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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1999
REGISTRATION NO. 333-91469
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
PATHNET TELECOMMUNICATIONS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
4813
PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
52-2201331
(IRS EMPLOYER
IDENTIFICATION NUMBER)
1015 31ST STREET, N.W.
WASHINGTON, D.C. 20007
(202) 625-7284
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MICHAEL A. LUBIN, ESQ.
VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
1015 31ST STREET, N.W.
WASHINGTON, D.C. 20007
(202) 625-7284
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
With a copy to:
BRUCE S. WILSON, ESQ.
COVINGTON & BURLING
P.O. BOX 7566
1201 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20044
(202) 662-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box: [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE PER OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED UNIT PRICE FEE
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Guarantees of 12 1/4% Senior Notes due
2008....................................... N/A N/A N/A $60,326.00
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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The information in this preliminary prospectus is not complete and may be
changed. We may not sell the securities until the registration statement
filed with the Securities and Exchange Commission is effective. This
preliminary prospectus is not an offer to sell these securities and it is
not soliciting an offer to buy these securities in any state where the
offer or sale is not permitted.
Subject to completion. Preliminary Prospectus dated December 16, 1999
PATHNET TELECOMMUNICATIONS, INC.
SENIOR GUARANTEES OF PATHNET, INC. 12 1/4% SENIOR NOTES DUE 2008
[PATHNET LOGO]
Pathnet Telecommunications, Inc. is offering to all holders of Pathnet, Inc.'s
12 1/4% Senior Notes due 2008 our absolute, irrevocable and unconditional senior
guarantees of those Notes. Concurrent with our offer, Pathnet is seeking
consents from the holders of those Notes to the waiver and amendment of certain
provisions of the indenture governing the Notes. Pathnet is seeking these
consents in connection with a contribution and reorganization transaction in
which Pathnet will become our wholly owned subsidiary. Each holder of the Notes
on the record date who consents to the requested waivers and amendments in
connection with the contribution and reorganization transaction will receive, in
addition to our guarantees, a consent fee payment of $10.00 per $1,000 in face
amount of Notes owned of record by the consenting holder on the record date.
PUBLIC OFFERING PRICE: None
PROCEEDS TO PATHNET TELECOM: None
THIS INVESTMENT INVOLVES SUBSTANTIAL RISK. SEE"RISK FACTORS" BEGINNING ON PAGE
7 TO READ ABOUT CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE INVESTING IN THE
SECURITIES.
------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED WHETHER
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 1999.
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TABLE OF CONTENTS
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PAGE
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ABOUT THIS PROSPECTUS....................................... 1
PROSPECTUS SUMMARY.......................................... 3
RISK FACTORS................................................ 7
USE OF PROCEEDS............................................. 24
CAPITALIZATION.............................................. 25
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA.......... 27
BUSINESS.................................................... 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 47
MANAGEMENT.................................................. 55
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 67
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 71
DESCRIPTION OF CONTRIBUTION AND REORGANIZATION
TRANSACTION............................................... 74
THE PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED
INDENTURE AMENDMENTS...................................... 83
DESCRIPTION OF THE GUARANTEES............................... 96
DESCRIPTION OF THE CONSENT SOLICITATION PROCESS............. 97
DESCRIPTION OF THE NOTES AND THE INDENTURE.................. 100
DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING
ARRANGEMENTS.............................................. 134
DESCRIPTION OF CAPITAL STOCK................................ 136
FEDERAL INCOME TAX CONSEQUENCES............................. 142
PLAN OF DISTRIBUTION........................................ 146
LEGAL MATTERS............................................... 146
EXPERTS..................................................... 146
WHERE YOU CAN FIND MORE INFORMATION......................... 146
INDEX TO FINANCIAL STATEMENTS............................... F-1
GLOSSARY OF SELECTED TERMS.................................. A-1
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ABOUT THIS PROSPECTUS
This preliminary prospectus is subject to completion prior to the offering.
It describes our company and the Guarantees that we propose to issue as we
currently expect them to exist at the time of the offering.
This prospectus contains the trademark of Pathnet, which is the property of
Pathnet and is licensed to us.
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PROSPECTUS SUMMARY
This summary highlights information that we believe is especially important
concerning our business, the offering of our guarantees and Pathnet's noteholder
consent solicitation. As a summary, it does not contain all of the information
that you should consider before accepting our guarantees and granting your
consent to the requested waivers and amendments to the Indenture that we
describe in this prospectus. Please read the entire prospectus carefully. Except
as otherwise required by the context, references in this prospectus to "Pathnet
Telecom," "we," "us," or "our" refer to Pathnet Telecommunications, Inc., and
references to "Pathnet" refer to Pathnet, Inc. only.
OVERVIEW
We are Pathnet Telecommunications, Inc., a newly formed Delaware
corporation and the issuer of the guarantees in this offering. We are offering
to all holders of Pathnet's 12 1/4% senior notes due 2008 our absolute,
unconditional and continuing guarantee of Pathnet's performance and compliance
with its obligations under the indenture that governs the terms of those notes,
including Pathnet's obligations to make interest and principal payments on the
notes. Concurrent with our offer, Pathnet is seeking consents from the
noteholders to the waiver and amendment of certain provisions of the indenture.
THE CONTRIBUTION AND REORGANIZATION TRANSACTION
Pathnet is seeking your consent to these waivers and amendments in
connection with a single plan of contribution and reorganization in which:
- the existing shareholders of Pathnet will exchange their shares of
Pathnet's common stock and series A, B and C convertible preferred stock
solely in return for substantially similar shares of our common stock and
our series A, B, and C convertible preferred stock;
- Pathnet will become our wholly owned subsidiary;
- three new investors in the Pathnet business -- The Burlington Northern
and Santa Fe Railway Company, CSX Transportation, Inc. and Colonial
Pipeline Company -- will contribute to us rights of way to permit us to
build our telecommunications network along their existing railroad and
pipeline corridors, with an estimated value of $187 million in return for
an aggregate of 8,511,607 shares of our series D convertible preferred
stock;
- Colonial will also contribute $68 million in cash in return for (1) an
aggregate of 2,867,546 shares of our series E convertible preferred
stock; (2) associated options to purchase more of our shares of capital
stock; and (3) a single fiber optic conduit along a portion of the
Colonial right of way corridors or other telecommunications assets of
equivalent value;
- Pathnet will lend to us $50 million of the proceeds remaining from
Pathnet's initial equity investments and the issue of its notes; and
- Pathnet will sell to us, for a $70 million promissory note, three fiber
optic development contracts, related assets, other agreements and the
rights to use Pathnet's name and other intellectual property.
CONSENT SOLICITATION FOR PATHNET NOTEHOLDER WAIVERS AND OTHER INDENTURE
AMENDMENTS
The structure of the proposed contribution and reorganization transaction
requires Pathnet to obtain waivers and consents from the holders of a majority
in principal amount of Pathnet's notes. In consideration for the required
consents, we are offering our guarantees for all of the notes and
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Pathnet will make a consent payment to each of the consenting noteholders who
held notes on the record date of the consent solicitation. To consent to the
transaction, the noteholders will need to:
- waive Pathnet's compliance, for purposes of the transaction, with the
"Change of Control" repurchase obligation and the "Excess Proceeds Offer"
requirements of the indenture, which otherwise would be triggered by the
closing of the transaction; and
- agree to the adoption of amendments to the terms of the indenture that
are intended to subject us to indenture covenants parallel to those
currently applicable to Pathnet and extend the scope of indenture tests
and covenants to us and any of our future subsidiaries.
The amendments will permit transactions between Pathnet, us and our other
future subsidiaries to the same extent that the indenture now permits those
transactions between Pathnet and its subsidiaries. We describe specific
amendments of the terms of the indenture below in "THE PATHNET SENIOR NOTEHOLDER
WAIVERS AND OTHER PROPOSED INDENTURE AMENDMENTS".
THE CONSENT SOLICITATION AND THIS OFFERING WILL END ON , 1999,
TEN CALENDAR DAYS FOLLOWING THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT OF
WHICH THIS PROSPECTUS IS A PART, UNLESS EXTENDED. IF WE HAVE NOT RECEIVED BEFORE
THE EXPIRATION DATE THE REQUISITE CONSENTS FROM THE HOLDERS OF A MAJORITY IN
OUTSTANDING PRINCIPAL AMOUNT OF THE NOTES, OUR OFFER OF THE GUARANTEES WILL
TERMINATE AND THE CONTRIBUTION AND REORGANIZATION TRANSACTION WILL NOT TAKE
PLACE AS PLANNED.
OUR COMPANY
We were formed on November 1, 1999, in order to give effect to the
contribution and reorganization transaction and become Pathnet's parent company.
Pathnet was formed on August 25, 1995. Since inception, Pathnet has operated as
a development stage enterprise, and its operations have resulted in cumulative
net losses of $82.9 million through September 30, 1999. Together, we are a
wholesale telecommunications provider building a nationwide network designed to
provide other wholesale and retail telecommunications service providers with
access to underserved and second and third tier markets throughout the United
States.
We plan to serve those second and third tier markets with
telecommunications network backbone infrastructure products and services, long
haul transport and local access services. We also expect to capture a portion of
the long haul transport services segment between first tier markets. We estimate
that our addressable market for these products and services is $13 billion in
1999, growing to $27 billion in 2004.
As of November 22, 1999, our network consisted of over 6,100 wireless route
miles providing wholesale transport services to 13 cities. We are constructing
1,100 route miles of fiber network scheduled for completion in the first half of
2000 and an additional 300 route miles of wireless microwave network. We have
also entered into two co-development agreements for the construction of an
additional 750 route miles of fiber optic network. We expect to develop more
backbone network from a pool of over 12,000 route miles of right of way -- 8,000
of which will have some form of exclusivity -- that we will receive from our new
investors in the contribution and reorganization transaction.
Our network will enable our customers, including existing local telephone
companies, interexchange carriers, Internet service providers, competitive
telecommunications companies, cellular operators and resellers to offer
additional services to new and existing customers in these markets without
having to expend their own resources to build, expand or upgrade their networks.
We expect our nationwide network to grow to over 20,000 route miles using both
fiber optic and wireless microwave technologies. We intend to continue to
develop our backbone on a "smart-build" basis by
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prioritizing route development along corridors with high demand for dark fiber
and conduit or by partnering with established companies in the joint development
of those routes.
Our principal executive office is located at 1015 31st Street, N.W.,
Washington, D.C. 20007, and our telephone number is (202) 625-7284.
RISK FACTORS
You should carefully consider the risk factors discussed under the caption
"RISK FACTORS," immediately following this summary and the other information
included in this prospectus before accepting our guarantees and consenting to
the requested waivers and amendments to the indenture necessary to authorize the
contribution and reorganization transaction.
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SUMMARY CONSOLIDATED FINANCIAL DATA
We present below summary historical consolidated financial data for Pathnet
and the pro forma balance sheet data for Pathnet Telecom. The summary historical
statements of operations data for the years ended December 31, 1997 and 1998
have been derived from Pathnet's audited financial statements that are included
elsewhere in this prospectus. The summary historical balance sheet data as of
September 30, 1999 and the summary historical statements of operations data for
the nine months ended September 30, 1998 and 1999, and the period from August
25, 1995 (the date of Pathnet's inception) to September 30, 1999 have been
derived from Pathnet's unaudited financial statements that are included
elsewhere in this prospectus. The unaudited financial information as of
September 30, 1998 and 1999 and for the nine month periods then ended includes,
in the opinion of management, all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of Pathnet's interim
results. The unaudited pro forma balance sheet data as of September 30, 1999
gives effect to the Contribution and Reorganization Transaction as if it
occurred on September 30, 1999. We have provided the pro forma balance sheet
data for informational purposes only.
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PATHNET
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PERIOD FROM
AUGUST 25, 1995
YEAR ENDED NINE MONTHS ENDED (DATE OF
DECEMBER 31, SEPTEMBER 30, INCEPTION) TO
-------------------------- --------------------------- SEPTEMBER 30,
1997 1998 1998 1999 1999
----------- ------------ ------------ ------------ ---------------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
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STATEMENTS OF OPERATIONS DATA:
Revenue....................................... $ 162,500 $ 1,583,539 $ 1,050,000 $ 2,275,003 $ 4,022,042
Net operating loss............................ (4,131,243) (16,312,761) (11,372,827) (20,518,466) (42,733,227)
Net loss...................................... (3,977,400) (36,296,596) (25,014,744) (40,409,110) (82,853,567)
Basic and diluted loss per common share....... $ (1.37) $ (12.51) $ (8.62) $ (13.88) $ (28.54)
Weighted average number of common shares
outstanding................................. 2,900,000 2,902,029 2,901,917 2,911,512 2,902,594
OTHER FINANCIAL DATA (UNAUDITED):
Ratio of earnings to fixed charges............ <1 <1 <1 <1 <1
Deficiency of earnings to fixed charges....... $ 3,977,400 $ 36,658,917 $ 25,377,065 $ 42,237,083 $ 85,043,861
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SEPTEMBER 30, 1999
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PATHNET PATHNET TELECOM
ACTUAL PRO FORMA (a)
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(UNAUDITED)
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BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities (excluding
marketable securities pledged as collateral) (b).......... $173,420,328 $212,045,321
Property and equipment, net................................. 106,123,850 106,123,850
Intangible assets -- rights of way.......................... -- 187,275,006
Total assets................................................ 338,574,555 568,849,554
Long-term obligations (c)................................... 346,782,984 351,057,984
Total liabilities........................................... 379,906,142 384,181,142
Redeemable preferred stock.................................. 35,969,639 37,999,993
Stockholders' equity (deficit).............................. (77,301,226) 146,668,419
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(a) Our pro forma summary consolidated balance sheet data as of September 30,
1999 reflects the following events as if such events had occurred as of
September 30, 1999:
- Contribution of over 12,000 route miles of rights of way with an estimated
value of $187 million for 8,511,607 shares of our Series D convertible
preferred stock;
- Receipt of $38 million in cash at the initial closing for 1,729,631 shares
of our Series E redeemable preferred stock. Another $25 million in cash
(which is excluded from our above pro forma balance sheet data) will be
received in exchange for 1,137,915 shares of our Series E redeemable
preferred stock (conditioned upon the completion of a fiber optic network
segment build that we expect to complete during the first calendar quarter
of 2000);
- Exchange of 2,977,593 shares of outstanding Pathnet common stock for
2,977,593 shares of our common stock;
- Exchange of 5,470,595 shares of Pathnet mandatorily redeemable preferred
stock into 15,864,715 shares of our convertible preferred stock;
- Receipt of $1 million in cash for options to purchase 1,593,082 shares of
our Series E redeemable preferred stock at $21.97 per share and shares of
our common stock at the time of an initial public offering;
- Receipt of $4 million in cash for our sale to Colonial of rights in a
specified number of conduit miles of our future network;
- Receipt of $275,000 in rights of way for our sale to CSX of rights a
specified number of conduit miles of our future network; and
- Payment by Pathnet of the proposed 1% consent fee to consenting holders of
the Notes (assuming all Noteholders provide their consent), and a related
payment to the Solicitation Agent, of an aggregate of approximately $4.4
million.
See "DESCRIPTION OF CONTRIBUTION AND REORGANIZATION TRANSACTION" included
elsewhere in this prospectus.
(b) Cash, cash equivalents and marketable securities include investments in
marketable securities available for sale.
(c) Long term obligations include other non-current liabilities of $263,734.
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RISK FACTORS
Pathnet Telecom is a new business venture that plans to build on the
existing Pathnet business following the closing of the contribution and
reorganization transaction. As such, we will face all of the risks currently
faced by Pathnet, as well as a variety of new risks associated with the
expansion of the existing Pathnet business.
You should consider carefully the risk factors described below, in addition
to the other information in this prospectus, before you decide to accept our
guarantees and grant your consent to the requested waivers and amendments to the
indenture necessary to authorize the contribution and reorganization
transaction. If any of the risks described below materializes and we are
unsuccessful in managing or addressing the risk, there could be a material
adverse effect on our business, financial condition or results of operations. We
cannot assure you that we will successfully manage or address these risks. The
risks and uncertainties described below are not all that we may encounter. We
may encounter other risks that we do not currently recognize or that we do not
currently regard as significant. If any of these other risks materializes, it
could also impair our business operations. In reviewing these risk factors, in
particular those relating to our industry, our network business and our company
operations, you may wish to refer to the glossary at the back of this prospectus
for definitions of technical terms.
RISKS RELATING TO OUR COMPANY OPERATIONS
WE MAY NOT BE ABLE TO DEVELOP THE RIGHTS OF WAY THAT BNSF, CSX AND COLONIAL ARE
AGREEING TO CONTRIBUTE TO US IN RETURN FOR THEIR SHARES, OR THE COST OF THAT
DEVELOPMENT MAY BE SIGNIFICANTLY HIGHER THAN WE ANTICIPATE.
Several factors could interfere with our ability to develop or even prevent
us from developing the rights of way or portions of those rights of way that are
the subject of the contribution and reorganization transaction:
- our inability to obtain property rights from third parties where BNSF,
CSX and Colonial do not own outright much of the property over which they
are granting us rights of way;
- restrictions imposed by BNSF, CSX, and Colonial to minimize or prevent
interference with their primary business operations;
- physical or engineering restrictions;
- terms of existing contractual arrangements between BNSF, CSX or Colonial
and third parties, including our competitors; and
- competitive factors, including potential oversupply of communications
bandwidth along the segments that we wish to develop.
Although we believe that we will be able to obtain the necessary property
rights and access to the segments that we wish to develop, we cannot assure you
that we will obtain these rights. If we fail to obtain these rights, we may not
be able to develop these rights of way for our network, and our business plans
would be impaired. We also believe that we will be able to develop segments of
our network on these rights of way within an acceptable range of our reasonable
current cost estimates, but we cannot predict development costs with certainty.
These costs could be significantly higher than we anticipate and may be
prohibitively expensive.
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WE HAVE AGREED TO INDEMNIFY BNSF, CSX AND COLONIAL FROM CERTAIN LOSSES AND
LIABILITIES IN DEPLOYING AND OPERATING OUR NETWORK, AND THESE LOSSES AND
LIABILITIES COULD BE SIGNIFICANT.
In the agreements by which we obtain our rights of way we have agreed to
release and indemnify BNSF, CSX and Colonial from claims, losses or liabilities
resulting from damage to property, personal injury to personnel, and many other
circumstances while we construct and operate our network. In some cases, our
release and indemnity apply even to circumstances outside of our control,
including where the claim, loss or liability arises from the negligence or gross
negligence of BNSF, CSX, Colonial or their employees or contractors within their
control. While we intend to obtain insurance to address these issues, we cannot
ensure that insurance coverage will be available or, if it is available,
adequate to cover all of these risks. If our insurance coverage is inadequate,
or if coverage is not available for some of these risks, we could be exposed to
significant losses and liabilities.
OUR TELECOMMUNICATIONS NETWORK WILL BE CONSTRUCTED ON RIGHTS OF WAY USED FOR
RAILROAD AND PIPELINE PURPOSES AND COULD BE DAMAGED OR DELAYED BY OTHER BUSINESS
OPERATIONS CONDUCTED ALONG THOSE RIGHTS OF WAY.
BNSF, CSX and Colonial use the rights of way on which we intend to install
our telecommunications network for railroad and pipeline purposes. Events could
occur, including the derailment of a train, the breach of a pipeline or damage
resulting from track or pipeline maintenance or construction, that could
interrupt telecommunications services on or otherwise damage our network. If any
of those events occur, our ability to provide telecommunications services to our
customers could be compromised, and our relationship with those customers could
be seriously damaged.
OUR AGREEMENTS WITH RIGHTS OF WAY PROVIDERS REQUIRE THAT WE COORDINATE OUR
NETWORK CONSTRUCTION AND OPERATION WITH PROVIDERS' EXISTING OPERATIONS.
The lease and access agreements we will enter into with BNSF, Colonial, CSX
and our other rights of way providers require that we coordinate our network
design, construction, deployment, operation and maintenance with the rail,
pipeline, utility and other operations of the applicable rights of way
providers. Those agreements generally provide that the rights of many providers'
operational needs take precedence over our own in terms of scheduling, access
time, personnel and other rights. Scheduling conflicts could increase our
development or operational costs on particular segments of rights of way, or
make deployment along the affected segment commercially impracticable. If we
cannot coordinate these activities successfully with the rights of way
providers, the development, design, construction, deployment, operation and
maintenance of the affected segments of our network could be delayed or become
prohibitively expensive.
WE HAVE NO HISTORY OF OPERATIONS AND WILL BE UNDERTAKING A SIGNIFICANTLY
EXPANDED NETWORK DEVELOPMENT BUSINESS.
We are newly incorporated and have no history of operations. Pathnet was
incorporated in August 1995 and has only a limited operational history. As of
November 22, 1999, Pathnet had constructed approximately 6,100 route miles of
our digital network and had completed 25 collocations. To achieve our business
plan, we will need to expand our fiber network substantially and at a much
faster rate than in prior years.
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WE ARE UNDERTAKING A MAJOR EXPANSION OF THE BUSINESS PREVIOUSLY CONDUCTED BY
PATHNET AND WE MAY NOT BE ABLE TO MANAGE THIS EXPANSION EFFECTIVELY.
The expansion and development of our business will depend upon, among other
things, our ability successfully to:
- implement our sales and marketing strategy;
- evaluate markets for our products and services;
- acquire additional rights of way;
- design profitable network routes;
- secure additional financing for our network deployment;
- reach agreement with suitable co-development partners;
- install facilities;
- obtain required government authorizations;
- interconnect to, and collocate with, facilities owned by existing local
telephone companies; and
- obtain appropriately priced unbundled network elements and wholesale
services from existing local telephone companies.
We must accomplish these activities in a timely manner, at reasonable cost
and on satisfactory terms and conditions. As we increase our product and service
offerings and expand our network into our targeted markets, there will be
additional demands on operating support systems, sales and marketing,
administrative resources and network infrastructure. We cannot assure you that
we will be able to manage our growth successfully, and if we are unsuccessful in
doing so, our business, results of operations and financial condition will be
negatively affected.
DEVELOPING AND EXPANDING OUR BUSINESS MAY SUBJECT US TO ADDED MARKET AND
REGULATORY RISKS.
The rights of way acquired in connection with the contribution and
reorganization transaction may significantly expand our business, making us more
vulnerable to competition from major telecommunications companies and more
likely to become the subject of regulatory scrutiny. Increased competition or
regulatory burdens could interfere with our ability to capitalize on the
expansion of our business.
OUR BUSINESS PLANS REQUIRE US TO MAKE SIGNIFICANT INVESTMENTS IN A RAPIDLY
EVOLVING INDUSTRY, AND OUR STRATEGY MAY BE ADVERSELY AFFECTED BY MARKET AND
TECHNOLOGICAL DEVELOPMENTS AND OTHER FACTORS THAT WE CANNOT CONTROL.
Our business strategy is to provide an integrated bundle of
telecommunications services and expand our operations and network. Our ability
to implement this strategy will be subject to a variety of factors, including:
- market pricing pressures for the services and products we offer;
- changes in expenses associated with the construction and expansion of our
network and services;
- availability of additional capital on acceptable terms;
- regulatory uncertainties in an industry where the regulatory environment
is still evolving;
- operating and technical problems;
- availability of alternative technologies;
- the need to establish and maintain interconnection and collocation
arrangements with existing local telephone companies in our target
markets;
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- variations in market growth rates for our products and services; and
- general economic conditions.
These factors could adversely affect our business strategies by increasing
the cost of difficulty in implementing our business plans.
WE MAY BE UNABLE TO HIRE AND RETAIN SUFFICIENT QUALIFIED PERSONNEL, AND THE LOSS
OF ANY OF OUR KEY EMPLOYEES COULD MATERIALLY ADVERSELY AFFECT US.
Our products and services are technical in nature, and the market for
employees in the telecommunications industry is competitive and dynamic. As a
result, our future success will depend in large part on our ability to attract
and retain a substantial number of highly skilled, knowledgeable, sophisticated
and qualified managerial, professional and technical personnel. Pathnet has
experienced, and we expect to experience, significant and increasing competition
from other companies in attracting and retaining personnel who possess the
skills that we are seeking. We therefore may be unable to attract and retain
senior management, other key employees, or other skilled personnel in the
future. We depend on these employees to implement our business plan and manage
our planned growth successfully, and losing key employees could have a material
adverse effect on our business.
WE DEPEND ON THIRD PARTIES, INCLUDING SUPPLIERS AND CONTRACTORS, AND
INTERRUPTIONS IN OR THE LOSS OF KEY SOURCES OF SUPPLY AND SERVICES FROM THIRD
PARTY CONTRACTORS COULD ADVERSELY AFFECT THE CONSTRUCTION OF OUR NETWORK.
We depend on third party suppliers for a number of components and parts
used in our network. If we are unable to obtain supplies or services from our
usual suppliers for any reason, we believe that there are alternative suppliers
of components for all of the components and transmission equipment contained in
our network or required to offer our products and services, but those
alternatives may not be available on as favorable terms. Any nationwide
shortage, or extended interruption in the supply of any of the key components,
change in the pricing arrangements with our suppliers and manufacturers or delay
in transitioning a replacement supplier's product into the network could disrupt
our operations.
We also use third party contractors to build various segments of our
network. If any of these relationships is terminated or a supplier or contractor
fails to provide reliable services or equipment, and we are unable to reach
suitable alternative arrangements quickly or on favorable terms, we may
experience significant delays and additional costs. The failure of our
contractors to complete their activities in a timely manner, within anticipated
budgets and in accordance with our quality standards and performance criteria,
could also delay the completion of our network or make it more costly to
construct.
WE WILL DEPEND ON SOPHISTICATED BILLING, CUSTOMER SERVICE AND INFORMATION
SYSTEMS.
We will depend on sophisticated information and processing systems to grow,
monitor costs, bill customers, service customer orders and achieve operating
efficiencies. As we expand our services and increase our customer base, our need
for enhanced billing and information systems will increase. If we are unable to
adequately identify our information and processing needs or develop or upgrade
systems as necessary, our ability to reach our financial and operational
objectives could be compromised.
FAILURE TO ACHIEVE YEAR 2000 COMPLIANCE MAY HAVE ADVERSE EFFECTS ON US.
The Year 2000 issue is the result of computer programs using two digits,
rather than four, to define the applicable year. Because of this programming
convention, software, hardware or firmware
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may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in system failures, miscalculations or errors causing disruptions
of operations or other business problems, including, among others, an inability
to process transactions, send invoices, or engage in similar normal business
activities. We cannot know the actual effects of the Year 2000 issue on our
business and operations until the beginning of Year 2000. If we or our major
vendors, other key service providers or customers fail to address adequately
their respective Year 2000 issues in a timely manner, we could experience, among
other things, interruptions in our network and a decline in sales which would
adversely affect our business. The Year 2000 issues and our Year 2000 readiness
program are described in further detail below in "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- Year 2000 Readiness
Disclosure."
WE MAY FACE RISKS ASSOCIATED WITH POTENTIAL ACQUISITIONS, STRATEGIC ALLIANCES
AND JOINT VENTURES THAT COULD BE ADVANTAGEOUS FOR OUR BUSINESS.
To expand and deploy our network in a timely manner, we may need to acquire
other businesses, form strategic alliances or enter into joint ventures that
will complement our existing business markets or accelerate our entry into our
target markets. These transactions may:
- pose challenges in assimilating the acquired operations and personnel;
- disrupt our ongoing business;
- divert resources;
- create difficulties in maintaining uniform standards, controls,
procedures and policies;
- impede management of our growth and information systems;
- present challenges where entering markets in which we have little
experience; or
- impair relationships with employees or customers.
We currently have no definitive acquisition agreement in place, although we
have had discussions with other companies and will continue to assess
opportunities on an ongoing basis. Our failure to implement our expansion and
growth strategy successfully would have a material adverse effect on our
business, results of operations and financial condition.
RISKS RELATING TO OUR FINANCING
WE EXPECT NEGATIVE OPERATING CASH FLOWS AND SUBSTANTIAL OPERATING LOSSES FOR THE
FORESEEABLE FUTURE.
Pathnet has incurred operating losses and negative cash flow since
inception. From August 25, 1995 through September 30, 1999, Pathnet's operations
have resulted in cumulative net losses of $82.9 million. We expect to incur
continued operating losses and negative cash flow as we build our network, offer
additional products and services and increase our customer base. These losses
will reduce our ability to meet working capital needs and increase our need for
external financing to support our objectives. Until and unless we develop an
adequate customer base and revenue stream, our capital and other operating
expenditures will result in negative cash flow and operating losses. We expect
these expenditures to increase as we develop our customer base in existing
markets, expand into new markets and diversify our service offerings. We may
never develop an adequate customer base, sustain profitability or generate
sufficient cash flow to meet our obligations on the guarantees, debt or fund our
other business needs. We therefore cannot assure you that we will become
profitable in the future.
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WE ANTICIPATE THAT OUR FUTURE GROWTH WILL REQUIRE SIGNIFICANT CAPITAL THAT WE
MAY BE UNABLE TO OBTAIN ON ACCEPTABLE TERMS.
Our business plan requires us to expand our existing network and services,
acquire and develop additional networks and services in new markets, deploy our
own fiber capacity in the majority of our markets and fund our initial operating
losses. These activities will require significant capital and operational
expenditures for the foreseeable future. Although we estimate that our current
available resources will be sufficient to fund the implementation of our current
business plan through the fourth quarter of 2000, after that time we expect we
will require additional financing, which may include commercial bank borrowings,
vendor financing or the sale or issuance of equity or debt securities. Our
required financing needs may change if the contribution and reorganization
transaction is not consummated or is consummated on different terms or on a
later schedule than anticipated. If we are unable to obtain necessary additional
financing on acceptable terms, our business could be adversely affected.
WE WILL BE GUARANTEEING AND/OR INCURRING A SUBSTANTIAL AMOUNT OF DEBT THAT COULD
ADVERSELY AFFECT OUR FUTURE PROSPECTS.
Pathnet currently has, and after the contribution and reorganization
transaction has closed we will have, a substantial amount of debt in relation to
its stockholders' equity. As of September 30, 1999, Pathnet had approximately
$379.9 million of indebtedness outstanding and total stockholders' equity
(deficit) of ($77.3) million. We plan to incur additional indebtedness in
developing our business.
The amount of our debt could adversely affect our future prospects by:
- impairing our ability to borrow additional money;
- requiring us to use a substantial portion of our cash flows from
operations to pay interest or repay debt which will reduce the funds
available to us for our operations, acquisition opportunities and capital
expenditures;
- placing us at a competitive disadvantage with companies that are less
restricted by their debt arrangements; and
- making us more vulnerable in the event of a downturn in general economic
conditions or upon the occurrence of any risks described in this section.
WE MAY NOT HAVE SUFFICIENT FUNDS FROM OUR OWN CASH FLOW OR OTHER SOURCES TO
SERVICE OUR DEBT.
We cannot assure you that we or Pathnet will be able to meet our debt
obligations under the guarantees, the Pathnet notes or otherwise. If we are
unable to generate sufficient cash to meet our obligations or if we fail to
satisfy the requirements of our debt agreements, we will be in default. A
default under the notes, which may include a material default under other
indebtedness, would permit the holders of the Pathnet notes (and other debt for
which we will be directly or indirectly responsible) to require payment before
the scheduled due date of the debt, resulting in further financial strain on us
and causing additional defaults under our other indebtedness.
DESPITE OUR CURRENT DEBT LEVEL, WE AND OUR SUBSIDIARIES PLAN TO INCUR
SUBSTANTIALLY MORE DEBT TO IMPLEMENT OUR BUSINESS PLAN.
We expect to need significant additional capital to complete the buildout
of our planned network and fulfill our long-term business strategies. We may be
unable to produce sufficient cash flows from ongoing operations to fund our
business plan and future growth. This could require us to alter our business
plan, including delaying, reducing or abandoning our expansion or spending
plans, which could have a material adverse effect on our future revenue
prospects or our business. In addition, we
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may elect to pursue other business opportunities that could require additional
capital investments in our network. If any of these events were to occur, we
could be required to sell assets, borrow more money than we currently
anticipate, issue additional debt or equity securities, refinance or restructure
our debt or enter into joint ventures.
Our ability to arrange financing depends upon many factors, including:
- general economic and capital markets conditions, especially the
non-investment grade debt market;
- conditions in the telecommunications industry;
- regulatory, technological or competitive developments;
- investor confidence and credit availability from banks or other lenders;
- the success of our network and demand for our products and services;
- cost overruns and unforeseen delays; and
- provisions of tax and securities laws that affect capital raising
activities.
THE TERMS OF DEBT OR OUR INABILITY TO OBTAIN ADDITIONAL FINANCING NEEDED IN THE
FUTURE MAY PREVENT THE COMPLETION OF OUR NETWORK AND DELAY THE ROLLOUT OF OUR
PRODUCTS AND SERVICES TO OUR CUSTOMERS.
Our inability to raise additional funds would have an adverse effect on our
ability to complete our network. If we decide to raise additional funds by
incurring more debt, we may become subject to additional or more restrictive
financial covenants. These covenants or other terms of the additional financing
may place significant limits on our financial and operating flexibility, or may
not be acceptable to us. Our failure to raise sufficient funds when needed and
on reasonable terms may require us to modify or significantly curtail our
business expansion plans. These modifications could have a material adverse
impact on our growth and ability to compete and to service our existing debt.
ALTHOUGH YOUR NOTES ARE REFERRED TO AS "SENIOR NOTES" THEY ARE, AND WILL
CONTINUE TO BE, EFFECTIVELY SUBORDINATED TO OUR SECURED DEBT AND THE SECURED AND
UNSECURED DEBT OF OUR SUBSIDIARIES.
The notes are unsecured and therefore are and will continue to be
effectively subordinated to any secured debt we may incur to the extent of the
value of the assets securing that debt. In the event of a default, foreclosure,
bankruptcy or similar proceeding involving us, our assets that serve as
collateral will be available to satisfy the obligations under any secured debt
before any payments are made on the notes. If there is any shortfall after the
foreclosure on these assets, our secured creditors would have a claim for that
shortfall ranking equally with your claim against us under the guarantees. In
addition we may secure any additional debt with our assets or borrow through
subsidiaries. Those secured assets, or the assets of our borrowing subsidiaries,
will be available to other creditors before they are available to you.
WE WILL DEPEND ON PAYMENTS FROM OUR SUBSIDIARIES TO REPAY OUR DEBTS, AND OTHER
CREDITORS OF OUR SUBSIDIARIES OTHER THAN PATHNET WILL HAVE CLAIMS AGAINST THE
ASSETS OF THOSE SUBSIDIARIES THAT ARE SENIOR TO YOUR NOTES.
After the contribution and reorganization transaction has closed, we will
be a holding company that receives a substantial part of our revenues from our
subsidiaries. Our ability to obtain payments from our subsidiaries may be
restricted by the profitability and cash flows of our subsidiaries and laws
relating to the payment of dividends by a subsidiary to its parent company. If
our subsidiaries are unable to pay dividends, we may be unable to service our
debt, including our obligations under the supplemental indenture and the
guarantees. If any of our subsidiaries experiences a bankruptcy, liquidation or
reorganization, its creditors will generally be entitled to payment of their
claims from
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the assets of that subsidiary before any assets are made available for
distributions to us, except to the extent we may also have a claim as a
creditor. In that situation, creditors of our subsidiaries and future holders of
preferred stock, if any, of our subsidiaries, would have claims on the assets of
the subsidiaries with priority over our claims.
OTHER THAN PATHNET, OUR SUBSIDIARIES, INCLUDING SUBSIDIARIES THAT WE MAY FORM IN
THE FUTURE, WILL NOT GUARANTEE OR OTHERWISE BE RESPONSIBLE FOR MAKING FUNDS
AVAILABLE TO US OR TO PATHNET TO MAKE PAYMENTS ON YOUR NOTES OR GUARANTEES.
Like your notes, your rights under the guarantees will be structurally
subordinated to both secured and unsecured debts of our subsidiaries other than
Pathnet. Under the terms of the existing indenture, Pathnet has formed new
subsidiaries that are separate legal entities with no obligations under the
notes. The supplemental indenture will extend this structure to us. If we
incorporate additional subsidiaries, whether new subsidiaries of Pathnet or
"sister" companies to Pathnet, these new subsidiaries also will be separate
legal entities. They will have no obligation under the supplemental indenture or
the guarantees to make payments or to provide dividends or other funds to us or
Pathnet to permit us to make payments on the notes or guarantees.
We have concluded that revising the Indenture to provide for these
guarantees would interfere with our ability to obtain equipment and other
financing necessary in connection with the future development of our network. As
a result, the notes are and will continue to be, and the guarantees will be,
effectively subordinated to the debts of our subsidiaries other than Pathnet.
VENDOR FINANCING ARRANGEMENTS WILL LIKELY REQUIRE US TO FORM SUBSIDIARIES WITH
SUBSTANTIAL ASSETS THAT WILL NOT BE OBLIGATED TO GUARANTEE THE NOTES.
We expect to take advantage of vendor financing in constructing our
network. Our proposed vendor financing agreement with Lucent specifically
requires us, if we wish to take advantage of the Lucent financing, to form a new
subsidiary and to contribute to this new subsidiary a substantial portion of our
assets. This contribution of assets would include the rights of way relating to
the segments of our network that we plan to construct with fiber for which
Lucent provides vendor financing, and could include additional cash
contributions. This new subsidiary will not guarantee the notes. See
"DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING ARRANGEMENTS -- Proposed
Credit Facility with Lucent."
OUR INDEBTEDNESS WILL CONTAIN RESTRICTIVE COVENANTS, WHICH COULD EXPOSE US TO
ADDITIONAL DEFAULTS.
By entering into the supplemental indenture, we will become subject to a
number of restrictive covenants parallel to those contained in the indenture and
applicable to Pathnet. These restrictions affect, and, in certain cases
significantly limit (and in some cases prohibit), among other things, our
ability and the ability of our subsidiaries to:
- incur additional indebtedness;
- create liens;
- make investments;
- pay dividends;
- issue stock; and
- sell assets.
For example, the indenture restricts and the supplemental indenture will
restrict our ability to incur indebtedness other than indebtedness to finance
the acquisition of equipment, inventory or network assets and other specified
indebtedness. In addition, if and when we (or our subsidiaries)
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borrow funds under our proposed credit facility with Lucent or under other
credit facilities with other vendors or third parties who may provide financing,
we may be required to maintain specified financial ratios. We cannot assure you
that we will be able to maintain those required ratios after each borrowing, and
our failure to do so or comply with other covenants could lead to a default on
those facilities and a foreclosure against any assets securing the facilities.
These restrictive covenants may also adversely affect our ability to finance our
future operations or capital needs, or to engage in other business activities
that may be in our interest.
PROVISIONS IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS, THE STOCKHOLDERS
AGREEMENT TO WHICH WE WILL BECOME A PARTY AND THE TERMS OF THE INDENTURE AND
SUPPLEMENTAL INDENTURE COULD DELAY OR PREVENT OUR CHANGE OF CONTROL, EFFECTIVELY
HINDERING OUR ACCESS TO ADDITIONAL EQUITY FINANCING.
Our certificate of incorporation, bylaws and stockholders agreement contain
provisions that will make any acquisition of us or investment in us more
difficult, including restrictions on removal of directors and limitations on the
ability of stockholders to call special meetings. The terms of our indenture and
supplemental indenture may also restrict and discourage attempts to change
control of Pathnet Telecom. Our ability to attract future equity investment may
be hindered because of these provisions, thereby limiting our access to
additional capital.
RISKS RELATING TO OUR NETWORK BUSINESS
THE DIFFICULTIES THAT WE MAY EXPERIENCE IN EXPANDING OUR NETWORK COULD INCREASE
OUR ESTIMATED COSTS AND DELAY SCHEDULED COMPLETION.
We plan to expand our existing network, enter new markets and broaden our
product and service offerings -- all of which are significant undertakings.
These activities will require us to install and operate additional facilities
and equipment, and develop, introduce and market new products and services. To
deploy these additional services we will need to modify and add to our existing
network architecture. We will also need to obtain and install our equipment in
the existing local telephone companies' central office collocation space as
described in further detail below. We may encounter administrative, technical,
operational, regulatory and other problems as a result of our expansion. Many of
these factors and problems are beyond our control. If we experience difficulties
in addressing and solving these problems, we may not be able to complete our
network buildout or expand our products and services as planned or in accordance
with our current cost or time estimates.
WE MAY PURSUE OTHER RELATIONSHIPS AND OPPORTUNITIES THAT COULD EXPOSE US TO
ADDITIONAL RISKS OR DELAY THE CONSTRUCTION AND OPERATION OF OUR NETWORK.
We may enter into relationships with long distance telephone companies,
existing local telephone companies, Internet Service Providers, competitive
telecommunications companies or other entities to manage existing assets or to
deploy alternative telecommunications products and services. We may also seek to
serve markets in addition to underserved or second or third tier markets and
customers in addition to telecommunications service providers. Pursuing these
other opportunities could require additional financing, pose additional risks
(such as increased or different competition, additional regulatory burdens and
network economics and pricing different from our currently planned network and
products and services) and divert our resources and management time. We cannot
assure you that we will successfully integrate any new opportunity into our
operations or that the opportunity would perform as expected.
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WE DEPEND UPON RIGHTS OF WAY AND ACCESS AGREEMENTS TO EXPAND AND MAINTAIN OUR
DIGITAL NETWORK, AND WE WILL NEED TO CONTINUE TO OBTAIN AND MAINTAIN APPROPRIATE
RIGHTS OF WAY AND ACCESS TO BUILD AND OPERATE OUR NETWORK.
In addition to the rights of way to which we will gain access as a result
of the contribution and reorganization transaction, we expect that we will need
to obtain and maintain additional rights of way to construct and develop our
network. We cannot assure you, however, that we will continue to have access to
existing rights of way, leases and licenses after the expiration of our current
agreements, or that we will obtain additional rights necessary to extend our
network on reasonable terms. In addition, if a franchise, license or lease
agreement is terminated and we are forced to remove or abandon a significant
portion of our network, our business, results of operations, and financial
condition will be materially adversely affected.
OUR USE OF RIGHTS OF WAY OBTAINED FROM OTHERS HAVE BEEN AND MAY IN THE FUTURE BE
CHALLENGED BY THIRD PARTIES, WHICH COULD DELAY OR ADVERSELY AFFECT THE
DEVELOPMENT OR OPERATION OF OUR NETWORK.
To construct and maintain our fiber optic and wireless network, we have
obtained and will obtain easements, leases, rights of way, franchises and
licenses from various private parties, including railroads, pipelines,
utilities, actual and potential competitors and local governments. Some of our
agreements with right of way providers require us to acknowledge that others who
question the right of way providers' ownership claim to the easement or property
right may challenge our claim to the rights of way being granted. Third parties
have challenged, and we expect in the future that third parties may challenge,
our use of rights of way obtained by or from others, including the rights of way
we will obtain upon the closing of the contribution and reorganization
transaction. If we are unable to resolve any of these challenges, or if the cost
of addressing them is higher than we contemplate, these challenges may hinder or
delay our business plans.
WE MAY BE UNABLE TO OBTAIN ADDITIONAL PERMITS AND AGREEMENTS NECESSARY FOR THE
OPERATION AND EXPANSION OF OUR NETWORK, AND THIS FAILURE COULD HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS.
We may require additional pole attachment or conduit use agreements with
existing local telephone companies, utilities or other local exchange carriers.
We cannot guarantee that we, or our operating companies or partners, will be
able to obtain new or maintain existing permits, pole attachment and conduit use
agreements needed to develop and operate and expand our network and provide our
planned products and services. Our failure to obtain or maintain necessary
permits, pole attachments and conduit use agreements could have a material
adverse effect on our ability to operate and expand our network.
WE DEPEND ON OUR WIRELESS NETWORK INFRASTRUCTURE, PORTIONS OF WHICH WE DO NOT
OWN.
We do not own, and we do not expect to own in the future, the underlying
sites and facilities upon which Pathnet's current wireless digital network is
deployed. Instead, we (or our affiliated companies) have entered into long term
fixed point microwave services agreements with certain of our co-development
partners such as Kinder Morgan, formerly KN Energy. Under these agreements, each
co-development partner has agreed to grant us a leasehold interest in, or a
similar right to use, their facilities and infrastructure as required for us to
deploy our network. As a result, we depend and will continue to depend on the
facilities and infrastructure of our co-development partners for the operation
of our business. In many cases, we also rely on our co-development partners for
the maintenance and provisioning of circuits on our network. We have entered
into maintenance agreements with some of these co-development partners where
they perform maintenance and provisioning services for us in return for a
monthly fee. The cancellation or non-renewal of any of these arrangements or
agreements could have a material adverse effect on our business.
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WE DEPEND ON OUR STRATEGIC RELATIONSHIPS AND CO-DEVELOPMENT PARTNERS.
As part of our "smart build" strategy and the contribution and
reorganization transaction, we have formed and plan to continue in the future to
pursue strategic alliances and relationships which would allow us to enter
certain markets for telecommunications services sooner than if we had made the
attempt independently. As our network is further developed, we will be dependent
on some of these arrangements in order to expand our network into target
markets.
Any disagreements with our co-development partners or companies with which
we have a strategic alliance could impair or adversely effect our ability to
conduct our business. In addition, the bankruptcy or insolvency of a
co-development partner could result in the termination of its agreement with us
and any related right of way agreements. The effect of those terminations or the
failure of a co-development partner to make required capital contributions would
have a material adverse effect on us.
WE DEPEND ON ACCESS TO AND INTERCONNECTION WITH THE FACILITIES OF EXISTING LOCAL
TELEPHONE COMPANIES, AND THE INABILITY TO SECURE ACCESS AND INTERCONNECTION ON
FAVORABLE TERMS COULD HAVE A MATERIAL ADVERSE EFFECT ON US.
Our ability to provide local access services depends upon our securing
access to existing local telephone companies' networks, including the physical
or virtual collocation of our equipment in the existing local telephone
companies' central offices in our target markets.
Challenges we may face in obtaining central office space from the existing
local telephone companies include:
- limitations on the availability of central office space in high demand
target markets where other competitive telecommunications companies are
seeking or have obtained central office space to offer services;
- delays when existing local telephone companies fail to promptly address
our requests for central office space; and
- expenditure of time and money to pursue negotiations, regulatory
disputes, and legal actions for resolution of disputes regarding lack of
sufficient office space.
We expect that these challenges may delay our attempts to obtain central
office space, which would slow down our deployment of our network and our
ability to increase the number of our customers.
WE DEPEND ON EXISTING LOCAL TELEPHONE COMPANIES TO PROVIDE NETWORK ELEMENTS FOR
OUR LOCAL ACCESS SERVICES.
We will interconnect with and use existing local telephone companies'
networks to provide local access services to our customers. This strategy
presents a number of challenges because we depend on existing local telephone
companies to:
- allow us to use their technology and capabilities of their networks to
service our customers;
- cooperate with us to provide and repair facilities; and
- provide the services and network components that we order, for which they
depend significantly on unionized labor. Labor issues have in the past
and may in the future hurt the existing local telephone companies'
performance.
Our dependence on existing local telephone companies may cause us to
encounter delays in establishing our network and rolling out our products and
services. We must also establish satisfactory
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billing and payment arrangements with existing local telephone companies. We may
not be able to do these things in a manner that will allow us to retain and grow
our customer base.
WE DEPEND ON THE QUALITY, AVAILABILITY AND MAINTENANCE OF EXISTING LOCAL
TELEPHONE COMPANIES' NETWORKS.
We may not be able to obtain the facilities and the services we need from
existing local telephone companies at satisfactory quality levels, rates, terms
and conditions. Our inability to do so could delay the expansion of our network
and degrade the quality of our services to our customers.
WE MAY EXPERIENCE WIRELESS PATH FAILURES OR CABLE CUTS.
We do not have route diversity on our digital network to maintain services
if a wireless path failure or fiber cable cut occurs. If we were to suffer a
deterioration in the perceived quality or reliability of our service as a result
of a path failure, cable cut, or other network outage, our customer relations
would be materially adversely affected.
RISKS RELATING TO OUR INDUSTRY
OUR BUSINESS IS VERY COMPETITIVE AND INCREASED COMPETITION COULD ADVERSELY
AFFECT US.
The telecommunications industry is extremely competitive, particularly with
regard to price and service. Many of our existing and potential competitors have
significantly greater financial, personnel, marketing and other resources than
we do. For example, some of our competitors have already made substantial
long-term investments in the construction of wireless and fiber optic networks
and the acquisition of bandwidth. Many of our competitors also have the added
competitive advantage of an established network and existing customer base. For
example, some communications carriers and local cable companies have extensive
networks in place that could be upgraded to fiber optic cable. Those companies
also have more employees and more substantial capital resources to begin those
upgrades. If communications carriers and local cable companies decide to equip
their existing networks with fiber optic cable, they could become significant
competitors of ours in a short period of time.
WE FACE COMPETITION FROM EXISTING AND FUTURE TELECOMMUNICATIONS SYSTEMS ON EACH
ROUTE WHERE WE PLAN TO PROVIDE INFRASTRUCTURE SERVICES AND WHOLESALE TRANSPORT
SERVICES.
Other companies may choose to compete with us in our current or planned
markets by selling or leasing network assets or wholesale transport services to
our targeted customers. This competition could have a material adverse effect on
our business. Our competitors for these products and services include:
- interexchange carriers, often referred to as "IXCs", such as AT&T Corp.,
MCI WorldCom, Inc. and Sprint Corporation;
- wholesale providers, such as Qwest Communications International Inc.,
Williams Communications Group, Inc., IXC Communications, Inc., DTI
Holdings, Inc., Global Crossing Ltd. and Level 3 Communications, Inc.;
- existing local telephone companies often referred to as "ILECs", such as
US West, BellSouth, Bell Atlantic, SBC and GTE Corporation, which
currently dominate their local telecommunications markets and have sought
or may soon seek authority to provide long distance services in their
local markets;
- competitive telecommunications companies often referred to as "CLECs",
such as GST Telecommunications, Inc., ITC/Deltacom, Inc. and Metromedia
Fiber Network, Inc.; and
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- potential competitors capable of offering services similar to those we
offer, such as communications service providers, cable television
companies, electric utilities, microwave carriers, satellite carriers,
wireless telephone operators and large end users with private networks.
WE FACE COMPETITION IN THE PROVISION OF LOCAL ACCESS SERVICES IN EACH OF OUR
MARKETS.
Our principal competitor in the provision of local access services in each
of our markets is the existing local telephone company. Although recent federal
legislation and rule-making proceedings afford us increased opportunities to
compete in providing these services, some aspects of these proceedings also
benefit existing local telephone companies. Potential changes in the regulation
of telecommunications services could deprive us of some competitive advantages
that we now enjoy, which could harm our business.
In addition to the existing local telephone companies, other
telecommunications service providers, such as Covad Communications Group, Inc.,
NorthPoint Communications Group, Inc. and Rhythms Netconnections, Inc., have
recently begun providing some local services. Other competitors and potential
entrants in the market for the provision of these services include long distance
companies, cable television companies, electric utilities, microwave carriers,
wireless telephone system operators, data service companies and operators of
private networks. Significant new competitors also could enter the local market
through consolidation and strategic alliances in the industry, foreign carriers
being allowed to compete in the U.S. market, technological advances, and further
deregulation and other regulatory initiatives. The introduction of any of these
new competitors into our markets for local services could materially and
adversely affect our business. See "BUSINESS -- Competition."
WE DO NOT PLAN TO OFFER A BROAD RANGE OF PRODUCTS OR SERVICES IN THE IMMEDIATE
FUTURE, AND THIS LIMITATION COULD INCREASE OUR VULNERABILITY TO CHANGING TRENDS
IN OUR INDUSTRY OR INCREASED COMPETITION. AT THE SAME TIME, OUR FUTURE SUCCESS
WILL DEPEND ON GROWTH IN THE DEMAND FOR LOCAL ACCESS SERVICES WE PLAN TO
CONTINUE TO OFFER.
We have planned to undertake only a narrow scope of activities in the
immediate future, which could limit potential revenues and result in lower
revenues than competitors who now provide a wide range of services. Although
Pathnet has recently commenced marketing local access services to
telecommunications service providers, we cannot assure you that we will be
successful in entering this business. If the markets for these services fail to
develop, grow more slowly than anticipated or become saturated with competitors,
our business prospects, operating results and financial condition could be
materially adversely affected.
OUR PRODUCT AND SERVICE OFFERINGS ARE SUBJECT TO RISKS OF INDUSTRY OVER-CAPACITY
AND RESULTING DOWNWARD PRICING PRESSURES.
Since shortly after the AT&T divestiture in 1984, the long distance
transmission industry generally has experienced over-capacity and declining
prices. These trends have exerted downward pricing pressures on a number of
telecommunications services, including our wholesale transport services, and we
anticipate that prices for these services will continue to decline over the next
several years because:
- existing long distance carriers and potential new carriers are
constructing new fiber optic and other long distance transmission
networks;
- regulatory changes may permit the existing local telephone companies to
provide long-distance services out-of-region;
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- expansion and new construction of transmission networks, particularly
fiber optic cable networks, are likely to create substantial excess
capacity relative to demand in the short or medium term; and
- recent technological advances may greatly expand the capacity of existing
and new fiber optic cable.
Dramatic and substantial price reductions in the long distance industry could
require us to reduce our prices significantly or to revise the mix of products
and services we plan to offer. Either of these results could adversely affect
our business. Also, an increase in the capacity of any of our competitors to
provide transport services could adversely affect our business even if we are
also able to increase our capacity.
INCREASED SUPPLY OF DARK FIBER IN THE INDUSTRY MAY LEAD TO LOWER PRICES.
The supply of bare fiber optic cable, with none of the associated
transmission electronics installed, has also increased, resulting in downward
pricing pressure on sales of this "dark fiber" capacity. The FCC recently issued
an order requiring existing local telephone companies to make dark fiber and
other transport facilities available to other telecommunications carriers at
cost-based nondiscriminatory prices. This requirement could further increase the
supply of and decrease demand for our dark fiber, adversely affecting our
business, financial condition and results of operations.
OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE DO NOT KEEP PACE WITH RAPID
TECHNOLOGICAL CHANGES.
The telecommunications industry is characterized by rapid and significant
changes in technology. We cannot predict the effect of technological changes on
our business. The introduction of new products or technologies may reduce the
cost or increase the supply of services similar to those that we plan to
provide, or could render those services and our network assets less desirable or
even obsolete. As a result, new entrants in the communications services industry
may become our most significant competitors in the future. These new entrants
may not be burdened by an installed base of outdated equipment and the resulting
competition they may provide could have a material adverse effect on us.
RISKS RELATING TO REGULATION
WE ARE SUBJECT TO SIGNIFICANT REGULATION THAT COULD CHANGE IN A MANNER ADVERSE
TO US.
Communications services are subject to significant regulation at the
federal, state and local levels. Our business plans require us to exploit new
opportunities afforded by recent regulatory changes. However, the regulatory
environment could adversely affect us in a number of ways, including:
- delays in receiving required regulatory approvals or the imposition of
onerous conditions for these approvals;
- difficulties in completing and obtaining regulatory approval of
interconnection agreements with existing local telephone companies; and
- enactment of new and adverse legislation or regulatory requirements or
changes in the interpretation of existing laws or regulations.
Many regulatory proceedings regarding issues that are important to our
business are currently underway or are being contemplated by federal and state
authorities. Changes in regulations or future regulations adopted by federal,
state or local regulators, or other legislative or judicial initiatives relating
to the telecommunications industry could have a material adverse effect on us.
20
<PAGE> 24
THE PROVISIONS OF THE TELECOMMUNICATIONS ACT OF 1996 THAT AFFECT US MAY NOT BE
IMPLEMENTED EFFECTIVELY OR MAY BE IMPLEMENTED IN A MANNER ADVERSE TO US.
The Telecommunications Act of 1996 was intended, among other things, to
foster competition in the local telephone market. However, the FCC and the
states are still implementing many of its rules and policies and it remains
uncertain how successfully the Telecommunications Act will promote competition.
Moreover, the Telecommunications Act and other recent federal laws regarding the
U.S. telecommunications industry remain subject to judicial review and
additional FCC rule-making proceedings. Our business strategy involves taking
advantage of some of the competitive opportunities advanced by the
Telecommunications Act, and the FCC may promulgate regulations implementing the
Telecommunications Act that are adverse to our business.
NEW REGULATIONS AND LEGISLATIVE INITIATIVES COULD SIGNIFICANTLY INCREASE
COMPETITION IN THE PROVISION OF LOCAL SERVICES.
Like most companies in the communications industry, we must comply with
many regulatory requirements. However, unlike some of our competitors,
particularly the existing local telephone companies, we are not currently
subject to some of the burdensome regulations federal law imposes on the
telecommunications industry. Our ability to compete in the provision of local
access services will depend upon a continued favorable, pro-competitive
regulatory environment. New regulations or legislation affording greater
flexibility and regulatory relief to our competitors could adversely affect us
by increasing competition in the provision of local services.
OUR ABILITY TO OFFER LONG DISTANCE COMPANIES LOCAL ACCESS SERVICES AT
COMPETITIVE RATES MAY BE LIMITED BY CURRENT FCC INITIATIVES.
The FCC is currently considering an industry proposal to restructure the
fees that existing local telephone companies charge long distance companies to
use their local networks. These fees are referred to as access charges. Changes
in the access charge structure could fundamentally affect the economic
environment in which we and our customers operate. If the FCC reduces the access
charges imposed by existing local telephone companies, it would significantly
reduce our price advantage in the market for local access services used by long
distance companies to access the existing local telephone companies' local
networks.
The FCC is also considering whether to impose limits on certain uses of
selected portions of the local telecommunications networks, sometimes called
"unbundled network elements", we purchase from the existing local telephone
companies. If the FCC limits our ability to offer long distance companies a
package of unbundled network elements that can be used to reach end users, our
ability to offer our local access services at competitive rates may be harmed.
PENDING REGULATORY INITIATIVES MAY MAKE IT EASIER FOR EXISTING LOCAL TELEPHONE
COMPANIES TO OFFER DIGITAL SUBSCRIBER LINE SERVICES, WHICH COULD HAVE A MATERIAL
ADVERSE EFFECT ON US.
In August 1998, the FCC proposed new rules that would allow existing local
telephone companies to provide Digital Subscriber Line services through separate
affiliates not subject to existing local telephone company regulation. The FCC
recently decided some of the other issues raised in that proceeding, but the
question of whether existing local telephone companies can provide unregulated
Digital Subscriber Line services through a separate affiliate remains
unresolved. Any decision that would permit an existing local telephone company
affiliate to offer Digital Subscriber Line services without being subject to
regulation imposed on existing local telephone companies could have a material
adverse effect on us by, for example, increasing the competition we face in the
provision of Digital Subscriber Line services.
21
<PAGE> 25
WE MAY NOT BE ABLE TO OBTAIN AND MAINTAIN THE FCC LICENSES NECESSARY FOR THE
OPERATION OF THE WIRELESS PORTIONS OF OUR NETWORK.
Portions of our network are wireless, meaning that we provide access
services via over-the-air microwave transmissions instead of through fiber optic
cables. Our arrangements with certain of our wireless co-development partners
contemplate that the wireless portion of our digital network will largely
provide "common carrier fixed point-to-point microwave" telecommunications
services under Part 101 of the FCC's rules. These services are subject to
regulation by federal, state and local governmental agencies. Changes in
existing laws and regulations governing our provision of these services could
have a material adverse effect on our business, financial condition, and results
of operations.
WE MUST COMPLY WITH FEDERAL AND STATE TAX AND OTHER SURCHARGES ON OUR SERVICES,
THE LEVELS OF WHICH ARE UNCERTAIN.
As a telecommunications provider, we must pay a variety of surcharges and
fees on our gross revenues from interstate services and intrastate services.
Interstate surcharges include fees for Federal Universal Service and common
carrier obligations, number administration, the provision of telecommunications
services to the disabled and other miscellaneous FCC requirements. State
regulators impose similar surcharges and fees on intrastate services. The
division of our services between interstate services and intrastate services is
a matter of interpretation, and FCC or relevant state commission authorities may
in the future contest how we allocate our charges. If this allocation is
changed, our payment obligations for the relevant surcharges could increase.
Periodic revisions by state and federal regulators of the applicable surcharges
may also increase the surcharges and fees we currently pay.
For more information on these and other risks posed by regulatory
initiatives, see "BUSINESS -- Government Regulation."
WE MAY BE REQUIRED TO REGISTER AS AN INVESTMENT COMPANY, WHICH WOULD SUBJECT US
TO SIGNIFICANT ADDITIONAL REGULATION.
Pathnet has, and after the consummation of the contribution and
reorganization transaction we will have, substantial cash balances and
short-term investments on a consolidated basis. As a result, we may be
considered an "investment company" under the Investment Company Act of 1940. The
Investment Company Act requires companies that are engaged primarily in the
business of investing, reinvesting, owning, holding or trading in securities, or
that fail numerical tests regarding composition of assets and sources of income
and that are not primarily engaged in a business other than investing,
reinvesting, owning, holding or trading in securities, to register as
"investment companies." Various substantive restrictions are imposed on
investment companies by the Investment Company Act.
Because we are primarily engaged in a business other than investing,
reinvesting, owning, holding or trading securities, we do not believe that we
are an investment company within the meaning of the Investment Company Act. If
we are required to register as an investment company under the Investment
Company Act, we would become subject to substantial regulation of our capital
structure, management, operations, transactions with "affiliated persons," as
defined in the Investment Company Act, and other matters. To avoid having to
register as an investment company, we may have to hold a portion of our liquid
assets as cash or government securities instead of as investment securities.
Having to register as an investment company or holding a material portion of our
liquid assets as cash or government securities to avoid registration could have
a material adverse effect on us.
22
<PAGE> 26
THIS PROSPECTUS CONTAINS "FORWARD-LOOKING STATEMENTS" AND INFORMATION RELATING
TO OUR BUSINESS AND US THAT ARE NOT HISTORICAL FACTS.
We make statements in this prospectus that are not historical facts. You
can identify these forward-looking statements by our use of terminology such as
"believes," "expects," "may," "will," "should" or "anticipates" or comparable
words. These forward-looking statements include, among others, statements
concerning:
- Our business strategy and competitive advantages;
- Our anticipated potential revenues from designated markets;
- The growth of the telecommunications industry and our business;
- The markets for our services and products;
- Forecasts of when we will enter particular markets or begin offering
particular services;
- Our anticipated capital expenditures and future funding requirements,
including the role of vendor and other sources of financing for equipment
and related asset purchases; and
- Anticipated regulatory developments.
These statements are only predictions. You should be aware that these
forward-looking statements are subject to risks and uncertainties, including
financial and regulatory developments, industry trends, and projections that
could cause actual events or results to differ materially from those expressed
or implied by the statements. Should one or more of these risks or uncertainties
materialize, or should our underlying assumptions about them prove incorrect,
our actual results, our performance or our proposed activities may vary
materially from those expressed or implied by these forward-looking statements.
We disclose factors that could cause our actual results to differ materially
from our descriptions in this "RISK FACTORS" section and elsewhere in this
prospectus including the sections under the "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," "DESCRIPTION OF
OTHER INDEBTEDNESS AND OTHER FINANCING ARRANGEMENTS" and "BUSINESS" captions.
Please read the entire prospectus for a description of some of these risks,
including competitive, financial, developmental, operational, technical,
regulatory and other risks associated with our business, before accepting our
Guarantees. You should not place undue reliance on the forward-looking
statements in this prospectus, which speak only as of the date of this
prospectus. We undertake no obligation, and do not intend, to update or revise
any forward-looking statements, whether as a result of new information, future
events or otherwise.
23
<PAGE> 27
USE OF PROCEEDS
We will not receive any proceeds from the issue of our Guarantees on the
Notes you hold. At September 30, 1999, the proceeds remaining from private
placements of equity securities and the 1998 offering of Notes, less any pledged
or restricted funds, consisted of $173.4 million of cash, cash equivalents and
marketable securities. Pathnet will lend $50 million of these proceeds to us in
the Contribution and Reorganization Transaction. In addition, in connection with
the closing of the Contribution and Reorganization Transaction (including both
of the Colonial tranches), we will receive $68 million in cash proceeds from
Colonial, comprised of $38 million at the initial closing; $25 million upon the
completion of a fiber optic network segment that we expect to complete during
the first calendar quarter of 2000; $1 million at the closing for the issuance
of an option to purchase more of our shares; and $4 million at the closing to
acquire a single fiber optic conduit along a portion of the Colonial right of
way corridors or other telecommunications assets of equivalent value.
We anticipate that after payment of the expenses of this offering and the
Contribution and Reorganization Transaction, we will use our proceeds to fund:
- Capital expenditures to be incurred in the development of our digital
network and for other purposes relating to our business (including the
business currently conducted by Pathnet);
- Expenses associated with our (and Pathnet's) development and sales and
marketing activities;
- Operating losses;
- Possible strategic investments and strategic acquisitions; and
- Working capital and other general corporate purposes.
The amounts that we actually expend will vary depending on a number of
factors, including future revenue growth, capital expenditures and the amount of
cash generated by our operations. Additionally, if we determine it would be in
our best interests, we may increase or decrease the number, selection and timing
of entry of our targeted regions. Accordingly, our management will retain broad
discretion in the allocation of such proceeds. We may also use a portion of the
proceeds to pursue possible strategic investments in or acquisitions of
businesses, technologies or products complementary to ours in the future. We
presently have no understandings, commitments or agreements with respect to any
acquisitions or material investments. Pending use of such net proceeds for the
above purposes, we intend to invest such funds in short-term, interest-bearing,
investment-grade securities.
24
<PAGE> 28
CAPITALIZATION
The following table sets forth Pathnet's total unaudited cash, cash
equivalents and marketable securities and capitalization as of September 30,
1999 on an actual basis and our unaudited cash, cash equivalents and marketable
securities and capitalization as of September 30, 1999 on a pro forma basis to
give effect to the consummation of the Contribution and Reorganization
Transaction and the offering of the Guarantees as if they occurred on September
30, 1999. You should read the information in this table in conjunction with
Pathnet's Consolidated Financial Statements and the notes related thereto
included elsewhere in this prospectus. See also "USE OF PROCEEDS" and
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS, LIQUIDITY AND CAPITAL RESOURCES."
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-------------------------------
PATHNET PATHNET TELECOM
ACTUAL PRO FORMA()(A)()
------------ ----------------
(UNAUDITED)
<S> <C> <C>
Cash, cash equivalents and marketable securities (excluding
marketable securities pledged as collateral)(b)............. $173,420,328 $212,045,321
============ ============
Pledged securities.......................................... $ 42,379,701 $ 42,379,701
============ ============
Long-term obligations:
Notes..................................................... $346,519,250 $346,519,250
------------ ------------
Mandatorily redeemable preferred stock:
Series A convertible preferred stock, par value $0.01 per
share, 1,000,000 and 0 shares authorized, issued and
outstanding actual and pro forma, respectively.......... 1,000,000 --
Series B convertible preferred stock, par value $0.01 per
share, 1,651,046 and 0 shares authorized, issued and
outstanding actual and pro forma, respectively.......... 5,008,367 --
Series C convertible preferred stock, par value $0.01 per
share, 2,819,549 and 0 shares authorized, issued and
outstanding actual and pro forma, respectively.......... 29,961,272 --
Series E convertible preferred stock, par value $0.01 per
share, 0 and 4,506,145 shares authorized actual and pro
forma, respectively, 0 and 1,729,631 shares issued and
outstanding actual and pro forma, respectively.......... -- 37,999,993
------------ ------------
Total mandatorily redeemable preferred stock....... 35,969,639 37,999,993
------------ ------------
Stockholders' equity (deficit):
Series A convertible preferred stock, par value $0.01 per
share, 0 and 2,899,999 shares authorized, issued and
outstanding actual and pro forma, respectively.......... -- 29,000
Series B convertible preferred stock, par value $0.01 per
share, 0 and 4,788,030 shares authorized, issued and
outstanding actual and pro forma, respectively.......... -- 47,880
Series C convertible preferred stock, par value $0.01 per
share, 0 and 8,176,686 shares authorized, issued and
outstanding actual and pro forma, respectively.......... -- 81,767
Series D convertible preferred stock, par value $0.01 per
share, 0 and 9,250,000 shares authorized actual and pro
forma, respectively, 0 and 8,511,607 shares issued and
outstanding actual and pro forma, respectively.......... -- 85,116
Undesignated preferred stock, par value $0.01 per share, 0
and 10,000,000 authorized, 0 issued and outstanding
actual and pro forma.................................... -- --
Common stock, par value $0.01 per share, 60,000,000 shares
authorized; 2,977,593 shares issued and outstanding
actual and pro forma.................................... 29,776 29,776
Deferred compensation..................................... (575,836) (575,836)
Additional paid in capital................................ 6,162,866 229,888,748
Accumulated other comprehensive loss...................... (45,465) (45,465)
Deficit accumulated during development stage.............. (82,872,567) (82,872,567)
------------ ------------
Total stockholders' equity (deficit)............... (77,301,226) 146,668,419
------------ ------------
Total capitalization............................... $305,187,633 $531,187,662
============ ============
</TABLE>
Footnotes on following page
25
<PAGE> 29
- ---------------
(a) Our pro forma summary consolidated balance sheet data as of September 30,
1999 reflects the following events as if such events had occurred as of
September 30, 1999:
- Contribution of over 12,000 route miles of rights of way with an estimated
value of $187 million for 8,511,607 shares of our Series D convertible
preferred stock;
- Receipt of $38 million in cash at the initial closing for 1,729,631 shares
of our Series E redeemable preferred stock. Another $25 million in cash
(which is excluded from our above pro forma balance sheet data) will be
received in exchange for 1,137,915 shares of our Series E redeemable
preferred stock (conditioned upon the completion of a fiber optic network
segment build that we expect to complete during the first calendar quarter
of 2000);
- Exchange of 2,977,593 shares of outstanding Pathnet common stock for
2,977,593 shares of our common stock;
- Exchange of 5,470,595 shares of Pathnet mandatorily redeemable preferred
stock into 15,864,715 shares of our convertible preferred stock;
- Receipt of $1 million in cash for options to purchase 1,593,082 shares of
our Series E redeemable preferred stock at $21.97 per share and shares of
our common stock at an initial public offering;
- Receipt of $4 million in cash for our sale to Colonial of rights in a
specified number of conduit miles of our future network;
- Receipt of $275,000 in rights of way for our sale to CSX of rights in a
specified number of conduit miles of our future network; and
- Pathnet's payment of a 1% consent fee to holders of the Notes (assuming
all holders of Notes consent to the Contribution and Reorganization
Transaction) and other payments to the Solicitation Agent of approximately
$4.4 million in the aggregate.
See "DESCRIPTION OF CONTRIBUTION AND REORGANIZATION TRANSACTION" included
elsewhere in this prospectus.
(b) Cash, cash equivalents and marketable securities include investments in
marketable securities available for sale.
26
<PAGE> 30
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
We present below selected historical consolidated financial information for
Pathnet and the pro forma balance sheet data for Pathnet Telecom. The summary
historical statements of operations data for the years ended December 31, 1996,
1997 and 1998 have been derived from Pathnet's audited financial statements that
are included elsewhere in this prospectus. The summary historical statement of
operations data for the period from August 25, 1995 (the date of Pathnet's
inception) to December 31, 1995 has been derived from Pathnet's audited
financial statements that are not included elsewhere in this prospectus. The
summary historical balance sheet data as of September 30, 1999 and the summary
historical statements of operations data for the nine months ended September 30,
1998 and 1999 and the period from August 25, 1995 (the date of Pathnet's
inception) to September 30, 1999 have been derived from Pathnet's unaudited
financial statements that are included elsewhere in this prospectus. The
unaudited financial information as of September 30, 1998 and 1999 and for the
nine month periods then ended includes, in the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair statement of Pathnet's interim results. The unaudited pro forma balance
sheet data as of September 30, 1999 gives effect to the Contribution and
Reorganization Transaction as if it occurred on September 30, 1999. We have
provided the pro forma balance sheet data for informational purposes only.
<TABLE>
<CAPTION>
PATHNET
----------------------------------------------------------------------------------------
PERIOD FROM
AUGUST 25, 1995
(DATE OF YEAR ENDED NINE MONTHS ENDED
INCEPTION) TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ---------------------------------------- ---------------------------
1995 1996 1997 1998 1998 1999
--------------- ----------- ----------- ------------ ------------ ------------
UNAUDITED UNAUDITED
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenue.................. $ -- $ 1,000 $ 162,500 $ 1,583,539 $ 1,050,000 $ 2,275,003
Operating expenses:
Cost of revenue........ -- -- -- 7,547,620 5,385,718 9,579,064
Selling, general and
administrative....... 429,087 1,333,294 4,247,101 9,615,867 6,721,862 9,500,235
Depreciation and
amortization
expense.............. 352 9,024 46,642 732,813 315,247 3,714,170
---------- ----------- ----------- ------------ ------------ ------------
Total operating
expenses............... 429,439 1,342,318 4,293,743 17,896,300 12,422,827 22,793,469
Net operating loss....... (429,439) (1,341,318) (4,131,243) (16,312,761) (11,372,827) (20,518,466)
Interest expense(a)...... -- (415,357) -- (32,572,454) (21,862,169) (30,318,331)
Interest income.......... 2,613 13,040 159,343 13,940,240 9,574,286 10,511,464
Write off of initial
public offering
costs.................. -- -- -- (1,354,534) (1,354,534) --
Other income (expense),
net.................... -- -- (5,500) 2,913 500 (83,777)
---------- ----------- ----------- ------------ ------------ ------------
Net loss................. $ (426,826) $(1,743,635) $(3,977,400) $(36,296,596) $(25,014,744) $(40,409,110)
========== =========== =========== ============ ============ ============
Basic and diluted loss
per common share....... $ (0.15) $ (0.60) $ (1.37) $ (12.51) $ (8.62) $ (13.88)
Weighted average number
of common shares
outstanding............ 2,900,000 2,900,000 2,900,000 2,902,029 2,901,917 2,911,512
OTHER FINANCIAL DATA
(UNAUDITED):
Ratio of earnings to
fixed charges.......... <1 <1 <1 <1 <1 <1
Deficiency of earnings to
fixed charges.......... $426,826 $ 1,743,635 $ 3,977,400 $ 36,658,917 $ 25,377,065 $ 42,237,083
<CAPTION>
PATHNET
---------------
PERIOD FROM
AUGUST 25, 1995
(DATE OF
INCEPTION) TO
SEPTEMBER 30,
1999
---------------
UNAUDITED
<S> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenue.................. $ 4,022,042
Operating expenses:
Cost of revenue........ 17,126,684
Selling, general and
administrative....... 25,125,584
Depreciation and
amortization
expense.............. 4,503,001
------------
Total operating
expenses............... 46,755,269
Net operating loss....... (42,733,227)
Interest expense(a)...... (63,306,142)
Interest income.......... 24,626,700
Write off of initial
public offering
costs.................. (1,354,534)
Other income (expense),
net.................... (86,364)
------------
Net loss................. $(82,853,567)
============
Basic and diluted loss
per common share....... $ (28.54)
Weighted average number
of common shares
outstanding............ 2,902,594
OTHER FINANCIAL DATA
(UNAUDITED):
Ratio of earnings to
fixed charges.......... <1
Deficiency of earnings to
fixed charges.......... $ 85,043,861
</TABLE>
27
<PAGE> 31
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
------------------------------
PATHNET PATHNET TELECOM
ACTUAL PRO FORMA(B)
------------ ---------------
(UNAUDITED)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities (excluding
marketable securities pledged as collateral)(c)........... $173,420,328 $212,045,321
Property and equipment, net................................. 106,123,850 106,123,850
Intangible assets -- rights of way.......................... -- 187,275,006
Total assets................................................ 338,574,555 568,849,554
Long-term obligations(d).................................... 346,782,984 351,057,984
Total liabilities........................................... 379,906,142 384,181,142
Redeemable preferred stock.................................. 35,969,639 37,999,993
Stockholders' (deficit) equity.............................. (77,301,226) 146,668,419
</TABLE>
- ---------------
(a) The 1996 expense relates to the beneficial conversion feature of a loan at
December 31, 1996.
(b) Our pro forma summary consolidated balance sheet data as of September 30,
1999 reflects the following events as if such events had occurred as of
September 30, 1999:
- Contribution of over 12,000 route miles of rights of way with an estimated
value of $187 million for 8,511,607 shares of our Series D convertible
preferred stock;
- Receipt of $38 million in cash at the initial closing for 1,729,631 shares
of our Series E redeemable preferred stock. Another $25 million in cash
(which is excluded from our above pro forma balance sheet data) will be
received in exchange for 1,137,915 shares of our Series E redeemable
preferred stock (conditioned upon the completion of a fiber optic network
segment build that we expect to complete during the first calendar quarter
of 2000);
- Exchange of 2,977,593 shares of outstanding Pathnet common stock for
2,977,593 shares of our common stock;
- Exchange of 5,470,595 shares of Pathnet mandatorily redeemable preferred
stock into 15,864,715 shares of our convertible preferred stock;
- Receipt of $1 million in cash for options to purchase 1,593,082 shares of
our Series E redeemable preferred stock at $21.97 per share and shares of
our common stock at an initial public offering;
- Receipt of $4 million in cash for our sale to Colonial of rights in a
specified number of conduit miles of our future network;
- Receipt of $275,000 in rights of way for our sale to CSX of rights in a
specified number of conduit miles of our future network; and
- Pathnet's payment of a 1% consent fee to holders of the Notes (assuming
all holders of Notes consent to the Contribution and Reorganization
Transaction) and other payments to the Solicitation Agent of approximately
$4.4 million in the aggregate.
See "DESCRIPTION OF CONTRIBUTION AND REORGANIZATION TRANSACTION" included
elsewhere in this prospectus.
(c) Cash, cash equivalents and marketable securities include investments in
marketable securities available for sale.
(d) Long term obligations include other non-current liabilities of $263,734.
28
<PAGE> 32
BUSINESS
This discussion contains forward-looking statements that involve risks and
uncertainties including, without limitation, statements relating to our company
and our business units' plans, strategies, objectives, expectations, intentions
and resources. Our actual results could differ materially from those anticipated
in forward-looking statements as a result of various factors, including those
described in the section of this prospectus entitled "RISK FACTORS." You should
assume, for the purposes of this section, that all references to our business,
strategies, plans or conditions affecting us prior to the date of this
prospectus are references to Pathnet's business, strategies, plans or conditions
affecting Pathnet. Unless we indicate otherwise, references to our current or
future business, strategies or plans are references to our consolidated
business, strategies or plans, including Pathnet and our other future
subsidiaries. We are providing information regarding Pathnet's past and future
business, strategies, plans and conditions affecting Pathnet because Pathnet
will be our wholly owned subsidiary, and we will be assuming many of Pathnet's
assets and obligations, immediately following the closing of the Contribution
and Reorganization Transaction.
OVERVIEW
We are a wholesale telecommunications provider building a nationwide
network designed to provide other wholesale and retail telecommunications
service providers with access to underserved and second and third tier markets
throughout the United States. Our network will enable our customers including
ILECs, IXCs, ISPs, CLECs, cellular operators and resellers to offer additional
services to new and existing customers in these markets without having to expend
their own resources to build, expand, or upgrade their own networks. In addition
to serving unique markets, our network will be differentiated by both its:
- Ability to provide a complete access solution in our target markets,
including collocations in central offices and intercity transport, and
- Its advanced network architecture that will allow our customers to offer
the latest voice, video, and data services across a single network at
very high speeds.
We expect our nationwide network to grow to over 20,000 route miles
utilizing fiber and high capacity Synchronous Optical Network Technology, also
known as "SONET" microwave. We intend to continue to develop our backbone on a
"smart-build" basis by prioritizing route development along corridors with high
demand for dark fiber and conduit or partnering with established companies in
the joint development of those routes. We expect our network will terminate in
central offices in our target markets where we intend to collocate and use ILEC
unbundled network elements or other third party local network assets in the
provision of service to our customers.
As of November 22, 1999, our network consisted of over 6,100 wireless route
miles providing wholesale transport services to 13 cities. We are constructing
1,100 route miles of fiber network, which is scheduled for completion in the
first half of 2000, and an additional 300 route miles of wireless network. We
have also entered into two additional co-development agreements for the
construction of an additional 750 route miles of fiber optic network. We expect
to develop additional backbone network from a pool of over 12,000 route miles of
right of way received in the Contribution and Reorganization
Transaction -- 8,000 of which will have some form of exclusivity. These
additional route miles will provide us with the opportunity to develop unique
and diverse paths connecting our target markets back to major tier one
metropolitan areas.
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We currently project the development of our network through the middle of
2000 to be:
<TABLE>
<CAPTION>
PROJECTED PROJECTED PROJECTED
NETWORK ROUTE COLLOCATIONS ACCESSED
MILES COMPLETED DEVELOPED CITIES
--------------- ------------ ---------
<S> <C> <C> <C>
As of November 22, 1999.............................. 6,100 25 13
End of Fourth Quarter 1999........................... 6,600 40 28
End of First Quarter 2000............................ 7,400 60 40
End of Second Quarter 2000........................... 7,600 85 50
</TABLE>
In addition to building our network backbone, since inception we have:
- Obtained state regulatory certification or otherwise been authorized to
provide our planned telecommunications services in 6 states, with
applications pending in an additional 9 states, which will allow us to
obtain unbundled network elements from the ILECs;
- Executed collocation agreements with two ILECs: US West and BellSouth;
- Launched our Alliance Program under which we expanded our virtual network
to reach additional markets by reselling portions of two other carriers'
networks;
- Signed Master Service Agreements with the three largest U.S. IXCs;
- Completed our fully operational Network Operations Center, providing
twenty-four hours a day, seven days-a-week coverage; and
- Entered into a leased fiber agreement for an indefeasible right to use
(sometimes referred to as an "IRU") a portion of our dark fiber capacity
on our fiber route currently being constructed from Chicago to Aurora (a
suburb of Denver), Colorado.
MARKET OPPORTUNITY
INDUSTRY OVERVIEW
We believe that the following five factors create a substantial market
opportunity for our products and services:
- Increasing demand for high capacity access and transport services to
accommodate unprecedented consumer demand for Internet access and related
services;
- Growing disparity, sometimes referred to as the "digital divide," between
telecommunications services available in the largest markets and those
services available in second and third tier markets due to our
telecommunications service provider customers' nearly exclusive focus of
resources and product offerings on first tier domestic and on global
markets;
- Rapid development of new technologies such as DSL that allow carriers to
exploit existing local network infrastructure to deliver multiple media
(including voice, data, video and Internet) at high speed over a single
physical local access connection to a network;
- Rapid migration from circuit-based network architectures to fast
packet-based network technologies that allow for the efficient
integration of multiple customers across a common backbone network
infrastructure; and
- Adoption of the Telecommunications Act and certain state regulatory
initiatives that provide increased opportunities in the
telecommunications marketplace by opening local markets to competition
and requiring ILECs to provide additional direct interconnection and
collocation to their competitors.
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We intend to exploit these developments and employ emerging convergent
technologies in the deployment of our backbone network and local access
platform. We believe the emergence and acceptance of advanced
convergence-supporting technologies at the user premise will significantly
increase our abilities to provide low cost solutions to our carrier customers in
underserved and second and third tier markets that have been overlooked by other
emerging telecommunications service providers.
ADDRESSABLE MARKET
We worked with The Yankee Group on an addressable market study for the
products and services we expect to bring to the marketplace in the near term.
The study found that the communications market is currently a $270 billion
market in the U.S. and is expected to grow at over 10% annually for the next
five years. According to The Yankee Group, the sections of the market that we
expect to address -- backbone infrastructure services, inter-city and local
wholesale transport services and local access services -- are among the most
rapidly growing components of the current telecommunications landscape which The
Yankee Group forecasts to grow at approximately 18% annually for the next five
years. The Yankee Group estimates that the addressable market for these products
and services in the United States to be $30 billion in 1999, expanding to $80
billion by 2005.
We plan to serve second and third tier markets with populations between
600,000 and 50,000, of which there are over 200, with backbone infrastructure
services, long haul wholesale transport and local access services. We also
expect to capture a portion of the long haul wholesale transport services
segment between first tier markets with populations over 600,000. We estimate
that the addressable market for these products and services is $13 billion in
1999, growing to $27 billion in 2004.
BUSINESS STRATEGY
Our business objective is to become the preferred facilities-based
wholesale telecommunications provider to customers in our target markets. To
achieve this goal, we plan to:
- Concentrate our focus on the needs of telecommunications service
providers and their customers;
- Focus on underserved and second and third tier markets;
- Enter and roll-out service rapidly in our target markets;
- Design, build and acquire a low-cost network;
- Provide superior customer service and service quality; and
- Pass to our customers savings from the deployment of our local network
access program.
Each of these strategies is discussed in more detail below:
- CONCENTRATE OUR FOCUS ON THE NEEDS OF TELECOMMUNICATIONS SERVICE
PROVIDERS AND THEIR CUSTOMERS. Our customers are companies in the
business of selling communications services to end user customers. We
believe that these companies are investing considerable sums to connect
as many customers as possible to keep pace with the rapidly evolving
telecommunications marketplace and that these carriers would like to find
the means to maximize the return on their investments and deployment of
resources. We further believe that these challenges are magnified when
they consider serving customers in second and third tier markets. Very
few of these telecommunications service providers operate at a scale that
justifies significant investment in building their own network in smaller
markets. The alternative -- re-selling ILEC local networks -- has limited
appeal because it can be expensive and, in many cases,
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the ILEC network components lack the broadband capabilities that these
telecommunications service providers need to compete effectively in the
marketplace. We believe that our customers will be able to effectively
"timeshare" our products and services. This will enable them to access
second and third tier markets to serve their customers without incurring
high capital expenditures, or many of the franchising and licensing fees
and long lead times that are usually associated with building their own
networks and establishing a meaningful local collocation presence in
these markets.
- FOCUS ON UNDERSERVED AND SECOND AND THIRD TIER MARKETS. We plan to serve
second and third tier markets with populations between 600,000 and
50,000, of which there are over 200, as well as a portion of the first
tier markets with populations over 600,000. We believe our customers will
value our backbone network because, for the most part, it will be built
along unique rights of way offering route separation and diversity in the
event of a network system failure. Also, unlike others backbone networks
that bypass second and third tier markets, we will construct and design
our backbone to interconnect into these markets. We seek to be among the
first to market advanced wholesale transport and local access services in
many of our markets. By pioneering in second and third tier markets, we
hope to capitalize on escalating demand for high capacity bandwidth
services that is a product of the current unprecedented demand for
Internet access and related services.
- ENTER AND ROLL OUT SERVICE RAPIDLY IN OUR TARGET MARKETS. We seek to
become the first emerging carrier to enter and roll out our products and
services broadly in our targeted underserved and second and third tier
markets by:
- Securing central office space before our competitors do;
- Obtaining and retaining customers before significant competition for
our products and services in these markets arises; and
- Maintaining advantages over our competitors by offering superior
coverage and high customer satisfaction.
- DESIGN, BUILD AND ACQUIRE A LOW-COST NETWORK. Consistent with our
conservative capital expenditure program, one of our key strategies since
inception has been to establish strategic relationships with owners of
existing telecommunications infrastructure, to reduce our capital costs
and time to market. As of November 22, 1999, we had entered into
strategic relationships with eight companies who have provided the
foundation for our existing 6,100-route mile wireless backbone network.
We have also entered into three co-development agreements relating to the
construction of 1,850 fiber route miles. After completing the
Contribution and Reorganization Transaction through our strategic
relationships with BNSF, CSX and Colonial, we will have access to over
12,000 miles of valuable rights of way, 8,000 miles of which will have
some form of exclusivity.
We are developing our network using a "smart build" approach. Under this
approach, we attempt to reduce the risk of building our network by
obtaining one or more co-development partners to share in the costs. We
also determine the level of customer demand before construction by
obtaining direct customer input regarding the attractiveness of a route
and, in certain cases, entering into pre-construction sales of dark fiber
and conduit. As a result, we expect that the cost of our retained
nationwide backbone network will be significantly less than a comparable
network built or acquired at market rates. We intend to continue this low
cost approach in providing our local access services. We plan to secure
CLEC status in each state that we provide service and we anticipate
signing interconnection agreements with all of the relevant ILECs. These
interconnection agreements allow us to construct our microwave tributary
routes directly to the ILEC central office facility, allowing us to use
the existing
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central office as our point of presence in the market, and avoid the cost
of separate facilities. This will enable us to obtain and use unbundled
network elements from the ILECs at favorable rates and terms, including
space in the ILEC's central offices that are necessary to establish our
collocations.
- PROVIDE SUPERIOR CUSTOMER SERVICE AND SERVICE QUALITY. As part of our
strategy to obtain and retain business and telecommunications service
provider customers, we intend to provide superior service and customer
care. We will aim to provide high quality services by offering what we
believe to be state-of-the-art networking solutions and superior customer
service. These networking solutions include end-to-end proactive network
monitoring and management through our Network Operations Center, 24 hours
a day, seven days-a-week. We also offer multiple security features and we
have completed implementing our Year 2000 readiness program to ensure
that our networks and systems are Year 2000 compliant. See "RISK
FACTORS -- Risks Relating to Our Company Operations" and "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- Year 2000 Readiness Disclosure." We plan to provide
superior customer service to promote a high level of customer
satisfaction, achieve customer loyalty and accelerate the use of our
products and services. In addition, we have, and will continue to
install, a technologically advanced network that we believe provides the
high level of reliability, security and flexibility that our customers
demand. Our fiber and wireless network is designed to meet industry
standards for reliability by maintaining overall network reliability of
99.999% and a bit error rate less than 10(-13).
- PASS TO OUR CUSTOMERS SAVINGS FROM THE DEPLOYMENT OF OUR LOCAL NETWORK
ACCESS PLATFORM. We plan to deploy a convergent local network access
platform. In other words, we intend to combine, or enable the combination
of, all multiple customer applications onto a single physical local
access connection, which will travel on our fast packet-based capable
backbone infrastructure. Using this convergent platform we believe that
our telecommunications service provider customers will be able to launch
their own services to better serve their end user customers.
STRATEGIC RELATIONSHIPS
FIBER CO-DEVELOPMENT PARTNERS
WORLDWIDE FIBER. In March 1999, we entered into a co-development agreement
with Worldwide Fiber, Inc. for the design, engineering and construction by
Worldwide Fiber of a multiple conduit fiber-optic system. The system will be
approximately 1,100 route miles long, between Aurora, Colorado (a suburb of
Denver) and Chicago, Illinois. The first segment, Chicago to Omaha, Nebraska, is
scheduled to be completed in the fourth quarter 1999, and the second segment,
Omaha to Aurora, is scheduled to be completed by the end of the first quarter of
2000. In connection with the co-development agreement, we entered into a joint
marketing agreement with Worldwide Fiber under which both Worldwide Fiber and we
will attempt to sell certain dark fibers on the route, and will share the
revenues from such sales. The joint marketing agreement also permits each party
to retain a certain number of dark fibers for its own use, subject to certain
restrictions on resale.
TRI-STATE. In August 1999, we entered into a co-development agreement with
Tri-State Generation and Transmission Association, Inc. and four regional
electric cooperatives for our design, engineering and construction of an aerial
fiber system, approximately 420 route miles long, between Albuquerque, New
Mexico and Grand Junction, Colorado. We expect this system to be completed in
the second half of 2000.
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ALLIANCE PROGRAM. We have entered into capacity purchase agreements with
two other carriers, IXC and Frontier, enabling us to resell capacity on their
networks. This allows us to extend our network reach to POPs throughout the
markets reached by Frontier's and IXC's networks and pre-sell capacity along
routes we intend to develop.
WIRELESS CO-DEVELOPMENT PARTNERS
FIXED POINT MICROWAVE SERVICES AGREEMENTS. We have entered into several
fixed point microwave services agreements with co-development partners who own
existing wireless telecommunications assets. Typically, under these agreements
we lease an interest in the co-development partner's sites and facilities on
which our network is built and in return we provide the co-development partner
with capacity on such network for its own internal use. These agreements
generally provide for a five or ten year term that is subject to renewal by us
upon the occurrence of certain events, for up to a 25-year term. As of the date
of this prospectus, we had entered into fixed point microwave services
agreements with these co-development partners:
- Idaho Power Company;
- Northern Indiana Public Service Company;
- The Burlington Northern and Santa Fe Railway Company;
- Kinder Morgan, Inc. (formerly KN Energy, Inc.);
- Kinder Morgan, Inc. (formerly KN Telecommunications, Inc.);
- Texaco Pipeline;
- Northern Border Pipeline Company; and
- Northeast Missouri Electric Power Cooperative.
TOWER LEASE AGREEMENTS. We entered into a leasing arrangement with
American Tower Company under which American Tower granted us a 25-year license
to use certain of its towers to deploy several wireless portions of our network.
PRODUCTS AND SERVICES
We plan to offer the following products and services:
- DARK FIBER AND CONDUIT FOR SALE OR GRANT OF IRU. We sell rights for dark
fiber and related services as well as rights to conduit. Dark fiber
consists of fiber strands contained within a fiber optic cable which has
been laid but does not yet have its transmission electronics installed. A
sale or grant of an indefeasible right to use our dark fiber typically
has a term which approximates the economic life of a fiber optic strand
(generally 20 to 30 years). Purchasers of dark fiber rights typically
install their own electrical and optical transmission equipment.
Substantially all of our current and planned builds include laying spare
conduits, and we may sell rights to use them. A purchaser of conduit
rights typically lays its own cable inside the conduit. Related services
for both sales of rights for dark fiber and conduits may include
installation of customer equipment at the locations where we have
installed transmission equipment and network equipment and maintenance of
the purchased fiber or conduit. Generally, we expect our customers to pay
for dark fiber rights and conduit at the time of delivery and acceptance
of the fiber or conduit, although other payment options may be available.
In addition, we typically require our customers to make ongoing payments
for maintenance services.
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- DARK FIBER FOR LEASE OR LEASE TO PURCHASE. We will also lease dark fiber
for a term less than the period for which the indefeasible usage rights
are typically granted. Leases will be typically structured with monthly
payments over the term of the lease. Generally, we expect to realize a
premium in lease pricing for bearing the risk that the lease will not be
renewed for the balance of the life of the asset. We plan to offer
customers the option to lease to purchase.
- WAVELENGTH LEASE. In our network, we intend to use Dense Wavelength
Division Multiplexing, or DWDM, a technology that allows multiple optical
signals to be combined so that they can be aggregated as a group and
transported over a single fiber to increase capacity. This will allow us
to sell a customer exclusive long-term use of a portion of the
transmission capacity of a fiber optic strand rather than the entire
strand. We expect that the installation of the necessary transmission
equipment to provide these services along our first completed fiber route
from Chicago to Denver will be complete in the first half of 2000. We
expect to be able to derive up to 160 individual wavelength channels at
either OC-48 or OC-192 per fiber pair.
- INTER-CITY WHOLESALE TRANSPORT SERVICES. Our inter-city transport
services are focused on second and third tier markets and are comprised
of point-to-point services offered as Time Division Multiplexing, or TDM,
which is an electronic process that combines multiple communication
channels into a single, higher-speed channel by interleaving portions of
each in a consistent manner over time-based private lines at DS-1, DS-3,
OC-3, OC-12, OC-48 and OC-192. We believe that our services will be
particularly attractive to our customers because of our low cost backbone
transport and low cost local loops (attributable to our collocation in
the ILEC's central office and our use of UNE transport). We believe that
we offer more flexible commitment levels with higher reliability than are
currently available on traditional multiplexed services. As of November
22, 1999, we offered inter-city wholesale transport services on our 6,100
route mile-wireless backbone network as well as via our Alliance Program.
- LOCAL WHOLESALE TRANSPORT SERVICES. Once we establish collocation in the
ILEC's central offices in second and third tier markets, we believe that
we will be able to deliver local transport between central offices or to
connect those central offices to our backbone or a telecommunications
service provider customer backbone. We plan to offer local transport
services, such as xDSL-based private lines or TDM-based private lines at
DS-0, DS-1, DS-3, OC-3, OC-12, OC-48. We expect our customers to use
these services to reduce charges for inter-office transport or to provide
end office trunking.
- LOCAL ACCESS SERVICES. We plan to deliver our local access services from
network presences we have established by collocating with the ILECs in
second tier and third tier markets and through the local networks we have
established using a combinations of UNEs and other network components
from other communications carriers.
- VIRTUAL POINTS OF PRESENCE (VPOP). We plan to bundle our wholesale
transport services and local access services to offer our virtual points
of presence service, sometimes referred to as VPOP. Through this bundle
of services, we intend to offer our customers the ability to establish a
virtual point of presence for their networks without requiring the
customer to place any equipment at our collocation site using our
facilities. We will focus this VPOP service on second and third tier
markets. We expect that our VPOP service will allow our customers to
virtually extend the reach of their networks while expending less
resources and incurring far less risk than if that customer had expanded
and built its own network.
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SALES AND MARKETING STRATEGY
Our wholesale customers tend to be very knowledgeable about the nature of
the services and technology available in the marketplace. As a result, our
marketing efforts are largely limited to ensuring that our products and services
are visible and well represented in the market. As part of our marketing
strategy, we attempt to position ourselves as the provider of choice for
telecommunication service providers because of the quality of our service, the
control we provide customers over their service platforms, the reliability of
our services and our low cost position. We believe our cost advantages allow us
to sell our services on our network at prices that represent potentially
significant savings for our large-volume customers relative to their other
alternatives.
We sell our services to large regional and national telecommunications
service providers through our direct sales team on a national account basis.
Since we sell primarily to other telecommunications service providers, we expect
that our sales and marketing department will remain relatively small and
focused, resulting in strong customer relationships and lower operating costs.
Our sales team consists of senior level management personnel and experienced
sales representatives with extensive knowledge of the industry and our products.
This team also has key industry contacts at various levels within many
telecommunications service provider organizations.
CUSTOMERS
We have defined a range of products and services designed to meet the
unique needs of our customers and, as a result, we intend to offer several types
of services to these types of customers:
- Full service IXCs: we intend to provide low cost DSL-based transport,
used to deliver broadband access. We expect to provide lower cost access
and short haul transport to reduce the cost of delivering traditional
voice, private line or data services;
- CLECs and competitive IXCs: we can extend reach to new markets by
providing a more efficient means for CLECs to originate or terminate
voice traffic and a lower cost source of inter-city wholesale transport
or infrastructure services;
- ISPs: we intend to offer low cost DSL to deliver broadband access. We
expect to be able to extend ISPs reach to new markets. We plan to provide
low cost infrastructure services and wholesale transport services. We
expect to provide direct access to the locations at which ISPs exchange
each other's traffic.
- ILECs: we expect to provide lower cost network services within the ILEC's
own region and wholesale transport services and local access services out
of region as ILECs become permitted to provide these services;
- Wireless and cable providers (including cellular companies): we plan to
provide backhaul services, head end distribution services and wholesale
transport services; and
- Resellers: we expect to provide low cost termination for switched
traffic.
THE PATHNET NETWORK
BACKBONE NETWORK
We plan to create an approximately 20,000 route mile nationwide network.
Tributaries using either fiber or wireless technology will connect our backbone
to our targeted markets. We believe that connecting the second and third tier
markets to a national backbone is the key to funneling traffic between these
markets and first tier markets.
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NETWORK ROUTE SELECTION AND SMARTBUILD APPROACH. In order to utilize
capital effectively, we employ a "smart-build" approach. This means that we seek
to reduce our risks in undertaking the build by:
- Obtaining one or more co-development partners to share in the costs;
- Determining the levels of customer demand before construction (by
obtaining direct customer input on the route); and
- In certain cases, seeking to effect pre-construction sales of dark fiber
and conduit.
Before deciding to construct or acquire a network to serve particular
markets, we review the demographic, economic, competitive and telecommunications
demand characteristics of the markets along proposed routes, including their
location, the concentration of potential business, government and institutional
end-user customers, the economic prospects for the area, available data
regarding transport demand and actual and potential competitive access
providers, also referred to as "CAPs" and CLEC competitors. Market demand is
estimated on the basis of market research performed by us and others, utilizing
a variety of data including estimates of the number of interstate access and
intrastate private lines in the market based primarily on FCC reports and
commercial databases.
We expect to enter into a co-development relationship with one or more
partners to share the costs of building the route as well as the dark fiber
revenue from each constructed route. We recently employed this approach in our
fiber routes from Chicago to Aurora (a suburb of Denver, Colorado), and from
Albuquerque, New Mexico to Grand Junction, Colorado with our partners, Worldwide
Fiber and Tri-State. Typically, independent contractors selected through a
competitive bidding process provide our construction and installation services.
In certain of our network builds, we provide project management services,
including contract negotiation and supervision of the construction, testing and
certification of our facilities.
FIBER CURRENCY, SWAPS AND ACQUISITIONS. When determining the fiber optic
cable and conduit sizing for a particular route, we take into account these
considerations:
- Fiber strands required for our retained network;
- Fiber strands required by our co-development partner's network;
- Projected sales of fibers and conduits along the route;
- Quantity of fibers to be allocated for swaps; and
- Retained empty conduit in the event we desire to deploy different or
advanced technologies.
We believe fiber has a "currency" value depending upon the value of the
route to specific telecommunications service providers. Once we determine a
particular route has a high currency value, we expect to capitalize on this by
using excess fibers and conduit to enable advantageous fiber swaps and sales of
fiber and conduit. If we determine that a particular route is being sufficiently
served by existing fiber, we will not build our own network along that route,
but instead we will use our fiber "currency" to swap for existing fiber along
those routes or we will acquire dark fiber that is already installed by another
company. In this way, swaps will allow us to leverage our network, gain more
geographical coverage and decrease our time to market.
In order to connect our network with our customers, we develop
interconnections from our backbone network into our targeted underserved and
second and third tier markets. We design and install our interconnections using
the most cost effective technology to meet the market's needs that may include
building fiber optic cable, acquiring existing fiber, installing wireless
components, or combinations of these technologies.
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LOCAL ACCESS CONVERGENT PLATFORM
We believe establishing a local presence in our target markets will
position us to deploy a convergent local network access platform that will
enable multiple customer applications to be combined at a single physical local
access connection and then travel onto our advanced, fast packet-based backbone
infrastructure. From this convergent platform, we expect to enable our
telecommunications service provider customers to launch their own services to
better serve their customers.
We intend to obtain state certification or authorization as a CLEC in each
state in which we are required to do so, and to sign interconnection agreements
with the relevant ILECs in our target markets. Once we have obtained the
appropriate state authorization and entered into interconnection agreements with
the ILECs, we will be able to construct our ILEC central office collocation
facilities and obtain and use network elements from the ILECs. As of the date of
this prospectus we were authorized to provide our products and services in 6
states and have several interconnection agreements in negotiation with the
ILECs.
As of November 22, 1999, we had 25 collocations, which are environmentally
controlled, secure sites designed to house transmission, routing and other
equipment. We are designing our collocations with an average of 100 square feet
in order to provide our customers direct local access via our access platform to
those markets. We intend to expand our network to include multiple collocations
in ILEC central offices within our target markets in order to provide the
platform for our end-to-end service offerings for our customers.
Once our collocations are established, we plan to link these collocations
together within the market using UNE transport from the ILECs in order to
provide our products and services throughout the market. In addition to UNEs
from the ILECs, there are other possible alternatives for us to employ in
linking these central offices. For instance, we may lease or purchase dark
fibers from a third party provider, use wireless connections or possibly even
lay our own local fiber if warranted based upon demand.
EQUIPMENT SUPPLIER RELATIONSHIPS
We have agreed upon an exclusive vendor agreement with Lucent Technologies
which provides for discounted pricing on the fiber that we purchase from Lucent
as well as marketing and engineering support in connection with the expansion of
our network. The effectiveness of this agreement is conditioned on the execution
of documents relating to the financing by Lucent of such purchases of fiber and
the execution of these financing documents is, in turn, conditioned on the
closing of the Contribution and Reorganization Transaction.
Under a Master Agreement between Pathnet and NEC, dated August 8, 1997, we
agreed to purchase from NEC certain equipment, services and licensed software
for us to use in our network under pricing and payment terms the we believe are
favorable. In addition, NEC has agreed, subject to certain conditions, to
warranty equipment that we purchase from NEC for three years, if defective, to
repair or replace certain equipment promptly and to maintain a stock of critical
spare parts for up to 15 years. This agreement with NEC provides for fixed
prices during the first three years of its term.
We have also entered into a Purchase Agreement with the Andrew Corporation
in which we agreed exclusively to recommend to our co-development partners
certain products manufactured by Andrew. In return, Andrew agreed to sell those
products to our co-development partners and to us for a three year period,
renewable for two additional one-year periods at our option. The agreement
generally provides for discounted pricing based on projected order volume.
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NETWORK RELIABILITY
We have constructed our Network Operations Center located in Washington,
D.C. This center, the NOC, currently provides real-time, end-to-end monitoring
of our network operations 24 hours a day, seven days-a-week, as well as
pro-active customer care for all of our customers' services. The NOC ensures the
efficient and reliable performance of the network through pro-active early
identification and prevention of potential network disruptions. In addition, the
NOC enables us to schedule and conduct maintenance of our network while
minimizing interference with the use of the network by our customers. Specific
features provided by the NOC include network fault and event management, network
and service level performance management and analysis as well as remote
configuration of all network elements. Our NOC has full fallback capability and
we believe that it is Year 2000 compliant.
COMPETITION
Competition in the telecommunications industry is intense. In our target
markets, we expect to face increasing competition in the areas of price and
performance, transmission quality, breadth and reliability of our network,
customer service and support, brand recognition and critical relationships with
third parties such as Internet service providers. While we generally will not
compete with telecommunications service providers for end user customers, we may
compete as a "carriers' carrier" with certain of those providers including IXCs
(such as AT&T Corp., MCI WorldCom, Inc. and Sprint Corporation), wholesale
providers (such as Qwest Communications International Inc., Williams
Communications Group, Inc., DTI Holdings, Inc., Global Crossing Ltd and Level 3
Communications, Inc.), ILECs (such as US West, BellSouth, Bell Atlantic, SBC and
GTE Corporation) and CLECs (such as GST Communications, Inc., ITC/Deltacom, Inc.
and Metromedia Fiber Network, Inc.) who would otherwise be our customers in our
target markets. Other entities which may become our competitors in this regard
include communications service providers, cable television companies, electric
utilities, wireless telephone operators, microwave carriers, satellite carriers,
and large end users with private networks.
Initially, in second and third tier markets our most significant
competitors will be ILECs and other CLECs. Many of the largest ILECs will begin
offering in the near future some of the products and services we plan to offer
and some have already begun to do so. These companies are able to draw upon
established networks, well-known brand names, customer loyalty, a pre-existing
base of management and employees, and greater access to capital than will likely
be available to us. Moreover, many ILECs own the telephone wires they use, and
can bundle digital data services, for example, without having to incur the costs
of negotiating interconnection agreements. As other industry participants also
seek to enter these markets, we will face increasing competition.
Industry consolidation and strategic alliances between participants in the
telecommunications industry will also increase the level of competition we will
face, particularly as the demand for bundling of services surges. New
technologies, further deregulation and other changes in our regulatory
environment will create further competitive pressures as we enter our target
markets.
GOVERNMENT REGULATION
OVERVIEW. Our telecommunications businesses are subject to varying degrees
of federal, state and local regulation. We are a telecommunications carrier
under the terms of the federal Communications Act. As a telecommunications
carrier, we are subject to FCC and state utility commission regulation of our
activities. Local authorities also may regulate the permitting and construction
of our telecommunications facilities.
The Telecommunications Act created a uniform national policy in favor of
competition in all telecommunications market segments. As described below, the
rules and policies implementing the
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Telecommunications Act remain subject to agency action and litigation at both
the federal and state level. We nonetheless believe that the national policy in
favor of competition that was created by the Telecommunications Act will lead to
increased market opportunities for us. Because these opportunities require
additional agency action before the Telecommunications Act is fully implemented,
and because these actions may be subject to court review, we cannot predict the
pace at which the law will be fully implemented.
We are required to file federal and state tariffs describing the prices,
terms and conditions of our services, and these tariffs are subject to varying
degrees of regulatory oversight and approval. We must also comply with state and
local license or permit requirements relating to the installation and operation
of our network. Burdensome license, permit or other regulatory requirements or
developments could make it more difficult for us to comply with these laws and
regulations.
The FCC and state public service commissions generally have the right to
impose sanctions, forfeitures, or other penalties mandating refunds if a carrier
fails to comply with applicable rules. We cannot assure you that regulators or
such third parties will determine that we have complied with all applicable laws
and regulations. Any proceedings against us could have a material adverse effect
on our business, financial condition, or results of operations.
FEDERAL REGULATION. The FCC regulates interstate and international
telecommunications services, and it also regulates the holders of radio
licenses. We are subject to FCC regulation as a common carrier, which means that
we are subject to longstanding general requirements that our rates be "just and
reasonable" and that we not engage in "unjust or unreasonable discrimination" in
serving the public. As a common carrier, we also must file certain periodic
reports and applications with the FCC, and the FCC has jurisdiction to act on
certain complaints for failure to comply with regulatory obligations. We also
are required to file basic tariffs at the FCC for our provision of
telecommunications services generally, although those tariffs are not subject to
pre-effective review and can be amended on one day's notice. We are subject to
the licensing processes of the FCC for the use of our microwave licenses. We
also generally must apply to the FCC for its consent before assigning a radio
license or transferring control (for example, through the sale of stock) of any
company holding radio licenses or common carrier authorizations.
We are not, however, subject to the particular laws and FCC regulations
imposed by the Telecommunications Act on ILECs, which are the existing local
telephone companies including, among others, the former Bell operating companies
and GTE. These regulations have provided, and we believe they will continue to
provide, significant opportunities for us to compete with ILECs for the
provision of competitive telecommunications services. These laws and regulations
require ILECs to:
- Provide "physical collocation" to competitors, a requirement that permits
us and other similarly licensed common carriers to install and maintain
our own network termination equipment at ILEC central offices;
- "Unbundle" components of their local service networks in a
nondiscriminatory manner so that we and other new competitors can obtain
network facilities, equipment, features, functions and capabilities at
cost-based prices (which may include a reasonable profit);
- Permit us and other competitors to "interconnect" with ILEC facilities at
any technically feasible point within their networks, at prices based on
cost (which may include a reasonable profit);
- Engage in "reciprocal compensation" for the exchange of
telecommunications traffic, an obligation that requires ILECs and new
competitors to complete calls originated by competing
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carriers under reciprocal arrangements at prices based on a reasonable
approximation of incremental cost, or through the mutual exchange of
traffic without explicit payment;
- Establish wholesale prices for their services to promote resale of
services and facilities by new competitors;
- Establish "number portability" so that customers can maintain their
existing phone numbers when they switch from one telecommunications
provider to another without impairing quality, reliability or
convenience;
- Establish "dialing parity" so that customers will not detect a difference
in quality or complexity in dialing telephone numbers or accessing
operators and emergency services; and
- Provide nondiscriminatory access to telephone poles, ducts, conduits and
rights of way.
Applicable FCC regulations require ILECs to negotiate in good faith with
carriers requesting any of the above arrangements. If the negotiating carriers
cannot reach agreement in a prescribed time, either carrier may request binding
arbitration of the disputed issues by a state regulatory commission. This set of
obligations provides significant market opportunity for new competitors, but, as
discussed below, we cannot assure you that the various government agencies
responsible for implementing these pro-competitive policies and requirements
will do so in a timely and effective manner.
The Telecommunications Act requires the FCC to establish rules and
regulations to implement its local competition provisions. In August 1996, the
FCC issued rules governing interconnection, resale, unbundled network elements,
the pricing of those facilities and services, and the negotiation and
arbitration procedures that would be utilized by states to implement those
requirements. These rules, which were generally favorable to new competitors,
were vacated in part by a July 1997 ruling of the United States Court of Appeals
for the Eighth Circuit. On January 25, 1999, the United States Supreme Court
issued an opinion upholding the authority of the FCC to establish rules,
including pricing rules, to implement statutory provisions governing both
interstate and intrastate services under the Telecommunications Act. The Court
also upheld rules allowing carriers to select provisions from among different
interconnection agreements approved by state commissions for the carriers' own
agreements (the "pick-and-choose" rule) and a rule allowing carriers to obtain
combinations of unbundled network elements.
The Supreme Court, however, vacated the FCC rule setting forth the specific
unbundled network elements ILECs must make available, finding that the FCC had
failed to apply the appropriate statutory standard. On November 5, 1999, the FCC
responded to the Court's decision by issuing a decision that maintains
competitors' access to a wide variety of unbundled network elements. Six of the
seven unbundled elements the FCC had originally required carriers to provide in
its 1996 order implementing the Telecommunications Act remain available to
competitors. These elements are loops, including loops used to provide
high-capacity and advanced telecommunications services; network interface
devices; local circuit switching, subject to restrictions in major urban
markets; dedicated and shared transport; signaling and call-related databases;
and operations support systems. The FCC removed access to operator and directory
assistance service from the list of available unbundled network elements. In
addition, the FCC added to its list certain unbundled network elements that were
not at issue in 1996. These elements include subloops, or portions of loops, and
dark fiber loops and transport. The FCC did not, however, require ILECs to
unbundle facilities used to provide Digital Subscriber Line service (packet
switches and digital subscriber line access multiplexers). The FCC did not
decide, but sought additional information on, the question of whether carriers
may combine certain unbundled network elements to provide special access
services to compete with those provided by the ILECs. The ability to obtain
unbundled network elements is an important element of our business, and we
believe that the FCC's actions in this area have generally been positive.
However, we cannot predict the extent to which the existing rules will be
sustained in
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the face of additional legal action and the scope of the rules that are yet to
be crafted by the FCC. For example, the FCC may restrict the use of UNEs for the
provision of services affording long distance companies access to local
telephone networks, which would reduce our competitive price advantage and limit
the market opportunities in that segment of the telecommunications market.
The rates charged for interconnection and unbundled network elements we
require vary greatly. These rates are subject to the approval of state
regulatory commissions, through approval processes that typically involve a
lengthy review of the rates proposed by the ILECs in each state. The final rates
approved typically depend on the ILECs' initial rate proposals and the policies
of the state public utility commission. These rate approval proceedings are
time-consuming and expensive. Recurring and non-recurring charges for telephone
lines and other unbundled network elements may increase based on the rates
proposed by the ILECs and approved by state regulatory commissions from time to
time, which would have a material adverse effect on the results of our
operations. Moreover, because the cost-based methodology for determining these
rates is still subject to judicial review, there is great uncertainty about how
these rates will be determined in the future.
Under the rules adopted by the FCC pursuant to the Telecommunications Act,
we have entered into collocation agreements with two major ILECs (BellSouth and
USWest) covering 20 states. We expect these collocation agreements to be part of
the more comprehensive interconnection agreements with these ILECs that are
currently under negotiation. In addition, we are negotiating additional
collocation agreements in other states. We have negotiated with two ILECs for
the provision of unbundled network elements to be used in connection with
competitive telecommunications services. We expect the pace of these
negotiations to continue for the foreseeable future. Although we expect, based
on our experience thus far, that such negotiations will yield acceptable
agreements that will permit us to implement our business plan on schedule, we
cannot predict the extent to which ILECs interpreting the FCC regulations may
seek to frustrate our collocation plans or the extent to which we will need to
seek arbitration or commence litigation to achieve our goal. If we are unable to
enter into, or experience a delay in obtaining, interconnection agreements, this
inability or delay may materially and adversely affect our business and
financial prospects.
The FCC has been reviewing the policies and practices of the ILECs with the
goal of facilitating the efforts of telecommunications companies to obtain
access to central office space and other network facilities more easily and on
more favorable terms. On March 31, 1999, the FCC adopted rules to make it easier
and less expensive for telecommunications companies to obtain central office
space and to require ILECs to make new alternative arrangements for providing
central office space. However, the FCC's new rules have not been uniformly
implemented in a timely manner and may not ultimately enhance our ability to
obtain central office space. Difficulties we experience in obtaining access to
and interconnection with the ILECs' facilities can negatively impact our future
plans for providing certain services.
Our expected provision of DSL is largely unregulated by the
Telecommunications Act or the FCC because we, and the telecommunications
companies that are our customers, are not ILECs. Moreover, our customers
providing DSL service to end users, such as Internet service providers, are
unregulated "information services providers." The FCC affirmed in a report
adopted on April 10, 1998, that Internet service providers will not be subject
to regulation as telecommunications carriers under the Telecommunications Act.
They thus will not be subject to universal service subsidies and other
regulations. We cannot, however, assure you that neither Congress nor the FCC
will alter that regulatory scheme in the future. Further, in August 1998, the
FCC proposed new rules that would allow ILECs to provide their own DSL services
through separate affiliates that are not subject to ILEC regulation. Although
the FCC recently decided some of the other issues raised in that proceeding, the
question of whether ILECs can provide unregulated DSL services through a
separate affiliate remains unresolved. Some members of Congress also have
expressed interest in giving ILECs
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additional pricing flexibility for high speed data services and expanding the
geographic area in which ILECs may offer these services to their customers. Any
expansion of ILECs' ability to offer high speed data and Internet services may
have an adverse impact on our business. On November 18, 1999, the FCC decided to
require ILECs to share telephone lines with DSL providers, an action that may
foster competition by allowing competitors to offer DSL services without the
purchase their customers to having to a second telephone line. Whether this
development will be implemented in an effective way remains to be seen.
Moreover, it is impossible to predict whether the FCC or Congress may change the
rules under which these services are offered and, if such changes are made, the
extent of the impact of such changes on our business.
The Telecommunications Act obligates the FCC to establish "universal
service" mechanisms to ensure that certain subscribers living in rural and
high-cost areas, as well as certain low-income subscribers, continue to have
access to telecommunications and information services at prices reasonably
comparable to those charged for similar services in urban areas. These
mechanisms also are meant to foster the provision of advanced telecommunications
services to schools, libraries and rural health-care facilities. Under the rules
adopted by the FCC to implement these requirements, we and all other
telecommunications providers will be required to contribute to a fund to support
universal service. The amount that we must contribute to the federal universal
service subsidy will be based on our share of specified defined
telecommunications end-user revenues. Therefore, it is difficult to predict in
advance the precise contributions that we will be required to make.
The FCC regulates the fees that local telephone companies charge long
distance companies for access to their local networks. These fees are commonly
called access charges. The FCC is currently considering a proposal, supported by
parts of both the local and long distance telephone industries, that would
restructure and most likely significantly reduce access charges. Changes in the
access charge structure could fundamentally change the economics of some aspects
of our business. Any material reduction in the access charges imposed by local
telephone companies could significantly reduce our price advantage in the market
for services affording long distance companies access to local telephone
networks.
As an enhancement to our local access services, during the second half of
2000, we expect to begin marketing and selling DSL services to our second and
third tier markets. To provide unbundled DSL capable lines to connect each
customer to our equipment, we will use networks owned by ILECs. The terms upon
which we connect our network to ILECs' networks are specified in interconnection
agreements that we must negotiate with the ILECs operating in our existing and
target markets. Federal law requires ILECs to provide access to their networks
through interconnection agreements and to offer network elements to other
telecommunications carriers at rates which generally must be cost-based and
nondiscriminatory. However, we may be unable to negotiate interconnection
agreements on favorable terms. The failure of ILECs to comply with their
obligations under these interconnection agreements could result in customer
dissatisfaction and the loss of potential customers.
We also are regulated by the FCC as the holder of a substantial number of
common carrier fixed point-to-point microwave licenses that we use on the
wireless portion of our network. Under the FCC's rules, we must coordinate our
proposed frequency use with other existing users of the spectrum to prevent
interference. After completing that process, we (and, in some cases, our co-
development partners) must apply to the FCC for the issuance of a license to
permit us to transmit information on the frequencies we desire to use. To obtain
a license we must demonstrate that the owner of the transmission site has
complied with the reporting, notification and technical requirements of the
Federal Aviation Administration for the construction, installation, location,
lighting and painting of transmitter towers and antennae like ours. Once the
license is obtained, we must make routine regulatory filings and obtain the
FCC's prior consent for any assignment of the
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license or any substantial change in control of the entity holding the license
and for certain modifications to a licensed facility. We cannot assure you that
we, or any of our co-development partners who desire to be the licensee for
their portion of our network, will obtain all of the licenses or approvals
necessary for the operation of our business, the transfer of any license or the
modification of any facility, or that the FCC will not impose burdensome
conditions or limitations on any such license, transfer or approval.
Our ownership also is regulated by the FCC to ensure that we do not exceed
the foreign ownership restrictions imposed by the Communications Act. Under the
Act, we cannot increase our foreign ownership to a level greater than 25%
without obtaining prior FCC consent. The FCC has determined that it will
authorize a higher level of foreign ownership, up to 100%, on a streamlined
basis where the foreign ownership is by citizens of, or companies organized
under the laws of, World Trade Organization member states. (A more demanding
public interest showing is required by proposals to increase foreign ownership
by citizens or countries of non-WTO member states.) We currently comply with the
25% cap on foreign ownership, and we will monitor foreign investment to ensure
that we do not exceed that benchmark without obtaining appropriate FCC consent.
These requirements may, in some circumstances, be applied to our co-development
partners as well. If a co-development partner were to choose to hold the
relevant license itself, and not through a holding company, that co-development
partner would be subject a provision that limits direct foreign ownership of FCC
licenses to 20%. The FCC does not have discretion to waive this limitation. If a
co-development partner exceeded the 20% limitation it would be required to
reduce its foreign ownership in order to obtain or retain its license.
STATE REGULATION. The Telecommunications Act preempts state statutes and
regulations that restrict the provision of competitive local telecommunications
services. State commissions can, however, impose reasonable terms and conditions
upon the provision of telecommunications service within their respective states.
States also can require that telecommunications providers apply for and obtain a
certificate of public convenience and necessity or other authorization prior to
commencing service in their respective states. We are in the process of becoming
certified, to the extent such certification is required, in the 48 contiguous
states as a competitive local exchange carrier ("CLEC") or other competitive
telecommunications carrier under the regulations of each state's regulatory
commission. We currently are authorized or permitted to provide service in six
states: Colorado, Idaho, Iowa, Montana, Oregon and Texas. We have pending
applications before an additional nine state commissions. Although we do not
anticipate any issues that would prevent us from obtaining authorization as a
competitive telecommunications carrier in each of the states in which we will
apply, we cannot assure you that all required state authorizations will be
granted.
In most states, we are required to file tariffs setting forth the general
terms, conditions and prices for services classified as intrastate by the
particular state commission in question. Most states require us to list the
services provided and the specific rate for each service. Under various states'
rules, however, we have regulatory flexibility to set price ranges for specific
services and, in some cases, prices can be set on an individual customer basis.
We also may be required to file applications with some states for the assignment
of our state certifications to any other entity and for any transfer of
substantial control that we decide to undertake in the future. Some states also
may require a filing prior to the issuance of substantial debt or equity
securities or other transactions that would result in a lien upon the property
we use to provide intrastate telecommunications services. States generally
require us to file various reports and pay certain fees, including state
universal service subsidies. Like the FCC, most state commissions are empowered
to consider complaints filed against carriers subject to their jurisdiction. We
cannot assure you that our state certificates will not be revoked or amended by
state commissions.
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LOCAL REGULATION. We may be required to obtain local permits for street
opening and construction permits to install and expand fiber optic networks.
Local zoning authorities often regulate our use of towers for microwave and
other telecommunications sites. We also are subject to general regulations
concerning building codes and local licensing. The Telecommunications Act
requires that fees charged to telecommunications carriers be applied in a
competitively neutral manner, but there can be no assurance that ILECs and
others with whom we will be competing will bear costs similar to those we will
bear in this regard.
OTHER LAWS AND REGULATIONS. Although the foregoing discussion provides an
overview of the major regulatory issues that confront our business, this
discussion does not attempt to describe all current and proposed federal, state
and local rules and initiatives affecting the telecommunications industry. Other
federal and state laws and regulations are currently the subject of judicial
proceedings and proposed additional legislation. In addition, some of the FCC's
rules implementing the Telecommunications Act will be subject to further
judicial review and could be altered or vacated by courts in the future. We
cannot predict the ultimate outcome of any such further proceedings or
legislation.
INTELLECTUAL PROPERTY
We have entered into a license agreement with Pathnet under which we may
use all of Pathnet's tradenames, trademarks and other intellectual property. We
use the name "Pathnet" as our primary business name and service mark, and have
registered that name with the United States Patent and Trademark Office. On
February 26, 1998, Pathnet filed an application in the United States Patent and
Trademark Office to register service mark "A NETWORK OF OPPORTUNITIES" for
communication services. Pathnet also filed an application for the Pathnet logo
on July 27, 1999.
We regard our products, services and technology as proprietary and we
attempt to protect them with patents, copyrights, trademarks, trade secret laws,
restrictions on disclosure and other methods. These methods may not be
sufficient to protect our technology. We also enter into confidentiality or
license agreements with our employees and consultants, and generally control
access to and distribution of our documentation and other proprietary
information. Despite these precautions, it may be possible for a third party to
copy or otherwise obtain and use our products, services or technology without
authorization, or to develop similar technology independently.
Pathnet currently has a patent application pending and we intend to prepare
additional applications and seek patent protection for our systems to the extent
possible. These patents may not be issued to us, and if issued, they may not
protect our intellectual property from competition that could seek to design
around or invalidate these patents.
PROPERTIES
Our network and our component assets are the principal properties that we
own. Our installed fiber optic cable is laid on rights of way held by us or our
co-development partners, and our digital wireless network is constructed on our
leasehold interests in telecommunications infrastructure.
Our corporate headquarters are located in Washington, D.C., and Pathnet
leases this space from 6715 Kenilworth Avenue General Partnership, under a Lease
Agreement dated August 9, 1997. Although our facilities are adequate at this
time, we believe that we will be required to lease additional facilities in the
D.C. metropolitan area as a result of anticipated growth. Recently, Pathnet
executed a lease with 11720 Sunrisecorp., L.L.C. for approximately 40,000 square
feet of office space in Reston, Virginia which will become our new headquarters
in the first half of 2000. We also lease office space in Richardson, Texas and
Lewiston, Texas under leases that expire in 2000 and 2001, respectively.
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We believe that all of our properties are well maintained.
EMPLOYEES
As of November 22, 1999, we employed 122 people. As needed, we also hire
temporary employees and independent contractor computer programmers. In
connection with our growth strategy, we anticipate hiring a significant number
of additional personnel in sales and other areas of our operations in the near
future. Our employees are not unionized, and we believe our relations with our
employees are good. Our success will continue to depend in part on our ability
to attract and retain highly qualified employees. See "RISK FACTORS -- Risks
Relating to Our Company Operations."
LEGAL PROCEEDINGS
From time to time, we are a party to routine litigation and proceedings in
the ordinary course of business. We are not aware of any current or pending
litigation to which we are or may be a party that we believe could materially
adversely affect our results of operations or financial condition.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion contains forward-looking statements that involve risks and
uncertainties including, without limitation, statements relating to our company
and our business units' plans, strategies, objectives, expectations, intentions
and resources. Our actual results could differ materially from those anticipated
in forward-looking statements as a result of various factors, including those
described in the section of this prospectus entitled "RISK FACTORS." You should
assume for purposes of this section that all references to our business, our
actions or conditions affecting us prior to the date of this prospectus are
references to Pathnet's business, actions or conditions affecting Pathnet.
Unless we indicate otherwise, references to our future business, strategies, or
plans, are references to our consolidated business, strategies or plans,
including Pathnet and our other future subsidiaries. We are providing
information regarding Pathnet's performance and results of operations, because
Pathnet will be our sole, direct and wholly owned subsidiary, and we will be
assuming many of Pathnet's assets and obligations, immediately after the closing
of the Contribution and Reorganization Transaction. You should read the
following discussion and analysis in conjunction with our combined financial
statements and related notes included in this prospectus. You can find
additional information concerning our businesses and strategic investments and
alliances in the section of this prospectus entitled "BUSINESS."
OVERVIEW
Since Pathnet's inception on August 25, 1995, its principal activities have
included:
- Entering into strategic relationships with owners of telecommunications
assets and co-development partners;
- Developing and constructing our digital backbone network;
- Negotiating collocation and interconnection agreements and installing
collocations and interconnections off our backbone network;
- Designing and developing our network architecture and operations support
systems, including the buildout and launch of our 24-hour Network
Operations Center;
- Raising capital and hiring management and other key personnel;
- Developing "leading edge" products and services; and
- Procuring governmental authorizations.
As of September 30, 1999, Pathnet had completed 6,100 wireless route miles
of our digital backbone network. In addition, as of September 30, 1999, we had
established seven collocations serving seven of our targeted second and third
tier markets. As of November 22, 1999, we had an additional 1,400 route miles of
network under construction with an additional 18 collocations completed. Pathnet
began offering wholesale transport services with the "turn up" of our first
route in the first quarter of 1998. During 2000, we intend to deploy additional
products and services including bundled wholesale transport and local access
services.
Pathnet has experienced operating losses since its inception, and we expect
these operating losses to continue as we expand our operations. Implementing our
business plan will require significant capital expenditures. See "RISK
FACTORS -- Risks Relating to Our Financing." Our financial
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performance will vary from market to market, and the time when we will achieve
positive earnings before interest, taxes, depreciation and amortization, if at
all, will depend on the:
- Size of our target markets;
- Timely completion of backbone routes, collocations and interconnections;
- Cost of the necessary infrastructure;
- Timing of and barriers to market entry; and
- Commercial acceptance of our services.
SOURCES OF REVENUE
INFRASTRUCTURE SERVICES. We employ a "smart build" approach in the
development of our network that includes determining the level of customer
demand on a route before construction and, in certain cases, entering into
pre-construction sales of dark fiber and conduit. We can sell indefeasible
rights of use or leases of fiber or conduit along a segment of our network at a
fixed price. Under our dark fiber and conduit sales agreements, we expect to
receive all of the proceeds relating to the sale of the dark fiber and conduits
upon completion of the route and acceptance by the customer. Our dark fiber and
conduit sale business is becoming increasingly competitive as other carriers
build and expand their networks. To expedite infrastructure development and
decrease development risk, we have sought, and in the future will continue to
seek, co-developers to share the project construction costs. We have pursued
co-marketing arrangements to facilitate selling the assets along network
segments and we may continue to do so in the future.
MANAGEMENT SERVICES. To date, we have generated revenues primarily from
services related to the construction of our digital network. We expect to
continue construction of our digital network with co-development partners when
these projects will allow us to retain bandwidth, fiber or conduit assets on
routes that complement and reduce the costs of completing our network. We
anticipate that the percentage of revenues that we receive from management
services will decline as we near the completion of our network.
WHOLESALE TRANSPORT AND LOCAL ACCESS SERVICES. We provide inter-city and
local wholesale transport services and local access services to our customers on
a long-term or month-to-month basis. We plan to bundle local access services
with our wholesale transport services to provide low cost, end-to-end solutions
for our customers. Our service agreements with customers are generally leases of
capacity which provide for monthly payments due in advance on a fixed-rate
basis. We price our customer contracts according to the capacity, the length of
the circuit used, the term of the contract and the extent of value added
services provided. Nonrecurring revenues include installation and activation
charges for new customers. We seek to price our services competitively in
relation to those of the ILECs and other competitive telecommunications
companies in our targeted underserved and second and third tier markets.
Although pricing will be an important part of our strategy, we believe that
customer relationships, customer care and consistent quality will be the key to
generating customer loyalty. During the past several years, market prices for
many telecommunications services have been declining -- a trend we believe will
likely continue. As prices decline for any given service, we expect that the
total number of customers and the proportion of our customers purchasing our
bundled services will increase.
OPERATING EXPENSES
COST OF REVENUE. The primary components of our cost of services to date
have been costs relating to network engineering, operations and maintenance.
With expected growth of our bundled
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wholesale transport and local access services we expect components such as
access costs (including fees for use of the local loop, rent, power and other
fees charged by ILECs, competitive telecommunications companies and other
providers) and costs associated with the provision of services to comprise a
greater portion of our costs of service.
SELLING, OPERATIONS AND ADMINISTRATION. We are building a small and
focused sales and marketing department that should allow us to maintain a low
ratio of overhead expenses to revenues compared to other telecommunications
service providers. Our general and administrative costs include expenses typical
of other telecommunications service providers, including office leases, customer
care, billing, corporate administration and human resources. We expect that
these costs will grow significantly as we expand our operations and that our
administrative overhead will be a large portion of these expenses. However, we
expect these expenses to decline as a percentage of our revenue as we build our
customer base and increase the number of customers connected to our network.
DEPRECIATION AND AMORTIZATION. Because we are primarily a facilities-based
wholesale provider, expenses associated with depreciation of property, plant and
equipment will be a substantial ongoing expense for us. We expect depreciation
and amortization expense to increase significantly as more of our network
becomes operational and as we increase capital expenditures to expand our
network. Depreciation and amortization expense will include:
- Depreciation of network infrastructure equipment;
- Depreciation of improvements to central offices, other collocations and
related equipment;
- Depreciation of network control center facilities, furniture, fixtures
and corporate facilities;
- Amortization of rights of way; and
- Amortization of software.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1998
During the nine months ended September 30, 1999, we continued to focus on
(1) developing relationships and strategic alliances with owners of valuable
telecommunications assets such as rights of way and with co-development
partners, (2) building out our network, (3) obtaining the regulatory status and
entering into interconnection agreements in each of our target markets to enable
us to obtain unbundled network elements and central office space from the ILECs,
and (4) developing our infrastructure including the hiring of key management
personnel.
REVENUE. For the three months ended September 30, 1999 and 1998, we
generated revenues of approximately $584,000 and $475,000, respectively. For the
nine months ended September 30, 1999 and 1998, we generated revenue of
approximately $2.3 million and $1.1 million, respectively. This increase is
attributable to revenues from our sales of telecommunications services, which
were $1.7 million in 1999 with no corresponding revenue in 1998. We expect that
the majority of our future revenue will be generated from our sale of wholesale
transport services, local access services and backbone infrastructure services.
OPERATING EXPENSES. For the three months ended September 30, 1999 and
1998, we incurred operating expenses of approximately $9.6 million and $4.5
million, respectively. For the nine months ended September 30, 1999 and 1998, we
incurred operating expenses of approximately $22.8 million and $12.4 million,
respectively. The increase in both periods is primarily a result of our
continued buildout of our network and additional staff costs incurred in
developing our infrastructure. We expect selling, general and administrative
expenses to continue to increase in the remainder of 1999 as
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additional staff is added. Cost of revenue reflects direct costs we incurred in
performing construction and management services and providing telecommunications
services.
INTEREST EXPENSE. Interest expense for the three months ended September
30, 1999 and 1998 was approximately $10 million and $11.2 million, respectively.
Interest expense for the nine months ended September 30, 1999 and 1998 was
approximately $30.3 million and $21.9 million, respectively. Interest expense
primarily represents interest on the Notes together with the amortization
expense related to bond issuance costs in respect of the Notes.
INTEREST INCOME. Interest income for the three months ended September 30,
1999 and 1998 was approximately $3.3 million and $4.7 million, respectively. The
decrease in interest income reflects a decrease in cash and cash equivalents and
marketable securities as those funds were used in building our network, funding
operations, and making interest payments on our Notes in April and September of
1999. Interest income for the nine months ended September 30, 1999 and 1998 was
approximately $10.5 million and $9.6 million, respectively. The increase in
interest income is attributable to the funds from the Notes generating income
over a nine month period in 1999 versus a six month period in 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
During the twelve months ended December 31, 1998, we focused on (1)
developing relationships and strategic alliances with owners of valuable
telecommunications assets such as rights of way and with co-development
partners, (2) building out our network, and (3) hiring key management and other
personnel.
REVENUE. Substantially all of our revenue for the year ended December 31,
1998 consisted of fees received for services we provided to our wireless
co-development partners, including analysis of existing facilities and system
performance, advisory services relating to PCS spectrum relocation matters, and
turnkey network construction and management services. For the years ended
December 31, 1998 and 1997, we generated revenue of approximately $1.6 million
and $162,500, respectively. This increase was attributable to fees we received
for performing construction and management services primarily for one customer.
OPERATING EXPENSES. For the twelve months ended December 31, 1998 and
1997, we incurred operating expenses of approximately $17.9 million and $4.3
million, respectively. This increase results primarily from accelerating the
buildout of our network and additional staff costs incurred in developing our
infrastructure. Cost of revenue reflects direct costs we incurred in performing
construction and management services and providing telecommunications services.
INTEREST EXPENSE. Interest expense for the twelve months ended December
31, 1998 was approximately $32.6 million. We had no interest expense for the
twelve months ended December 31, 1997. Interest expense primarily represents
interest on the Notes together with the amortization expense related to bond
issuance costs in respect of the Notes.
INTEREST INCOME. Interest income for the twelve months ended December 31,
1998 and 1997 was approximately $13.9 million and $159,300, respectively. The
increase in interest income represents interest earned on the proceeds of the
Notes issued in April, 1998.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
During the twelve months ended December 31, 1997, we (1) initiated
construction on the first segment of our network, (2) continued focusing on
developing relationships and strategic alliances with owners of valuable
telecommunications assets, and (3) continued the development of our engineering
department and key management personnel.
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REVENUE. Substantially all of our revenue for the year ended December 31,
1997 consisted of fees received for services we provided to our wireless
co-development partners, including analysis of existing facilities and system
performance, advisory services relating to PCS spectrum relocation matters, and
turnkey network construction and management services. For the years ended
December 31, 1997 and 1996, we generated revenue of approximately $162,500 and
$1,000, respectively. This increase was attributable to fees we received for
performing construction and management services.
OPERATING EXPENSES. For the twelve months ended December 31, 1997 and
1996, we incurred operating expenses of approximately $4.3 million and $1.3
million, respectively. The increase results primarily from building our network
and additional staff costs incurred in developing our infrastructure. Cost of
revenue reflects direct costs we incurred in performing construction and
management services and providing telecommunications services.
INTEREST EXPENSE. We had no interest expense for the twelve months ended
December 31, 1997. Interest expense for the twelve months ended December 31,
1996 was $415,357 and represents interest on a bridge loan from the original
investors in our company.
INTEREST INCOME. Interest income for the twelve months ended December 31,
1997 and 1996 was approximately $159,300 and $13,000, respectively. This
increase in interest income represents interest we earned on the proceeds of a
private offering of Series B convertible preferred stock in June 1997 and a
private offering of Series C convertible preferred stock in October 1997.
CAPITAL EXPENDITURES
We have invested a significant amount of capital constructing and deploying
our digital network. We intend to continue to expand our network coverage. We
plan to add a bundled product comprised of local access and wholesale transport
to our existing products. These efforts will require us to fund our operating
losses and we will require significant capital to:
- Continue construction and development of our nationwide network
infrastructure;
- Purchase and install electronics, transmission and interconnection
equipment and other components along the network and as needed to
establish the platform for our local access and bundled services;
- Procure, design and construct central office and other collocation and
interconnection sites; and
- Continue development of our corporate infrastructure.
Capital expenditures were approximately $61.8 million for the nine months
ended September 30, 1999. We expect that our capital expenditures will be
substantially higher in future periods in connection with the expansion of our
network and services in our target markets.
As of September 30, 1999, we had capital commitments of approximately $79.9
million relating to the development of our network pursuant to existing
agreements. From September 30, 1999 until December 31, 2000 we intend to:
- Complete the construction and lighting of network segments to which we
are currently committed, including Chicago, Illinois to Aurora (a suburb
of Denver), Colorado, Grand Junction, Colorado to Alberquerque, New
Mexico and Alberquerque to El Paso, Texas;
- Begin perfection and pre-engineering of selected network segments from
the right of way acquired under the Contribution and Reorganization
Transaction; and
- Commence construction on up to three additional fiber routes;
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<PAGE> 55
- Continue interconnecting and collocating in 60 to 80 of our targeted
underserved and second and third tier markets.
LIQUIDITY AND CAPITAL RESOURCES
From inception through September 30, 1999, we financed our operations
primarily through private placements of $36 million of equity securities and
$338.7 million of net proceeds raised from the issuance of the Notes in April
1998. As of September 30, 1999, we had approximately $173.4 million of cash,
cash equivalents and marketable securities to fund future operations. In
connection with the Contribution and Reorganization Transaction, Colonial is
contributing an aggregate (in both tranches) of $68 million in cash to us in
exchange for shares of our Series E Convertible Preferred Stock, rights to a
single conduit along the Colonial rights of way and an option to purchase
additional shares of our capital stock. The Contribution and Reorganization
transaction will bring the total cash equity investment in Pathnet Telecom and
our subsidiaries to $100 million, including $25 million which will be received
upon the completion of a fiber optic network during the first calendar quarter
of 2000.
In addition, we expect to finance the cost of some of our equipment through
vendor financing arrangements. We have negotiated with Lucent a proposed credit
facility in which Lucent will, subject to certain conditions (including the
closing of the Contribution and Reorganization Transaction), provide us with
financing for fiber optic cable that we purchase from them. For a description of
the terms and conditions of the proposed financing transaction with Lucent see
"DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING ARRANGEMENTS -- Proposed
Credit Facility with Lucent."
We estimate that our current available resources will be sufficient to fund
the implementation of our business plan, as currently contemplated, including
the capital commitments described above, operating losses in new markets and
working capital needs through the fourth quarter of 2000. In the event the
strategic investment from Colonial is not consummated or is consummated on
different terms, this projection of available resources may change. After such
time, we expect we will require additional financing, which may include
commercial bank borrowings, additional vendor financing or the sale or issuance
of equity or debt securities.
Our expectations of our future capital requirements and cash flows from
operations are based on current estimates. If our plans or assumptions change or
prove to be inaccurate, we may require additional sources of capital or
additional capital sooner than anticipated. See "RISK FACTORS -- Risks Relating
to Our Financing."
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue exists because many computer systems and software
applications use two, rather than four, digits to designate a particular year.
As a result, these systems and applications may not properly recognize the Year
2000, or process data that includes that date, potentially causing data
miscalculations or inaccuracies, operational malfunctions or failures.
OVERVIEW OF OUR YEAR 2000 PROGRAM. In the fourth quarter of 1998, we began
a corporate-wide program to ready technology systems, non-technology systems and
software applications for the Year 2000. Our objective is to target Year 2000
compliance for all of our systems, including network and customer interfacing
systems, and we have grouped these systems into one of six compliance areas:
Network Architecture, Internal Infrastructure, Software Applications, Financial
Relationships, Supply-Chain Relationships and Customer Relationships. Because
Pathnet has operated for only a few years, few legacy systems or applications
exist. We identified all systems and applications that we believe needed to be
modified or reprogrammed to achieve Year 2000 compliance and implemented the
necessary changes.
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Inventory, assessment and remediation of mission critical hardware systems
and software applications, including network computing and network systems
engineering, is substantially complete. We completed our testing and deployment
of upgrades necessary to complete the remediation of critical systems on
September 30, 1999. We are currently formulating contingency plans in the event
that certain of our suppliers or service providers may not be Year 2000
compliant. We will continue to develop and test these plans throughout the
remainder of 1999.
As part of our Year 2000 plan, we have requested confirmation from our
communications equipment vendors and other key suppliers, financial institutions
and customers that their systems will be Year 2000 compliant. Responses received
to date indicate a high level of Year 2000 compliance at these companies, but we
cannot assure you that the systems of companies with which we do business will
be Year 2000 compliant. We expect to continue to receive additional responses in
the next quarter. If the vendors important to us fail to provide needed products
and services, our network buildout and operations could be affected and thereby
have a material adverse effect on our results of operations, liquidity and
financial condition. Moreover, to the extent that significant customers are not
Year 2000 compliant and that affects their network needs, our sales could be
lower than otherwise anticipated.
We have hired outside consultants to assist us with our Year 2000
compliance, but we have relied primarily on our own employees to develop and
implement our Year 2000 compliance strategy. Because our existing systems are
relatively new, we have not had to replace any significant portion of them. As a
result our expenditures to implement our Year 2000 plan have not been material
to date and we do not believe our future expenditures on this matter will be
material (remediation costs incurred to date have been less than $100,000). Such
expenditures represent less than 1% of 1999 projected capital expenditures and
will be funded out of cash flow from operations. To the extent we would have had
to replace a significant portion of our technology systems, our expenditures
could have material adverse effects on us. As a result, our expenditures to
ensure Year 2000 compliance have not been material to date. We expect to
continue to use existing employees for the significant part of our Year 2000
compliance efforts.
The discussion of our efforts and management's expectations relating to
Year 2000 compliance are forward-looking statements. The dates by which we
believe the program will be completed are based upon management's best
estimates. We derived these estimates using numerous assumptions regarding
future events, including the continued availability of certain resources and
other factors. We cannot assure you that these estimates will prove to be
accurate, and our actual results could differ materially from those we currently
anticipate. Specific factors that could cause material differences include, but
are not limited to, the availability and cost of personnel trained in Year 2000
issues, the ability to identify, assess, remediate and test all relevant
computer codes and embedded technology. In addition, variability of definitions
of "compliance with Year 2000" may lead to claims relating to products and
services sold by us whose impact we cannot currently estimate. We cannot assure
you that the aggregate cost of defending and resolving such claims, if any, will
not materially adversely affect our results of operations.
Due to the general uncertainty inherent in the Year 2000 problem, resulting
in large part from the uncertainty of the Year 2000 readiness of third parties,
we cannot ensure our ability to timely and cost effectively resolve problems
associated with the Year 2000 issue that may adversely affect our operations and
business or expose us to third party liability and we have been unable to fully
determine the risks associated with the reasonably likely worst case scenario.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to minimal market risks. We manage sensitivity of our
results of operations to these risks by maintaining a conservative investment
portfolio, (which primarily consists of debt
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securities, that typically mature within one year), and entering into long-term
debt obligations with appropriate pricing and terms. We do not hold or issue
derivative, derivative commodity or other financial instruments for trading
purposes. Financial instruments held for other than trading purposes do not
impose a material market risk on us.
We are exposed to interest rate risk. We periodically need additional debt
financing due to our large operating losses, and capital expenditures associated
with establishing and expanding our network coverage increase our financing
needs. The interest rate that we will be able to obtain on debt financing will
depend on market conditions at that time, and may differ from the rates we have
obtained on our current debt.
Although all of our long-term debt bears fixed interest rates, the fair
market value of our fixed rate long-term debt is sensitive to changes in
interest rates. We have no cash flow or earnings exposure due to market interest
rate changes for our fixed long-term debt obligations.
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MANAGEMENT
OUR DIRECTORS AND EXECUTIVE OFFICERS
The table below contains information about the ages and positions of our
executive officers, selected key employees, and directors as of the date of this
prospectus.
<TABLE>
<CAPTION>
NAME AGE POSITION(S) WITH PATHNET TELECOM
- ---- --- --------------------------------
<S> <C> <C>
Richard A. Jalkut....................... 55 President, Chief Executive Officer and
Director
Robert A. Rouse......................... 50 Executive Vice President, Chief
Operating Officer and President, Network
Services
James M. Craig.......................... 43 Executive Vice President, Chief
Financial Officer and Treasurer
William R. Smedberg, V.................. 38 Executive Vice President, Corporate
Development
Michael A. Lubin........................ 50 Vice President, General Counsel and
Secretary
Shawn F. O'Donnell...................... 34 Vice President, Senior Vice President of
Engineering and Construction
Peter J. Barris......................... 47 Director
Kevin J. Maroni......................... 37 Director
Patrick J. Kerins....................... 44 Director
Stephen A. Reinstadtler................. 33 Director
</TABLE>
Richard A. Jalkut has served as President, CEO and director of Pathnet
since August 1997. He will serve in these capacities for Pathnet Telecom upon
the close of the Contribution and Reorganization Transaction. Mr. Jalkut has
over 30 years of telecommunications experience. From 1995 to August 1997, he
served as President and Group Executive of NYNEX Telecommunications Group, where
he was responsible for all activities of the NYNEX Telecommunications Group, an
organization with over 60,000 employees. From 1991 until 1995, Mr. Jalkut served
as President and CEO of New York Telephone Co. Inc., the predecessor company to
NYNEX Telecommunications Group. Mr. Jalkut currently serves as a member of the
board of directors of HSBC Bank USA, a commercial bank; Ikon Office Solutions,
Inc., a company engaged in wholesale and retail office equipment; Digex
Incorporated; and Home Wireless Networks, a start-up company developing a
wireless product for home and business premises.
Robert A. Rouse has served as Pathnet's Executive Vice President, President
of Network Services since April 1999 and, since September 1999, as Pathnet's
Chief Operating Officer. He will hold these positions for Pathnet Telecom after
completion of the Contribution and Reorganization Transaction. Mr. Rouse joined
Pathnet with over 30 years experience in the telecommunications industry. Before
Pathnet, Mr. Rouse was Executive Vice President of Intermedia, responsible for
network services, engineering and systems. Before that, he spent over 10 years
with MCI - the last three as Senior Vice President of Network Services for
MCI/Concert. In this position, he was responsible for integrating the network
and product functionality between MCI and British Telecom as well as building
global networks. Before joining MCI in 1986, Mr. Rouse spent 17 years with
Frontier Communications, Inc. where he was involved in a series of unregulated
start-up business ventures, and he played a key role in developing Frontier's
long distance company.
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James M. Craig has served as Executive Vice President, Chief Financial
Officer and Treasurer of Pathnet since April 1999. He will serve in these
capacities for Pathnet Telecom upon the close of the Contribution and
Reorganization Transaction. Mr. Craig has 22 years of accounting and finance
experience, including 15 years specifically in the communications industry.
Formerly the Senior Director Treasury Management for Omnipoint Communications,
Mr. Craig was responsible for corporate planning and forecasting. He also served
as a point of contact for investment banks, sell-side analysts and rating
agencies. Before that, Mr. Craig assisted in the launch of two start-up
telecommunications companies, UniSite and National Telecom PCS, Inc. While with
UniSite, he established regional and national alliances between UniSite and
telecommunications tower owners. Mr. Craig also spent a total of 11 years with
MCI, holding positions such as Director of Wireless Communications, Director of
Corporate Development, Director of Telecommunications Group Planning and
Director of Corporate Treasury Group.
William R. Smedberg, V joined Pathnet initially as a consultant in 1996,
served as Vice President, Finance and Corporate Development of Pathnet from
January 1997 to February 1999 and assumed the position of Executive Vice
President, Corporate Development of Pathnet in March 1999. Mr. Smedberg will
serve as Pathnet Telecom's Executive Vice President, Corporate Development after
completion of the Contribution and Reorganization Transaction. Before joining
Pathnet, Mr. Smedberg served in various financial and planning positions at the
James River Corporation of Virginia, Inc. for nine years. In particular, he
served as Director, Strategic Planning and Corporate Development for Jamont, a
European consumer products joint venture among Nokia Oy, Montedison S.p.A. and
James River, from 1991 to 1996, where he was responsible for Jamont's corporate
finance, strategic planning and corporate development. Before that, Mr. Smedberg
worked in the defense industry as a consultant and engineer for TRW, Inc.
Michael A. Lubin has served as Vice President, General Counsel and
Secretary of Pathnet since its inception in August 1995. He will serve in this
capacity for Pathnet Telecom upon the close of the Contribution and
Reorganization Transaction. Before joining Pathnet, Mr. Lubin was an
attorney-at-law at Michael A. Lubin, P.C., a law firm he founded in 1985. Mr.
Lubin has experience in telecommunications, copyright and intellectual property
matters, corporate and commercial law, construction claims adjudication and
trial work. From 1976 until 1981, he served as a Federal prosecutor with the
Fraud Section, Criminal Division, United States Department of Justice.
Shawn O'Donnell has served as Vice President, Senior Vice President of
Engineering and Construction of Pathnet since August 1999. He will serve in this
capacity for Pathnet Telecom upon the close of the Contribution and
Reorganization Transaction. Mr. O'Donnell has more than 14 years of engineering
experience in the telecommunications industry. Before joining Pathnet, Mr.
O'Donnell served as Director of Transmissions and Facility Standards and
Engineering with MCI WorldCom. In that position, he was in charge of a 340+
person team that was responsible for overall transmission and facility
engineering for local, long distance and Internet networks. He also held a
variety of other positions at MCI WorldCom, including Senior Manger of
Transmission Engineering Implementation and Senior Manager of Switched Network
Planning. Before MCI WorldCom, Mr. O'Donnell was a Control Engineer with Potomac
Edison. While there, he was responsible for the management of communications
networks associated with high voltage control systems.
Peter J. Barris has been a director of Pathnet since August 1995 and will
serve as a director of Pathnet Telecom upon consummation of the Contribution and
Reorganization Transaction. Since 1992, Mr. Barris has been a partner; in 1994,
was appointed a General Partner; and, in 1999, was appointed Managing General
Partner of New Enterprise Associates, a firm that manages venture capital
investments. Mr. Barris is also a member of the board of directors of Mobius
Management Systems, Inc., PcOrder.com, Inc. and Careerbuilder, Inc., each of
which is quoted on the NASDAQ National Market.
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Kevin J. Maroni has been a director of Pathnet since August 1995 and will
serve as a director of Pathnet Telecom after the closing of the Contribution and
Reorganization Transaction. Since 1994, Mr. Maroni has been a principal, and, in
1995, was appointed a General Partner of Spectrum Equity Investors, which
manages private equity funds focused on growth capital for Telecommunications
companies. Prior to Spectrum, Mr. Maroni worked at Time Warner and Harvard
Management Company. Mr. Maroni is currently on the board of directors of several
private companies and CTC Communications Corp (which is quoted on the NASDAQ
National Market).
Patrick J. Kerins has been a director of Pathnet since July 1997 and will
serve as a director of Pathnet Telecom after consummation of the Contribution
and Reorganization Transaction. Since March 1997, Mr. Kerins has served as
Managing Director of Grotech Capital Group, which is engaged in venture capital
and other private equity investments. From 1987 to March 1997, he worked in the
investment banking division of Alex Brown & Sons, Incorporated, including
serving as Managing Director beginning in January 1994. Mr. Kerins is a member
of the board of directors of CD Now, Inc., an online retailer of compact discs
and other music related projects which is quoted on the NASDAQ National Market.
Stephen A. Reinstadtler has been a director of Pathnet since October 1997
and will, upon consummation of the Contribution and Reorganization Transaction,
serve as a director of Pathnet Telecom. Since August 1995, Mr. Reinstadtler has
served as Vice President and Director at Toronto Dominion Capital (U.S.A.) Inc.,
where he has been involved in private equity and mezzanine debt investments.
From April 1994 to July 1995, he was Manager at The Toronto-Dominion Bank, where
he was involved in commercial lending activities to the telecommunications
industry. From August 1992 to April 1994, Mr. Reinstadtler also served as
Associate at Kansallis-Osake-Pankki, where he was involved in commercial lending
activities to the telecommunications industry.
ADDITIONAL DIRECTORS TO BE ELECTED
Our board of directors currently consists of Richard Jalkut, Kevin Maroni,
Patrick Kerins, Stephen Reinstadtler and Peter Barris, all of whom are also
directors of Pathnet. Upon the closing of the Contribution and Reorganization
Transaction our stockholders will designate additional directors as provided in
the stockholders agreement that will be executed at the closing.
Upon the closing of the Contribution and Reorganization Transaction, Mr.
Barris and Mr. Maroni will serve as the representative of the holders of our
Series A Convertible Preferred Stock, Mr. Kerins will serve as the
representative of the holders of our Series B Convertible Preferred Stock, Mr.
Reinstadtler will serve as the representative of our Series C Convertible
Preferred Stock, and Mr. Jalkut, our President and CEO, will serve by virtue of
his position as CEO. The remaining directors will be elected as set forth in
"CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Our Stockholders Agreement."
After an initial "Qualified Public Offering," for so long as BNSF, CSX and
Colonial hold at least 5% of our outstanding voting securities, all of the
stockholders who are party to the stockholders agreement have agreed to vote
their shares to elect each of BNSF's, CSX's and Colonial's designees to the
board of directors. The terms of the stockholders agreement relating to election
of directors (other than the election of the BNSF, CSX and Colonial designees as
described above) will terminate upon the earlier of the date on which no shares
of our preferred stock remain outstanding or, if applicable, on which we
complete an initial "Qualified Public Offering." After the termination of these
stockholders agreement provisions and the conversion of our preferred stock into
common stock, each of our directors, other than the designees of BNSF, CSX and
Colonial, will be elected by a majority vote of our stockholders.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Although we may establish a compensation committee in the future, we do not
currently have one. Unless our board of directors determines otherwise, our
present intention is to keep Pathnet employees, other than our executive
officers, and accordingly our decisions regarding compensation, at the level of
our Pathnet subsidiary. Pathnet does have a compensation committee of its board
of directors, which currently consists of two of Pathnet's directors, Messrs.
Maroni and Barris. Prior to the resignation of Richard Prins from Pathnet's
board of directors in 1999, Pathnet had a three member compensation committee,
consisting of Messrs. Maroni, Barris and Prins. Pathnet's compensation committee
was established to, among other things, administer Pathnet's stock incentive
plans, review and make recommendations to the board of directors concerning the
compensation of executive officers, and consider existing and proposed
employment agreements between Pathnet and its executive officers.
During the fiscal year ended December 31, 1998, no executive officer of
Pathnet served as a member of Pathnet's compensation committee or as a director
of any entity of which any of our or Pathnet's directors served as an executive
officer. No member of Pathnet's compensation committee is currently a Pathnet
employee.
COMPENSATION OF OUR DIRECTORS
Currently, our directors do not receive directors' fees or other
compensation and they are not compensated or reimbursed for their out-of-pocket
expenses incurred in serving as directors or for attending meetings of the board
of directors or its committees. However, our new stockholders agreement
contemplates the election of at least one director who is not an affiliate of
any stockholder or member of management. As a result, after the close of the
Contribution and Reorganization Transaction, we may consider changing the
compensation arrangements for our directors.
LIMITATION OF LIABILITY AND INDEMNIFICATION
We are incorporated under the laws of the State of Delaware.
Section 102(b)(7) of the Delaware General Corporation Law (the "DGCL")
permits a provision in the certificate of incorporation of each corporation
organized thereunder, eliminating or limiting, with certain exceptions, the
personal liability of a director to the corporation or its stockholders for
monetary damages for certain breaches of fiduciary duty as a director.
Our certificate of incorporation limits, to the fullest extent permitted by
law, the liability of our directors to us and our stockholders for monetary
damages for breach of their fiduciary duty. This provision is intended to afford
our directors the benefit of the DGCL. This limitation on liability does not
extend to:
- Any breach of a director's duty of loyalty to us or our stockholders;
- Acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- Violations of the Delaware General Corporation Law regarding the improper
payment of dividends; or
- Any transaction from which the director derived any improper personal
benefit.
Section 145 of the DGCL, in summary, empowers a Delaware corporation,
within certain limitations, to indemnify its officers, directors, employees and
agents against expenses (including attorneys' fees), judgments, fines and
amounts paid in settlement, actually and reasonably incurred by them in
connection with any suit or proceeding other than by or on behalf of the
corporation, if they
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acted in good faith and in a manner reasonably believed to be in or not opposed
to the best interest of the corporation, and, with respect to a criminal action
or proceeding, had no reasonable cause to believe their conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145 of
the DGCL permits a corporation to indemnify its officers, directors, employees
and agents against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit,
provided such person meets the standard of conduct described in the preceding
paragraph, except that no indemnification is permitted in respect of any claim
where such person has been found liable to the corporation, unless the Court of
Chancery or the court in which such action or suit was brought approves such
indemnification and determines that such person is fairly and reasonably
entitled to be indemnified.
Our certificate of incorporation requires us to indemnify our directors and
officers to the extent not prohibited by law for actions or proceedings arising
because of their positions as directors or officers.
Our stockholders agreement provides for indemnification of us, our
directors and officers, and persons who control us within the meaning of Section
15 of the Securities Act or Section 20 of the Exchange Act for certain
liabilities, including liabilities under the Securities Act.
In addition, Pathnet maintains, and we will maintain, standard directors'
and officers' insurance policies.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Pathnet Telecom
pursuant to the foregoing agreements and provisions, we have been informed that
in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
COMPENSATION OF OUR EXECUTIVE OFFICERS
We are being formed as part of the Contribution and Reorganization
Transaction and, as such, we have no historical compensation information.
However, we expect that each of the executive officers who will serve as our
officers immediately after closing the transaction will be the individuals that
held the same office at Pathnet immediately before closing. Consequently, the
following tables present the compensation information for Pathnet's last two
fiscal years as illustrative of the total compensation that we (including
Pathnet) will pay to our executive officers.
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The table below presents information about compensation earned by Pathnet's
CEO and each of Pathnet's four other most highly compensated executive officers
who served as executive officers at the end of our last fiscal year. The
officers listed in the table below are referred to as the Named Executive
Officers:
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION OTHER SECURITIES
--------------------- ANNUAL UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION* OPTIONS**
- --------------------------- ---- ---------- ------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Richard A. Jalkut.......... 1998 $ 400,000 $ -- $ 40,289(1) --
President and Chief 1997 166,154(2) -- 9,857(3) 858,754
Executive Officer
David Schaeffer............ 1998 300,000 -- -- --
Chairman of the Board and 1997 216,923(5) -- -- 430,413
Treasurer(4)
William R. Smedberg V...... 1998 111,250 28,267 -- 78,656
Vice President, Finance and 1997 100,384 -- -- --
Corporate Development(6)
Michael A. Lubin........... 1998 136,840 5,000 -- 15,000
Vice President, General 1997 136,115 -- -- --
Counsel and Secretary
Michael L. Brooks.......... 1998 102,000 38,780 -- 85,732
Vice President, Network 1997 103,077 -- -- --
Operations(7)
</TABLE>
- ---------------
* Except as stated herein, none of the above Named Executive Officers received
perquisites or other personal benefits in excess of the lesser of $50,000 or
10% of that individual's salary plus annual bonus.
** We have not issued any stock appreciation rights or long-term incentive
plans.
(1) Consists of $16,277 for club dues; $7,756 for lodging; $11,685 for airfare;
and $4,571 for other transportation.
(2) Mr. Jalkut began his employment with Pathnet in August 1997, and his salary
was $400,000 per annum in 1997.
(3) Reimbursement for travel expenses.
(4) Mr. Schaeffer ceased to be an executive officer of Pathnet in February 1999,
and resigned as a director of Pathnet on November 4, 1999.
(5) Mr. Schaeffer's salary increased to $300,000 per annum from $150,000 per
annum in August 1997. He no longer receives a salary from Pathnet.
(6) Mr. Smedberg currently serves as the Executive Vice President, Corporate
Development of Pathnet.
(7) Mr. Brooks continues to serve as Vice President, Network Operations of
Pathnet, but is no longer an executive officer of Pathnet.
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STOCK OPTION GRANTS IN OUR LAST FISCAL YEAR
The table below provides information regarding stock options granted to the
Named Executive Officers of Pathnet during the year ended December 31, 1998.
None of the Named Executive Officers received stock appreciation rights. As part
of the Contribution and Reorganization Transaction, each of the option grants
for Pathnet common stock will be assumed by us and will be exercisable for
shares of our common stock on terms and conditions substantially identical to
the terms of the Pathnet options, including terms relating to the option vesting
schedule.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF POTENTIAL REALIZABLE VALUE AT
SECURITIES TOTAL OPTIONS ASSUMED ANNUAL RATE OF STOCK PRICE
UNDERLYING GRANTED TO EXERCISE APPRECIATION FOR THE OPTION TERM(1)
OPTIONS EMPLOYEES IN OF BASE EXPIRATION ------------------------------------
GRANTED FISCAL YEAR $/SHARE DATE 0% 5% 10%
---------- -------------- -------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard A. Jalkut........ -- --% $ -- -- $ -- $ -- $ --
David Schaeffer(4)....... -- -- -- -- -- -- --
Michael A. Lubin......... 15,000(2) 1.35 5.20 12/2/2008 -- 49,054 124,312
Michael L. Brooks........ 70,732(3) 6.39 1.13 3/24/2008 287,879 519,191 878,567
15,000(2) 1.35 5.20 12/2/2008 -- 49,054 124,312
William R. Smedberg V.... 63,656(3) 5.75 1.13 3/24/2008 239,080 467,251 786,427
15,000(2) 1.35 5.20 12/2/2008 -- 49,054 124,312
</TABLE>
- ---------------
(1) The information disclosed assumes, solely for purposes of demonstrating
potential realizable value of the stock options, that the fair market value
per share of common stock of Pathnet was $21.97 share as of September 30,
1999 and increases at the rate indicated during the option term.
(2) The options vest ratably over a four year period. The option may be
transferred by will or by the laws of descent and distribution. Upon a
change of control of Pathnet and a termination of the optionee's employment
without cause, the options that would otherwise become vested within one
year will be deemed vested immediately before such optionee's termination.
(3) The options vest ratably over a three year period. The option may be
transferred by will or by the laws of descent and distribution. Upon a
change of control of Pathnet and a termination of the optionee's employment
without cause, the options that would otherwise become vested within one
year will be deemed vested immediately before such optionee's termination.
(4) Mr. Schaeffer is no longer an officer or director of Pathnet.
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<PAGE> 65
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table lists information about the number and value of
unexercised stock options held by each of the Named Executive Officers as of
December 31, 1998. None of the Named Executive Officers exercised stock options
in 1998 and none of them holds stock appreciation rights.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY
DECEMBER 31, 1998 OPTIONS(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Richard A. Jalkut(2)........................ 286,251 572,503 $9,965,971 $11,930,963
David Schaeffer(3).......................... 215,206 3,835,270 --
Michael A. Lubin............................ 141,465 15,000 3,103,792 251,550
Michael L. Brooks........................... 35,366 50,366 737,027 988,577
William R. Smedberg V....................... 21,217 57,439 442,162 1,135,979
</TABLE>
- ---------------
(1) Based on an assumed market price of Pathnet's common stock of $21.97 per
share as of September 30, 1999.
(2) The options vest ratably over a three-year period and may be transferred
only by will, by the laws of descent and distribution, or to a "Permitted
Transferee," as provided under Pathnet's 1997 Plan. If Mr. Jalkut is
actually or constructively terminated following a "Change in Control," his
options that are unvested at the time of the termination of his employment
and that would have vested within one year following his termination will be
deemed vested immediately before a "Change in Control." Mr. Jalkut has
agreed with Pathnet that the Contribution and Reorganization Transaction
will not constitute a "Change in Control" as defined under Pathnet's 1997
Plan and, as such, the vesting of Mr. Jalkut's options will not be
accelerated due to this transaction.
(3) Pathnet and Mr. Schaeffer have agreed with respect to options originally
granted to Mr. Schaeffer under Pathnet's 1997 Plan, that a total of 107,389
shares of common stock are fully vested at an exercise price of $3.76 per
share, and all other options granted to Mr. Schaeffer under Pathnet's 1997
Plan have terminated or lapsed. Under the terms of Mr. Schaeffer's option
agreement, he has two years from the date of his termination from Pathnet to
exercise the vested portion of his option award.
1995 STOCK OPTION PLAN
We will assume Pathnet's 1995 Stock Option Plan at the closing of the
Contribution and Reorganization Transaction. Additionally, upon the close of the
Contribution and Reorganization Transaction, we will assume, and we have agreed
with the existing option holders to amend, all existing awards under Pathnet's
"1995 Plan" so that the awards will be exercisable for shares of our common
stock rather than common stock of Pathnet. The total number of shares of common
stock that we may issue under the 1995 Plan may not exceed 495,126 shares of
common stock. As of September 30, 1999, Pathnet had awarded options on all
shares reserved under Pathnet's 1995 Plan, at an exercise price of $0.03 per
share. The 1995 Plan will permit our board of directors, or a committee of the
board, to exercise broad discretion to grant stock options to our employees. If
additional shares are authorized under the 1995 Plan, the 1995 Plan will permit
the board of directors to exercise its discretion to determine:
- The exercise price of the options;
- Any vesting provisions, including whether accelerated vesting will occur
with a "Change in Control"; and
- The term of the options, which cannot exceed 10 years.
Within one year following the closing of the Contribution and
Reorganization Transaction, our stockholders must approve our assumption of the
1995 Plan and the options awarded under the Plan.
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<PAGE> 66
1997 STOCK INCENTIVE PLAN
At the closing of the Contribution and Reorganization Transaction, we will
assume Pathnet's 1997 Stock Incentive Plan, which will become our 1997 Plan.
Additionally, upon the close of the Contribution and Reorganization Transaction,
we will assume and amend all existing awards under Pathnet's 1997 Plan so that
the awards will be exercisable for our shares of common stock rather than
Pathnet common stock. Our stockholders also must approve our assumption of the
1997 Plan and the options awarded under the Plan. The 1997 Plan will permit our
board of directors, or a committee of the board, to grant a variety of awards to
employees and consultants. Under our 1997 Plan, the board of directors will have
the authority to grant:
- Incentive and non-qualified stock options;
- Stock appreciation rights, which are rights to receive an amount equal to
a specified portion of the increase in market value of common stock over
a specified exercise price between the date of grant and the date of
exercise;
- Restricted shares, which involve the immediate transfer of shares of
common stock for the performance of services. Restricted shares must be
subject to a "substantial risk of forfeiture" within the meaning of
Section 83 of the Internal Revenue Code;
- Deferred shares, which involve an agreement to deliver shares of common
stock in the future in consideration for the performance of service;
- Performance awards, each of which is a bookkeeping unit equivalent to one
share of common stock;
- Performance compensation awards; and
- Other stock based awards.
The total number of shares of common stock that may be issued or
transferred under our 1997 Plan may not exceed 5,004,874. The maximum share
number is subject to adjustment in the event of a stock split, stock dividend or
other similar transactions.
The board of directors will have broad discretion in granting and
establishing the terms of awards under our 1997 Plan. However, our 1997 Plan
will contain limitations, including:
- No individual may be granted, in any calendar year, options and stock
appreciation rights for more than 1,160,000 total shares of common stock;
- No individual may be granted, in any one calendar year, performance
compensation awards for more than 1,160,000 shares of common stock or, in
the event the performance compensation is paid in cash, the equivalent
cash value thereof;
- The term of options may not be more than 10 years; and
- Performance compensation awards must specify a performance period not to
exceed one year and pre-established objective performance criteria which,
if achieved, will result in payment.
Similar to our 1995 Plan, our 1997 Plan will allow the board of directors
to exercise broad discretion in determining:
- The exercise price of any stock based award;
- Any vesting terms of an award, including whether vesting will accelerate
with a "Change in Control" (which is described below); and
- The term of the options, which cannot exceed 10 years.
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<PAGE> 67
Under our 1997 Plan, the board of directors may establish performance
criteria for purposes of performance awards. The 1997 Plan will also allow the
board of directors to specify performance criteria for stock options, stock
appreciation rights and restricted stock awards that are designated as
performance compensation awards. Performance criteria may be described in terms
of either company-wide objectives or objectives that are related to the
performance of the individual participant or a division, department, region or
function within Pathnet Telecom. Performance criteria applicable to any award to
a participant who is, or is determined by the board of directors likely to
become, a "covered employee" within the meaning of Section 162(m) of the
Internal Revenue Code must be limited to specified levels of, or growth in, one
or more of these criteria:
- Return on net assets;
- Return on stockholders' equity;
- Return on assets;
- Return on capital;
- Stockholder returns;
- Profit margin;
- Earnings per share;
- Net earnings;
- Operating earnings;
- Price per share; and
- Sales or market share.
Except where a modification would result in an award to a "covered
employee" no longer qualifying as performance-based compensation within the
meaning of Section 162(m) of the Internal Revenue Code, the board of directors
may modify a part or all of these performance criteria as it deems appropriate
and equitable in light of events and circumstances, such as changes in our
business, operations, corporate structure or capital structure.
The option agreements between us and each existing optionee provide that,
if we terminate the optionee's employment either actually or constructively,
following the occurrence of a "Change in Control," the portion of the option
that otherwise would have vested in the 12-month period following the Change in
Control will be deemed vested as of the date immediately before the date of the
Change in Control.
"Change in Control" is defined under the 1997 Plan to mean:
- A sale of all or substantially all of our assets or a merger or other
similar transaction involving us which results in less than a majority of
the voting power of the surviving corporation being held by our common
stockholders immediately before the transaction;
- During any two year period, a majority of the board of directors consists
of persons who are not members of or have not been approved by the
incumbent board of directors; or
- The ownership or acquisition of 50% or more of our voting power by any
person or group.
The option agreements between Pathnet and each of Richard Jalkut and Robert
Rouse provide that if Mr. Jalkut's or Mr. Rouse's employment, whichever the case
may be, is terminated after a Change of Control, then certain of their options
will be deemed to become vested immediately before the "Change in Control." Both
Mr. Jalkut and Mr. Rouse have agreed with Pathnet that the
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<PAGE> 68
Contribution and Reorganization Transaction does not constitute a "Change in
Control" under Pathnet's 1997 Plan.
In August 1997, Mr. Jalkut was granted an option to purchase 296,122 shares
of common stock under Pathnet's 1997 Plan, which vests in equal installments
over three years.
As of September 30, 1999, there were options covering 2,624,308 shares of
Pathnet's common stock outstanding under Pathnet's 1997 Plan.
SCHAEFFER BOARD RESIGNATION
In October 1997, Mr. Schaeffer was an employee of Pathnet and was granted
an option to purchase 430,413 shares of common stock under Pathnet's 1997 Plan.
Mr. Schaeffer is no longer an officer or director of Pathnet and has not been an
officer or director of Pathnet Telecom. In a letter agreement dated November 4,
1999, in which Mr. Schaeffer resigned from his position as a director of
Pathnet, Pathnet and Mr. Schaeffer agreed that Mr. Schaeffer holds options for a
total of 107,389 shares of Pathnet common stock, which are fully vested at an
exercise price of $3.67 per share. We will assume these option grants and
convert them to options for shares of our common stock at closing of the
Contribution and Reorganization Transaction.
JALKUT EMPLOYMENT AGREEMENT
Pathnet is currently a party to an employment agreement with Mr. Jalkut.
Under this employment agreement, Mr. Jalkut will receive a minimum annual base
salary of $400,000 (or any greater amount approved by a majority of the board of
directors), bonuses and other benefits determined by the board of directors.
Additionally, Mr. Jalkut is entitled to receive reimbursement of certain
expenses, all of which expenses may not exceed $50,000 per year. In accordance
with his employment agreement, on August 4, 1997, Mr. Jalkut received
nonqualified stock options for 296,122 shares of common stock at an exercise
price of $3.28 per share; the number of shares and the option price were
subsequently adjusted in a stock split. These options vest ratably over three
years. We have granted Mr. Jalkut registration rights for the shares he will
receive upon exercise of his options. If we terminate Mr. Jalkut's employment he
may elect, within 10 business days of his termination, to have us pay him,
subject to the terms of the Indenture and the Supplemental Indenture, the
aggregate fair value of his options then vested or held by him. We will be
required to make any payments in accordance with his employment agreement.
During his employment and for two years after his termination, Mr. Jalkut's
employment agreement requires him to refrain from investing in businesses or
activities that compete with us, soliciting our employees or otherwise competing
with us, by, for example, working with or for one of our competitors. Mr.
Jalkut's employment agreement also prevents him from disclosing or using our
confidential or proprietary information at any time.
Other than the restrictions on Mr. Jalkut described above and our
obligation to pay severance for one year following the termination of Mr.
Jalkut's employment (depending on the basis for his termination), Mr. Jalkut's
employment agreement will terminate in the event of his death and may be
terminated:
- By us:
(a) Without cause (as defined in his employment agreement), by giving
60 days' prior written notice; or
(b) For cause, generally subject to a 30-day written notice of the
board's intention to terminate him for cause;
(c) Upon Mr. Jalkut's disability (as defined in his employment
agreement); and
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<PAGE> 69
- By Mr. Jalkut:
(a) Without cause, by giving 180 days' prior written notice; and
(b) Immediately, upon a constructive termination (as defined in his
employment agreement).
Unless we terminate Mr. Jalkut's employment for cause, or Mr. Jalkut
terminates his employment without cause, Mr. Jalkut is entitled to continue to
receive his salary for 12 months following the termination of his employment
with us.
OTHER AGREEMENTS
Messrs. Schaeffer, Lubin, O'Donnell, Rouse, Craig and Smedberg each have
entered into an agreement with Pathnet which requires each of them to (1) assign
to Pathnet all inventions developed by them during their employment, (2)
maintain the confidentiality of our proprietary information, and (3) refrain
from working with or for a competitor of ours for two years after his
termination.
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<PAGE> 70
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We summarize in this section selected material terms of our stockholders
agreement. For a more complete description of these rights, we refer you to the
copy of our stockholders agreement filed as an exhibit to the registration
statement of which this prospectus is a part. If there is an inconsistency
between this summary and our stockholders agreement, the stockholders agreement
will control.
OUR STOCKHOLDERS AGREEMENT
Overview
Upon closing of the various contribution agreements comprising the
Contribution and Reorganization Transaction, we will enter into a stockholders
agreement with CSX, Colonial, BNSF, our other preferred stockholders and David
Schaeffer. Our stockholders agreement will put in place at the Pathnet Telecom
level many of the provisions that currently apply under Pathnet's existing
Investment and Stockholders Agreement. Pathnet's existing Investment and
Stockholders Agreement will be terminated after the Contribution and
Reorganization Transaction.
In accordance with our stockholders agreement, each stockholder will agree
to vote in favor of the election of a board of directors consisting of 10
members:
- Two designees of the Series A Preferred Stockholders (initially, a
designee of Spectrum Equity Investors L.P. and the other will initially
be a designee of New Enterprise Associates VI Limited Partnership);
- One designee of the Series B Preferred Stockholders (initially, a
designee of Grotech Partners IV, L.P.);
- One designee of the Series C Preferred Stockholders (initially, a
designee of Toronto Dominion Capital (U.S.A.), Inc.) who may not be a
partner or associate of Spectrum, New Enterprise Associates or Grotech
for so long as they have designation rights under our stockholders
agreement;
- Three designees of the Series D and E Preferred Stockholders (one
designated by BNSF, one by CSX and one by Colonial);
- Our CEO;
- One independent "outside" director, who is neither a member of management
nor an affiliate of any stockholder; and
- One director who will be elected by all voting stockholders voting
together as a single class, as provided by our certificate of
incorporation.
Under the stockholders agreement, we will be subject to covenants
substantially similar to those in effect under Pathnet's Investment and
Stockholders Agreement. For so long as at least 25% of the shares of preferred
stock outstanding immediately after the closing of the Contribution and
Reorganization Transaction remain outstanding, these covenants will require that
we obtain the approval of the holders of two-thirds of the outstanding shares of
preferred stock (all voting as a single class) before we undertake certain
fundamental actions, including mergers, dispositions, acquisitions, amendments
to our certificate of incorporation and bylaws, affiliated transactions, and
certain issuances of securities. In addition, certain actions that would
adversely affect the rights of a single series of preferred stock relative to
any other series of preferred stock would require the majority vote of each
adversely affected series.
Each party to our stockholders agreement will represent and warrant to the
other stockholders that they, he or it (1) has no present intention or plan,
formally or informally, on the closing date to
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<PAGE> 71
transfer or dispose of any of the shares received by such party under their, his
or its contribution agreement, and (2) intends for their, his or its
contribution of Pathnet shares or other property to us in accordance with their,
his or its contribution agreement to be treated as part of a single integrated
transaction in which gain or loss will not be recognized for tax purposes. Each
existing Pathnet stockholder who participates will represent and warrant to the
other parties that it intends its contribution of Pathnet shares to us to
qualify as a tax-free reorganization under Section 368(a)(1)(B) of the Internal
Revenue Code, pursuant to which gain or loss will not be recognized.
Registration Rights
In our stockholders agreement, we will grant registration rights to our
preferred stockholders and to Mr. Jalkut and Mr. Schaeffer. These registration
rights are substantially similar to the registration rights granted to these
same holders in the Pathnet Investment and Stockholders Agreement, except that
Mr. Schaeffer will now have registration rights. The holders of securities
subject to registration rights will have both "demand" and "piggy back"
registration rights.
Demand Rights
We will grant "demand" registration rights for two separate groups of our
equity securities. The groups are broadly distinguished by the identity of the
holders who can demand that we register their shares under the Securities Act.
The first group consists of the holders of:
- Shares of common stock issued to our preferred stockholders, or issuable
to our preferred stockholders upon the conversion of their shares of
preferred stock; and
- Shares of common stock issued or issuable to Mr. Jalkut upon the exercise
of his options.
We refer to these groups of shares as "registrable securities." On three
separate occasions, by the vote of the holders of the applicable percentage of
the registrable securities outstanding in this first group, the holders of the
shares in this group may require us to use our best efforts to file a
registration statement with the SEC in respect of their registrable securities.
Before we make an initial "Qualified Public Offering" (which the stockholders
agreement defines as a public offering of more than $75 million in value of our
securities at a per share price that implies a valuation in excess of $600
million for all of the shares of our capital stock), the holders of at least 67%
of the total number of outstanding registrable securities must affirmatively
vote to exercise any of these demand rights. After we make an initial Qualified
Public Offering, the holders of 20% of the total number of outstanding
registrable securities may make the demand. Although we do not include Mr.
Schaeffer's shares in calculating the percentages for purposes of the demand by
this group, he will be entitled to participate on a proportional basis in any
registration demanded by this group of our stockholders.
Separately, we have granted Mr. Schaeffer a single right to demand that we
register his shares of our common stock under the Securities Act. Mr. Schaeffer
may exercise his demand registration right if: (1) we complete an initial
Qualified Public Offering, and (2) our registration statement filed in respect
of that initial offering either:
- Does not include Mr. Schaeffer's shares of our common stock that he
proposes to register; or
- Has ceased to be effective within the thirty-day period following the
expiration of a mandatory "lock-up" period applicable to all of the
holders of our securities with registration rights. (The lock-up
provisions of our stockholders agreement will prohibit sales of our
securities by the parties to our stockholders agreement for a period up
to 180 days following the completion of an initial public offering.)
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<PAGE> 72
Although they may not initiate a "demand" under this provision, the holders
of our registrable securities identified above may participate on a proportional
basis in any registration demanded by Mr. Schaeffer under this provision of the
stockholders agreement.
In exercising these demand registration rights, the stockholders must in
all cases have selected an underwriter reasonably acceptable to us who is
prepared to underwrite the offering of the shares on a firm commitment basis. We
have additional obligations to assist in the registration and underwriting of
any shares that these holders seek to sell pursuant to their registration
rights. We have a right to defer each of those demand registrations for up to 60
days, if our legal counsel has advised us that filing a registration statement
relating to such a demand registration would require us either (1) to disclose a
material impending transaction and we have determined in good faith that the
disclosure would have a material adverse effect on us, or (2) to conduct a
special audit.
Pathnet has separate "demand registration" obligations under a Warrant
Registration Rights Agreement executed in conjunction with Pathnet's Note and
warrant offering in April 1998. Under that agreement, the holders of a majority
of the Pathnet warrants may require Pathnet on one occasion after an initial
public offering to register under the Securities Act their shares of common
stock received upon the exercise of their warrants, subject to Pathnet's right
to defer the registration of those shares for up to 60 days in similar
circumstances. As we discuss below in "DESCRIPTION OF THE CONTRIBUTION AND
REORGANIZATION TRANSACTION -- Disposition of Existing Pathnet Stock Options and
Warrants," we are proposing to the holders of these rights that we assume
Pathnet's obligations under this Warrant Registration Rights Agreement. If the
requisite holders of the Pathnet warrants consent to the proposed amendments, we
may be required by the terms of the Warrant Registration Rights Agreement to
register additional shares of our common stock upon the exercise of these
warrants.
Piggyback Rights
We will also grant to each of these groups of our stockholders (and, if we
assume Pathnet's obligations to the holders of its warrants, then also to those
warrant holders) so-called "piggyback" registration rights, under which they can
require us to register their shares of common stock whenever we register any of
our equity securities under the Securities Act. These piggyback registration
rights will be subject to underwriter "cutbacks," which means that our managing
underwriter may decide to limit the number of shares added to a registration
that we initiate because the underwriter has concluded that including the
additional "piggyback" shares would have an adverse impact on the marketing of
the securities to be sold in the underwritten offering. These piggyback
registration rights will not apply to any registration relating to a public
offering pursuant to demand registration rights granted to the Pathnet
warrantholders, to the registration of securities with our employee benefit
plans, on any SEC form that does not permit secondary offerings, or to
securities we issue in a merger, exchange offer or similar transaction.
We are required to bear up to $60,000 of registration expenses for each
demand registration under our stockholders agreement. In addition, we have
agreed to indemnify the registration rights holders against, and provide
contribution for, liabilities under the Securities Act, the Securities Exchange
Act of 1934 or other federal or state laws regarding the registration of our
securities. However, we will not indemnify the registration rights holders
against, or provide them contribution for, any untrue statements or omissions
made by us in reliance on and in conformity with information furnished to us in
writing by the registration rights holders.
Preemptive Rights
Under our stockholders agreement, each of our preferred stockholders and
Mr. Schaeffer have the right to participate in certain of our sales of
securities. Specifically, on each occasion between the
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closing of the Contribution and Reorganization Transaction and an initial
"Qualified Public Offering" that we issue shares of our capital stock (or other
securities convertible or exchangeable for our capital stock), our preferred
stockholders and Mr. Schaeffer will have the right to purchase their pro rata
share of the newly issued securities. In addition, in the event that any of our
preferred stockholders or Mr. Schaeffer elects not to purchase his or its pro
rata share of the newly issued securities, the remaining preferred stockholders
and Mr. Schaeffer have the right to purchase those shares as well.
Transfer Restrictions
Mr. Schaeffer's ability to transfer his shares of our capital stock is
subject to restrictions under our stockholders agreement. He is prohibited from
making any transfers other than specifically enumerated "Permitted Transfers."
Those Permitted Transfers include:
- Transfers made in accordance with specified provisions of our
stockholders agreement which, among other things, grant a right of first
refusal to our preferred stockholders with respect to the shares Mr.
Schaeffer proposes to transfer.
- Transfers by Mr. Schaeffer to his spouse or his children, to a trust he
establishes for his spouse or children, upon his death, to a trust
established under his will and other similar transfers, provided that the
transferee enters into an enforceable written agreement that is
satisfactory to us and to a majority of our preferred stockholders,
providing that the shares transferred by Mr. Schaeffer remain subject to
our stockholders agreement.
- Transfers that constitute a bona fide pledge or other granting of a
security interest in Mr. Schaeffer's shares of our stock to secure a loan
for borrowed money, subject to specified restrictions, including
limitations on the purpose of any such loan, the minimum net assets of
the lending institution, and a review of the applicable loan documents by
our outside counsel for compliance with the terms of our stockholders
agreement.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below provides some information regarding beneficial ownership of
our capital stock as of September 30, 1999 for:
- Each of the Named Executive Officers.
- Each of our directors.
- All of our executive officers and directors as a group.
- Each other person, entity or group who we know beneficially owns 5% or
more of any class of our stock.
All share amounts in the table have been adjusted and are presented
assuming that the Contribution and Reorganization Transaction was closed as of
September 30, 1999. Unless otherwise noted, the address of each of our Named
Executive Officers and directors is 1015 31st Street, N.W., Washington, D.C.
20007.
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<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING
COMMON STOCK SERIES A PREFERRED SERIES B PREFERRED
---------------------- ---------------------- ----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
STOCKHOLDER(a) SHARES OF CLASS SHARES OF CLASS SHARES OF CLASS
-------------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Spectrum Equity Investors, L.P.(d)................ 0 0.00% 1,372,668 47.33% 1,220,099 25.48%
Spectrum Equity Investors II, L.P.(d)............. 0 0.00% 0 0.00% 0 0.00%
New Enterprise Associates VI, Limited
Partnership(e)................................... 0 0.00% 522,000 18.00% 685,014 14.31%
Onset Enterprise Associates II, L.P.(f)........... 0 0.00% 522,000 18.00% 463,976 9.69%
Onset Enterprise Associates III, L.P.(f).......... 0 0.00% 0 0.00% 0 0.00%
Paul Capital Partner Funds(g)..................... 0 0.00% 245,989 8.48% 125,144 2.61%
Thomas Domencich(h)............................... 0 0.00% 145,000 5.00% 62,573 1.31%
Toronto Dominion Capital (USA) Inc.(i)............ 0 0.00% 0 0.00% 884,146 18.47%
Grotech Partners IV, L.P.(j)...................... 0 0.00% 0 0.00% 884,146 18.47%
Utech Climate Challenge Fund, L.P.(k)............. 0 0.00% 0 0.00% 442,076 9.23%
Utility Competitive Advantage Fund, LLC(l)........ 0 0.00% 0 0.00% 0 0.00%
BNSF(m)........................................... 0 0.00% 0 0.00% 0 0.00%
Colonial(n)....................................... 0 0.00% 0 0.00% 0 0.00%
CSX(o)............................................ 0 0.00% 0 0.00% 0 0.00%
David Schaeffer(p)................................ 2,900,000 97.4% 0 0.0% 0 0.0%
Richard A. Jalkut(q).............................. 0 0.00% 0 0.00% 0 0.00%
Michael A. Lubin(r)............................... 0 0.00% 0 0.00% 0 0.00%
William R. Smedberg V(s).......................... 0 0.00% 0 0.00% 0 0.00%
Michael Brooks(t)................................. 0 0.00% 0 0.00% 0 0.00%
Kevin J. Maroni(u)................................ 0 0.00% 1,372,668 47.33% 1,220,099 25.48%
Peter J. Barris(v)................................ 0 0.00% 522,000 18.00% 685,014 14.31%
Stephen A. Reinstadtler(w)........................ 0 0.00% 0 0.00% 884,146 18.47%
Patrick J. Kerins(x).............................. 0 0.00% 0 0.00% 884,146 18.47%
All Directors and Executive Officers as a
Group(p)(q)(r)(s)(t)(u)(v)(w)(x)................. 2,900,000 97.39% 1,894,668 65.33% 3,673,405 76.72%
<CAPTION>
SERIES C PREFERRED SERIES D PREFERRED SERIES E PREFERRED
---------------------- ---------------------- ----------------------
PERCENTAGE PERCENTAGE PERCENTAGE
STOCKHOLDER(a) SHARES OF CLASS SHARES OF CLASS SHARES OF CLASS
-------------- --------- ---------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Spectrum Equity Investors, L.P.(d)................ 1,363,406 16.67% 0 0.00% 0 0.00%
Spectrum Equity Investors II, L.P.(d)............. 1,363,406 16.67% 0 0.00% 0 0.00%
New Enterprise Associates VI, Limited
Partnership(e)................................... 1,374,051 16.80% 0 0.00% 0 0.00%
Onset Enterprise Associates II, L.P.(f)........... 817,672 10.00% 0 0.00% 0 0.00%
Onset Enterprise Associates III, L.P.(f).......... 272,553 3.33% 0 0.00% 0 0.00%
Paul Capital Partner Funds(g)..................... 136,275 1.67% 0 0.00% 0 0.00%
Thomas Domencich(h)............................... 0 0.00% 0 0.00% 0 0.00%
Toronto Dominion Capital (USA) Inc.(i)............ 1,006,500 12.31% 0 0.00% 0 0.00%
Grotech Partners IV, L.P.(j)...................... 1,006,500 12.31% 0 0.00% 0 0.00%
Utech Climate Challenge Fund, L.P.(k)............. 136,276 1.67% 0 0.00% 0 0.00%
Utility Competitive Advantage Fund, LLC(l)........ 366,980 4.49% 0 0.00% 0 0.00%
BNSF(m)........................................... 0 0.00% 3,413,746 40.11% 0 0.00%
Colonial(n)....................................... 0 0.00% 1,684,115 19.79% 2,867,546 100.00%
CSX(o)............................................ 0 0.00% 3,413,746 40.11% 0 0.00%
David Schaeffer(p)................................ 0 0 0 0.00% 0 0.00%
Richard A. Jalkut(q).............................. 0 0.00% 0 0.00% 0 0.00%
Michael A. Lubin(r)............................... 0 0.00% 0 0.00% 0 0.00%
William R. Smedberg V(s).......................... 0 0.00% 0 0.00% 0 0.00%
Michael Brooks(t)................................. 0 0.00% 0 0.00% 0 0.00%
Kevin J. Maroni(u)................................ 2,726,812 33.35% 0 0.00% 0 0.00%
Peter J. Barris(v)................................ 1,374,051 16.80% 0 0.00% 0 0.00%
Stephen A. Reinstadtler(w)........................ 1,006,500 12.31% 0 0.00% 0 0.00%
Patrick J. Kerins(x).............................. 1,006,500 12.31% 0 0.00% 0 0.00%
All Directors and Executive Officers as a
Group(p)(q)(r)(s)(t)(u)(v)(w)(x)................. 6,113,863 74.77% 0 0.00% 0 0.00%
<CAPTION>
BENEFICIAL OWNERSHIP OF
COMMON STOCK
----------------------------
STOCK PRO FORMA
STOCKHOLDER(a) OPTIONS(b) TOTAL SHARES PERCENTAGE(c)
-------------- ---------- ------------ -------------
<S> <C> <C> <C>
Spectrum Equity Investors, L.P.(d)................ 0 3,956,173 57.06%
Spectrum Equity Investors II, L.P.(d)............. 0 1,363,406 31.41%
New Enterprise Associates VI, Limited
Partnership(e)................................... 0 2,581,065 46.43%
Onset Enterprise Associates II, L.P.(f)........... 0 1,803,648 37.72%
Onset Enterprise Associates III, L.P.(f).......... 0 272,553 8.39%
Paul Capital Partner Funds(g)..................... 0 507,408 14.56%
Thomas Domencich(h)............................... 0 207,573 6.52%
Toronto Dominion Capital (USA) Inc.(i)............ 0 1,890,646 38.84%
Grotech Partners IV, L.P.(j)...................... 0 1,890,646 38.84%
Utech Climate Challenge Fund, L.P.(k)............. 0 578,352 16.26%
Utility Competitive Advantage Fund, LLC(l)........ 0 366,980 10.97%
BNSF(m)........................................... 0 3,413,746 53.41%
Colonial(n)....................................... 1,593,082 6,144,742 67.36%
CSX(o)............................................ 0 3,413,746 53.41%
David Schaeffer(p)................................ 107,389 3,007,389 97.48%
Richard A. Jalkut(q).............................. 572,502 572,502 16.13%
Michael A. Lubin(r)............................... 141,465 141,465 4.54%
William R. Smedberg V(s).......................... 54,936 54,936 1.81%
Michael Brooks(t)................................. 53,049 53,049 1.75%
Kevin J. Maroni(u)................................ 0 5,319,579 64.11%
Peter J. Barris(v)................................ 0 2,581,065 46.43%
Stephen A. Reinstadtler(w)........................ 0 1,890,646 38.84%
Patrick J. Kerins(x).............................. 0 1,890,646 38.84%
All Directors and Executive Officers as a
Group(p)(q)(r)(s)(t)(u)(v)(w)(x)................. 929,341 14,581,936 99.50%
</TABLE>
- ---------------
(a) In accordance with the rules of the Securities and Exchange Commission, each
beneficial owner's holding has been calculated assuming full exercise of
outstanding warrants and options exercisable or convertible by the holder
within 60 days after September 30, 1999.
(b) Only Options exercisable within 60 days after September 30, 1999 are listed.
(c) The pro forma percentages of beneficial ownership of common stock as to each
beneficial owner assumes the exercise or conversion into common stock of all
outstanding options, warrants and convertible securities held by such owner
that are exercisable or convertible within 60 days of September 30, 1999,
but not the exercise or conversion of options, warrants and convertible
securities held by others shown in the table.
(d) Spectrum Equity Investors, L.P.'s and Spectrum Equity Investors II, L.P.'s
address is One International Place, Boston, Massachusetts, 02110.
(e) New Enterprise Associates VI, Limited Partnership's address is 1119 Saint
Paul Street, Baltimore, Maryland, 21202.
(f) Onset Enterprise Associates II, L.P.'s and Onset Enterprise Associates III,
L.P.'s address is 8911 Capital of Texas Highway, Austin, Texas, 78759.
(g) The Paul Capital Partner Funds are five funds that constitute a "group"
under Section 13(d) of the Exchange Act. Each fund's address is: c/o Paul
Capital Partners, 50 California Street, Suite 3000, San Francisco,
California, 94111. The five funds are Paul Capital Partners V L.P., Paul
Capital Partners V (Domestic Annex Fund) L.P., Paul Capital Partners V
International, L.P., Paul Capital Partners VI, L.P. and PCP Associates, L.P.
(h) Thomas Domencich's address is 104 Benevolent Street, Providence, Rhode
Island, 02906.
(i) Toronto Dominion Capital (USA) Inc.'s address is 31 West 52nd Street, New
York, New York, 10019.
(j) Grotech Partners IV, L.P.'s address is 9690 Deereco Road, Timonium,
Maryland, 21093.
(k) Utech Climate Challenge Fund, L.P.'s and Utility Competitive Advantage Fund,
L.L.C.'s address is c/o Arete Ventures, Two Wisconsin Circle, Chevy Chase,
Maryland 20815.
72
<PAGE> 76
(l) Utility Competitive Advantage Fund L.L.C.'s address is c/o William T.
Heflin, Managing Director, Kinetic Ventures, L.L.C., 2 Wisconsin Circle,
Suite 620, Chevy Chase, Maryland 20815.
(m) BNSF's address is 2500 Lou Menk Drive, Fort Worth, Texas, 76131.
(n) Colonial Pipeline Company's address is 945 East Paces Ferry Road, NE,
Atlanta, Georgia, 30326.
(o) CSX's address is c/o CSX Real Property, Inc., 301 West Bay Street, J915,
Jacksonville, Florida, 32202.
(p) Mr. Schaeffer is no longer an officer or director of Pathnet and is not an
officer or director of Pathnet Telecom.
(t) Mr. Brooks is no longer an executive officer of Pathnet, but he is included
in the beneficial ownership computation of all directors and officers as a
group because Mr. Brooks was an executive officer of Pathnet at the end of
its last fiscal year.
(u) Mr. Maroni, who is a limited partner of the general partner of Spectrum and
a general partner of the general partner of Spectrum Equity Investors II,
L.P., disclaims beneficial ownership of the shares owned by Spectrum Equity
Investors, L.P. and Spectrum Equity Investors II, L.P.
(v) Mr. Barris, who is general partner of the general partner of New Enterprise
Associates VI, Limited Partnership, disclaims beneficial ownership of the
shares owned by New Enterprise Associates VI, Limited Partnership.
(w) Mr. Reinstadtler, Vice President and Director of Toronto Dominion Capital
(USA) Inc., disclaims beneficial ownership of the shares owned by Toronto
Dominion Capital (USA) Inc.
(x) Mr. Kerins, Managing Director of the general partner of Grotech Partners IV,
LP, disclaims beneficial ownership of the shares owned by Grotech Partners
IV, LP.
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<PAGE> 77
DESCRIPTION OF CONTRIBUTION AND REORGANIZATION TRANSACTION
TRANSACTION OVERVIEW
OVERVIEW. We have entered into agreements providing for the Contribution
and Reorganization Transaction with each of BNSF, CSX, Colonial and all of the
existing stockholders of Pathnet. This section describes the terms of those
agreements and the Contribution and Reorganization Transaction in general. As
discussed in the following section entitled "THE PATHNET SENIOR NOTEHOLDER
WAIVERS AND OTHER PROPOSED INDENTURE AMENDMENTS," we intend by this offering and
the consent solicitation to address the current requirements of the indenture
governing the Notes that would otherwise inhibit our ability to complete the
Contribution and Reorganization Transaction and to operate our businesses
(including the business currently conducted by Pathnet) following the completion
of the Contribution and Reorganization Transaction.
The Contribution and Reorganization Transaction consists of the following
principal steps:
- Our issuance of 8,511,607 shares of our Series D Convertible Preferred
Stock, valued at $187 million, to three new investors -- BNSF, CSX and
Colonial -- in exchange for leasehold interests or comparable license
rights to their railroad and pipeline rights of way in order to construct
and operate our fiber optic telecommunications network;
- Our issuance, at a cash purchase price of $21.97 per share for an
aggregate purchase price of $38 million, of 1,729,631 shares of our
Series E Convertible Preferred Stock to Colonial;
- Our issuance of an additional 1,137,915 shares of our Series E
Convertible Preferred Stock to Colonial at a cash purchase price of $25
million conditioned upon the completion of our fiber optic build between
Chicago, Illinois and Aurora (a suburb of Denver), Colorado;
- Our grant, in exchange for a $1 million cash payment at the closing of
the Contribution and Reorganization Transaction, of an option to Colonial
and certain affiliates of Colonial to purchase up to an additional
1,593,082 shares of our Series E or, under certain circumstances, Series
D Convertible Preferred Stock and a separate option to purchase our
common stock;
- The exchange of all shares of the outstanding common and preferred
Pathnet stock solely for shares of our common and preferred stock on
substantially similar terms, after which we will own 100% of Pathnet;
- Our sale to Colonial of rights in a specified number of conduit miles of
our future network along Colonial's rights of way (or equivalent
telecommunications assets) for a $4 million cash payment at the closing
of the Contribution and Reorganization Transaction;
- Our purchase from Pathnet for $70 million (payable by means of our
promissory note to Pathnet) of the following Pathnet assets:
- three fiber co-development contracts and the agreements related to
those co-development contracts;
- those fiber network assets that are currently constructed and
installed relating to Pathnet's network segment build between
Chicago and Aurora (a suburb of Denver), Colorado; and
- the right to use Pathnet's intellectual property in our business.
- Our borrowing from Pathnet (following the execution of the Supplemental
Indenture referred to under "THE PATHNET SENIOR NOTEHOLDER WAIVERS AND
OTHER PROPOSED INDENTURE AMENDMENTS") of $50 million in cash to assist in
the development of our fiber optic rights of way received from BNSF, CSX
and Colonial.
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<PAGE> 78
THE PARTIES. Pathnet Telecom was formed on November 1, 1999, to effectuate
the Contribution and Reorganization Transaction and become the parent company of
Pathnet. Pathnet, a company formed in August 1995, is a wholesale
telecommunications provider building a nationwide network designed to provide
our customers, who are telecommunications providers, with access to underserved
and second and third tier markets, of which there are over 200. CSX, BNSF and
Colonial are each holders of extensive right of way assets that were originally
acquired and maintained for use in their primary railroad and pipeline
businesses. The other parties to the Contribution and Reorganization Transaction
include all of the existing stockholders of Pathnet.
THE TRANSACTION. BNSF, CSX, and Colonial have agreed to contribute right
of way assets and, in the case of Colonial, both right of way assets and cash,
in exchange for newly-issued shares of our capital stock. At the same time, we
are reorganizing the Pathnet corporate structure, and through an exchange of
shares of our capital stock with existing Pathnet stockholders, Pathnet Telecom
will become the parent company of Pathnet. As discussed below, prior to the
filing of the registration statement of which this prospectus is a part, the
parties executed the definitive contribution agreements providing for these
contributions of assets and exchanges of shares. The closing of those
transactions is conditioned principally upon our obtaining the consents of the
holders of a majority in principal of the Notes.
PURPOSE OF THE TRANSACTION. We plan to use the rights of way and cash
obtained in the Contribution and Reorganization Transaction in the construction
of our fiber optic telecommunications network. BNSF, CSX and Colonial have
committed to enter into right of way leases or licenses permitting us to install
and operate a fiber optic and wireless network across their rights of way for
periods ranging from 30 to 35 years. We expect that the access rights that we
obtain from CSX, BNSF and Colonial will satisfy substantially all of our planned
right of way requirements for our backbone network. We will obtain additional
rights of way as necessary to link our backbone network to our target markets.
Once the contribution transactions with CSX, BNSF and Colonial have closed, we
will have right of way agreements in place to access over 12,000 railroad track
and pipeline miles. One of our purposes in entering into the Contribution and
Reorganization Transaction is to enhance our ability to conduct and finance the
future operations of Pathnet and Pathnet Telecom in an efficient and competitive
manner, but we cannot assure you that we will realize this goal.
CONSENT OF NOTEHOLDERS REQUIRED. The Indenture executed in 1998 between
Pathnet and The Bank of New York as trustee contains the covenants,
restrictions, events of default, and other terms relating to the Notes. Under
the terms of the Indenture, completing the Contribution and Reorganization
Transaction technically would constitute a "change of control" of Pathnet,
triggering its obligation (under Section 1010 of the Indenture) to offer to
repurchase the Notes at a premium to both their face amount and their current
market value. Pathnet likely would not have access to the funds necessary to
meet this repurchase obligation if it were to arise. Moreover, repurchasing the
Notes would deprive Pathnet of resources needed to help fund the development of
the Pathnet and Pathnet Telecom network and other telecommunications businesses.
As a result, the Contribution and Reorganization Transaction is subject to
conditions, as more fully described below in "-- Conditions to Closing the
Contribution and Reorganization Transaction," under which it will not close if
Pathnet is unable to obtain the waiver of this repurchase obligation from the
holders of a majority in outstanding principal amount of the Notes.
In seeking the waiver of this "change of control," Pathnet will also seek
related waivers and amendments to the terms of the Indenture as more fully
described below in "THE PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED
INDENTURE AMENDMENTS," including a waiver of obligations to consummate the
Excess Proceeds Offer because the Contribution and Reorganization Transaction
constitutes an "Asset Sale" under the terms of the Indenture. Pathnet's purpose
in seeking these related waivers and amendments is to impose upon us
substantially the same covenant restrictions that are currently imposed upon
Pathnet, and to permit inter-company
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<PAGE> 79
transactions between us and Pathnet (and our other subsidiaries) to the same
extent that the Indenture currently permits those transactions between Pathnet
and its subsidiaries.
DESCRIPTION OF THE CONTRIBUTION AND REORGANIZATION TRANSACTION AGREEMENTS
We have executed contribution agreements with our new investors and former
Pathnet stockholders to accomplish the Contribution and Reorganization
Transaction. We summarize some of the material terms of these agreements in this
section. We have filed complete copies of these agreements as exhibits to our
registration statement filed in connection with this offering, and we encourage
you to review the agreements for further details concerning their terms.
CONTRIBUTION AGREEMENTS WITH CSX, BNSF AND COLONIAL. On November 4, 1999,
we entered into definitive contribution agreements with each of CSX, BNSF and
Colonial to issue our shares of Series D and Series E Convertible Preferred
Stock and obtain right of way access rights along their railroad and pipeline
properties and easements. Each of these companies has significant property and
easement holdings in areas where we expect to build and expand our fiber optic
telecommunications network. Under those contribution agreements:
- CSX agreed to enter into a Fiber Optic Access and License Agreement by
which CSX will provide us with access to portions of CSX's extensive
railroad corridors covering the eastern United States;
- BNSF agreed to enter into a Fiber Optic Access Agreement by which BNSF
will provide us with access to portions of BNSF's extensive railroad
corridors covering the western United States; and
- Colonial agreed to contribute access to portions of its pipeline
corridors covering the eastern United States.
The contribution agreements are subject to certain conditions to closing,
which are described in more detail below in "-- Conditions to Closing the
Transaction." In exchange for granting us these rights of way, we will issue to
CSX, BNSF and Colonial shares of our Series D Convertible Preferred Stock. In
addition, our Contribution Agreement with Colonial provides for Colonial to
contribute $38 million in cash in exchange for shares of our Series E
Convertible Preferred Stock. Colonial has agreed to pay this amount at the
initial closing of the Contribution and Reorganization Transaction, and another
$25 million in exchange for additional Series E Convertible Preferred Shares
promptly following Pathnet's substantial completion of the fiber optic build
between Chicago, Illinois and Aurora, a suburb of Denver, Colorado (which
Pathnet is currently constructing with World Wide Fiber, Inc.). We currently
expect Pathnet to complete this fiber build during the first calendar quarter of
2000, but we cannot assure you that construction will be completed within this
time frame.
Colonial will pay an additional $4 million at the initial closing of the
Contribution and Reorganization Transaction in return for the future right to
receive a specified number of "conduit miles" of installed fiber optic conduit
or the equivalent value in other telecommunications assets.
Under the contribution agreements with BNSF, CSX and Colonial, we have made
a variety of representations and warranties to each of the new investors with
respect to the Contribution and Reorganization Transaction, our securities to be
issued to each of them, and the current business and financial condition of
Pathnet. We have also agreed to indemnify the new investors against any breach
of those representations and warranties.
COLONIAL OPTION AGREEMENT. In addition to the contribution and conduit
purchase investments outlined above, our contribution agreement with Colonial
provides for a separate option agreement which will permit Colonial to purchase
additional shares of our stock. Upon the execution of the Colonial Option
Agreement at the closing of the Contribution and Exchange Transaction, Colonial
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<PAGE> 80
will pay us a non-refundable fee of $1 million for the purchase of this option.
Under the Colonial Option Agreement, we have agreed to grant two options to
Colonial in exchange for their cash contribution.
The first option, which may be exercised by a number of Colonial's
affiliated companies, permits Colonial or those affiliates to purchase up to $35
million of additional shares of our Series E Convertible Preferred Stock at the
same purchase price as that paid by Colonial under the Colonial contribution
agreement. Colonial also has the right to exercise $10 million of the $35
million on its own behalf. This option will expire on the later of the date
which is 120 days after the date Colonial's contribution agreement was signed or
15 days after the closing of the Contribution and Reorganization Transaction.
The option agreement also allows us during the same period to enter into
agreements with one or more of Colonial's designated affiliated entities, where
those entities would contribute rights of way in exchange for shares of our
Series D Convertible Preferred Stock at $21.97 per share.
The second option permits Colonial to purchase a number of shares of our
common stock equal to 10% of the total number of shares of common stock that we
actually sell in any initial public offering of our common stock at a price
determined in accordance with the terms of the Colonial option agreement. This
second option must be exercised by Colonial prior to the filing of our
registration statement for an initial public offering of our common stock, but
the shares will be issued only if and when we close on a firm commitment
underwritten initial public offering.
CONTRIBUTION AGREEMENTS WITH PATHNET'S EXISTING STOCKHOLDERS. Concurrent
with our contribution agreements with BNSF, CSX and Colonial, we entered into
contribution agreements with existing Pathnet preferred and common stockholders.
All of the Pathnet common stockholders (except for David Schaeffer) are parties
to one contribution agreement under which those stockholders agreed to exchange
their entire stock and interest in Pathnet for shares of our common stock.
Mr. Schaeffer signed a separate contribution agreement with us under which
he also agreed to exchange his entire stock and interest in Pathnet for shares
of our common stock. Mr. Schaeffer is the only common stockholder that is a
party to the Pathnet Investment and Stockholders Agreement, and he has agreed in
his contribution agreement to enter into our new stockholders agreement.
The holders of Pathnet's Series A, B and C Convertible Preferred Stock have
also elected to participate in the Contribution and Reorganization Transaction.
They executed a contribution agreement, under which they agreed to exchange
their shares of Pathnet Series A, B and C Convertible Preferred Stock solely for
shares of our Series A, B and C Convertible Preferred Stock, respectively, with
substantially similar terms for each corresponding series. The contribution
agreement with the existing Pathnet preferred stockholders also requires that
those stockholders enter into our new stockholders agreement. For a discussion
of the provisions of that new stockholders agreement, please refer to the
section below entitled "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Our
Stockholders Agreement."
As with the contribution transactions involving BNSF, CSX and Colonial, the
closing of the contribution transactions involving all of the existing
stockholders of Pathnet remains subject to the effectiveness of this
registration statement, our receiving appropriate waivers and consents from the
holders of the Notes, the FCC, the Antitrust Division of the Department of
Justice and the FTC to all required filings under applicable law.
Under the contribution agreements with the Pathnet existing stockholders,
we have made a limited number of representations and warranties with respect to
the Contribution and Reorganization Transaction and our securities to be issued.
However, these contribution agreements do not contain representations and
warranties with respect to the business and financial condition of Pathnet, nor
do
77
<PAGE> 81
they contain the indemnification provisions contained in the contribution
agreements with CSX, BNSF and Colonial.
STRUCTURE OF THE PATHNET BUSINESS FOLLOWING THE CONCLUSION OF THE
CONTRIBUTION AND REORGANIZATION TRANSACTION
The structure of the issued and outstanding stock and debt security of
Pathnet business immediately following the closing of the Contribution and
Reorganization Transaction will be as follows:
[PATHNET GRAPHIC]
To facilitate vendor financing and other business relationships that will
be required to permit us to continue to develop and maintain our network, we may
in the future need to incorporate other subsidiaries ("sister" companies to
Pathnet or other subsidiaries of Pathnet). We plan to enter into vendor
financing arrangements, including a pending fiber optic purchase agreement and
related vendor financing facility with Lucent Technologies, Inc., that would
require us to incorporate those separate subsidiaries and to contribute some of
our assets to those subsidiaries. See "DESCRIPTION OF OTHER INDEBTEDNESS AND
OTHER FINANCING ARRANGEMENTS -- Proposed Credit Facility with Lucent."
To support additional vendor and other financing, we (or our relevant
subsidiaries) may in the future need to pledge or secure our assets, together
with any other assets provided by the vendors, in order to obtain vendor
financing. Because the Notes and our Guarantees are unsecured, any security that
we provide to a vendor will be senior to your interests as holders of the Notes.
Moreover, after the Contribution and Reorganization Transaction, we may
establish subsidiaries for purposes of such
78
<PAGE> 82
vendor financing or for other reasons associated with the operation of our
business, which we are permitted to do under the Indenture and the Supplemental
Indenture, and the Supplemental Indenture, like the Indenture, will not require
these new subsidiaries to guarantee the Notes. Accordingly, if we establish
additional subsidiaries in the future, your Notes will be effectively
subordinated to the claims of the creditors of those subsidiaries, except in
cases in which we or Pathnet are creditors to the new subsidiaries. In those
cases (and assuming that our status or Pathnet's status as a creditor is
respected in any proceeding relating to a claim as a creditor), our claims still
would be effectively subordinated to any security interests in the assets of the
subsidiary held by vendor finance providers or other creditors.
DESCRIPTION OF FIBER OPTIC ACCESS AGREEMENTS AND RELATED FIBER OPTIC LEASES AND
LICENSES FROM BNSF, CSX AND COLONIAL
Upon the successful completion of the consent solicitation process and the
closing of the Contribution and Reorganization Transaction, we will enter into
two further agreements relating to the rights of way with each of BNSF, CSX and
Colonial. In each case, the first agreement, which we refer to as an "access
agreement," will describe the basic structure of our right to develop the rights
of way. These agreements will address the number of miles available for
development, the nature and duration of any exclusive rights we will have in the
rights of way, and any obligation we have to provide additional benefits to
BNSF, CSX or Colonial. The second agreement, which we refer to as a "lease
agreement," identifies the particular segments in which we will have a right of
way interest. These agreements will also ensure that our construction and
operational activities will not interfere with any of the grantors' rail or
pipeline businesses, including any other contractual obligations to which that
grantor is a party. We describe each agreement with BNSF, CSX and Colonial in
more detail below.
BNSF AGREEMENTS. The access agreement with BNSF authorizes us to develop
up to a specified number of miles of BNSF's rail corridor. Prior to December 31,
2004, we will have the exclusive right to develop approximately 4,000 miles of
this right of way (the "Exclusive Corridors"). In addition, for five years after
commencing construction of each segment along the Exclusive Corridors, and for
three years after commencing construction on all other BNSF rights of way, any
party that requests the right to develop BNSF rights of way for fiber optic uses
must first negotiate with us to provide for their communications needs. If we do
not reach agreement within a specified time period, the party may proceed to
negotiate its development directly with BNSF.
We could lose these exclusivity rights in certain specified circumstances,
including our failure to develop at least 800 miles of the BNSF Exclusive
Corridors before April 30, 2001, and an additional 800 miles per year
thereafter. We must also develop or acquire fiber optic rights in at least 3,000
miles of telecommunications network nationally (including, but not limited to,
the BNSF right of way) by June 30, 2001 and approximately an additional 3,000
miles per year thereafter.
The lease agreement with BNSF, which addresses conditions of construction
and operations, is for a term of 35 years and permits us to install an unlimited
number of fibers and conduits. It requires us to use BNSF personnel for
supervising all construction and to pay all costs associated with using these
personnel. It also contains other provisions associated with construction and
operation of our facilities, including indemnification, insurance provisions and
mechanisms for complying with BNSF safety and operations regulations.
CSX AGREEMENTS. The CSX access agreement authorizes us to develop up to a
specified number of miles of CSX's right of way on the former Conrail system
(the "Conrail Miles") and an additional specified number of miles on the
remainder of CSX's system. For the first three years after the date of the
access agreement (the "CSX Exclusivity Period"), we will have the exclusive
right to develop up to 2,000 of the Conrail Miles, subject to restrictions
concerning the length and location of specific developments ("Construction
Exclusivity"). For an additional four years after the end of the
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CSX Exclusivity Period, any party that requests the right to develop a segment
of the Conrail Miles where we have commenced construction must first negotiate
with us to provide for their communications and development needs. If we do not
reach an agreement within a specified time period, the party can proceed to
negotiate its development with CSX. If we fail to develop at least 500 miles of
CSX rights of way in each year after the date of the access agreement, or if at
least 75% of our development is not in contiguous segments of 200 miles each, we
will lose our Construction Exclusivity for all segments of right of way on which
development is not complete.
The CSX access agreement also provides that we will construct four conduits
for CSX between Boston and Framingham, Massachusetts (the "Boston/Framingham
Conduits") and one conduit for CSX wherever else we develop CSX rights of way
(the "CSX Conduit"). CSX may sell or use the Boston/Framingham conduit for
commercial purposes as soon as we complete construction but may use each
completed segment of the CSX Conduit only for CSX internal communications until
the earlier of five years after completion of construction of that segment of
the CSX Conduit, or ten years after the closing of the Contribution and
Reorganization Transaction.
The CSX lease agreement is for a term of 30 years and addresses the terms
of constructing and operating our telecommunications network on the CSX rights
of way. We must use CSX personnel to supervise our construction activities and
are responsible for all costs associated with using these personnel. We may
install an unlimited amount of fibers but we may not install more than eight
conduits (plus the conduits that we provide to CSX) without CSX's permission.
COLONIAL PIPELINE AGREEMENTS. The Colonial access agreement authorizes us
to develop our network along the entire route of Colonial's right of way up to a
specified number of miles. We have the exclusive right to develop these rights
of way for ten years following the date of the Colonial lease agreement. Any
segment of the Colonial right of way that we have not designated for development
within five years of the date of the lease agreement, or on which development is
not completed within seven years of the date of the lease agreement, reverts to
Colonial and we have no further right to develop those segments.
Concurrent with the closing of the Contribution and Reorganization
Transaction, Colonial will pay us $4 million for our obligation to construct a
single conduit for Colonial along 2,200 miles of Colonial's right of way. If the
full amount of conduit is not available within five years after the date of the
lease agreement, we may provide alternate telecommunications services or assets
of equivalent value on other portions of our network. Until the fifth
anniversary of the date of the lease, Colonial may use the Colonial conduit only
for its internal communications. After that date, Colonial may sell its conduit
on any terms it desires. However, subject to certain limitations, if Colonial
desires to sell any portion of its conduit, it must first give us an opportunity
to purchase that portion on the same terms. If we decide not to purchase that
portion, Colonial may proceed with the sale.
The Colonial lease agreement is for a term of 30 years, which we may renew
for one term of 10 years by paying a fair market value rental rate. Like the
other lease agreements, the Colonial lease agreement addresses construction and
operational issues affecting the Colonial right of way, and provides that we may
not install more than ten conduits (including the conduit we provide to
Colonial).
TERMS COMMON TO THE BNSF, CSX AND COLONIAL AGREEMENTS. In addition to the
terms described above, several additional provisions are common to our
agreements with each of BNSF, CSX and Colonial. Each may purchase
telecommunications capacity on our national telecommunications network at prices
at least as favorable as we are then offering to our other customers. In certain
defined circumstances which constitute a material breach of our obligations
under a lease agreement or an access agreement, the other party may terminate
that agreement.
Our rights under the access agreements and the lease agreements are subject
to the rights of others with existing contractual arrangements with BNSF, CSX
and Colonial. Other provisions in the
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lease agreements and the access agreements describe our obligations to maintain
certain levels of insurance and our obligations to indemnify BNSF, CSX and
Colonial for certain specified liabilities. Our indemnification obligations are
broad, and we could incur significant liabilities if deploying our fiber optic
network interferes in any way with the rail or pipeline operations of BNSF, CSX
or Colonial. We are required to coordinate our construction and maintenance
activities with our partners, and we are in some cases responsible for the
actions of their employees or contractors, even where we do not control them.
While our partners own many of their rights of way in fee, in many other
cases they have only an easement or other limited property interest in their
right of way. In many cases, this easement or other limited property interest
may permit railroad or pipeline uses, but may not permit use of the right of way
for fiber optic development. Where that situation exists, we are responsible for
all costs required to obtain any additional property or legal rights necessary
to permit us to develop each right of way. These costs will vary significantly
and could be substantial. In addition, the process of obtaining these additional
rights is time consuming and could significantly delay completion of affected
segments of our network.
DISPOSITION OF EXISTING PATHNET STOCK OPTIONS AND WARRANTS
STOCK OPTIONS. On September 30, 1999, options to purchase an aggregate of
3,119,434 shares of common stock of Pathnet were outstanding with employees and
several consultants of Pathnet under Pathnet's 1995 Stock Option Plan and its
1997 Stock Incentive Plan. As discussed above in "MANAGEMENT -- 1995 Stock
Option Plan" and "MANAGEMENT -- 1997 Stock Option Plan," we will upon the
closing of the Contribution and Reorganization Transaction assume Pathnet's
obligations under its 1995 Plan and its 1997 Plan. We have entered into
agreements with the two employees of Pathnet who currently hold options issued
under Pathnet's 1995 Plan to amend both the 1995 Plan and their existing option
awards under the Plan. The amended plan and amended awards will provide that
upon the exercise of their options, we will issue to these two optionees shares
of our common stock in lieu of the shares of Pathnet common stock for which the
awards were originally issued.
Under the terms of Pathnet's 1997 Plan as we will assume it, our board of
directors and the committee appointed to administer the Plan will exercise their
authority to amend that Plan and the awards already issued under Pathnet's 1997
Plan at the closing of the Contribution and Reorganization Transaction. The
amended plan and amended awards will provide that upon the exercise of awards
granted under Pathnet's 1997 Plan, we will issue shares of our common stock in
lieu of the shares of Pathnet common stock for which the awards were originally
issued. For a more detailed description of our stock option plans, see
"MANAGEMENT -- 1995 Stock Option Plan" and "MANAGEMENT -- 1997 Stock Incentive
Plan."
WARRANTS. In April 1998, Pathnet issued warrants for the purchase of
shares of its common stock under a Warrant Agreement (and a related Warrant
Registration Rights Agreement) together with the original private placement of
the Pathnet Notes. The Pathnet warrants are not currently exercisable, but
would, unless amended, become exercisable upon the closing of the Contribution
and Reorganization Transaction. Concurrent with this offering and the consent
solicitation, in a separate private transaction, Pathnet plans to approach the
qualified institutional buyers permitted to hold the warrants to request that
they agree to amend the terms of the Pathnet warrants, the effect of which would
be to waive their right to exercise their warrants for shares of Pathnet common
stock upon the closing of the Contribution and Reorganization Transaction. In
return, we propose to amend the Warrant Agreement (and the related Warrant
Registration Rights Agreement) to require us, upon the closing of the
Contribution and Reorganization Transaction, to convert their existing warrants
into warrants to purchase shares of our common stock on substantially similar
terms. The terms of the Warrant Agreement provide that Pathnet may amend or
waive any term of the warrants with the consent of the holders of at least a
majority of the outstanding warrants.
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Neither the consent solicitation for the Notes nor the Contribution and
Reorganization Transaction are conditioned upon the success of the warrant
transaction. If the warrant consent solicitation is not successful, the Pathnet
warrants will remain outstanding, and will be exercisable upon the closing of
the Contribution and Reorganization Transaction. For additional information
concerning the Pathnet warrants, see "DESCRIPTION OF CAPITAL STOCK -- Warrants."
CONDITIONS TO CLOSING THE CONTRIBUTION AND REORGANIZATION TRANSACTION
The conditions listed below must be met before we, or the other parties to
the contribution agreements, are obligated to complete the Contribution and
Reorganization Transaction:
- There must be no court order or injunction restraining the Contribution
and Reorganization Transaction;
- As required by the Hart-Scott-Rodino Antitrust Improvement Act of 1976,
as amended, and the FTC rules promulgated thereunder, BNSF, CSX, Colonial
and certain existing Pathnet stockholders must file premerger
Notification and Report Forms with the FTC and Department of Justice and
all waiting periods applicable to such filings must have either expired
or been terminated early so that all HSR requirements arising from our
transaction will have been satisfied;
- If required by applicable law, we must obtain consents from the FCC or
applicable state public utility commissions either to transfer or license
the FCC or state authorizations and licenses currently held by Pathnet
and its subsidiaries to us, or to continue to operate under the current
Pathnet FCC and state authorizations and licenses;
- All of the representations and warranties made by BNSF, CSX, Colonial and
the existing Pathnet stockholders in the contribution agreements must be
correct in all material respects on the date those agreements are signed
and on the date that the transactions described in the agreements are
completed before we are obligated to close;
- All of the representations and warranties made by Pathnet or by us in the
contribution agreements must be correct in all material respects on the
date those agreements were signed and on the date the transactions
described in the agreements are completed before the other parties are
obligated to close;
- We must have performed our obligations under the contribution agreements
in all material respects;
- On the date the transactions described in the contribution agreements
close, we must also close, as a single overall plan of contribution,
contribution agreements with (1) each of BNSF, CSX and Colonial; (2) the
holders of at least 90% of Pathnet's preferred stock; and (3) certain
common stockholders of Pathnet; so that immediately after closing, we
will own enough Pathnet stock to constitute control under a provision of
the tax code that will require us to hold 80% or more of Pathnet's
outstanding voting stock and 80% or more of any class of Pathnet
non-voting stock;
- All parties to the contribution agreements must deliver closing documents
listed in the contribution agreements, such as certified board
resolutions from us and from Pathnet authorizing the Contribution and
Reorganization Transaction, and certificates from us certifying that the
representations and warranties we make in the contribution agreements are
correct; and
- Pathnet and we must have obtained the required consents from the holders
of the Notes to waivers and amendments to the Indenture governing the
Notes, as more completely described in this prospectus.
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THE PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED
INDENTURE AMENDMENTS
In April 1998, Pathnet issued $350 million in principal amount of 12 1/4%
Senior Notes due 2008. A separate agreement, called the Indenture, contains a
series of covenants, restrictions, events of default, and other terms relating
to the Notes. When we refer in this document to the "12 1/4% Notes" (or
sometimes the "Senior Notes" or just the "Notes") and the Indenture, we are
referring to those notes and that agreement unless we expressly state otherwise.
The Indenture was originally filed by Pathnet in connection with the
registration of the Notes in 1998 and was an exhibit to that registration
statement, and we are incorporating that original Indenture as an exhibit to the
registration statement of which this prospectus is a part.
Before the Contribution and Reorganization Transaction can occur, Pathnet
needs to obtain a waiver of certain provisions of the Indenture, namely the
"Change of Control" repurchase obligation and the "Excess Proceeds Offer"
obligation, each of which is more fully described under the heading "Waiver of
Pathnet Obligations" below. Under Section 1019 of the Indenture, the holders of
at least a majority in outstanding principal amount of the Notes can waive
Pathnet's compliance with the Change of Control Offer obligation and with the
Excess Proceeds Offer obligation in connection with the closing of the
Contribution and Reorganization Transaction.
To facilitate the consents to the necessary waivers for the Contribution
and Reorganization Transaction, we are proposing to issue to the holders of the
Notes our senior irrevocable and unconditional Guarantees of the Notes. The
holders of the Notes will have recourse against us, as the ultimate parent
entity of the underlying business, in the form of our Guarantees of Pathnet's
payment on the Notes (as described more fully under the heading "DESCRIPTION OF
THE GUARANTEES" below). You do not need to provide your consent as a holder of
Notes to our issue of the Guarantees. However, we will not issue the Guarantees
unless we obtain the requisite number of consents, as described below, and close
on the Contribution and Reorganization Transaction.
In addition to our agreement to issue the Guarantees, upon the receipt of
the requisite consents, we propose to become a party to and be bound by a
Supplemental Indenture. The Supplemental Indenture will contain covenants that
correspond to the Indenture covenants currently applicable to Pathnet. In return
for our agreement to become bound by the Supplemental Indenture covenants and to
guarantee Pathnet's obligations under the Notes, Pathnet wishes to amend the
scope and application of several terms of the Indenture. By proposing the
amendments, Pathnet intends solely to expand the corporate group covered by the
Indenture to include Pathnet Telecom and its other Restricted Subsidiaries (as
defined in Supplemental Indenture), and thereby permit transactions between
Pathnet and Pathnet Telecom (and our other future subsidiaries) to the same
extent that the Indenture currently permits such transactions between Pathnet
and its Restricted Subsidiaries (as defined in the Indenture). Accordingly,
Pathnet proposes to amend the scope of the restrictions in the Indenture that
previously applied to Pathnet and its Restricted Subsidiaries to apply more
broadly to include us and any other Restricted Subsidiaries (as defined in
Supplemental Indenture) that we may create in the future that would, if Pathnet
created them, fall within the Indenture definition of Restricted Subsidiaries.
In order to effect the proposed amendments, it will also be necessary to make
amendments to a number of other defined terms of the Indenture.
Pathnet may amend most terms of the Indenture by obtaining the approval of
the holders of at least a majority in outstanding principal amount of the Notes.
However, Section 902(2) of the Indenture provides that certain provisions of the
Indenture (including the Change of Control Offer obligation and the Excess
Proceeds Offer obligation) cannot be amended without the consent of the holders
of all outstanding Notes. Pathnet intends to preserve without modification those
covenant obligations that cannot be amended without the consent of the holders
of all outstanding Notes. We
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describe the proposed amendments to the Indenture more fully in "Proposed
Indenture Amendments" below.
Pathnet has undertaken the consent solicitation process in order to obtain
the waivers and consent to the proposed amendments from the holders of at least
a majority in outstanding principal amount of the Notes. The consent
solicitation process and the documentation produced in connection with it is
described in more detail in "The Consent Solicitation Process" below. The
consent solicitation documentation is included as an exhibit to the registration
statement of which this prospectus is a part.
WAIVER OF PATHNET OBLIGATIONS
Waiver of "Change of Control" Offer Obligation. Section 1010 of the
Indenture requires Pathnet to repurchase the Notes at a premium if a "Change of
Control" (as that term is defined in the Indenture) occurs before the Notes
mature in 2008. The Contribution and Reorganization Transaction involves a
proposed exchange of our shares with all of Pathnet's current stockholders.
Interposing Pathnet Telecom as a holding company for Pathnet technically
constitutes a "Change of Control" of Pathnet under the applicable definition in
the Indenture. As a result, if this change of control repurchase provision were
to apply to the Contribution and Reorganization Transaction, closing the
Contribution and Reorganization Transaction would trigger Pathnet's obligation
under the Indenture to offer to repurchase the Notes at 101% of their face
value, plus accrued and unpaid interest.
Pathnet does not have the funds to finance the repurchase of the Notes at
the price required by the Section 1010 change of control provision of the
Indenture. Moreover, the repurchase obligation would deprive us and Pathnet of
the funds necessary to contribute to the development of our telecommunications
business, and BNSF, CSX, and Colonial would be unwilling to invest in us on the
terms provided in the contribution agreements if Pathnet remained subject to the
repurchase obligation. As a result, if Pathnet does not obtain from the
requisite holders of a majority in outstanding principal amount of the Notes the
necessary waiver under Section 1019 of the Indenture of the Change of Control
Offer Obligation, the Contribution and Reorganization Transaction will not take
place, and BNSF, CSX and Colonial will not invest in us as contemplated in the
contribution agreements.
Waiver of "Excess Proceeds Offer" Obligation. Section 1017 of the
Indenture requires Pathnet to make an Excess Proceeds Offer (as that term is
defined in the Indenture) in connection with certain sales and other conveyances
of assets and similar transactions. The Excess Proceeds Offer provision in
effect requires Pathnet to apply excess cash generated from the sale of Pathnet
assets outside the ordinary course of business -- to the extent not applied to
repayment of the Notes or investment in other telecommunications assets -- to a
proportional repurchase of the Notes.
Pathnet seeks a one-time waiver, pursuant to Section 1019 of the Indenture,
of the obligation to make an "Excess Proceeds Offer" to permit it to sell to us
in return for a promissory note in the principal amount of $70 million the
following assets:
- The fiber optic network assets already installed and constructed along
the Chicago to Aurora route;
- The Agreement between Pathnet and World Wide Fiber dated March 31, 1999,
relating to the development of the fiber optic route between Chicago and
Aurora, Colorado, a suburb of Denver and the joint marketing agreement
and other documents and agreements relating to that agreement and the
assets acquired in accordance with that agreement;
- The Dark Fiber Network Agreement between Pathnet and Tri State dated
August 5, 1999 relating to the development of the fiber optic network
between Albuquerque, New Mexico and
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Grand Junction, Colorado and the related escrow arrangements and other
documents and agreements with Tri-State, including the associated right
of way agreement with Public Service of New Mexico;
- The fiber optic development agreement, joint marketing agreement and
other related documents and agreements with CapRock Telecommunications
Corp.; relating to the development of an approximately 340 route mile
fiber route between El Paso, Texas and Albuquerque, New Mexico; and
- The right to use Pathnet's tradenames, trademarks and other intellectual
property.
These sales and other transfers by Pathnet to us would constitute an Asset Sale
and would trigger Pathnet's obligation to make and consummate an Excess Proceeds
Offer. The imposition of this obligation would deprive us and Pathnet of funds
necessary to contribute to the development of our telecommunications business.
Accordingly, Pathnet, BNSF, CSX, and Colonial have conditioned their obligation
to consummate the Contribution and Reorganization Transaction upon Pathnet
having obtained a waiver of the Excess Proceeds Offer obligation from the
requisite holders of the Notes. As a result, if Pathnet does not obtain from the
holders of a majority in outstanding principal amount of the Notes the necessary
waiver under Section 1019 of the Indenture of the Excess Proceeds Offer
obligation, the Contribution and Reorganization Transaction will not take place,
and BNSF, CSX and Colonial will not invest in us as contemplated in the
contribution agreements.
Following the completion of the Contribution and Reorganization
Transaction, we expect that Pathnet will:
- Continue to own and operate its existing 6,300 route miles of wireless
network segments and the associated wireless partner contracts, together
all of Pathnet's existing central office collocations, the Network
Operations Center, intellectual property previously developed by Pathnet
and the current Pathnet employees; and
- Provide management and general and administrative services, and related
Network Operations Center functions and support, to Pathnet Telecom and
other companies within the Pathnet Telecom affiliated group, pursuant to
the terms of a management services agreement that we plan to execute with
Pathnet at the closing of the Contribution and Reorganization
Transaction.
We expect that Pathnet Telecom, either directly or through other
subsidiaries of either Pathnet or Pathnet Telecom, will conduct the fiber and
other businesses made possible by the contribution of the railroad and pipeline
company rights of way.
PROPOSED INDENTURE AMENDMENTS
The proposed Indenture amendments are designed to impose upon us and our
Restricted Subsidiaries restrictions parallel to those that the Indenture
currently imposes upon Pathnet and its Restricted Subsidiaries, and to permit
transactions between Pathnet and us (and our other Restricted Subsidiaries) to
the same extent that the Indenture currently permits such transactions between
Pathnet and its Restricted Subsidiaries. The necessary amendments to the
Indenture will be contained in the Supplemental Indenture, which will bind both
Pathnet and us. The major changes as proposed in the Supplemental Indenture are
described in the table below.
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This table is a summary of complex provisions contained in the Indenture
and the Supplemental Indenture, and it may omit detailed information important
to your understanding of the operation of relevant covenants of the Indenture
and the Supplemental Indenture in specific circumstances important to you.
<TABLE>
<CAPTION>
CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
--------- ----------------- --------------------------
<S> <C> <C>
EVENTS OF DEFAULT Payment defaults on the Notes. No change for Notes; adds failure
of Guarantees to be in effect.
Covenant defaults on the Indenture. Covenant defaults on the Indenture,
including obligations imposed
directly on Pathnet Telecom.
Cross defaults to other indebtedness or Cross defaults to other
adverse judgments over $7.5 million indebtedness or adverse judgments
against Pathnet or any Significant over $7.5 million against any of
Subsidiary of Pathnet. Pathnet, Pathnet Telecom, or any
Significant Subsidiary of either
Pathnet or Pathnet Telecom.
Bankruptcy proceedings by or in respect Bankruptcy proceedings by or in
of Pathnet or any Significant respect of Pathnet, Pathnet
Subsidiary of Pathnet. Telecom, or any Significant
Subsidiary of Pathnet or Pathnet
Telecom.
Pledge Agreement ceases to be in full No change.
force and effect.
CONSOLIDATION, Restricts the ability of Pathnet and Expands the covenant so that it
MERGER, CONVEYANCE, its Restricted Subsidiaries to enter applies to Pathnet Telecom and its
TRANSFER OR LEASE into transactions involving a merger or consolidated group, rather than
disposition of all or substantially all solely to Pathnet and its
of Pathnet's and its Restricted consolidated group. Provisions
Subsidiaries' assets on a consolidated relating to the required
basis. substitution of successors and the
requirement to secure the Notes in
certain circumstances apply to
Pathnet obligations under the Notes
and as appropriate to Pathnet
Telecom obligations under the
Guarantees.
AMENDMENTS Certain types of amendments (and Provides that Pathnet Telecom and
TO THE Supplemental Indentures) may be adopted Pathnet can amend the Indenture in
INDENTURE without consent of Holders. the same circumstances, and with
the same levels of approvals, as
Pathnet is permitted to make such
amendments under the Indenture.
Most types of amendments (and Applies to the Supplemental
Supplemental Indentures) may be adopted Indenture the same majority consent
with the consent of a majority of the threshold for those amendments that
Holders. currently require such a majority
in the Indenture.
</TABLE>
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<TABLE>
<CAPTION>
CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
--------- ----------------- --------------------------
<S> <C> <C>
AMENDMENTS TO THE Certain types of amendments (and Subjects Pathnet Telecom to the
INDENTURE (CONTINUED) Supplemental Indentures) may not be unanimous consent threshold for the
adopted without the consent of all amendments requiring unanimous
Holders. consent in the original Indenture,
and adds to that list any amendment
that modifies the provisions of the
Indenture relating to the
Guarantees in a manner adverse to
the holders of the Notes.
MAINTENANCE OF OFFICE Pathnet must maintain an office or Both Pathnet and Pathnet Telecom
agency in New York City for service of must maintain an office or agency
notices and demands. in New York City for the service of
notices and demands under the Notes
and the Guarantees, on the same
terms as that obligation currently
applies to Pathnet.
MONEY FOR NOTE PAYMENTS Regulates Pathnet's dealings with Regulates Pathnet Telecom's
Paying Agents and its ability to act as dealings with Paying Agents and
its own Paying Agent. Pathnet Telecom's ability to make
payments directly to the holders of
the Guarantees in the same manner
as Pathnet's dealings are regulated
under the Indenture.
CORPORATE EXISTENCE Pathnet and its subsidiaries must Expands the covenant so that it
maintain corporate existence. also applies to Pathnet Telecom and
its other subsidiaries.
PAYMENT OF TAXES AND Pathnet and its subsidiaries must pay Expands the covenant so that it
OTHER CLAIMS taxes and other claims. also applies to Pathnet Telecom and
its other subsidiaries.
MAINTENANCE OF Pathnet and Restricted Subsidiaries Expands the covenant so that it
PROPERTIES must maintain material properties in also applies to Pathnet Telecom and
good condition and repair. its Restricted Subsidiaries.
INSURANCE Pathnet and Restricted Subsidiaries Expands the covenant so that it
must maintain customary insurance. also applies to Pathnet Telecom and
its Restricted Subsidiaries.
OFFICERS COMPLIANCE Required from Pathnet. Required from Pathnet and from
CERTIFICATE Pathnet Telecom.
</TABLE>
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<TABLE>
<CAPTION>
CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
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<S> <C> <C>
FINANCIAL STATEMENTS Pathnet must file Exchange Act reports Pathnet Telecom must file Exchange
with the SEC (whether or not required Act reports (including consolidated
by law to do so) and must provide reports) with the SEC (whether or
Trustee with copies. not required by law to do so) and
must provide Trustee with copies.
To the extent permitted in the
future by applicable law, releases
Pathnet from separate SEC and
Trustee periodic report filing
obligations.
CHANGE OF CONTROL Pathnet required to offer to repurchase No change to Pathnet's obligation.
REPURCHASE OBLIGATION the Notes at a premium upon occurrence Expands the provision so that
of a Change of Control. Pathnet's repurchase obligation is
also triggered by a Change of
Control of Pathnet Telecom;
Guarantees apply to this
obligation.
LIMITATION ON Subject to a ratio test for Expands the existing covenant so
INDEBTEDNESS Consolidated Indebtedness to that both Pathnet and Pathnet
Consolidated Operating Cash Flow Test Telecom are subject to the same
for Pathnet and its Restricted limitations (including the
Subsidiaries, neither Pathnet nor its limitations on their respective
Restricted Subsidiaries can incur Restricted Subsidiaries), except
Indebtedness other than Permitted that:
Indebtedness. Permitted Indebtedness
includes Telecommunications (1) the definition of Permitted
Indebtedness of either Pathnet or any Indebtedness will continue to
Restricted Subsidiary; subordinated include Telecommunications
indebtedness of Pathnet to its Indebtedness, but will apply to
Restricted Subsidiaries; and any Pathnet Telecom's Restricted
indebtedness of a Restricted Subsidiary Subsidiaries as well as
to Pathnet or to any other Restricted Pathnet's, and will allow
Subsidiary. intercompany Indebtedness among
Pathnet Telecom, Pathnet, and
their respective Restricted
Subsidiaries subject to the
corresponding restrictions; and
(2) the Consolidated Indebtedness
to Consolidated Operating Cash
Flow Ratio used to determine
whether any of the covered
entities can incur additional
debt is calculated by reference
to Pathnet Telecom, Pathnet and
all Restricted Subsidiaries on
a consolidated basis.
</TABLE>
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<TABLE>
<CAPTION>
CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
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<S> <C> <C>
RESTRICTED PAYMENTS Restricts Pathnet and its Restricted Changes the cash dividend
LIMITATION Subsidiaries from declaring cash declaration and capital stock
dividends on Pathnet capital stock, redemption restrictions to apply to
redeeming capital stock or subordinated Pathnet Telecom rather than to
debt of Pathnet, or making investments Pathnet.
(other than Permitted Investments),
unless Pathnet could, after such Imposes parallel restrictions on
payment, incur additional Indebtedness Pathnet Telecom's ability to make
under the Permitted Indebtedness other Restricted Payments.
covenant and the aggregate amount of
permitted Restricted Payments does not
exceed an amount determined as
described in the Restricted Payments
covenant.
SALE OF CAPITAL STOCK OF Restricts the sale or issuance of Expands the covenant to apply to
RESTRICTED SUBSIDIARIES Capital Stock of Restricted capital stock of Pathnet and
Subsidiaries of Pathnet to third Restricted Subsidiaries of both
parties. Pathnet Telecom and Pathnet.
TRANSACTIONS WITH Restricts transactions by Pathnet and Imposes the same restriction on
AFFILIATES its Restricted Subsidiaries with Pathnet Telecom and its Restricted
Affiliates unless conducted on an Subsidiaries and expands the
arms'-length basis. definition of Affiliates to include
all Affiliates of Pathnet Telecom.
As provided in the current
Indenture for transactions among
Pathnet and its own Restricted
Subsidiaries, the Supplemental
Indenture provides that
transactions among any of Pathnet
Telecom, Pathnet and any Restricted
Subsidiary are not restricted.
LIEN RESTRICTIONS Neither Pathnet nor any Restricted Expands the restriction to include
Subsidiary can permit any Lien to exist Pathnet Telecom and its Restricted
other than Permitted Liens, unless the Subsidiaries, and expands the
Notes are equally and ratably secured. definition of "Permitted Liens" to
Permitted Liens include liens for include liens among Pathnet
Telecommunications Indebtedness and Telecom, Pathnet and their
liens among Pathnet and any Restricted respective Restricted Subsidiaries.
Subsidiary.
</TABLE>
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<TABLE>
<CAPTION>
CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
--------- ----------------- --------------------------
<S> <C> <C>
LIMITATIONS ON Prohibits Restricted Subsidiaries of Expands the restrictions to apply
GUARANTEES AND OTHER Pathnet from issuing or guaranteeing to Pathnet Telecom's Restricted
DEBT Debt Securities unless they Subsidiaries; exception for vendor
concurrently guarantee the Notes; financings and other borrowings
specific exception excludes from the continues to apply.
definition of Debt Securities any
vendor equipment financing facilities
or similar financings and other
borrowings incurred in a manner not
customarily viewed as a securities
offering.
LIMITATION ON ASSET Pathnet and its Restricted Subsidiaries Retains unmodified Pathnet's
SALES may not engage in an Asset Sale unless obligations in respect of Asset
the transaction is for fair market Sales. Imposes corresponding
value and meets other requirements as obligations on Pathnet Telecom and
to the nature of the consideration; if its Restricted Subsidiaries.
the amount of proceeds exceeds a
specified threshold, Pathnet is
required to commence an offer to
purchase Notes up to such amount within
15 Business Days of the closing of the
Asset Sale.
PROHIBITION AGAINST Subject to exceptions, including, among Expands the existing covenant to
DIVIDEND RESTRICTIONS others, those for Secured Indebtedness apply to Pathnet and to Restricted
and Telecommunications Indebtedness, Subsidiaries of both Pathnet and
Pathnet cannot permit any Restricted Pathnet Telecom.
Subsidiary to accept a restriction on
its ability to pay dividends or make
other payments to Pathnet or any
Restricted Subsidiary of Pathnet to the
extent necessary to permit Pathnet to
make payment on the Notes.
</TABLE>
The following description provides a narrative description of the material
amendments to the Indenture that Pathnet proposes to make in the Supplemental
Indenture. Like the table above, this description does not restate the
Supplemental Indenture in its entirety and is subject to and qualified in its
entirety by reference to the provisions of the Supplemental Indenture, which is
incorporated by reference into this prospectus. We urge you to read the
Supplemental Indenture, which is filed as an exhibit to the registration
statement of which this prospectus is a part. Capitalized terms used in this
description have the meaning given to them in the Indenture as amended by the
Supplemental Indenture unless we refer to the "original Indenture," in which
case terms are used as defined in that version.
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- CERTAIN DEFINITIONS IN THE INDENTURE. The definitions used in the
original Indenture will be amended to the extent necessary to effect the
proposed amendments to the original Indenture described below. Revised
definitions that are used generally throughout the Supplemental Indenture
will be contained in Section 102 of the Supplemental Indenture.
As discussed above, the Indenture (Section 902(2)) provides that two of
Pathnet's obligations cannot be amended, changed or modified without the
consent of the holders of each outstanding Note. These are Pathnet's
obligations to make and consummate (1) an Excess Proceeds Offer with
respect to any Asset Sale by Pathnet or any of its Restricted
Subsidiaries in accordance with Section 1017 of the Indenture; and (2) a
Change of Control Offer in the event of a Change of Control of Pathnet in
accordance with Section 1010 of the Indenture. The Indenture also
provides that Pathnet cannot, without the consent of the holder of each
affected Note, amend the definitions relating to these obligations in any
way that would amend, change or modify any of these obligations.
Accordingly, none of the amendments in the Supplemental Indenture in any
way amends, changes or modifies Pathnet's independent obligation to make
and consummate an Excess Proceeds Offer or a Change of Control Offer
under the Indenture.
However, in order to effect the amendments necessary to impose
corresponding obligations on us, Pathnet must amend certain defined terms
that are otherwise used in Section 1017 of the original Indenture. For
ease of application, we have reproduced in the Supplemental Indenture as
a new Section 1017(a) of the Indenture the independent obligation on
Pathnet and its Restricted Subsidiaries pursuant to Section 1017 of the
original Indenture to make an Excess Proceeds Offer in respect of any
Asset Sale by those entities. We have also reproduced (in Section 103 of
the Supplemental Indenture and without the inclusion of any references to
us) the applicable definitions from Section 102 of the Supplemental
Indenture used in Section 1017(a) of the Supplemental Indenture. These
"Section 1017(a)-only" definitions represent definitions previously set
forth in Section 101 of the Indenture that have been modified solely to
conform to changes to other defined terms or provisions of the Indenture
necessitated by the new corporate structure. Examples of these amendments
are the frequent replacement of the term "Restricted Subsidiary" (which
meant all restricted subsidiaries of Pathnet under Section 101 of the
original Indenture but now means all restricted subsidiaries of Pathnet
and us under Section 102 of the Supplemental Indenture) with the new term
"Restricted Company Subsidiary," which means all restricted subsidiaries
of Pathnet. These changes preserve the meaning of the original provisions
of Section 1017 of the Indenture.
- MODIFICATION AND AMENDMENT. Section 901 of the Indenture specifies the
amendments that Pathnet and the Trustee can make without the consent of
the holders of Notes. Section 902 states that Pathnet and the Trustee
must have the unanimous consent of holders of the Notes to make any of
the amendments specifically listed in that section, but that any other
amendment can be made with the consent of a majority of holders of the
Notes. These sections are modified in the Supplemental Indenture so that
we can make amendments on the same terms as Pathnet, except that any
amendment to the Guarantees adverse to the holders of the Notes requires
unanimous consent of the holders.
The defined terms used in Section 1010 of the original Indenture are
either unamended in the Supplemental Indenture, or were already defined
within that Section. Accordingly, Pathnet does not propose to reproduce
these terms in a separate section of the Supplemental Indenture.
Defined terms listed in Section 101 of the Indenture that do not need to
be amended for the purposes of the Supplemental Indenture, and are not
included in the revised definitions in
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Section 102 or 103 of the Supplemental Indenture, retain the meaning
given to them in the Indenture.
- EVENTS OF DEFAULT. Section 501 of the Indenture currently contains the
definition of "Event of Default." The Supplemental Indenture deletes this
section in its entirety and inserts the same definitions of "Event of
Default" in the definition sections, except that:
- the same Events of Default that previously applied to Pathnet (and in
several cases to any of Pathnet's "Significant Subsidiaries") will also
be triggered by us (and in several cases any of our Significant
Subsidiaries) and
- the Supplemental Indenture will include an additional Event of Default
for the Guarantees ceasing to be in full force and effect before payment
in full of the Notes.
- CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE. Article 8 of the
Indenture currently restricts the ability of Pathnet and its Restricted
Subsidiaries to consolidate or merge with or into any other person or
entity or to sell, assign, convey, transfer, lease or otherwise dispose
of all or substantially all of the properties or assets of Pathnet or its
Restricted Subsidiaries. The Supplemental Indenture amends this Article
so that the corresponding restrictions apply to us and our Restricted
Subsidiaries as well as Pathnet and its Restricted Subsidiaries, except
that:
- the exceptions for transactions with Restricted Subsidiaries will
include Pathnet and our Restricted Subsidiaries (as redefined in the
Supplemental Indenture to include any of our other direct or indirect
subsidiaries, which would if Pathnet incorporated them, fall within the
original Indenture definition of Restricted Subsidiaries); and
- with respect to us, the provisions relating to substitution of
successors and the requirement to secure the Notes in certain events
apply to our obligations under the Guarantees.
In determining whether the merger, conveyance, transfer or lease satisfies
paragraph (3) of Indenture Section 801 (with respect to our ability to
incur additional Indebtedness), the test refers to our "Consolidated
Indebtedness to Consolidated Operating Cash Flow Ratio" calculated by
reference to Pathnet, Pathnet Telecom and all of the Restricted
Subsidiaries on a consolidated basis.
- MAINTENANCE OF OFFICE OR AGENCY. Section 1002 of the Indenture currently
requires Pathnet to maintain an office or agency in The City of New York
where Notes can be presented or surrendered for payment, or surrendered
for registration of transfer or exchange and where notices and demands to
or upon Pathnet in respect of the Notes and the Indenture can be served.
The Supplemental Indenture provides that we are also required to maintain
an office for the service of notice or demands on us with respect to the
Guarantees on the terms set out in that section.
- MONEY FOR NOTE PAYMENTS TO BE HELD IN TRUST. Section 1003 of the
Indenture currently places certain obligations on Pathnet with respect to
its dealings with Paying Agents and regulates the terms on which Pathnet
is able to make any payments on the Notes directly to any holder of the
Notes. The Supplemental Indenture provides that our dealings with Paying
Agents, and our ability to make payments directly to the holders of Notes
pursuant to the Guarantees, are regulated in the same manner.
- AFFIRMATIVE COVENANTS. These provisions of the Indenture currently
contain affirmative covenants of Pathnet (and in certain cases its
subsidiaries or Restricted Subsidiaries):
- Section 1004 (corporate existence);
- Section 1005 (payment of taxes and other claims);
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- Section 1006 (maintenance of properties);
- Section 1007 (insurance);
- Section 1008 (statement by officers as to default); and
- Section 1009 (provision of financial statements).
The Supplemental Indenture amends these covenants so that each affirmative
covenants also applies to us (and, where the corresponding covenant from
the Indenture is so applicable, to any other subsidiaries or Restricted
Subsidiaries that we may in the future incorporate), except that:
- the separate SEC filing requirements and the obligation to prepare and
deliver financial statements under Section 1009(a) of the original
Indenture will not apply to Pathnet if Pathnet is able to rely on any
law, rule, regulation or SEC approval, whether in force now or
subsequently introduced, to limit the scope of or cease compliance with
these obligations and we are otherwise in compliance with our SEC filing
obligations; and
- the requirements to file documents with the Trustee under Section
1009(b) will apply only to us and not to Pathnet.
- CHANGE OF CONTROL. Section 1010 of the Indenture currently gives holders
of the Notes a right to require Pathnet to repurchase Notes upon the
occurrence of a Change of Control. The Supplemental Indenture expands the
definition of Change of Control so that the repurchase right is also
triggered by a change of control of Pathnet Telecom. The proposed
amendment does not change, amend or modify the existing obligation of
Pathnet to make and consummate a Change of Control Offer in the event of
a Change of Control of Pathnet in accordance with Section 1010.
- LIMITATION ON INDEBTEDNESS. Section 1011 of the Indenture currently
limits the ability of Pathnet and its Restricted Subsidiaries to incur
additional Indebtedness, other than Permitted Indebtedness or
Indebtedness that would not result in Pathnet's Consolidated Indebtedness
to Consolidated Operating Cash Flow Ratio being outside the parameters
described in that Section. The Supplemental Indenture amends this section
so that:
- the Consolidated Indebtedness to Consolidated Operating Cash Flow Ratio
that we must use -- to determine whether any Indebtedness that either we
or Pathnet (or any of our respective Restricted Subsidiaries) wish to
incur is allowed -- is calculated by reference to Pathnet Telecom,
Pathnet and the Restricted Subsidiaries on a consolidated basis; and
- we are subject to the same limitations on our ability (and the ability
of any of our other Restricted Subsidiaries) to incur additional
Indebtedness as Pathnet and its Restricted Subsidiaries.
- LIMITATION ON RESTRICTED PAYMENTS. Section 1012 of the Indenture
currently restricts the ability of Pathnet and its Restricted
Subsidiaries to (1) declare or pay cash dividends or other distributions;
(2) purchase, redeem or otherwise acquire or retire for value any shares
of Capital Stock of Pathnet or certain of its Affiliates; (3) make any
principal payment on, repurchase, redeem, defease or otherwise acquire or
retire for value Indebtedness of Pathnet that is subordinated in right of
payment to the Notes; or (4) make any Investment (other than a Permitted
Investment) in any Person. The Supplemental Indenture expands the scope
of this Section so that;
- the restriction on cash dividends applies to us, rather than to Pathnet;
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- the purchase and redemption restrictions apply to our Capital Stock and
the Capital Stock of our Affiliates (other than our Affiliates that are,
directly or indirectly, wholly-owned by us);
- the restrictions on principal payments or retirement of Indebtedness
refers to any of our Indebtedness or Indebtedness of Pathnet that is so
expressly subordinated in right of payment to the Guarantees or the
Notes;
- the restrictions on investment apply to Investments by us, by Pathnet
and by any of our Restricted Subsidiaries, except that the definition of
Permitted Investments will be correspondingly expanded to include
Investments in all Restricted Subsidiaries (and not just those of our
Restricted Subsidiaries that are also Pathnet Restricted Subsidiaries);
and
- in determining whether a Restricted Payment satisfies the test with
respect to our ability to incur additional Indebtedness, reference is
made to the Consolidated Indebtedness to Consolidated Operating Cash
Flow Ratio calculated by reference to Pathnet, Pathnet Telecom and all
Restricted Subsidiaries on a consolidated basis.
- LIMITATION ON ISSUANCE AND SALE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. Section 1013 of the Indenture currently restricts the
ability of Pathnet and its Restricted Subsidiaries to issue or sell any
Capital Stock of a Restricted Subsidiary (other than to Pathnet or to a
Restricted Subsidiary). The Supplemental Indenture expands the scope of
this section so that the same restriction also applies to us and the
issuance or sale of the Capital Stock of Pathnet and our Restricted
Subsidiaries.
- LIMITATION ON TRANSACTIONS WITH AFFILIATES. Section 1014 of the
Indenture currently imposes restrictions on the ability of Pathnet and
its Restricted Subsidiaries to engage in any transaction or series of
related transactions with or for the benefit of Affiliates, unless
conducted on an arm's-length basis with appropriate certifications to the
holders of the Notes of the arm's-length nature of such transactions.
This provision also permits transactions between Pathnet and its
Restricted Subsidiaries. This section is amended by the Supplemental
Indenture so that our ability and the ability of our Restricted
Subsidiaries to engage in transactions with Affiliates is restricted in
the same manner, but so that transactions between us and Pathnet or any
of our Restricted Subsidiaries are not subject to the restrictions under
this section. We have also included (as the Indenture provides in respect
of the existing Pathnet Stockholders Agreement) that Pathnet Telecom will
be permitted to perform its obligations under the Pathnet Telecom
stockholders agreement.
- LIMITATION ON LIENS. Section 1015 of the Indenture currently limits the
ability of Pathnet or any Restricted Subsidiary to create, incur, assume
or suffer to exist any Lien (other than Permitted Liens) on the property
or assets of Pathnet or any Restricted Subsidiary. The Supplemental
Indenture amends this Section so that our ability and the ability of our
Restricted Subsidiaries to create, incur, assume or suffer to exist any
Lien (other than Permitted Liens) on our respective property or assets is
also restricted in the same manner. The definition of the term "Permitted
Liens" is correspondingly expanded to cover liens and indebtedness within
the Pathnet Telecom "Restricted Entity" group, which will include
Pathnet, Pathnet Telecom, and all their respective Restricted
Subsidiaries, to the extent previously permitted as between Pathnet and
its Restricted Subsidiaries.
- LIMITATION ON ISSUANCE OF CERTAIN GUARANTEES AND DEBT
SECURITIES. Section 1016 of the Indenture currently limits the ability
of Restricted Subsidiaries of Pathnet to guarantee, assume or in any
other manner become liable for any Debt Securities or to issue any Debt
Securities unless, in either such case, the Restricted Subsidiary
simultaneously executes and delivers a guarantee of payment for the
Notes. The scope of this section is expanded so that
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our Restricted Subsidiaries are subject to the same limitations. The
amendment does not provide for us to be subject to such limitations as we
are already secondarily liable for the Notes under the Guarantees.
- LIMITATIONS ON ASSET SALES. Section 1017 of the Indenture currently
restricts the ability of Pathnet and its Restricted Subsidiaries to
engage in Asset Sales. The Supplemental Indenture expands this section by
adding a new paragraph that imposes equivalent restrictions on Asset
Sales by us and our Restricted Subsidiaries, except that in the new
paragraph, for the purpose of determining whether any transfer of
property or assets by Pathnet or any Restricted Subsidiary of Pathnet
falls within the exemptions in clause (A) or clause (G) of the definition
of "Asset Sale," the Consolidated Indebtedness to Consolidated Operating
Cash Flow Ratio is calculated by reference to Pathnet, Pathnet Telecom,
and all Restricted Subsidiaries on a consolidated basis. Asset Sales
between Pathnet and Pathnet Telecom will continue to be subject to the
limitations under this section, and the proposed amendment will not
change, amend or modify Pathnet's existing obligation to make and
consummate an Excess Proceeds Offer in connection with any Asset Sale in
accordance with Section 1017(a) of the Indenture. In particular, for the
purpose of determining whether any transfer of property or assets by
Pathnet or any Restricted Subsidiary of Pathnet falls within the
exemptions in clause (A) or clause (G) of the definition of "Asset Sale,"
with respect to Section 1017(a), the Consolidated Indebtedness to
Consolidated Operating Cash Flow Ratio is calculated by reference to
Pathnet and its Restricted Subsidiaries alone.
- LIMITATIONS ON DIVIDEND RESTRICTIONS. Section 1018 of the Indenture
currently limits the ability of Pathnet and its Restricted Subsidiaries
to create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of the Restricted Subsidiaries
to: (1) pay dividends or other distributions; (2) pay Indebtedness owed
to Pathnet or any other Restricted Subsidiary; (3) make Investments in
Pathnet or any other Restricted Subsidiary, (4) transfer any of their
assets or property to Pathnet or any other Restricted Subsidiary; or (5)
guarantee any Indebtedness of Pathnet or any other Restricted Subsidiary.
This Section is expanded in the Supplemental Indenture so that these
restrictions apply more broadly to Pathnet and all Restricted
Subsidiaries.
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DESCRIPTION OF THE GUARANTEES
The following description is a summary of the material provisions of the
Guarantees. It does not restate the terms of the Guarantees in their entirety
and is subject to, and qualified in its entirety by reference to, the provisions
of the Guarantees. We urge you to read the form of Guarantees, which is filed as
an exhibit to the registration statement of which this prospectus is a part.
Capitalized terms used in this section have the meaning given to them in the
Indenture and the Notes.
- GUARANTEE OF THE NOTES. We will unconditionally guarantee to the holder
of any outstanding Note(s) all obligations, covenants, liabilities,
undertakings and agreements of any kind of Pathnet contained in the
Indenture, including:
(1) the prompt payment in full, in United States currency, when due, of
the principal and of the interest on the Notes and all other amounts
that may be owing from Pathnet to the holders of the Notes under the
Indenture and the Notes; and
(2) the prompt performance and observance by Pathnet of all covenants,
agreements and conditions to be performed and observed by Pathnet
under the Indenture.
The Guarantees will be absolute, unconditional and continuing guarantees of
the obligations of Pathnet under the Indenture, including its obligations to
make interest and principal payments. If Pathnet does not comply with its
obligations under the Indenture the holders may proceed directly against us
without being required to seek payment or performance from Pathnet.
- DURATION OF THE GUARANTEES. The Guarantees will continue in effect with
respect to any Note until the holder of that Note has received payment in
full of the Redemption Price with respect to that Note, when the
Guarantees terminate. Until that time, the holder of any Note can enforce
the Guarantees as many times as necessary. If we make a payment to any
holder of Notes under the Guarantees, as a result of Pathnet's
non-compliance with any provision of the Indenture, and that payment is
or can be avoided, invalidated, recaptured or set-aside for any reason,
then the Guarantees will be reinstated with respect to Pathnet's
compliance with that provision.
- NATURE OF OUR OBLIGATIONS UNDER THE GUARANTEES. Our obligation and
liability under the Guarantees is absolute and unconditional. If any
holder of Notes makes a claim under the Guarantees we will not be
entitled to make any counterclaim, set-off, deduction or raise any
defense based on any claim that we may have against Pathnet or any other
person. We will remain liable even if there is an intervening event,
circumstance or condition that might ordinarily give us a defense,
discharge our liability under the Guarantees or limit the extent of any
claim made against us.
- AMENDMENT. We will not be able to amend, modify, waive, discharge or
terminate the Guarantees in any way that is adverse to the holders of the
Notes without the consent of the holders of all of the Notes outstanding
at the time.
- TRANSFERABILITY. The Guarantees are intended solely for the benefit of
the holders of the Notes. The Guarantees will not be transferable
separately from the Notes.
- GOVERNING LAW. The Guarantees will be governed by the laws of the State
of New York.
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DESCRIPTION OF THE CONSENT SOLICITATION PROCESS
PRINCIPAL TERMS OF THE SOLICITATION
On the terms and subject to the conditions set forth in this prospectus and
in the Consent and Letter of Transmittal, Pathnet is soliciting consents in
connection with the Contribution and Reorganization Transaction. Pathnet seeks
consents from those persons who are holders of outstanding Notes on the
effective date of the registration statement of which this prospectus is a part
(referred to in this Section as the "record date") to each of the following:
- The waiver of Pathnet's compliance with the Change of Control Offer
obligation (as described above);
- The waiver of Pathnet's compliance with the Excess Proceeds Offer
obligation (as described above); and
- The proposed amendments to the Indenture (as described above under the
heading "THE PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED
INDENTURE AMENDMENTS").
Pathnet will make consent payments to the holders of Notes on the record
date (referred to in this Section as the "record holders") in the amount of
$10.00 in cash for each $1,000 in principal amount of Notes for which a validly
delivered and unrevoked consent has been received by the Depositary on or prior
to 5:00 p.m., New York City time, on the date which is 10 calendar days
following the effective date of the registration statement of which this
prospectus is a part, unless Pathnet extends the solicitation (referred to in
this section as the "expiration date"). If Pathnet extends the solicitation, the
term "expiration date" will mean the latest date and time to which the exchange
offer is extended.
CERTAIN CONDITIONS TO THE SOLICITATION
Pathnet will not be required to accept the delivery of consents or make any
consent payments, and we will not be required to deliver the Guarantees, if:
- Pathnet and the Trustee have not received validly delivered and unrevoked
consents from the holders as at the record date of a majority in
aggregate principal amount of the Notes outstanding on that date;
- Any of the conditions to closing the Contribution and Reorganization
Transaction (as listed under the heading "DESCRIPTION OF CONTRIBUTION AND
REORGANIZATION TRANSACTION -- Conditions to Closing the Contribution and
Reorganization Transaction" above) has not been satisfied;
- The Supplemental Indenture providing for the proposed amendments has not
been executed by the Trustee;
- The Trustee objects in any respect to or takes any action that could, in
our judgment, adversely affect the consummation of the solicitation or
Pathnet's or our ability to effect any of the proposed amendments, or
takes any action that challenges the validity or effectiveness of the
procedures used by Pathnet and us in soliciting the consents to the
waivers described above and to the proposed amendments or in the making
of the solicitations or payment for any of the consents; and
- Any order, statute, rule, regulation, executive order, stay, decree,
judgment or injunction has been proposed, enacted, entered, issued,
promulgated, enforced or deemed applicable by any court or governmental
regulatory or administrative agency or instrumentality that:
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- in our judgment might prohibit, prevent, restrict or delay
consummation of the solicitation or any part of the Contribution and
Reorganization Transaction; or
- is, or is reasonably likely to be, materially adverse to our
business, operations, properties, condition (financial or
otherwise), assets, liabilities or prospects.
PROCEDURE FOR DELIVERING CONSENTS
DELIVERY OF CONSENTS. To accept your consent in the solicitation, the
Depository must receive it before the expiration date at the address given in
the Consent and Letter of Transmittal. Except as otherwise provided below, the
delivery will be deemed made only when actually received or confirmed by the
Depositary. You should send your Consent only to the Depositary, not to Pathnet,
Pathnet Telecom, the Trustee, the Information Agent or the Solicitation Agent.
Pathnet intends to cause the execution of a Supplemental Indenture
providing for the proposed amendments on the initial expiration date set out
above if, as of such date, it has obtained the consents of at least a majority
in aggregate principal amount of the holders of outstanding Notes to the
proposed amendments, or, if later, promptly upon obtaining such consents. When
executed, the Supplemental Indenture will be binding upon you as a holder of
Notes as at the record date, whether or not you have given a consent with
respect to the proposed amendments.
REVOCATION OF CONSENT. All properly completed and executed consents (1)
waiving Pathnet's compliance with the Change of Control Offer obligation, (2)
waiving Pathnet's compliance with the Excess Proceeds Offer obligation, and (3)
consenting to the proposed amendments that are received by the Depositary will
be counted as consents with respect to the waiver of the Change of Control Offer
obligation, the waiver of the Excess Proceeds Offer obligation and the proposed
amendments, unless the Depositary receives, prior to the consent date, a written
notice of revocation. You may revoke your consent by delivering a written notice
of revocation in accordance with the procedures described in the consent form.
To be effective, a notice of revocation of consent must (1) contain the name of
the person who delivered the consent and the description of the Notes to which
it relates, the certificate number or numbers of such Notes and the aggregate
principal amount represented by such Notes, (2) be signed by the record holder
thereof in the same manner as the original signature on the consent or be
accompanied by evidence, satisfactory to Pathnet, Pathnet Telecom, the Trustee
and the Depositary that the holder of the Notes revoking the consent has
succeeded to the beneficial ownership of the Notes, and (3) be received prior to
the expiration date by the Depositary at the address given on the front page of
the Consent and Letter of Transmittal. A purported notice of revocation that
lacks any of the required information or is dispatched to any other address will
not be effective to revoke a consent previously given.
RECORD HOLDERS ENTITLED TO CONSENT. Only a record holder (or his or her
duly authorized proxy) or a beneficial owner who has complied with the
procedures set out in this section may deliver a consent. If you beneficially
own Notes that are registered in the name of a broker, dealer, commercial bank,
trust company or other nominee and you wish to deliver a consent, you should
contact the record holder promptly and instruct the record holder to execute and
deliver the consent on your behalf.
The Consent and Letter of Transmittal (available from the Solicitation
Agent and the Information Agent identified below) contain additional details
concerning signatures, payment, delivery instructions and tax information
necessary to complete the consent.
IRREGULARITIES. All questions as to the form of all documents and the
validity (including time of receipt) of deliveries and revocations of consents
will be determined by Pathnet, in its sole discretion, which determination will
be final and binding. Alternative, conditional or contingent consents will not
be considered valid. Pathnet reserves the absolute right to reject any or all
consents that are not in
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proper form or the acceptance of which would, in Pathnet's opinion, be unlawful.
Pathnet also reserves the right to waive any defects, irregularities or
conditions of delivery as to particular consents. Pathnet's interpretation of
the terms and conditions of the solicitation (including the instructions in the
consent) will be final and binding. Any defect or irregularity in connection
with deliveries of consents must be cured within such time as Pathnet
determines, unless waived by Pathnet. Deliveries of consents will not be deemed
to have been made until all defects and irregularities have been waived by
Pathnet or cured. None of Pathnet, the Trustee, the Depositary, the Information
Agent, the Solicitation Agent or any other person will be under any duty to give
notice of any defects or irregularities in deliveries of consents, or will incur
any liability to record holders for failure to give any such notice.
WAIVER OF CONDITIONS. Pathnet has expressly reserved the absolute right,
in its sole discretion, to amend or waive any of the conditions to the
solicitation in the case of any consents delivered, in whole or in part, at any
time and from time to time.
SOLICITATION AGENTS
Pathnet has retained Lazard Freres & Co. LLC to act as Solicitation Agent
in connection with the solicitation. In their capacity as Solicitation Agent,
Lazard Freres & Co. LLC may contact the holders of outstanding Notes regarding
the solicitation and may request brokers, dealers and other nominees to forward
this prospectus and related materials to beneficial owners of Notes.
Pathnet has agreed to pay Lazard Freres & Co. LLC a usual and customary fee
for their services as Solicitation Agent in connection with the solicitation.
DEPOSITARY AND INFORMATION AGENT
The Bank of New York has been appointed Depositary for the solicitation.
All deliveries and correspondence sent to the Depositary should be directed to
the address set forth on the back cover of the Statement. Requests for
additional copies of the Statement and the Letter of Consent and Transmittal
should be directed to MacKenzie Partners, Inc., as Information Agent, at the
address set forth on the Letter of Consent and Transmittal. Pathnet has agreed
to pay the Depositary and the Information Agent reasonable and customary fees
for their services and to reimburse the Depositary and the Information Agent for
their reasonable and out-of-pocket expenses in connection therewith. These fees,
together with the expenses of counsel to the bondholders, counsel to the
Solicitation Agent and fees of counsel, and accountants to Pathnet and Pathnet
Telecom, are in addition to the consent fee payable to the holders of the Notes
consenting to the transaction.
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DESCRIPTION OF THE NOTES AND THE INDENTURE
Terms that are used in this section but not previously defined are defined
under the caption "-- certain definitions" below.
Pathnet issued $350 million in aggregate principal amount of 12 1/4% Senior
Notes due 2008 under an Indenture dated April 8, 1998 between Pathnet and The
Bank of New York, as trustee. The Indenture is subject to and governed by the
Trust Indenture Act of 1939, as amended.
The description below is a summary of certain provisions of the current
terms of the Indenture and the Notes that we believe will be relevant for your
review before making a decision about accepting the Guarantees. The description
does not restate the Indenture or the Notes in their entirety and is subject to
and qualified in its entirety by reference to the Indenture and the Notes
(including the definitions of certain terms contained in the Indenture and those
terms made a part of the Indenture by reference to the Trust Indenture Act as in
effect on the date of the Indenture), which are incorporated by reference into
this prospectus. Please note that this summary excludes certain terms of the
Notes and the Indenture which have been summarized in Pathnet's Registration
Statement No. 333-53467 filed with the Securities and Exchange Commission on May
22, 1998. We urge you to read the Indenture and a sample Note, which have been
filed as an exhibit to the Registration Statement No. 333-52247, filed with the
Securities and Exchange Commission on May 8, 1998. Capitalized terms used in
this description have the meanings given to them in the Indenture and the Notes,
and section references refer to sections of the Indenture. For definitions of
certain capitalized terms used in the following summary, see "-- Certain
Definitions." Parenthetical section references herein refer to the section or
sections summarized.
Upon issuance of the Guarantees, the Indenture as described below will be
modified by the Supplemental Indenture. See "THE PATHNET SENIOR NOTEHOLDER
WAIVERS AND OTHER PROPOSED INDENTURE AMENDMENTS -- Proposed Indenture
Amendments" for a description of the modifications.
GENERAL
The Notes will mature on April 15, 2008, and are limited to an aggregate
principal amount of $350 million. The Notes are issued in fully registered form,
without coupons, in denominations of $1,000 and integral multiples of $1,000.
Payments in respect of the Notes are made, and the Notes are exchangeable and
transferable, at Pathnet's office or agency in The City of New York maintained
for such purposes. That office or agency is currently the office of the Bank of
New York located at 101 Barclay Street, Floor 7 East, New York, New York 10286.
No service charge is made for any registration of transfer, exchange or
redemption of Notes, except in certain circumstances for any tax or other
governmental charge that may be imposed. (Sections 202, 203, 301 and 305)
INTEREST
The Notes bear interest at the rate of 12 1/4% per annum, payable in
arrears on April 15 and October 15 of each year to holders of record of the
Notes at the close of business on the April 1 or October 1 immediately preceding
such interest payment date. Interest is calculated on the basis of a 360-day
year comprised of twelve 30-day months. If Pathnet defaults on any payment of
principal, whether at Stated Maturity, upon redemption or otherwise, interest
will continue to accrue and, to the extent permitted by law, interest will
accrue on overdue installments of interest at the rate of interest borne by the
Notes. (Sections 202, 301, 307 and 310)
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RANKING
The Notes are general unsecured obligations of Pathnet, except for the
pledge by Pathnet of the Pledged Securities under the pledge agreement. The
Indebtedness evidenced by the Notes ranks equally in right of payment with all
other existing and future unsubordinated senior obligations of Pathnet and
senior in right of payment to all existing and future obligations of Pathnet
expressly subordinated in right of payment to the Notes. The Notes, however, are
effectively subordinated to secured senior obligations of Pathnet with respect
to the assets of Pathnet securing such obligations, including Telecommunications
Indebtedness, which is or may be secured by substantially all of the assets of
Pathnet.
As of September 30, 1999 Pathnet had approximately $0.2 million in
outstanding Indebtedness other than the Notes and approximately $33.4 million of
other liabilities. Subject to certain limitations, Pathnet and its Restricted
Subsidiaries may incur additional Indebtedness in the future, including secured
Indebtedness.
SINKING FUND
The Notes are not entitled to the benefit of any sinking fund.
REDEMPTION
Pathnet may not redeem the Notes before April 15, 2003, except in the
limited circumstances described in the next paragraph. Beginning April 15, 2003,
the Notes are redeemable at the option of Pathnet, in whole or in part, on not
less than 30 nor more than 60 days prior notice. The redemption prices for the
Notes are listed below and are expressed as percentages of principal amount, if
redeemed during the 12-month period beginning on April 15 of the years listed
below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---- ----------------
<S> <C>
2003........................................................ 106.125%
2004........................................................ 104.083
2005........................................................ 102.042
2006 and thereafter......................................... 100.000
</TABLE>
Accrued and unpaid interest, if any, to the redemption date must also be
paid. (Sections 203, 1101 and 1102)
In addition, at any time on or before April 15, 2001, Pathnet may redeem up
to 35% of the aggregate principal amount of the Notes originally issued with the
net cash proceeds of one or more Public Equity Offerings at a redemption price
equal to 112.25% of the principal amount of the Notes, plus any accrued and
unpaid interest to the redemption date. Redemption must occur within 60 days of
the closing date of the Public Equity Offering and, immediately after the
redemption, at least 65% of the principal amount of the Notes originally issued
must remain outstanding. (Sections 203 and 1102)
If less than all the Notes are redeemed at any time, the Trustee will
select, not more than 60 days prior to the redemption date, by such method as it
deems fair and appropriate, the particular Notes to be redeemed. No partial
redemption will reduce the principal amount of a Note not redeemed to less than
$1,000. Notice of redemption will be mailed, first-class postage prepaid, at
least 30 but not more than 60 days before the redemption date to each holder of
Notes whose notes are to be redeemed at its registered address. On and after the
date of redemption, interest will cease to accrue on Notes or the portions of
the Notes that are called for redemption and accepted for payment. (Sections
1104, 1105 and 1107)
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SECURITY
Pathnet purchased and pledged to the Trustee, in accordance with the terms
of the Indenture and a pledge agreement, certain United States Treasury
securities as security for the benefit of the holders of the Notes with respect
to the payment of the first four scheduled interest payments on the Notes. These
securities are held by the Trustee in an escrow account. Immediately before any
date on which an interest payment is to be made, Pathnet may either (1) deposit
with the Trustee, from funds otherwise available to Pathnet, cash sufficient to
pay the interest scheduled to be paid on such date, or (2) direct the Trustee to
release from the escrow account proceeds sufficient to pay such scheduled
interest amount. If Pathnet exercises the former option, it may direct the
Trustee to release to Pathnet from the escrow account a sum of money or United
States Treasury securities equal to the amount of the deposit that it makes.
Pathnet has exercised that option in respect of each of the payments that have
been made to date and the value of the securities in the escrow account has been
reduced accordingly. Any failure by Pathnet to pay interest on the Notes in a
timely manner on the fourth scheduled interest payment date, namely April 15,
2000, will constitute an immediate event of default under the Indenture, with no
grace or cure period.
Interest earned on the pledged securities is added to the escrow account.
In the event that, in the opinion of a nationally recognized firm of independent
public accountants selected by Pathnet, the funds or pledged securities held in
the escrow account exceed the sum necessary to provide for payment in full of
the remaining interest payment the Trustee is permitted to release to Pathnet,
at Pathnet's request, any such excess amount.
The Notes are secured by a first priority security interest in the pledged
securities and in the escrow account and, accordingly, the pledged securities
and the escrow account also secure repayment of the principal amount of the
Notes.
Under the pledge agreement, after Pathnet has made the fourth scheduled
interest payment on the Notes in a timely manner, all of the remaining pledged
securities, if any, will be released from the escrow account and thereafter the
Notes will be unsecured.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INDEBTEDNESS. In general, Pathnet will not, and will not
permit any of its Restricted Subsidiaries to, incur any Indebtedness including
any Acquired Indebtedness. However, Pathnet and its Restricted Subsidiaries can
incur Permitted Indebtedness, as defined below. In addition, Pathnet can incur
additional Indebtedness if, after giving effect to such Indebtedness, the
Consolidated Indebtedness to Consolidated Operating Cash Flow Ratio would have
been less than or equal to (i) 6.0 to 1.0 but greater than zero, for
Indebtedness incurred on or prior to December 31, 2001, or (ii) 5.0 to 1.0 but
greater than zero, for Indebtedness incurred after that date.
For the purposes of determining compliance with this covenant, if an item
of Indebtedness or any portion of such item meets the criteria of more than one
of the types of Indebtedness that Pathnet and the Restricted Subsidiaries are
permitted to incur, Pathnet will have the right, in its sole discretion, to
classify such item of Indebtedness or any portion of such item at the time of
its incurrence and will only be required to include the amount and type of such
Indebtedness or portion of such Indebtedness under the clause permitting the
Indebtedness classified in that manner. (Section 1011)
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LIMITATION ON RESTRICTED PAYMENTS. (a) In general, Pathnet will not, and
will not permit any of its Restricted Subsidiaries to take, directly or
indirectly, any of the following actions:
(i) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Capital Stock of Pathnet (other than
dividends or distributions payable solely in shares of its Qualified
Capital Stock or in options, warrants or other rights to acquire such
shares of Qualified Capital Stock);
(ii) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any shares of Capital Stock of Pathnet or any
Capital Stock of any of its Affiliates (other than Capital Stock of any
Wholly Owned Restricted Subsidiary) or any options, warrants or other
rights to acquire such shares of Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to the Stated Maturity of any
principal payment or any sinking fund payment, any Indebtedness of Pathnet
that is expressly subordinated in right of payment to the Notes; or
(iv) make any Investment (other than any Permitted Investment) in any
Person.
The payments or other actions described in (but not excluded from) the list
above are collectively referred to as "Restricted Payments." However, Pathnet
and its Restricted Subsidiaries will be able to make Restricted Payments if,
immediately after giving effect to the proposed Restricted Payment:
(1) no Default or Event of Default will have occurred and be
continuing;
(2) Pathnet could incur at least $1.00 of additional Indebtedness
(other than Permitted Indebtedness) pursuant to the "Limitation on
Indebtedness" covenant; and
(3) the aggregate amount of all Restricted Payments declared or made
after the date of the Indenture shall not exceed the sum of:
(A) (i) 100% of Consolidated Operating Cash Flow less 1.5 times
Consolidated Interest Expense or (ii) if Consolidated Operating Cash
Flow is a negative, minus 100% of such negative amount, in each case on
a cumulative basis for the period beginning on the first day of
Pathnet's first fiscal quarter after the date of the Indenture and
ending on the last day of Pathnet's last fiscal quarter ending prior to
the date of such proposed Restricted Payment; PLUS
(B) the aggregate Net Cash Proceeds and the Fair Market Value of
Telecommunications Assets or Voting Stock of a Person that becomes a
Restricted Subsidiary, the assets of which consist primarily of
Telecommunications Assets, received by Pathnet after the Issue Date as
capital contributions or from the issuance or sale (other than to any
Subsidiary) of shares of Qualified Capital Stock of Pathnet (including
upon the exercise of options, warrants or rights) or warrants, options
or rights to purchase shares of Qualified Capital Stock of Pathnet; PLUS
(C) the aggregate Net Cash Proceeds and the Fair Market Value of
Telecommunications Assets or Voting Stock of a Person that becomes a
Restricted Subsidiary, the assets of which consist primarily of
Telecommunications Assets, received by Pathnet after the Issue Date from
the issuance or sale (other than to any Subsidiary) of debt securities
or Redeemable Capital Stock that have been converted into or exchanged
for Qualified Capital Stock of Pathnet, together with the aggregate Net
Cash Proceeds and the Fair Market Value of Telecommunications Assets or
Voting Stock of a Person that becomes a Restricted
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Subsidiary, the assets of which consist primarily of Telecommunications
Assets, received by Pathnet at the time of such conversion or exchange;
PLUS
(D) to the extent not otherwise included in Consolidated Operating
Cash Flow, an amount equal to the sum of (i) the net reduction in
Investments (other than Permitted Investments) in any Person (other than
a Restricted Subsidiary) resulting from the payment in cash of
dividends, repayments of loans or advances or other transfers of assets,
in each case to Pathnet or any Restricted Subsidiary after the Issue
Date from such Person and (ii) the amount of any net reduction in
Investments resulting from the redesignation of an Unrestricted
Subsidiary as a Restricted Subsidiary (valued as provided in the
definition of "Investment") at the time of such redesignation; provided
that, in the case of (i) or (ii) above, the foregoing sum will not
exceed the total amount of Investments (other than Permitted
Investments) previously made in such Person or Unrestricted Subsidiary
by Pathnet and its Restricted Subsidiaries.
The amount of any such Restricted Payment, if other than cash, shall be
determined by the Board of Directors of Pathnet, whose determination will be
conclusive and evidenced by a Board Resolution.
(b) Notwithstanding paragraph (a) above, Pathnet and any Restricted
Subsidiary may take the following actions so long as with respect to clauses
(ii) through (vi) below no Default or Event of Default shall have occurred and
be continuing:
(i) the payment of any dividend within 60 days after the date of
declaration of such dividend, if at such date of declaration the payment of
such dividend would have complied with the provisions of paragraph (a)
above and such payment will be deemed to have been paid on such date of
declaration for purposes of the calculation required by paragraph (a)
above;
(ii) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of Pathnet (x) in exchange for, or out
of the Net Cash Proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of, shares of Qualified Capital Stock of
Pathnet; (y) that are held by former officers, employees or directors (or
their estates or beneficiaries under their estates) of Pathnet or any of
its Subsidiaries; provided that the aggregate amount of such purchase,
redemption or other acquisition or retirement for value under this clause
(y) will not exceed $250,000 in any given fiscal year; or (z) pursuant to
the employment agreement dated August 4, 1997, between Pathnet and Richard
Jalkut, as amended and as in effect on the Issue Date (and any extensions
or renewals thereof); provided that the amount of such purchase, redemption
or other acquisition or retirement for value under this clause (z) will not
exceed $1.0 million in any given fiscal year;
(iii) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Indebtedness of Pathnet that is expressly
subordinated in right of payment to the Notes in exchange for, or out of
the Net Cash Proceeds of a substantially concurrent issuance and sale
(other than to a Subsidiary) of, shares of Qualified Capital Stock of
Pathnet;
(iv) the purchase of any Indebtedness of Pathnet that is expressly
subordinated in right of payment to the Notes at a purchase price not
greater than 101% of the principal amount thereof in the event of a Change
of Control in accordance with provisions similar to the "Purchase of Notes
upon a Change of Control" covenant; provided that prior to such purchase
Pathnet has made the Change of Control Offer as provided in such covenant
with respect to the Notes and has purchased all Notes validly tendered for
payment in connection with such Change of Control Offer;
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(v) the purchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness (other than Redeemable Capital Stock)
of Pathnet that is expressly subordinated in right of payment to the Notes
in exchange for, or out of the Net Cash Proceeds of a substantially
concurrent incurrence (other than to a Subsidiary) of, new Indebtedness of
Pathnet that is expressly subordinated in right of payment to the Notes, so
long as (A) the principal amount of such new Indebtedness does not exceed
the principal amount (or, if such Indebtedness being refinanced provides
for an amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration thereof, such lesser amount as of the
date of determination) of the Indebtedness being so purchased, redeemed,
defeased, acquired or retired, plus the lesser of (x) the amount of any
premium required to be paid in connection with such refinancing pursuant to
the terms of the Indebtedness being refinanced or (y) the amount of any
premium reasonably determined by Pathnet as necessary to accomplish such
refinancing, PLUS, in either case, the amount of expenses of Pathnet
incurred in connection with such refinancing; (B) such new Indebtedness is
subordinated to the Notes to the same extent as such Indebtedness so
purchased, redeemed, defeased, acquired or retired; and (C) such new
Indebtedness has an Average Life longer than the Average Life of the
Indebtedness being refinanced and a final Stated Maturity of principal
later than the final Stated Maturity of the Indebtedness being refinanced;
and
(vi) the payment of cash in lieu of fractional shares of Common Stock
pursuant to the Warrant Agreement.
The actions described in items (i) through (iv) and (vi) above will be
Restricted Payments that will be permitted in accordance with this paragraph (b)
but will reduce the amount that would otherwise be available for Restricted
Payments under clause (3) of paragraph (a) above. The actions described in item
(v) above will be Restricted Payments that will be permitted in accordance with
this paragraph (b) and will not reduce the amount that would otherwise be
available for Restricted Payments under clause (3) of paragraph (a). (Section
1012)
LIMITATION ON ISSUANCE AND SALES OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. In general, Pathnet will not, and will not permit any Restricted
Subsidiary to, issue or sell any Capital Stock of a Restricted Subsidiary (other
than to Pathnet or to a Restricted Subsidiary). However, this covenant will not
prohibit:
(i) issuances or sales of Capital Stock of a Restricted Subsidiary if,
immediately after giving effect to such issuance or sale, such Restricted
Subsidiary would no longer be a Restricted Subsidiary and any Investment in
such Person remaining after giving effect to such issuance or sale would
have been permitted to be made under the "Limitation on Restricted
Payments" covenant if made on the date of such issuance and sale;
(ii) the ownership by directors of director's qualifying shares or the
ownership by foreign nationals of Capital Stock of any Restricted
Subsidiary, to the extent mandated by applicable law;
(iii) the issuance and sale of Capital Stock of any Restricted
Subsidiary owned by Pathnet and the Restricted Subsidiaries in compliance
with the "Limitation on Sale of Assets" covenant; provided that such
Restricted Subsidiary would remain a Restricted Subsidiary after such
transaction; or
(iv) the issuance and sale of Capital Stock of any Restricted
Subsidiary to any Person that transfers, leases, licenses or grants a right
to use Telecommunications Assets to Pathnet pursuant to an Incumbent
Agreement; provided that, after such issuance and sale, such subsidiary
remains a Restricted Subsidiary and, in the good faith determination of the
Board of Directors of Pathnet, the Fair Market Value of any such transfer,
lease, license or grant is not less than the
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Fair Market Value of the Capital Stock of such Restricted Subsidiary issued
and sold in respect thereof. (Section 1013)
LIMITATION ON TRANSACTIONS WITH AFFILIATES. Pathnet will not, and will not
permit any Restricted Subsidiary to, enter into or suffer to exist, directly or
indirectly, any transaction or series of related transactions (including,
without limitation, the sale, purchase, exchange or lease of assets, property or
services) with, or for the benefit of, any Affiliate of Pathnet or any
Restricted Subsidiary (other than Pathnet or a Restricted Subsidiary so long as
no Affiliate of Pathnet (other than a Restricted Subsidiary) shall beneficially
own Capital Stock in such Restricted Subsidiary) unless:
(i) such transaction or series of related transactions are on terms,
taken as a whole, that are no less favorable to Pathnet or such Restricted
Subsidiary, as the case may be, than those that could have been obtained in
an arms' length transaction with unrelated third parties that are not
Affiliates;
(ii) with respect to any transaction or series of related transactions
involving aggregate consideration equal to or greater than $5 million,
Pathnet will deliver an officers' certificate to the Trustee certifying
that such transaction or series of related transactions complies with
clause (i) above; and
(iii) with respect to any transaction or series of related
transactions involving aggregate consideration in excess of $10 million,
Pathnet will deliver the officers' certificate described in clause (ii)
above which will also certify that such transaction or series of related
transactions has been approved by a majority of the Disinterested Directors
of the Board of Directors of Pathnet or that Pathnet has obtained a written
opinion from a nationally recognized investment banking or public
accounting firm or, if Pathnet believes that an investment banking or
public accounting firm is generally not qualified to give such an opinion,
by a nationally recognized appraisal firm (an "independent financial
expert") certifying that the financial terms of such transaction or series
of related transactions, taken as a whole, are fair to Pathnet or such
Restricted Subsidiary, as the case may be, from a financial point of view;
provided, however, that this covenant will not restrict (1) any transaction
or series of related transactions among Pathnet and one or more of its
Restricted Subsidiaries or among its Restricted Subsidiaries, (2) Pathnet
from paying reasonable and customary regular compensation and fees to
directors of Pathnet or any Restricted Subsidiary who are not employees of
Pathnet or any Restricted Subsidiary, (3) the performance of Pathnet's
obligations under the Investment and Stockholders' Agreement, dated as of
October 31, 1997, among Pathnet, David Schaeffer and the Investors named
therein, as amended; the Investment and Stockholders' Agreement, dated as
of August 28, 1995, by and among Pathnet and the Investors named therein;
the Investment and Stockholders' Agreement, dated as of December 23, 1996,
by and among Pathnet and the Investors named therein; the Non-Qualified
Stock Option Agreement, dated August 4, 1997, between Pathnet and Richard
Jalkut; and the Employment Agreement, dated August 4, 1997, between Pathnet
and Richard Jalkut, in each case as amended through the Issue Date;
provided that any amendments or modifications to the terms of transactions
described in this clause (3) will be (x) no less favorable to Pathnet than
those that could have been obtained in an arm's length transaction with
unrelated third parties who are not Affiliates and (y) approved by the
Board of Directors of Pathnet (including a majority of the Disinterested
Directors), (4) the making of any Restricted Payment not prohibited by the
"Limitations on Restricted Payments" covenant and (5) loans or advances
made to directors, officers or employees of Pathnet or any Restricted
Subsidiary, or guarantees in respect thereof or otherwise made on their
behalf, in respect of expenses incurred in the ordinary course of business,
in an aggregate principal amount not to exceed $500,000 in any calendar
year. (Section 1014)
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Under Delaware law, the Disinterested Directors' fiduciary obligations
require that they act in good faith and in a manner which they reasonably
believe to be in the best interests of Pathnet and its stockholders, which may
not necessarily be the same as the interests of holders of the Notes.
LIMITATION ON LIENS. Pathnet will not, and will not permit any Restricted
Subsidiary to, directly or indirectly, create, incur, assume or suffer to exist
any Lien (other than Permitted Liens) on or with respect to any of its property
or assets (including, without limitation, any shares of Capital Stock or
Indebtedness of any Restricted Subsidiary) whether owned at the Issue Date or
thereafter acquired, or any income, profits or proceeds therefrom, or assign or
otherwise convey any right to receive income thereon, unless (x) in the case of
any Lien securing Indebtedness of Pathnet that is expressly subordinated in
right of payment to the Notes, the Notes are secured by a Lien on such property,
assets or proceeds that is senior in priority to such Lien and (y) in the case
of any other Lien, the Notes are secured by a Lien on such property, assets or
proceeds that is senior in priority to, or equally and ratably secured with, the
obligation or liability secured by such Lien. (Section 1015)
LIMITATION ON ISSUANCE OF CERTAIN GUARANTEES BY, AND DEBT SECURITIES OF,
RESTRICTED SUBSIDIARIES. Pathnet will not permit any Restricted Subsidiary to:
(i) directly or indirectly guarantee, assume or in any other manner
become liable with respect to any Debt Securities ("Guaranteed
Indebtedness"); or
(ii) issue any Debt Securities, unless, in either such case, such
Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture providing for the guarantee (a "Subsidiary Guarantee") of payment
of the Notes. If the Guaranteed Indebtedness (A) ranks equally in right of
payment with the Notes, then the guarantee of such Guaranteed Indebtedness
will rank equally in right of payment with, or be subordinated in right of
payment to, the Subsidiary Guarantee or (B) is subordinated in right of
payment to the Notes, then the guarantee of such Guaranteed Indebtedness
will be subordinated in right of payment to the Subsidiary Guarantee at
least to the extent that the Guaranteed Indebtedness is subordinated in
right of payment to the Notes. The obligations of each Restricted
Subsidiary under a Subsidiary Guarantee will be limited to the maximum
amount, and will, after giving effect to all other contingent and fixed
liabilities of such Restricted Subsidiary, result in the obligations of
such Restricted Subsidiary under the Subsidiary Guarantee not constituting
a fraudulent conveyance or fraudulent transfer under applicable law.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary of the Notes will provide by its terms that it shall be automatically
and unconditionally released and discharged upon:
(i) the sale or other disposition, by way of merger or otherwise, to
any Person not an Affiliate of Pathnet, of all of Pathnet's and its
Restricted Subsidiaries' Capital Stock in such Restricted Subsidiary;
(ii) the merger or consolidation of the applicable Restricted
Subsidiary with and into Pathnet or another Restricted Subsidiary that has
guaranteed the Notes and that is the surviving Person in such merger or
consolidation; and
(iii) the release by all of the holders of Debt Securities of Pathnet
of such Restricted Subsidiary's obligations under all of its Guarantees in
respect thereof and the release by all of the holders of Debt Securities of
such Restricted Subsidiary of its obligations thereunder. (Section 1016)
PURCHASE OF NOTES UPON A CHANGE OF CONTROL. If a Change of Control occurs
at any time, then each holder of Notes will have the right to require that
Pathnet purchase all of such holder's Notes,
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in whole or in part in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash in an amount equal to 101% of the
principal amount thereof, plus accrued and unpaid interest and liquidated
damages, if any, thereon to the date of purchase (the "Change of Control
Purchase Date") pursuant to the procedures described below (the "Change of
Control Offer") and the other procedures set forth in the Indenture.
Within 15 days following any Change of Control, Pathnet will notify the
Trustee thereof and give written notice of such Change of Control to each holder
of Notes by first-class mail, postage prepaid, at the address of such holder
appearing in the security register, stating, among other things:
(i) the purchase price and the purchase date, which shall be a
Business Day no earlier than 30 days nor later than 60 days from the date
such notice is mailed, or such later date as is necessary to comply with
requirements under the Exchange Act or any applicable securities laws or
regulations;
(ii) that any Note not tendered will continue to accrue interest;
(iii) that, unless Pathnet defaults in the payment of the purchase
price, any Notes accepted for payment pursuant to the Change of Control
Offer will cease to accrue interest and Liquidated Damages, if any, after
the Change of Control Purchase Date; and
(iv) certain other procedures that a holder of Notes must follow to
accept a Change of Control Offer or to withdraw such acceptance. (Section
1010)
If a Change of Control Offer were made, we cannot assure you that Pathnet
would have available funds sufficient to pay the Change of Control Purchase
Price for all of the Notes that might be delivered by holders thereof seeking to
accept the Change of Control Offer. The failure of Pathnet to make or consummate
the Change of Control Offer would result in an Event of Default and would give
the Trustee and the holders of the Notes the rights described under "Events of
Default."
One of the events that constitutes a Change of Control under the Indenture
is the disposition of "all or substantially all" of Pathnet's assets. This term
has not been interpreted under New York law (which is the governing law of the
Indenture) to represent a specific quantitative test. As a consequence, if
holders of the Notes elect to require Pathnet to purchase the Notes and Pathnet
elects to contest such election, there can be no assurance as to how a court
interpreting New York law would interpret the phrase.
The existence of a holder's right to require Pathnet to purchase such
holder's Notes upon a Change of Control may deter a third party from acquiring
Pathnet in a transaction that constitutes a Change of Control.
The definition of "Change of Control" in the Indenture is limited in scope.
The provisions of the Indenture may not afford holders of Notes the right to
require Pathnet to purchase such Notes in the event of a highly leveraged
transaction or certain transactions with Pathnet's management or its Affiliates,
including a reorganization, restructuring, merger or similar transaction
involving Pathnet (including, in certain circumstances, an acquisition of
Pathnet by management or its Affiliates) that may adversely affect holders of
the Notes, if such transaction is not a transaction defined as a Change of
Control. See "Certain Definitions" for the definition of "Change of Control." A
transaction involving Pathnet's management or its Affiliates, or a transaction
involving a recapitalization of Pathnet, would result in a Change of Control if
it is the type of transaction specified by such definition.
Pathnet will comply with the applicable tender offer rules, including Rule
l4e-l under the Exchange Act, and any other applicable securities laws and
regulations in connection with a Change of Control Offer.
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LIMITATION ON SALE OF ASSETS. (a) Pathnet will not, and will not permit
any Restricted Subsidiary to, directly or indirectly, engage in any Asset Sale
unless (i) the consideration received by Pathnet or such Restricted Subsidiary
for such Asset Sale is not less than the Fair Market Value of the shares or
other assets sold (as determined by the board of directors of Pathnet, whose
determination shall be conclusive and evidenced by a resolution thereof) and
(ii) the consideration received by Pathnet or the relevant Restricted Subsidiary
in respect of such Asset Sale consists of at least 75% cash or Cash Equivalents;
provided, however, that for purposes of this covenant, "Cash Equivalents" shall
include (i) the amount of any liabilities (other than liabilities that are by
their terms subordinated to the Notes) of Pathnet or such Restricted Subsidiary
(as shown on Pathnet's or such Restricted Subsidiary's most recent balance sheet
or in the notes thereto) that are assumed by the transferee of any such assets
or other property in such Asset Sale or are no longer a liability of Pathnet or
any Restricted Subsidiary (and excluding any liabilities that are incurred in
connection with or in anticipation of such Asset Sale), but only to the extent
that such assumption is effected on a basis under which there is no further
recourse to Pathnet or any of its Restricted Subsidiaries with respect to such
liabilities and (ii) any securities, notes or other obligations received by
Pathnet or any such Restricted Subsidiary in connection with such Asset Sale
that are converted by Pathnet or such Restricted Subsidiary into cash within 60
days of receipt.
(b) If Pathnet or any Restricted Subsidiary engages in an Asset Sale,
Pathnet may use the Net Cash Proceeds thereof, within 12 months after such Asset
Sale, to (i) permanently repay or prepay the Notes or any then outstanding
Indebtedness of Pathnet that ranks equally with the Notes or Indebtedness of any
Restricted Subsidiary or permanently reduce (without making any prepayment) the
amount that is at the time available to be borrowed under the Notes or any
Indebtedness of Pathnet ranking equally with the Notes or any Indebtedness of a
Restricted Subsidiary or (ii) invest (or enter into a legally binding agreement
to invest) in properties and assets to replace the properties and assets that
were the subject of the Asset Sale or in properties and assets that are or will
be used in the Telecommunications Business of Pathnet or a Restricted
Subsidiary, as the case may be. If any such legally binding agreement to invest
such Net Cash Proceeds is terminated, then Pathnet may, within 60 days of such
termination or within 12 months of such Asset Sale, whichever is later, apply or
invest such Net Cash Proceeds as provided in clause (i) or (ii) (without regard
to the parenthetical contained in such clause (ii)) above. The amount of such
Net Cash Proceeds not so used as set forth above in this paragraph (b)
constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds exceeds $10 million,
Pathnet will, within 15 business days, make an offer to purchase (an "Excess
Proceeds Offer"), on a proportional basis, the Notes and Indebtedness described
in the second succeeding sentence, in accordance with the procedures set forth
below, the maximum principal amount of Notes (expressed as a multiple of $1,000)
and such other Indebtedness that may be purchased with the Excess Proceeds. Any
Excess Proceeds Offer shall include a pro rata offer under similar circumstances
to purchase all other Indebtedness of Pathnet ranking equally with the Notes
which Indebtedness contains similar provisions requiring Pathnet to purchase
such Indebtedness. The offer price as to each Note (the "Excess Proceeds Offer
Price") will be payable in cash in an amount equal to 100% of the principal
amount of such Note, plus accrued and unpaid interest, if any, thereon to the
date of purchase. To the extent that the aggregate principal amount of Notes
validly tendered and not withdrawn by holders thereof pursuant to an Excess
Proceeds Offer is less than the Excess Proceeds, Pathnet may use such deficiency
for general corporate purposes. If the aggregate principal amount of Notes
validly tendered and not withdrawn by holders thereof pursuant to an Excess
Proceeds Offer exceeds the Excess Proceeds, Notes to be purchased will be
selected on a proportional basis. Upon completion of such Exceeds Proceeds
Offer, the amount of Excess Proceeds shall be reset to zero. (Section 1017)
If an Excess Proceeds Offer were made, there can be no assurance that
Pathnet would have available funds sufficient to pay an Excess Proceeds Offer
Price for all of the Notes that might be
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delivered by holders of the Notes seeking to accept an Excess Proceeds Offer.
The failure of Pathnet to make or consummate the Excess Proceeds Offer would
result in an Event of Default and would give the Trustee and the holders of the
Notes the rights described under "Events of Default."
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. Pathnet will not, and will not permit any Restricted Subsidiary
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction of any kind on the ability of
any Restricted Subsidiary to:
(a) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of any Capital Stock of such Restricted
Subsidiary owned by Pathnet or any other Restricted Subsidiary;
(b) pay any Indebtedness owed to Pathnet or any other Restricted
Subsidiary;
(c) make Investments in Pathnet or any other Restricted Subsidiary;
(d) transfer any of its property or assets to Pathnet or any other
Restricted Subsidiary; or
(e) guarantee any Indebtedness of Pathnet or any other Restricted
Subsidiary, except for such encumbrances or restrictions existing under or
by reason of (i) any agreement in effect on the Issue Date, (ii) applicable
law, (iii) customary non-assignment provisions in leases entered into in
the ordinary course of business and other agreements of Pathnet or any
Restricted Subsidiary, (iv) any agreement or other instrument of a Person
acquired by Pathnet or any Restricted Subsidiary in existence at the time
of such acquisition (but not created in contemplation thereof), which
encumbrance or restriction is not applicable to any Person, or the
properties or assets of any Person, other than the Person, or the property
or assets of the Person, so acquired, (v) customary restrictions on
transfers of property contained in any security agreement (including a
capital lease obligation) securing Indebtedness of Pathnet or a Restricted
Subsidiary otherwise permitted under the Indenture, (vi) any encumbrance or
restriction with respect to a Restricted Subsidiary of Pathnet entered into
for the sale or disposition of all or substantially all of the Capital
Stock or assets of such Restricted Subsidiary permitted under the
"Limitation on Sale of Assets" covenant, (vii) any agreement or instrument
governing or relating to Indebtedness under any senior financing facility
permitted to be incurred under clause (g), (j) or (m) of the definition of
"Permitted Indebtedness" if such encumbrance or restriction applies only
(A) to amounts which at any point in time (other than during such periods
as are described in the following clause (B)) (1) exceed scheduled amounts
due and payable (or which are to become due and payable within 30 days) in
respect of the Notes or the Indenture for interest, premium and principal
less the amount of cash that is otherwise available to Pathnet at such time
for the payment of interest, premium and principal due and payable in
respect of the Notes or the Indenture or (2) if paid, would result in an
event described in the following clause (B) of this sentence, or (B) during
the pendency of any event that causes, permits or, after notice or lapse of
time, would cause or permit the holder or holders of such Indebtedness to
declare such Indebtedness to be immediately due and payable or to require
cash collateralization or cash cover for such Indebtedness for so long as
such cash collateralization or cash cover has not been provided; (viii) any
encumbrance or restriction under the Vendor Credit Facility; (ix) any
encumbrance or restriction relating to transfer of property or assets
comprising an Initial System pursuant to an Incumbent Agreement, and (x)
any encumbrance or restriction under any agreement that extends, renews,
refinances or replaces agreements containing the encumbrances or
restrictions in the foregoing clauses (i) through (vi) and (viii), so long
as the Board of Directors of Pathnet determines in good faith that the
terms and conditions of any such encumbrances or restrictions, taken as a
whole, are no less favorable to Pathnet, any Restricted
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Subsidiary and the holders of the Notes than those so extended, renewed,
refinanced or replaced. (Section 1018)
PROVISION OF FINANCIAL STATEMENTS AND REPORTS. (a) Pathnet will file on a
timely basis with the Commission, to the extent such filings are accepted by the
Commission and whether or not Pathnet has a class of securities registered under
the Exchange Act, the annual reports, quarterly reports and other documents that
Pathnet would be required to file if it were subject to Section 13 or 15 of the
Exchange Act.
(b) Pathnet will also be required (i) to file with the Trustee, and provide
to each holder of Notes, without cost to such holder, copies of such reports and
documents within 15 days after the date on which Pathnet files such reports and
documents with the Commission or the date on which Pathnet would be required to
file such reports and documents if Pathnet were so required, and (ii) if filing
such reports and documents with the Commission is not accepted by the Commission
or is prohibited under the Exchange Act, to supply at Pathnet's cost copies of
such reports and documents to any prospective holder promptly upon request.
(Section 1009)
CONSOLIDATION, MERGER AND SALE OF ASSETS. Pathnet will not, in a single
transaction or a series of transactions, consolidate with or merge with or into
any other Person or sell, assign, convey, transfer, lease or otherwise dispose
of all or substantially all of its properties and assets to any other Person or
Persons, and Pathnet will not permit any Restricted Subsidiary to enter into any
such transaction or series of transactions if such transaction or series of
transactions, in the aggregate, would result in the sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of Pathnet and its Restricted Subsidiaries on a
consolidated basis to any other Person or Persons, unless at the time and
immediately after giving effect thereto:
(i) either (a) Pathnet will be the continuing corporation or (b) the
Person (if other than Pathnet) formed by such consolidation or into which
Pathnet or such Restricted Subsidiary is merged or the Person that acquires
by sale, assignment, conveyance, transfer, lease or disposition all or
substantially all the properties and assets of Pathnet and its Restricted
Subsidiaries on a consolidated basis, as the case may be (the "Surviving
Entity"), (1) will be a corporation organized and validly existing under
the laws of the United States of America, any state thereof or the District
of Columbia and (2) will expressly assume, by a supplemental indenture to
the Indenture in form satisfactory to the Trustee, Pathnet's obligations
pursuant to the Notes for the due and punctual payment of the principal of,
premium, if any, and interest on all the Notes and the performance and
observance of every covenant of the Indenture on the part of Pathnet to be
performed or observed;
(ii) immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis (and treating
any obligation of Pathnet or any Restricted Subsidiary incurred in
connection with or as a result of such transaction or series of
transactions as having been incurred at the time of such transaction), no
Default or Event of Default will have occurred and be continuing;
(iii) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (on the assumption that the transaction
or series of transactions occurred on the first day of the two fiscal
quarter period ending immediately prior to the consummation of such
transaction or series of transactions, with the appropriate adjustments
with respect to the transaction or series of transactions being included in
such pro forma calculation), Pathnet (or the Surviving Entity if Pathnet is
not the continuing obligor under the Indenture) could incur at least $1.00
of additional Indebtedness (other than Permitted Indebtedness) under the
provisions of the "Limitation on Indebtedness" covenant; and
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(iv) Pathnet or the Surviving Entity shall have delivered to the
Trustee, in form and substance reasonably satisfactory to the Trustee, an
officers' certificate (attaching the computations to demonstrate compliance
with clause (iii) above) and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, conveyance, transfer, lease or
other disposition, and if a supplemental indenture is required in
connection with such transaction, such supplemental indenture, comply with
the requirements of the Indenture and that all conditions precedent therein
provided for relating to such transaction have been complied with. (Section
801)
Upon any consolidation or merger, or any sale, assignment, conveyance,
transfer, lease or disposition of all or substantially all of the properties and
assets of Pathnet in accordance with the immediately preceding paragraphs in
which Pathnet is not the continuing obligor under the Indenture, the Surviving
Entity shall succeed to, and be substituted for, and may exercise every right
and power of, Pathnet under the Indenture with the same effect as if such
successor had been named as Pathnet therein. When a successor assumes all the
obligations of its predecessor under the Indenture, the predecessor shall be
released from those obligations; provided that, in the case of a transfer by
lease, the predecessor shall not be released from the payment of principal of,
premium, if any, and interest on the Notes. (Section 802)
EVENTS OF DEFAULT
The following are "Events of Default" under the Indenture:
(i) default in the payment of interest or Liquidated Damages, if any,
on any Note when it becomes due and payable, and continuance of such
default for a period of 30 days or more (provided that such 30-day grace
period shall not be applicable to the first four interest payments due on
the Notes);
(ii) default in the payment of principal of or premium, if any, on any
Note at its Maturity (upon acceleration, optional redemption, required
purchase or otherwise);
(iii) (A) default in the performance, or breach, of any covenant or
agreement of Pathnet contained in the Indenture (other than a default in
the performance, or breach, of a covenant or agreement which is
specifically dealt with in the immediately preceding clause (i) or (ii) or
in clause (B), (C) or (D) of this clause (iii)) and continuance of such
default or breach for a period of 30 days after written notice shall have
been given to Pathnet by the Trustee or to Pathnet and the Trustee by the
holders of at least 25% in aggregate principal amount of the Notes then
outstanding; (B) default in the performance or breach of the provisions of
the "Limitation on Sale of Assets" covenant; (C) default in the performance
or breach of the provisions of the "Consolidation, Merger and Sale of
Assets" covenant; and (D) default in the performance or breach of the
provisions of the "Purchase of Notes upon a Change of Control" covenant;
(iv) (A) one or more defaults in the payment of principal of or
premium, if any, or interest on Indebtedness of Pathnet or any Significant
Subsidiary aggregating $7.5 million or more, when the same becomes due and
payable at the Stated Maturity thereof, and such default or defaults shall
have continued after any applicable grace period and shall not have been
cured or waived or (B) Indebtedness of Pathnet or any Significant
Subsidiary aggregating $7.5 million or more shall have been accelerated or
otherwise declared due and payable, or required to be prepaid or
repurchased (other than by regularly scheduled required prepayment), prior
to the Stated Maturity thereof);
(v) one or more final judgments, orders or decrees of any court or
regulatory agency shall be rendered against Pathnet or any Significant
Subsidiary or their respective properties for the
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payment of money, either individually or in an aggregate amount, in excess
of $7.5 million and either (A) an enforcement proceeding shall have been
commenced by any creditor upon such judgment or order or (B) there shall
have been a period of 30 days during which a stay of enforcement of such
judgment or order, by reason of a pending appeal or otherwise, was not in
effect;
(vi) the occurrence of certain events of bankruptcy, insolvency or
reorganization with respect to Pathnet or any Significant Subsidiary; or
(vii) if the Pledge Agreement ceases to be in full force and effect
before payment in full of the obligations thereunder. (Section 501)
If an Event of Default (other than an Event of Default arising from an
event of bankruptcy, insolvency or reorganization as specified in clause (vi)
above) occurs and is continuing, the Trustee or the holders of not less than 25%
in aggregate principal amount of the Notes then outstanding, by written notice
to Pathnet (and to the Trustee if such notice is given by the holders), may, and
the Trustee upon the written request of such holders shall, declare the
principal of, premium, if any, and accrued and unpaid interest and Liquidated
Damages, if any, on all outstanding Notes immediately due and payable, and upon
any such declaration all such amounts payable in respect of the Notes shall
become immediately due and payable. If an Event of Default arising from an event
of bankruptcy, insolvency or reorganization as specified in clause (vi) or (vii)
above occurs and is continuing, then the principal of, premium, if any, and
accrued and unpaid interest and Liquidated Damages, if any, on all of the
outstanding Notes will ipso facto become immediately due and payable without any
declaration or other act on the part of the Trustee or any holder of Notes.
(Section 502)
At any time after a declaration of acceleration under the Indenture, but
before a judgment or decree for payment of the money due has been obtained by
the Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to Pathnet and the Trustee, may rescind or
annul such declaration and its consequences if (a) Pathnet has paid or deposited
with the Trustee a sum sufficient to pay (i) all overdue interest and Liquidated
Damages, if any, on all outstanding Notes, (ii) all unpaid principal of and
premium, if any, on any outstanding Notes that have become due otherwise than by
such declaration of acceleration, together with interest on such unpaid
principal at the rate borne by the Notes, (iii) to the extent that payment of
such interest is lawful, interest upon overdue interest and Liquidated Damages,
if any, and overdue principal at the rate borne by the Notes, (iv) all sums paid
or advanced by the Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel; and
(b) all Events of Default, other than the non-payment of amounts of principal
of, premium, if any, or interest and Liquidated Damages, if any, on the Notes
that have become due solely by such declaration of acceleration, have been cured
or waived. No such rescission shall affect any subsequent default or impair any
right consequent thereon. (Section 502)
The holders of not less than a majority in aggregate principal amount of
the outstanding Notes may, on behalf of the holders of all the Notes, waive any
past defaults under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest and Liquidated Damages, if any, on
any Note, or in respect of a covenant or provision which under the Indenture
cannot be modified or amended without the consent of the holder of each Note
outstanding. (Section 513)
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee will mail to each holder of the Notes notice of the
Default or Event of Default within five days after the earlier of receipt from
Pathnet of notice of the occurrence thereof or the date when such Default or
Event of Default becomes known to the Trustee. Except in the case of a Default
or an Event of Default in the payment of the principal of, premium, if any, or
interest on any Notes, the
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Trustee may withhold the notice to the holders of such Notes if a committee of
its trust officers in good faith determines that withholding such notice is in
the interests of the holders of the Notes.
Pathnet is required to furnish to the Trustee annual and quarterly
statements as to the performance by Pathnet of its obligations under the
Indenture and as to any default in such performance. Pathnet is also required to
notify the Trustee within five days of the occurrence of any Default or Event of
Default.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
Pathnet may, at its option and at any time, terminate its obligations with
respect to the outstanding Notes ("defeasance"). This means that Pathnet will be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Notes and to have satisfied all its other obligations under such
Notes, except for:
(i) the rights of holders of outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest and Liquidated
Damages, if any, on the Notes when such payments are due;
(ii) Pathnet's obligations to issue temporary Notes, register the
transfer or exchange of any such Notes, replace mutilated, destroyed, lost
or stolen Notes, maintain an office or agency for payments in respect of
the Notes and segregate and hold such payments in trust;
(iii) the rights, powers, trusts, duties and immunities of the
Trustee; and
(iv) the defeasance provisions of the Indenture.
In addition, Pathnet may, at its option and at any time, terminate its
obligations with respect to certain covenants set forth in the Indenture, and
any omission to comply with such obligations will not constitute a Default or an
Event of Default with respect to the Notes ("covenant defeasance"). (Sections
1301, 1302 and 1303)
In order to exercise either option:
(i) Pathnet must irrevocably deposit or cause to be deposited with the
Trustee, in trust, specifically pledged as security for, and dedicated
solely to, the benefit of the holders of the Notes, cash in United States
dollars, Government Securities, or a combination or both, that, in the
opinion of a nationally recognized firm of independent public accountants,
will be sufficient to pay and discharge the principal of, premium, if any,
and interest on the outstanding Notes on the Stated Maturity (or upon
redemption, if applicable) of such principal, premium, if any, or
installment of interest and Liquidated Damages, if any;
(ii) no Default or Event of Default with respect to the Notes can have
occurred and be continuing on the date of such deposit or, insofar as an
event of bankruptcy under clause (vi) of "Events of Default" above is
concerned, at any time during the period ending on the 123rd day after the
date of such deposit;
(iii) Pathnet's termination of its obligations must not result in a
breach or violation of, or constitute a default under any material
agreement or instrument (other than the Indenture) to which Pathnet is a
party or by which it is bound;
(iv) in the case of termination of its obligations with respect to the
outstanding Notes, Pathnet must have delivered to the Trustee an opinion of
counsel stating that Pathnet has received from, or there has been published
by, the Internal Revenue Service a ruling, or since the date of this
prospectus there has been a change in applicable federal income tax law, in
either case to the effect that, and based thereon such opinion shall
confirm that, the holders of the outstanding Notes will not recognize
income, gain or loss for U.S. federal income tax
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purposes as a result of Pathnet's termination of its obligations under the
Notes and will be subject to U.S. federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if
such termination had not occurred;
(v) in the case of termination of its obligations under certain
covenants, Pathnet must have delivered to the Trustee an opinion of counsel
to the effect that the holders of the Notes outstanding will not recognize
income, gain or loss for U.S. federal income tax purposes as a result of
the termination of its obligations under such covenants and will be subject
to U.S. federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such termination had not
occurred; and
(vi) Pathnet must deliver to the Trustee an officers' certificate and
an opinion of counsel, each stating that all conditions precedent provided
for relating to either the termination of its obligations under the Notes,
or the termination of its obligations with respect to certain covenants, as
the case may be, have been complied with. (Section 1304)
SATISFACTION AND DISCHARGE
The Indenture will cease to be of further effect (except as to surviving
rights of registration of transfer or exchange of the Notes as expressly
provided for in the Indenture), and the Trustee, at the expense of Pathnet, will
execute proper instruments acknowledging satisfaction and discharge of the
Indenture when:
(i) either (A) all the Notes that have previously been authenticated
and delivered (other than destroyed, lost or stolen Notes which have been
replaced or paid and Notes for whose payment money has previously been
deposited in trust or segregated and held in trust by Pathnet, or
discharged) to the Trustee for cancellation or (B) all Notes not previously
delivered to the Trustee for cancellation that (x) have become due and
payable, (y) will become due and payable at their Stated Maturity within
one year or (z) are to be called for redemption within one year under
arrangements satisfactory to the Trustee for the giving of notice of
redemption by the Trustee in the name, and at the expense, of Pathnet, and
Pathnet has irrevocably deposited or caused to be deposited with the
Trustee as trust funds in trust for such purpose an amount sufficient to
pay and discharge the entire Indebtedness on the Notes not previously
delivered to the Trustee for cancellation, for the principal of, premium
and Liquidated Damages, if any, and interest on the Notes to the date of
such deposit (in the case of Notes which have become due and payable) or to
the Stated Maturity or date of redemption, as the case may be;
(ii) Pathnet has paid or caused to be paid all sums payable by it
under the Indenture; and
(iii) Pathnet has delivered to the Trustee an officers' certificate
and an opinion of counsel, each stating that all conditions precedent
provided in the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with. (Section 401)
MODIFICATION AND WAIVER
The Indenture may be modified or amended by a supplemental indenture
entered into by Pathnet and the Trustee with the consent of the holders of a
majority in aggregate outstanding principal amount of the Notes; provided, that
no modification or amendment can do any of the following, without the consent of
the holder of each outstanding Note affected by such modification or amendment:
(i) change the Stated Maturity of the principal of, or any installment
of interest on, any Note, or reduce the principal amount of any Note or
premium, if any, or the rate of interest on such Note, alter any redemption
provision with respect to any Note or change the coin or currency in which
the principal of any Note or any premium or the interest thereon is
payable,
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or impair the right to institute suit for the enforcement of any such
payment after the Stated Maturity of any Note (or, in the case of
redemption, on or after the date of redemption);
(ii) amend, change or modify Pathnet's obligation to make and
consummate an Excess Proceeds Offer with respect to any Asset Sale in
accordance with the "Limitation on Sale of Assets" covenant or Pathnet's
obligation to make and consummate a Change of Control Offer in the event of
a Change of Control in accordance with the "Purchase of Notes Upon a Change
of Control" covenant, including, in each case, amending, changing or
modifying any definition relating to such obligations;
(iii) reduce the percentage of the principal amount of outstanding
Notes the consent of whose holders is required for any such supplemental
indenture or the consent of whose holders is required for any waiver of
compliance with certain provisions and defaults of the Indenture and their
consequences provided for in the Indenture;
(iv) modify any of the provisions relating to supplemental indentures
requiring the consent of holders or relating to the waiver of past defaults
or relating to the waiver of certain covenants, except to increase the
percentage of the aggregate principal amount of outstanding Notes required
for such actions or to provide that certain other provisions of the
Indenture cannot be modified or waived without the consent of the holder of
each Note affected thereby;
(v) except as otherwise permitted under "Consolidation, Merger and
Sale of Assets," consent to the assignment or transfer by Pathnet of any of
their rights or obligations under the Indenture; or
(vi) release any Lien created by the Pledge Agreement, except in
accordance with the terms of the Pledge Agreement. (Sections 901 and 902).
Notwithstanding the foregoing, without the consent of any holder of
the Notes, Pathnet and the Trustee may modify or amend the Indenture:
(a) to evidence the succession of another Person to Pathnet or any
other obligor on the Notes, and the assumption by any such successor of
the covenants of Pathnet or such obligor in the Indenture and in the
Notes in accordance with "Consolidation, Merger and Sale of Assets;"
(b) to add to the covenants of Pathnet or any other obligor upon
the Notes for the benefit of the holders of the Notes or to surrender
any right or power conferred upon Pathnet or any other obligor upon the
Notes, as applicable, in the Indenture or in the Notes;
(c) to cure any ambiguity, or to correct or supplement any
provision in the Indenture or in the Notes that may be defective or
inconsistent with any other provision in the Indenture or in the Notes,
or make any other provisions with respect to matters or questions
arising under the Indenture or the Notes; provided that, in each case,
such action will not adversely affect the interests of the holders of
the Notes;
(d) to comply with the requirements of the Commission in order to
effect or maintain the qualification, if any, of the Indenture under the
Trust Indenture Act;
(e) to evidence and provide the acceptance of the appointment of a
successor Trustee under the Indenture;
(f) to mortgage, pledge, hypothecate or grant a security interest
in favor of the Trustee for the benefit of the holders of the Notes as
additional security for the payment and performance of Pathnet's
obligations under the Indenture, in any property or assets, including
any of which are required to be mortgaged, pledged or hypothecated, or
in which
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a security interest is required to be granted to the Trustee pursuant to
the Indenture or otherwise; or
(g) to add a guarantor of the Notes under the Indenture. (Section
901)
The holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1019)
GOVERNING LAW
The Indenture, the Notes and the pledge agreement are governed by, and
construed in accordance with, the laws of the State of New York.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will perform only the duties that are specifically set
forth in the Indenture. If an Event of Default has occurred and is continuing,
the Trustee will exercise such rights and powers vested in it under the
Indenture and use the same degree of care and skill in its exercise as a prudent
person would exercise under the circumstances in the conduct of their own
affairs.
The Indenture and provisions of the Trust Indenture Act, which are
incorporated into the Indenture by reference, contain limitations on the rights
of the Trustee, should it become a creditor of Pathnet, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest (as defined) it must eliminate such conflict or resign.
(Sections 601 and 603)
CERTAIN DEFINITIONS
"Accounts Receivable Subsidiary" means any Restricted Subsidiary of Pathnet
that is, directly or indirectly, wholly owned by Pathnet (other than directors'
qualifying shares) and organized for the purpose of and engaged in (i)
purchasing, financing and collecting accounts receivable obligations of
customers of Pathnet or its Restricted Subsidiaries, (ii) the sale or financing
of accounts receivable or interests therein and (iii) other activities directly
related thereto.
"Acquired Indebtedness" means Indebtedness of a Person (a) existing at the
time such Person becomes a Restricted Subsidiary or (b) assumed in connection
with an acquisition of assets from such Person, in each case, other than
Indebtedness incurred in connection with, or in contemplation of, such Person
becoming a Restricted Subsidiary or such acquisition.
"Affiliate" means, with respect to any specified Person, (i) any other
Person directly or indirectly controlling or controlled by, or under direct or
indirect common control with, such specified Person or (ii) any other Person
that owns, directly or indirectly, 10% or more of such specified Person's Voting
Stock or any executive officer or director of any such specified Person or other
Person or, with respect to any natural Person, any other Person in such Person's
immediate family. For the purposes of this definition, "control," when used with
respect to any specified Person, means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. Notwithstanding the
foregoing, no individual shall be deemed to be an Affiliate of a Person solely
by reason of (a) such Person being party to an Incumbent Agreement or (b) such
Person owning an interest in a Restricted Subsidiary pursuant to, or as the
result of, an Incumbent Agreement.
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"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Capital Stock
of any Subsidiary; (ii) all or substantially all of the properties and assets of
Pathnet or any Subsidiary; or (iii) any other properties or assets of Pathnet or
any Subsidiary, other than in the ordinary course of business (it being
understood that the ordinary course of business includes, but is not restricted
to, any transfer or sale of, or the grant of a right to use, an asset to an
Incumbent pursuant to (x) an Incumbent Agreement, (y) applicable law or (z) an
agreement to which such Incumbent is a party which exists on the date of, and is
not entered into in contemplation of, such Incumbent Agreement). For the
purposes of this definition, the term "Asset Sale" shall not include any
transfer of properties or assets (A) that is governed by the provisions of the
Indenture described under "Consolidation, Merger and Sale of Assets," (B) of
Pathnet to any Restricted Subsidiary, or of any Restricted Subsidiary to Pathnet
or any other Restricted Subsidiary in accordance with the terms of the
Indenture, (C) having an aggregate Fair Market Value of less than $2 million in
any given fiscal year, (D) by Pathnet or a Restricted Subsidiary to a Person who
is not an Affiliate of Pathnet in exchange for Telecommunications Assets (or not
less than 66 2/3% of the outstanding Voting Stock of a Person that becomes a
Restricted Subsidiary, the assets of which consist primarily of
Telecommunications Assets) or related telecommunications services where, in the
good faith judgment of the board of directors of Pathnet evidenced by a board
resolution, the Fair Market Value of such Telecommunications Assets (or such
Voting Stock) or services so received is at least equal to the Fair Market Value
of the properties or assets disposed of or, if less, the difference is received
by Pathnet in cash in an amount at least equal to such difference, (E)
constituting Capital Stock of an Unrestricted Subsidiary or other Investment
that was permitted under the "Limitation on Restricted Payments" covenant when
made, (F) constituting accounts receivable of Pathnet or a Restricted Subsidiary
to an Accounts Receivable Subsidiary or in consideration of Fair Market Value
thereof, to Persons that are not Affiliates of Pathnet or any Subsidiary of
Pathnet in the ordinary course of business, including in connection with
financing transactions, (G) in connection with a Sale-Leaseback Transaction
otherwise permitted to be incurred under the "Limitation on Indebtedness"
covenant, (H) to a Permitted Telecommunications Joint Venture if such transfer
of properties or assets is permitted under the definition of "Permitted
Investments," (I) in connection with a Permitted Telecommunications Asset Sale
or (J) to an Unrestricted Subsidiary if permitted under the "Limitation on
Restricted Payments" covenant.
"Attributable Value" means, with respect to any lease at the time of
determination, the present value (discounted at the interest rate implicit in
the lease or, if not known, at Pathnet's incremental borrowing rate) of the
obligations of the lessee of the property subject to such lease for rental
payments during the remaining term of the lease included in such transaction,
including any period for which such lease has been extended or may, at the
option of the lessor, be extended, or until the earliest date on which the
lessee may terminate such lease without penalty or upon payment of penalty (in
which case the rental payments shall include such penalty), after excluding from
such rental payments all amounts required to be paid on account of maintenance
and repairs, insurance, taxes, assessments, water, utilities and similar
charges.
"Average Life" means, as of the date of determination with respect to any
Indebtedness, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years from the date of determination to the date or dates of
each successive scheduled principal payment (including, without limitation, any
sinking fund requirements) of such Indebtedness multiplied by (ii) the amount of
each such principal payment by (b) the sum of all such principal payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, partnership interests, participations, rights in or other equivalents
(however designated and whether voting or non-voting) in equity of such Person,
including, without limitation, all common stock or Preferred Stock,
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and any rights (other than debt securities convertible into capital stock),
warrants or options exchangeable for or convertible into such capital stock,
whether now outstanding or issued after the Issue Date.
"Capitalized Lease Obligation" means, with respect to any Person, any
obligation of such Person under a lease of (or other agreement conveying the
right to use) any property (whether real, personal or mixed) that is required to
be classified and accounted for as a capital lease obligation under GAAP, and,
for the purposes of the Indenture, the amount of such obligation at any date
shall be the capitalized amount thereof at such date, determined in accordance
with GAAP.
"Cash Equivalents" means (a) any evidence of Indebtedness with a maturity
of 180 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (b) certificates of deposit or acceptances with a maturity of 180 days
or less of any financial institution that is a member of the Federal Reserve
System, in each case having combined capital and surplus and undivided profits
of not less than $500 million; (c) commercial paper with a maturity of 180 days
or less issued by a corporation that is not an Affiliate of Pathnet and is
organized under the laws of any state of the United States or the District of
Columbia and rated at least A-1 by S&P or at least P-l by Moody's; and (d) money
market mutual funds that invest substantially all of their assets in securities
of the type described in the preceding clauses.
"Change of Control" means any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than Permitted Holders, is or becomes
the "beneficial owner" (as defined in Rules 13d-3 and l3d-5 under the
Exchange Act, except that a Person shall be deemed to have "beneficial
ownership" of all securities that such Person has the right to acquire,
whether such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 50% of the total outstanding
Voting Stock of Pathnet;
(b) Pathnet consolidates with, or merges with or into, another Person
or conveys, transfers, leases or otherwise disposes of all or substantially
all of its assets to any Person, or any Person consolidates with, or merges
with or into, Pathnet, in any such event pursuant to a transaction in which
the outstanding Voting Stock of Pathnet is converted into or exchanged for
cash, securities or other property, other than any such transaction
(i) where the outstanding Voting Stock of Pathnet is not converted
or exchanged at all (except to the extent necessary to reflect a change
in the jurisdiction of incorporation of Pathnet) or is converted into or
exchanged for (A) Voting Stock (other than Redeemable Capital Stock) of
the surviving or transferee corporation or (B) cash, securities and
other property (other than Capital Stock of the Surviving Entity) in an
amount that could be paid by Pathnet as a Restricted Payment as
described under the "Limitation on Restricted Payments" covenant; and
(ii) immediately after such transaction, no "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act),
other than Permitted Holders, is the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall
be deemed to have "beneficial ownership" of all securities that such
Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly,
of more than 50% of the total outstanding Voting Stock of the surviving
or transferee corporation;
(c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of Pathnet
(together with any new directors whose election to
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such Board of Directors, or whose nomination for election by the
stockholders of Pathnet, was approved by a vote of 66 2/3% of the directors
then still in office who were either directors at the beginning of such
period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors of Pathnet then in office; or
(d) Pathnet is liquidated or dissolved or adopts a plan of liquidation
or dissolution other than in a transaction which complies with the
provisions described under "Consolidation, Merger and Sale of Assets."
"Consolidated Adjusted Net Income" means, for any period, the consolidated
net income (or loss) of Pathnet and all Restricted Subsidiaries for such period
as determined in accordance with GAAP, adjusted by excluding, without
duplication,
(a) any net after-tax extraordinary gains or losses (less all fees and
expenses relating thereto),
(b) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to asset dispositions other than in the
ordinary course of business,
(c) the portion of net income (or loss) of any Person (other than
Pathnet or a Restricted Subsidiary), including Unrestricted Subsidiaries,
in which Pathnet or any Restricted Subsidiary has an ownership interest,
except to the extent of the amount of dividends or other distributions
actually paid to Pathnet or any Restricted Subsidiary in cash dividends or
distributions during such period,
(d) the net income (or loss) of any Person combined with Pathnet or
any Restricted Subsidiary on a "pooling of interests" basis attributable to
any period prior to the date of combination,
(e) the net income of any Restricted Subsidiary to the extent that the
declaration or payment of dividends or similar distributions by such
Restricted Subsidiary is not at the date of determination permitted,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to such Restricted Subsidiary or its
stockholders (except, for purposes of determining compliance with the
"Limitation on Indebtedness" covenant, any restriction permitted under
clause (vii) or (viii) of "Limitations on Dividend and other Payment
Restrictions Affecting Restricted Subsidiaries"), and
(f) any net income (or loss) from any Restricted Subsidiary that was
an Unrestricted Subsidiary at any time during such period other than any
amounts actually received from such Restricted Subsidiary.
"Consolidated Indebtedness" means, with respect to any period, the
aggregate amount of Indebtedness of Pathnet and its Restricted Subsidiaries
outstanding at the date of determination as determined on a consolidated basis
in accordance with GAAP.
"Consolidated Indebtedness to Consolidated Operating Cash Flow Ratio"
means, at any date of determination, the ratio of (i) Consolidated Indebtedness
to (ii) Consolidated Operating Cash Flow for the two preceding fiscal quarters
for which financial information is available immediately prior to the date of
determination multiplied by two; provided that any Indebtedness incurred or
retired by Pathnet or any of its Restricted Subsidiaries during the fiscal
quarter in which the transaction date occurs shall be calculated as if such
Indebtedness were so incurred or retired on the first day of the fiscal quarter
in which the date of determination occurs (provided that, in making any such
computation, the aggregate amount of Indebtedness under any revolving credit or
similar facility will be deemed to include an amount of funds equal to the
average daily balance of such Indebtedness
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during such two fiscal quarter period); and provided further that (x) if the
transaction giving rise to the need to calculate the Consolidated Indebtedness
to Consolidated Operating Cash Flow Ratio would have the effect of increasing or
decreasing Consolidated Indebtedness or Consolidated Operating Cash Flow in the
future, Consolidated Indebtedness and Consolidated Operating Cash Flow shall be
calculated on a pro forma basis as if such transaction had occurred on the first
day of such two fiscal quarter period preceding the date of determination; (y)
if during such two fiscal quarter period, Pathnet or any of its Restricted
Subsidiaries shall have engaged in any Asset Sale in respect of any company,
entity or business, Consolidated Operating Cash Flow for such period shall be
reduced by an amount equal to the Consolidated Operating Cash Flow (if
positive), or increased by an amount equal to the Consolidated Operating Cash
Flow (if negative), directly attributable to Pathnet, entity or business that is
the subject of such Asset Sale and any related retirement of Indebtedness as if
such Asset Sale and any related retirement of Indebtedness had occurred on the
first day of such period; or (z) if during such two fiscal quarter period
Pathnet or any of its Restricted Subsidiaries shall have acquired any company,
entity or business, Consolidated Operating Cash Flow shall be calculated on a
pro forma basis as if such acquisition and related financing had occurred on the
first day of such period.
"Consolidated Interest Expense" means, for any period, without duplication,
the sum of (a) the interest expense of Pathnet and its Restricted Subsidiaries
for such period, including, without limitation, (i) amortization of debt
discount, (ii) the net cost of Interest Rate Agreements (including amortization
of discounts), (iii) the interest portion of any deferred payment obligation,
(iv) accrued interest, (v) the consolidated amount of any interest capitalized
by Pathnet and (vi) amortization of debt issuance costs, plus (b) the interest
component of Capitalized Lease Obligations of Pathnet and its Restricted
Subsidiaries paid, accrued and/or scheduled to be paid or accrued during such
period; excluding, however, any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Consolidated Adjusted Net Income pursuant to clause (e) of the
definition thereof (but only in the same proportion as the net income of such
Restricted Subsidiary is excluded from the calculation of Consolidated Adjusted
Net Income pursuant to clause (e) of the definition thereof); provided that in
making such computation, (x) the Consolidated Interest Expense attributable to
interest on any Indebtedness computed on a pro forma basis and (A) bearing a
floating interest rate shall be computed as if the rate in effect on the date of
computation had been the applicable rate for the entire period and (B) which was
not outstanding during the period for which the computation is being made but
which bears, at the option of Pathnet, a fixed or floating rate of interest,
shall be computed by applying, at the option of Pathnet, either the fixed or
floating rate, (y) the Consolidated Interest Expense attributable to interest on
any Indebtedness under a revolving credit facility computed on a pro forma basis
shall be computed based upon the average daily balance of such Indebtedness
during the applicable period and (z) the interest rate with respect to any
Indebtedness covered by an Interest Rate Agreement shall be deemed to be the
effective interest rate with respect to such Indebtedness after taking into
account such Interest Rate Agreement.
"Consolidated Operating Cash Flow" means, with respect to any period, the
Consolidated Adjusted Net Income for such period (a) increased by (to the extent
deducted in computing Consolidated Adjusted Net Income) the sum of (i) the
Consolidated Tax Expense for such period (other than taxes attributable to
extraordinary, unusual or non-recurring gains or losses); (ii) Consolidated
Interest Expense for such period; (iii) depreciation of Pathnet and the
Restricted Subsidiaries for such period, determined on a consolidated basis in
accordance with GAAP; (iv) amortization of Pathnet and its Restricted
Subsidiaries for such period, determined on a consolidated basis in accordance
with GAAP; and (v) any other non-cash charges that were deducted in computing
Consolidated Adjusted Net Income (excluding any non-cash charge which requires
an accrual or reserve for cash charges for any future period) of Pathnet and its
Restricted Subsidiaries
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for such period in accordance with GAAP and (b) decreased by any non-cash gains
that were included in computing Consolidated Adjusted Net Income.
"Consolidated Tax Expense" means, for any period, the provision for U.S.
federal, state, provincial, local and foreign income taxes of Pathnet and all
Restricted Subsidiaries for such period as determined on a consolidated basis in
accordance with GAAP.
"Credit Facilities" means, with respect to Pathnet or its Restricted
Subsidiaries, one or more debt facilities or commercial paper facilities with
banks or other institutional lenders providing for revolving credit loans, term
loans, receivables financing (including through the sale of receivables to such
lenders or to special purpose entities formed to borrow from such lenders
against such receivables) or letters of credit, in each case, as amended,
restated, modified, renewed, refunded, replaced or refinanced in whole or in
part from time to time.
"Currency Agreement" means any spot or forward foreign exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by Pathnet or any of its Restricted Subsidiaries.
"Debt Securities" means any debt securities (including any Guarantee of
such securities) issued by Pathnet and/or any Restricted Subsidiary in
connection with a public offering (whether or not underwritten) or a private
placement (provided that such private placement is underwritten for resale
pursuant to Rule 144A, Regulation S or otherwise under the Securities Act or
sold on an agency basis by a broker-dealer or one of its Affiliates to 10 or
more non-affiliated beneficial holders); it being understood that the term "Debt
Securities" shall not include any evidence of indebtedness under the Vendor
Credit Facility, any financing by a Restricted Subsidiary similar to the Vendor
Credit Facility or any Credit Facility or other commercial bank borrowings, any
vendor equipment financing facility or any similar financings, recourse
transfers of financial assets, capital leases or other types of borrowings
incurred in a manner not customarily viewed as a "securities offering."
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors of Pathnet is
required to deliver a resolution thereof under the Indenture, a member of the
board of directors of Pathnet who does not have any material direct or indirect
financial interest in or with respect to such transaction or series of
transactions. For purposes of this definition, no Person shall be deemed not to
be a Disinterested Director solely because such Person or an Affiliate of such
Person holds or beneficially owns Capital Stock of Pathnet or any of its
Restricted Subsidiaries.
"Escrow Account" means an account established with the Trustee in its name
as Trustee pursuant to the terms of the Pledge Agreement for the deposit of the
Pledged Securities purchased by Pathnet with a portion of the net proceeds from
the initial offering of the Notes made pursuant to an Offering Memorandum of
April 1, 1998.
"Event of Default" has the meaning set forth under "Events of Defaults"
herein.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be obtained in an arm's length transaction between an informed
and willing seller under no compulsion to sell and an informed and willing buyer
under no compulsion to buy. Unless otherwise specified in the Indenture, Fair
Market Value shall be determined by the Board of Directors of Pathnet acting in
good faith and as of the date on which such determination is made.
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"GAAP" means generally accepted accounting principles in the United States
that are in effect on the date of the Indenture.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which obligations
or guarantees the full faith and credit of the United States of America is
pledged which, in any case, are not callable or redeemable at the option of the
issuer of the issuer thereof.
"Guarantee" or "guarantee" means, as applied to any obligation, (a) a
guarantee (other than by endorsement of negotiable instruments for collection in
the ordinary course of business), direct or indirect, in any manner, of any part
or all of such obligation and (b) an agreement, direct or indirect, contingent
or otherwise, the practical effect of which is to assure in any way the payment
or performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. When used as a verb,
"Guarantee" or "guarantee" shall have a corresponding meaning.
"Incumbent" means any railroad, utility, governmental entity, pipeline or
other licensed owner (which ownership is determined immediately prior to any
transaction with Pathnet or a Restricted Subsidiary) of Telecommunications
Assets to be used in Pathnet's network pursuant to an Incumbent Agreement (and
any subsidiary or affiliate of such Person that is a party to an Incumbent
Agreement for the sole purpose of receiving payments from Pathnet or a
Restricted Subsidiary pursuant to such agreement).
"Incumbent Agreement" means an agreement between an Incumbent and Pathnet
or a Restricted Subsidiary pursuant to which, among other things, such Incumbent
receives a payment equal to a percentage of Pathnet's or such Restricted
Subsidiary's revenues, if any, attributable, in whole or in part, to
Telecommunications Assets transferred or leased, or with respect to which a
right of use has been granted, by such Incumbent to Pathnet or such Restricted
Subsidiary and upon or with respect to which Pathnet or such Restricted
Subsidiary has constructed or intends to construct a portion of its network.
"Incur" or "incur" means, with respect to any Indebtedness, to incur,
create, issue, assume, guarantee or otherwise become directly or indirectly
liable or responsible for the payment of, or otherwise incur, such Indebtedness,
contingently or otherwise; provided that neither the accrual of interest nor the
accretion of original issue discount shall be considered an incurrence of
Indebtedness. With respect to Indebtedness to be borrowed under a binding
commitment previously entered into that provides for Pathnet to Incur
Indebtedness on a revolving basis, Pathnet shall be deemed to have Incurred the
greater of (a) the Indebtedness actually Incurred or (b) all or a portion of the
amount of such unborrowed commitment that Pathnet shall have so designated to be
Incurred in an Officer's Certificate delivered to the Trustee (in which case
Pathnet shall not be deemed to incur such unborrowed amount at the time or times
it is actually borrowed).
"Indebtedness" means, with respect to any Person at any date of
determination, without duplication:
(a) all liabilities, contingent or otherwise, of such Person: (i) for
borrowed money (including overdrafts), (ii) in connection with any letters
of credit and acceptances issued under letter of credit facilities,
acceptance facilities or other similar facilities (including reimbursement
obligations with respect thereto), (iii) evidenced by bonds, notes,
debentures or other similar instruments, (iv) for the deferred and unpaid
purchase price of property or services or created or arising under any
conditional sale or other title retention agreement with respect to
property acquired by such Person or (v) for Capitalized Lease Obligations
(including any Sale-Leaseback Transaction);
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(b) all obligations of such Person under or in respect of Interest
Rate Agreements and Currency Agreements;
(c) all Indebtedness referred to in (but not excluded from) the
preceding clauses of other Persons and all dividends of other Persons, the
payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien upon or with respect to any property (including, without
limitation, accounts and contract rights) owned by such Person, whether or
not such Person has assumed or become liable for the payment of such
Indebtedness (the amount of such obligation being deemed to be the lesser
of (i) the Fair Market Value of such property or asset and (ii) the amount
of such obligation so secured);
(d) all guarantees by such Person of Indebtedness referred to in this
definition of any other Person; and
(e) all Redeemable Stock of such Person valued at the greater of its
voluntary or involuntary maximum fixed repurchase price, plus accrued and
unpaid dividends.
The amount of Indebtedness of any Person at any date will be the
outstanding balance at such date (or, in the case of a revolving credit or other
similar facility, the total amount of funds outstanding and/or designated as
incurred and certified by an officer of Pathnet to have been Incurred on such
date pursuant to clause (b) of the last sentence of the definition of "Incur")
of all unconditional obligations as described above and, with respect to
contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation; provided (i) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
equals the face amount of such Indebtedness less the remaining unamortized
portion of the original issue discount of such Indebtedness at such time as
determined in conformity with GAAP and (ii) that Indebtedness shall not include
any liability for U.S. federal, state, local or other taxes owed by such Person.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the Fair Market Value of such Redeemable Capital
Stock, such Fair Market Value will be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock. Notwithstanding the
foregoing, trade accounts and accrued liabilities arising in the ordinary course
of business will not be considered Indebtedness for purposes of this definition.
"Initial System" means all property, rights and assets necessary to own and
operate an Incumbent's base microwave network system and shall include, without
limitation, the initial microwave radio and protect microwave radio, software,
antennae, waveguide, multiplexors, towers, shelters, licenses (including Federal
Communications Commission and Federal Aviation Administration licenses),
permits, leases, rights-of-way, easements and other related assets. An Initial
System shall not include any additional microwave radios and related equipment
installed as part of an expansion of an Initial System.
"Interest Rate Agreement" means any interest rate protection agreements and
other types of interest rate hedging agreements or arrangements (including,
without limitation, interest rate swaps, caps, floors, collars and other similar
agreements).
"Invested Capital" means the sum of (a) 75% of the aggregate net cash
proceeds received by Pathnet from the issuance of (or capital contributions with
respect to) any Qualified Capital Stock subsequent to the Issue Date, other than
the issuance of Qualified Capital Stock to a Restricted Subsidiary of Pathnet,
and (b) 75% of the aggregate net cash proceeds from sales of Redeemable
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Capital Stock of Pathnet or Indebtedness of Pathnet convertible into Qualified
Capital Stock of Pathnet, in each case upon such redemption or conversion
thereof into Qualified Capital Stock.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan or other extension of credit or capital contribution to (by means
of any transfer of cash or other property to others or any payment for property
or services for the account or use of others), or any purchase, acquisition or
ownership by such Person of any Capital Stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued or owned by, any other Person and
all other items that would be classified as investments on a balance sheet
prepared in accordance with GAAP. In addition, the portion (proportionate to
Pathnet's equity interest in such Subsidiary) of the Fair Market Value of the
net assets of any Subsidiary at the time that such Subsidiary is designated an
Unrestricted Subsidiary shall be deemed to be an "Investment" made by Pathnet in
such Unrestricted Subsidiary at such time and the portion (proportionate to
Pathnet's equity interest in such Subsidiary) of the Fair Market Value of the
net assets of any Subsidiary at the time that such Subsidiary is designated a
Restricted Subsidiary shall be considered a reduction in outstanding
Investments. "Investments" shall exclude extensions of trade credit on
commercially reasonable terms in accordance with normal trade practices.
"Issue Date" means the date of the Indenture.
"Lien" means any mortgage, charge, pledge, lien (statutory or otherwise),
privilege, security interest, hypothecation, assignment for security, claim, or
preference or priority or other encumbrance upon or with respect to any property
of any kind, real or personal, movable or immovable, now owned or hereafter
acquired. A Person shall be deemed to own subject to a Lien any property which
such Person has acquired or holds subject to the interest of a vendor or lessor
under any conditional sale agreement, capital lease or other title retention
agreement.
"Maturity" means, with respect to any Note, the date on which any principal
of such Note becomes due and payable as provided therein or in the Indenture,
whether at the Stated Maturity with respect to such principal or by declaration
of acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means: (a) with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents, including payments in respect
of deferred payment obligations when received in the form of, or stock or other
assets when disposed of for, cash or Cash Equivalents (except to the extent that
such obligations are financed or sold with recourse to Pathnet or any Restricted
Subsidiary), net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of legal counsel and investment banks) related to
such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset
Sale, (iii) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties which are the subject of
such Asset Sale, (iv) amounts required to be paid to any Person (other than
Pathnet or any Restricted Subsidiary) owning a beneficial interest in the assets
subject to the Asset Sale and (v) appropriate amounts to be provided by Pathnet
or any Restricted Subsidiary, as the case may be, as a reserve required in
accordance with GAAP against any liabilities associated with such Asset Sale and
retained by Pathnet or any Restricted Subsidiary, as the case may be, after such
Asset Sale, including, without limitation, pension and other post-employment
benefit liabilities, liabilities related to environmental matters and
liabilities under any indemnification obligations associated with such Asset
Sale, all as reflected in an officers' certificate delivered to the Trustee; and
(b) with respect to any issuance or sale of Capital Stock or options, warrants
or rights to purchase Capital Stock, or debt securities or Redeemable Capital
Stock that has been converted into or exchanged for Qualified Capital Stock, as
referred to under the "Limitation on Restricted Payments" covenant, the proceeds
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of such issuance or sale in the form of cash or Cash Equivalents, including
payments in respect of deferred payment obligations when received in the form
of, or stock or other assets when disposed for, cash or Cash Equivalents (except
to the extent that such obligations are financed or sold with recourse to
Pathnet or any Subsidiary of Pathnet), net of fees, commissions and expenses
actually incurred in connection with such issuance or sale and net of taxes paid
or payable as a result thereof.
"Permitted Holder" means Spectrum Equity Investors, L.P., New Enterprise
Associates VI, Limited Partnership, Onset Enterprise Associates II, L.P., FBR
Technology Venture Partners L.P., Toronto Dominion Capital (USA), Inc. and
Grotech Partners IV, L.P., any general partner of any such Person on the Issue
Date, any Person controlled by any such general partner, David Schaeffer or
Richard A. Jalkut.
"Permitted Indebtedness" means:
(a) Indebtedness of Pathnet pursuant to the Notes or of any Restricted
Subsidiary pursuant to a Guarantee of the Notes;
(b) Indebtedness of Pathnet or any Restricted Subsidiary outstanding
on the Issue Date;
(c) Indebtedness of Pathnet owing to any Restricted Subsidiary (but
only so long as such Indebtedness is held by such Restricted Subsidiary);
provided that any Indebtedness of Pathnet owing to any such Restricted
Subsidiary is subordinated in right of payment from and after such time as
the Notes shall become due and payable (whether at Stated Maturity, by
acceleration or otherwise) to the payment and performance of Pathnet's
obligations under the Notes; and provided further that any transaction
pursuant to which any Restricted Subsidiary to which such Indebtedness is
owed ceases to be a Restricted Subsidiary shall be deemed to be an
incurrence of Indebtedness by Pathnet that is not permitted by this clause
(c);
(d) Indebtedness of any Restricted Subsidiary to Pathnet or of any
Restricted Subsidiary to another Restricted Subsidiary;
(e) Indebtedness of Pathnet or any Restricted Subsidiary in respect of
performance, surety or appeal bonds or under letter of credit facilities
provided in the ordinary course of business and, in the case of letters of
credit, under which recourse to Pathnet is limited to the cash securing
such letters of credit;
(f) Indebtedness of Pathnet under Currency Agreements and Interest
Rate Agreements entered into in the ordinary course of business; provided
that such agreements are designed to protect Pathnet or any Restricted
Subsidiary against, or manage exposure to, fluctuations in currency
exchange rates and interest rates, respectively, and that such agreements
do not increase the Indebtedness of the obligor outstanding at any time
other than as a result of fluctuations in foreign currency exchange rates
or interest rates or by reason of fees, indemnities and compensation
payable thereunder;
(g) Telecommunications Indebtedness and any Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund
such Telecommunications Indebtedness in an amount not to exceed the amount
so refinanced or refunded (plus premiums, accrued interest, and reasonable
fees and expenses);
(h) Indebtedness of Pathnet or any Restricted Subsidiary consisting of
guarantees, indemnities or obligations in connection with
Telecommunications Indebtedness, Indebtedness permitted under clause (j) or
(m) of the "Permitted Indebtedness" definition or in respect of purchase
price adjustments in connection with the acquisition of or disposition of
assets, including, without limitation, shares of Capital Stock;
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(i) Indebtedness of Pathnet not to exceed, at any time outstanding,
2.0 times the Net Cash Proceeds from the issuance and sale after the Issue
Date, other than to a Restricted Subsidiary, of Qualified Capital Stock of
Pathnet, to the extent such Net Cash Proceeds have not been used to make
Restricted Payments pursuant to clause (a)(3)(B) or clauses (b)(ii) and
(iii) of the "Limitation on Restricted Payments" covenant to make a
Restricted Payment or to make any Permitted Investments under clause (h) of
the definition of Permitted Investments; provided that such Indebtedness
does not mature prior to the Stated Maturity of the Notes and has an
Average Life longer than the Notes;
(j) Indebtedness of Pathnet or any Restricted Subsidiary under one or
more Credit Facilities; provided that the aggregate principal amount of any
Indebtedness incurred pursuant to this clause (j) (including any amounts
refinanced or refunded under this clause (j)) does not exceed at any time
outstanding the greater of (x) 80% of eligible accounts receivable of
Pathnet as of the last fiscal quarter for which financial statements are
prepared or (y) $50.0 million; and any Indebtedness issued in exchange for,
or the net proceeds of which are used to refinance or refund, Indebtedness
issued under this clause (j) in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, and reasonable
fees and expenses);
(k) Indebtedness of Pathnet or a Restricted Subsidiary issued in
exchange for, or the net proceeds of which are used to refinance or refund,
then outstanding Indebtedness of Pathnet or a Restricted Subsidiary,
incurred under the ratio test set forth in clause (i) or (ii) of the
"Limitation on Indebtedness" covenant or under clauses (b) through (f),
(h), (i) and (m) of this definition of "Permitted Indebtedness," and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, and reasonable fees and
expenses); provided that such new Indebtedness shall only be permitted
under this clause (k) if (A) in case the Notes are refinanced in part, or
the Indebtedness to be refinanced ranks equally with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new indebtedness is issued or remains outstanding,
is expressly made to rank equally with, or subordinate in right of payment
to, the remaining Notes, (B) in case the Indebtedness to be refinanced is
subordinated in right of payment to the Notes, such new Indebtedness, by
its terms or by the terms of any agreement or instrument pursuant to which
such new Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the Notes at least to the same extent
that the Indebtedness to be refinanced is subordinated to the Notes and (C)
such new Indebtedness, determined as of the date of incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the
Indebtedness being refinanced or refunded; provided further that no
Indebtedness incurred under this clause (k) in exchange for, or the
proceeds of which refinance or refund any Indebtedness incurred under the
ratio test set forth under clause (i) or (ii) of the "Limitation on
Indebtedness" covenant will mature prior to the Stated Maturity of the
Notes or have an Average Life shorter than the Notes; provided further that
in no event may Indebtedness of Pathnet be refinanced by means of any
Indebtedness of any Restricted Subsidiary issued pursuant to this clause
(k);
(l) Indebtedness arising by reason of the recharacterization of a sale
of accounts receivable to an Accounts Receivable Subsidiary; and
(m) Indebtedness of Pathnet or any Restricted Subsidiary in addition
to that permitted to be incurred pursuant to clauses (a) through (l) above
in an aggregate principal amount not in excess of $30.0 million at any time
outstanding.
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"Permitted Investment" means any of the following:
(a) Investments in Cash Equivalents; provided that the term "with a
maturity of 180 days or less" in clauses (a), (b) and (c) of the definition
of "Cash Equivalents" is changed to "with a maturity of one year or less"
for the purposes of this definition of "Permitted Investments" only;
(b) Investments in Pathnet or any Restricted Subsidiary;
(c) Investments by Pathnet or any Restricted Subsidiary in another
Person if, as a result of such Investment, (i) such other Person becomes a
Restricted Subsidiary or (ii) such other Person is merged or consolidated
with or into, or transfers or conveys all or substantially all of its
assets to, Pathnet or a Restricted Subsidiary;
(d) Investments in the form of intercompany Indebtedness to the extent
permitted under clauses (c) and (d) of the definition of "Permitted
Indebtedness;"
(e) Investments in existence on the Issue Date;
(f) Investments in the Pledged Securities to the extent required by
the Pledge Agreement;
(g) Investments in an amount not to exceed $1.0 million at any one
time outstanding;
(h) Investments in an aggregate amount not to exceed the sum of (1)
Invested Capital, (2) the Fair Market Value of Qualified Capital Stock of
Pathnet, Redeemable Capital Stock of Pathnet, or Indebtedness of Pathnet
convertible into Qualified Capital Stock of Pathnet, in the latter two
cases upon such redemption or conversion thereof into Qualified Capital
Stock of Pathnet, issued by Pathnet or any Restricted Subsidiary of Pathnet
as consideration for any such Investments made pursuant to this clause (h),
and (3) in the case of the disposition or repayment of any Investment made
pursuant to this clause (h) after the Issue Date (including by
redesignation of an Unrestricted Subsidiary of Pathnet to a Restricted
Subsidiary of Pathnet), an amount equal to the lesser of the return of
capital with respect to such Investment and the initial amount of such
Investment, in either case, less the cost of the disposition of such
Investment; provided, however, that the amount of any Permitted Investments
under this clause (h) shall be excluded from the computation of the amount
of any Restricted Payment under the "Limitation on Restricted Payments"
covenant;
(i) Investments in trade receivables, prepaid expenses, negotiable
instruments held for collection and lease, utility and worker's
compensation, performance and other similar deposits or escrow;
(j) Loans, advances and extensions of credit to employees made in the
ordinary course of business of Pathnet not in excess of $500,000 in any
fiscal year;
(k) Bonds, notes, debentures or other securities received as a result
of Asset Sales permitted under the covenant described in "Certain Covenants
Limitation on Asset Sales";
(l) Endorsements for collection or deposit in the ordinary course of
business by such Person of bank drafts and similar negotiable instruments
of such other person received as payment for ordinary course of business
trade receivables;
(m) Investments deemed to have been made as a result of the
acquisition of a Person that at the time of such acquisition held
instruments constituting Investments that were not acquired in
contemplation of, or in connection with, the acquisition of such Person;
(n) Investments in or acquisitions of Capital Stock, indebtedness,
securities or other property of Persons (other than Affiliates of Pathnet)
received by Pathnet or any of its Restricted Subsidiaries in the bankruptcy
or reorganization of or by such Person or any exchange
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of such Investment with the issuer thereof or taken in settlement of or
other resolution of claim or disputes, and, in each case, extensions,
modifications and renewals thereof;
(o) Investments in any Person to which Telecommunications Assets used
in an Initial System have been transferred and which person has provided to
Pathnet or a Restricted Subsidiary the right to use such assets pursuant to
an Incumbent Agreement; provided that, in the good faith determination of
the Board of Directors, the present value of the future payments expected
to be received by Pathnet in respect of any such Investment plus the Fair
Market Value of any capital stock or other securities received in
connection therewith is at least equal to the Fair Market Value of such
Investment; and
(p) Investments in one or more Permitted Telecommunications Joint
Ventures; provided that the total original cost of all such Permitted
Telecommunications Joint Ventures plus the cost or Fair Market Value, as
applicable, of all additions thereto less the sum of all amounts received
as returns thereon shall not exceed $20.0 million.
"Permitted Liens" means:
(a) Liens existing on the Issue Date;
(b) Liens on any property or assets of a Restricted Subsidiary granted
in favor of Pathnet or any Restricted Subsidiary;
(c) Liens on any property or assets of Pathnet or any Restricted
Subsidiary securing the Notes or any Guarantees thereof;
(d) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease permitted by the Indenture;
(e) Liens securing Indebtedness incurred under clauses (g), (j) or (m)
of the definition of "Permitted Indebtedness";
(f) statutory Liens of landlords and carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen or other like Liens arising in
the ordinary course of business of Pathnet or any Restricted Subsidiary and
with respect to amounts not yet delinquent or being contested in good faith
by appropriate proceeding, if a reserve or other appropriate provision, if
any, as required in conformity with GAAP shall have been made therefor;
(g) Liens for taxes, assessments, government charges or claims that
are being contested in good faith by appropriate proceedings promptly
instituted and diligently conducted and if a reserve or other appropriate
provision, if any, as shall be required in conformity with GAAP shall have
been made therefor;
(h) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance bonds, escrows and other obligations of a
like nature incurred in the ordinary course of business (other than
contracts for the payment of money);
(i) easements, rights-of-way, restrictions and other similar charges
or encumbrances not interfering in any material respect with the business
of Pathnet or any Restricted Subsidiary incurred in the ordinary course of
business;
(j) Liens arising by reason of any judgment, decree or order of any
court so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such
judgment, decree or order shall not have been finally terminated or the
period within which such proceedings may be initiated shall not have
expired;
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(k) Liens securing Acquired Indebtedness created prior to (and not in
connection with or in contemplation of) the incurrence of such Indebtedness
by Pathnet or any Restricted Subsidiary; provided that such Lien does not
extend to any property or assets of Pathnet or any Restricted Subsidiary
other than the assets acquired in connection with the incurrence of such
Acquired Indebtedness;
(l) Liens securing obligations of Pathnet under Interest Rate
Agreements or Currency Agreements permitted to be incurred under clause (f)
of the definition of "Permitted Indebtedness" or any collateral for the
Indebtedness to which such Interest Rate Agreements or Currency Agreements
relate;
(m) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security;
(n) Liens securing reimbursement obligations of Pathnet or any
Restricted Subsidiary with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the
products and proceeds thereof;
(o) Liens arising from purchase money mortgages and purchase money
security interests; provided that (i) the related Indebtedness shall not be
secured by any property or assets of Pathnet or of any Restricted
Subsidiary other than the property and assets so acquired and (ii) the Lien
securing such Indebtedness shall be created within 60 days of such
acquisition;
(p) Liens securing the Escrow Account, the Pledged Securities and the
proceeds thereof and the security interest created by the Pledge Agreement;
(q) any extension, renewal or replacement, in whole or in part, of any
Lien described in the foregoing clauses (a) through (o); provided that any
such extension, renewal or replacement shall be no more restrictive in any
material respect than the Lien so extended, renewed or replaced and shall
not extend to any additional property or assets;
(r) Liens with respect to the equipment and related assets of Pathnet
installed on its network in favor of Persons that have licensed, leased,
transferred or granted to Pathnet or any Restricted Subsidiary a right to
use Telecommunications Assets or financed the purchase of
Telecommunications Assets or securing the obligations of Pathnet or such
Restricted Subsidiary under an Incumbent Agreement; provided that such
Liens will (1) be created on terms that Pathnet reasonably believes to be
no less favorable to Pathnet than Liens granted under clause (e) of this
definition and (2) not secure any Indebtedness in excess of the Fair Market
Value of the equipment and assets so secured;
(s) Liens relating to revenues of Pathnet or any Restricted Subsidiary
arising as a result of obligations under an Incumbent Agreement; and
(t) Liens on the property or assets or Capital Stock of Accounts
Receivable Subsidiaries and Liens arising out of any sale of Accounts
Receivable in the ordinary course of business (including in connection with
a financing transaction) to or by an Accounts Receivable Subsidiary or to
Persons that are not Affiliates of Pathnet.
"Permitted Telecommunications Asset Sale" means any transfer, conveyance,
sale, lease or other disposition of a capital asset that is a Telecommunications
Asset, the proceeds of which are treated as revenues (including deferred
revenues) by Pathnet in accordance with GAAP.
"Permitted Telecommunications Joint Venture" means a corporation,
partnership or other entity engaged in one or more Telecommunications Businesses
in which Pathnet owns, directly or indirectly, an equity interest.
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"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust, business
trust, unincorporated organization or government or any agency or political
subdivision thereof.
"Pledge Agreement" means the Pledge Agreement dated as of the Issue Date,
by and between the Trustee and Pathnet, governing the disbursement of funds from
the Escrow Account.
"Pledged Securities" means the securities purchased by Pathnet with a
portion of the net proceeds from the initial offering of the Notes made pursuant
to an Offering Memorandum of April 1, 1998, which shall consist of Government
Securities, to be deposited in the Escrow Account.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations, rights or other equivalents (however designated,
whether voting or non-voting) of such Person's preferred or preference stock,
whether now outstanding or issued after the Issue Date, including, without
limitation, all series and classes of such preferred or preference stock of such
Person.
"Public Equity Offering" means an offer and sale of Common Stock (which is
Qualified Capital Stock) of Pathnet pursuant to a registration statement that
has been declared effective by the Commission pursuant to the Securities Act
(other than a registration statement on Form S-8 or otherwise relating to equity
securities issuable under any employee benefit plan of Pathnet) and resulting in
Net Cash Proceeds to Pathnet of not less than $45 million.
"Qualified Capital Stock" means, with respect to any Person, any and all
Capital Stock of such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any class or series of Capital Stock that,
either by its terms, by the terms of any security into which it is convertible
or exchangeable or by contract or otherwise, is or, upon the happening of an
event or passage of time would be, required to be redeemed prior to the final
Stated Maturity of the Notes or is redeemable at the option of the holder
thereof at any time prior to such final Stated Maturity, or is convertible into
or exchangeable for debt securities at any time prior to such final Stated
Maturity; provided that any Capital Stock that would not otherwise constitute
Redeemable Capital Stock but for provisions giving holders thereof the right to
require such Person to repurchase or redeem such Capital Stock upon the
occurrence of an "asset sale" or "change of control" occurring prior to the
Stated Maturity of the Notes shall not constitute Redeemable Capital Stock if
the "asset sale" or "change of control" provisions applicable to such Capital
Stock are no more favorable in any material respect to holders of such Capital
Stock than the provisions contained in the "Limitation on Asset Sales" and
"Purchase of Notes upon a Change of Control" covenants are to holders of the
Notes, and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such Capital Stock pursuant to any such provision prior
to Pathnet's repurchase of such Notes as are required to be repurchased pursuant
to the "Limitation on Asset Sales" and "Purchase of Notes upon a Change of
Control" covenants.
"Restricted Subsidiary" means any Subsidiary of Pathnet other than an
Unrestricted Subsidiary.
"S&P" means Standard and Poor's Ratings Services, a division of
McGraw-Hill, Inc., and its successors.
"Sale-Leaseback Transaction" means any direct or indirect arrangement, or
series of related arrangements, with any Person (other than Pathnet or a
Restricted Subsidiary) or to which any Person (other than Pathnet or a
Restricted Subsidiary) is a party, providing for the leasing to Pathnet or to a
Restricted Subsidiary of any property for an aggregate term exceeding three
years, whether owned by Pathnet or by any Subsidiary of Pathnet at the Issue
Date or later acquired, which has been or is to be sold or transferred by
Pathnet or such Restricted Subsidiary to such Person or to any other Person from
whom funds have been or are to be advanced by such Person on the security of
such property; provided that the transfer by Pathnet or any Restricted
Subsidiary of Telecommunica-
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tions Assets to, and the leasing by Pathnet or any Restricted Subsidiary of such
assets from, a Permitted Telecommunications Joint Venture shall not constitute a
Sale-Leaseback Transaction.
"Significant Subsidiary" means, at any date of determination, any
Restricted Subsidiary that, together with its Subsidiaries, (i) for the most
recent fiscal year of Pathnet, accounted for more than 10% of the consolidated
revenues of Pathnet and its Restricted Subsidiaries, (ii) as of the end of such
fiscal year, was the owner of more than 10% of the consolidated assets of
Pathnet and its Restricted Subsidiaries, or (iii) owns one or more FCC licenses
the aggregate cost or Fair Market Value of which represents 5% or more of the
net asset value of Pathnet and its Restricted Subsidiaries on a consolidated
basis as of the end of such fiscal year, in the case of (i), (ii) or (iii) as
set forth on the most recently available consolidated financial statements of
Pathnet for such fiscal year.
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and, when used with respect to any other Indebtedness, means the
date specified in the instrument governing such Indebtedness as the fixed date
on which the principal of such Indebtedness, or any installment of interest
thereon, is due and payable.
"Subsidiary" means any Person a majority of the equity ownership or Voting
Stock of which is at the time owned, directly or indirectly, by Pathnet or by
one or more other Subsidiaries or by Pathnet and one or more other Subsidiaries.
"Telecommunications Assets" means, with respect to any Person, assets
(including, without limitation, rights of way, trademarks and licenses) other
than current assets that are utilized by such Person, directly or indirectly,
for the design, development, construction, installation, integration or
provision of Pathnet's network, including, without limitation, any businesses or
services in which Pathnet is currently engaged and including any computer
systems used in a Telecommunications Business. Telecommunications Assets shall
also include 66 2/3% of the Voting Stock of another Person, provided that
substantially all of the assets of such other Person consist of
Telecommunications Assets, and provided further such Voting Stock shall be held
by Pathnet or a Restricted Subsidiary, such other Person either is, or
immediately following the relevant transaction shall become, a Restricted
Subsidiary of Pathnet pursuant to the Indenture or a Permitted
Telecommunications Joint Venture subject to the limitations set forth under
clause (p) of the definition of "Permitted Investment." The determination of
what constitutes Telecommunications Assets shall be made by the Board of
Directors and evidenced by a board resolution delivered to the Trustee.
"Telecommunications Business" means, the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) constructing, creating,
developing, acquiring or marketing Telecommunication Assets or other
communications related network equipment, software and other devices for use in
a telecommunications business or (iii) evaluating, participating or pursuing any
other activity or opportunity that is primarily related to those identified in
clause (i) or (ii) above; provided that the determination of what constitutes a
Telecommunications Business shall be made in good faith by the Board of
Directors of Pathnet.
"Telecommunications Indebtedness" means Indebtedness of Pathnet or any
Restricted Subsidiary incurred at any time within 315 days of, and for the
purpose of financing all or any part of the cost of, the construction,
expansion, installation, acquisition or improvement by Pathnet or any Restricted
Subsidiary of any new Telecommunications Assets; provided that the proceeds of
such Indebtedness are expended for such purposes within such 315-day period; and
provided further that the Net Cash Proceeds from the issuance of such
Indebtedness does not exceed, as of the date of incurrence
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thereof, 100% of the lesser of the cost or Fair Market Value of such
Telecommunications Assets; provided further that, to the extent an Incumbent
Agreement is characterized as a Capitalized Lease Obligation, it shall be
considered Telecommunications Indebtedness.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended.
"Unrestricted Subsidiary" means (a) any Subsidiary that at the time of
determination shall be an Unrestricted Subsidiary (as designated by the Board of
Directors of Pathnet, as provided below) and (b) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors of Pathnet may designate any
Subsidiary (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary so long as (i) neither Pathnet nor any other Subsidiary
is directly or indirectly liable for any Indebtedness of such Subsidiary, (ii)
no default with respect to any Indebtedness of such Subsidiary would permit
(upon notice, lapse of time or otherwise) any holder of any other Indebtedness
of Pathnet or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity, (iii) any Investment in such Subsidiary made as a result of
designating such Subsidiary an Unrestricted Subsidiary will not violate the
provisions of the "Limitation on Restricted Payments" covenant, (iv) neither
Pathnet nor any Restricted Subsidiary has a contract, agreement, arrangement,
understanding or obligation of any kind, whether written or oral, with such
Subsidiary other than those that might be obtained at the time from persons who
are not Affiliates of Pathnet, and (v) neither Pathnet nor any other Subsidiary
has any obligation (1) to subscribe for additional shares of Capital Stock or
other equity interest in such Subsidiary, or (2) to maintain or preserve such
Subsidiary's financial condition or to cause such Subsidiary to achieve certain
levels of operating results. Any such designation by the Board of Directors of
Pathnet shall be evidenced to the Trustee by filing a board resolution with the
Trustee giving effect to such designation. The Board of Directors of Pathnet may
designate any Unrestricted Subsidiary as a Restricted Subsidiary if, immediately
after giving effect to such designation, there would be no Default or Event of
Default under the Indenture and Pathnet could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) pursuant to the "Limitation on
Indebtedness" covenant.
"Vendor Credit Facility" means, collectively, (i) the revolving credit
facility to be entered into by and among Pathnet, the Finance Subsidiary and
NEC, substantially in the form outlined by the commitment letter dated October
14, 1997; (ii) the revolving credit facility to be entered into by and among
Pathnet, the Finance Subsidiary and Andrew, substantially in the form outlined
by the commitment letter dated December 8, 1997; and (iii) the takeout credit
facility substantially in the form of the Commitment Letters dated October 7,
1997 and October 8, 1997, among Pathnet, the Finance Subsidiary and each of the
financial institutions party thereto.
"Voting Stock" means, with respect to any Person, any class or classes of
Capital Stock pursuant to which the holders thereof have the general voting
power under ordinary circumstances to elect at least a majority of the board of
directors, managers or trustees of any Person (irrespective of whether or not,
at the time, stock of any other class or classes shall have, or might have,
voting power by reason of the happening of any contingency).
"Wholly Owned" means, with respect to the Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other than
any director's qualifying shares or Investments by foreign nationals mandated by
applicable law) by such Person or one or more Wholly Owned Subsidiaries of such
Person.
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DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING ARRANGEMENTS
PROPOSED CREDIT FACILITY WITH LUCENT
Pathnet has been negotiating with Lucent Technologies, Inc., over the terms
of a senior secured credit facility that would provide us with vendor financing
for fiber optic cable purchases. The credit facility would be executed in
connection with a fiber optic cable purchase agreement where we agree to make
Lucent our exclusive provider of fiber optic cable. Neither party has signed the
definitive agreements governing the proposed financing, but we expect to execute
definitive agreements in the next several weeks. We describe below the material
terms of the proposed Lucent credit facility, based on the current drafts of the
agreements. We cannot assure you that we will enter into any financing
agreements with Lucent, or that any agreements that we execute will be on these
terms. However, we currently expect that we will enter into a vendor financing
agreement with Lucent on terms similar to those outlined below.
The first tranche of the proposed facility will be $60 million and will be
available to be drawn after the facility becomes effective until January 31,
2001. The proceeds of any loans by Lucent must be used to finance fiber optic
cable that we purchase under the fiber optic cable purchase agreement between us
and Lucent. The loans will not cover the entire invoice cost of those purchases.
Under the Lucent credit facility, we will be required to pay various customary
arrangement, commitment and other fees. To preserve exclusivity, Lucent must
offer additional tranches on similar terms to the first tranche.
If executed as currently drafted, we expect the proposed credit facility
with Lucent to have these terms:
- The first tranche loans would mature on December 31, 2005;
- Mandatory prepayments are required in connection with dark fiber sales
and other dispositions;
- Lucent's obligation to loan any funds under the facility is conditioned
on, among other things:
-- We must purchase and pay for a specified minimum dollar value of
Lucent products;
-- A newly-formed vendor financing subsidiary of Pathnet or Pathnet
Telecom would be the borrower under the credit facility and must be
capitalized with assets having a value of at least $60 million;
-- We must obtain the necessary permits (including any required rights of
way) required to build the network segment in which the financed fiber
will be installed; and
- The loans would bear interest at floating rates based on an index plus a
specified margin.
The indebtedness outstanding under the Lucent credit facility is expected
to be guaranteed by the borrower (a newly formed vendor financing subsidiary of
Pathnet or Pathnet Telecom). The indebtedness will be secured by all property
and assets owned by, and all capital stock of and inter-company indebtedness
owed to, the borrower.
We anticipate that the Lucent credit facility will contain various
covenants typical for facilities of this nature. Some of those covenants will
restrict the vendor financing subsidiary and its subsidiaries, if any, from,
among other things:
- Incurring indebtedness;
- Entering into merger or consolidation transactions;
- Disposing of their assets;
- Acquiring assets; and
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- Making certain restricted payments;
- Paying interest or principal on the Notes if excess cash is available at
Pathnet Telecom or Pathnet for Note repayment;
- Creating any liens on its assets;
- Making investments;
- Entering into sale and leaseback transactions; and
- Entering into non-arms'-length basis transactions with affiliates.
As currently drafted, the Lucent credit facility also requires that the
vendor financing subsidiary comply with various customary financial covenants,
including required ratios for:
- Consolidated Indebtedness to Total Capitalization;
- Consolidated Indebtedness to Consolidated EBITDA;
- Consolidated EBITDA to Consolidated Debt Service;
- Consolidated EBITDA to Consolidated Interest Expense; and
- Minimum annual revenues to the vendor financing subsidiary.
The draft Lucent credit facility contains a number of events of default,
including:
- Nonpayment of principal, interest, fees or other amounts;
- The occurrence of a default on other material indebtedness of the vendor
financing subsidiary and its subsidiaries (if any) and, in certain
circumstances, of Pathnet Telecom and our subsidiaries including a
termination by Lucent as the result of our default on the fiber supply
agreement with Lucent;
- Failure to comply with certain covenants, conditions or provisions under
the credit facility;
- The existence of certain judgments;
- The occurrence of any default under material agreements that could result
in a material adverse effect on the vendor financing subsidiary;
- The breach of representations or warranties;
- Commencement of reorganization, bankruptcy, insolvency or similar
proceedings;
- The occurrence of certain ERISA events; and
- A change of control of Pathnet Telecom or the vendor financing
subsidiary.
If the borrowing subsidiary defaults on its obligations under the Lucent
credit facility, all of those obligations could be declared to be immediately
due and payable. Upon a payment default or upon any acceleration of the
obligations under the Lucent credit facility, assuming those obligations
exceeded $7.5 million, any amounts then owing under the Notes would become
immediately due and payable.
Under the Lucent credit facility, the vendor financing subsidiary is not
permitted to offer any guarantee of any indebtedness of Pathnet Telecom or
Pathnet. In addition to the Lucent credit facility, we intend to enter into
similar financing arrangements with other of our equipment vendors. We expect
that other vendor financing participants will demand similar restrictions.
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DESCRIPTION OF CAPITAL STOCK
The following summary of the structure and terms of our capital stock is
not complete, and you should refer to our certificate of incorporation and
bylaws for more information. See "WHERE YOU CAN FIND MORE INFORMATION" to locate
copies of those documents.
GENERAL
Our capital stock consists of 60 million shares of common stock, $.01 par
value per share, and 39,620,860 shares of preferred stock, $.01 par value per
share.
OUR CAPITAL STOCK
<TABLE>
<CAPTION>
ISSUED AND
AUTHORIZED SHARES OUTSTANDING SHARES*
----------------- -------------------
<S> <C> <C>
COMMON STOCK:....................................... 60,000,000 2,977,593
---------- ----------
PREFERRED STOCK:
Series A Convertible Preferred Stock........... 2,899,999 2,899,999
Series B Convertible Preferred Stock........... 4,788,030 4,788,030
Series C Convertible Preferred Stock........... 8,176,686 8,176,686
Series D Convertible Preferred Stock........... 9,250,000 8,511,607
Series E Convertible Preferred Stock........... 4,506,145 1,729,631**
Blank Check Preferred Stock.................... 10,000,000 --
---------- ----------
Total Preferred Stock.......................... 39,620,860 26,105,953
---------- ----------
TOTAL OF ALL STOCK........................ 99,620,860 29,083,546
========== ==========
</TABLE>
- ---------------
* After close of the Contribution and Reorganization Transaction.
** Assuming no additional Series E Convertible Preferred shares are issued under
the Colonial option agreement. Subsequent to the initial closing, and upon
receipt of the $25 million cash payment from Colonial upon the completion of
the Chicago-Aurora fiber build, we will issue 1,137,915 shares of our Series
E Convertible Preferred Stock. At that time, an aggregate of 2,867,546 shares
of our Series E Convertible Preferred Stock will be issued and outstanding
(again, assuming no additional Series E shares have been issued under the
Colonial option agreement).
We describe in the sections below the important terms our capital stock and
our certificate of incorporation and bylaws.
COMMON STOCK
Our common stockholders are entitled to one vote per share of common stock
on all matters to be voted upon by the stockholders generally. Holders of common
stock also will be entitled to receive dividends, if any, declared from time to
time by the board of directors out of funds legally available for dividends. If
we are liquidated, dissolved or wound-up, holders of common stock will share
proportionately in all assets available for distribution. However, both dividend
and distribution rights of our common stockholders are subject to the rights of
our preferred stockholders as described below. Our common stockholders have no
preemptive or conversion rights (other than the preemptive rights granted to Mr.
Schaeffer under our stockholders agreement). Our common stock does not have
cumulative voting rights. All shares of common stock outstanding immediately
following the closing of the Contribution and Reorganization Transaction will be
fully paid and will not be subject to further calls or assessments. There are no
redemption or sinking fund provisions applicable to our common stock.
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BLANK CHECK PREFERRED STOCK
Subject to the limitations described below, our certificate of
incorporation gives our board of directors the authority, without further
stockholder action, to issue up to 10 million shares of preferred stock in one
or more series and to fix the relative powers, preferences, rights,
qualifications, limitations or restrictions of our preferred stock, including:
- Dividend rates;
- Conversion rights;
- Voting powers;
- Terms of redemption;
- Redemption prices;
- Amounts payable upon liquidation; and
- The number of shares constituting any series or the designation of those
series.
Our issuance of preferred stock may have the effect of delaying, deferring
or preventing our "change in control" and may adversely affect the voting and
other rights of our common and preferred stockholders. These effects may include
the loss of voting control to others. Other than the issuance of the Series A,
B, C, D and E Convertible Preferred Stock in the Contribution and Reorganization
Transaction (including shares that may be issued under the Colonial Option
Agreement), we currently have no plans to issue any shares of preferred stock.
In addition, our certificate of incorporation forbids us from issuing any equity
security, other than as set forth in the stockholders agreement, without the
affirmative vote or written consent of 67% of the outstanding shares of all
preferred stock, voting as a single class.
SERIES A, B, C, D AND E CONVERTIBLE PREFERRED STOCK
References in this discussion to "our preferred stockholders" mean the
holders of any of our Series A, B, C, D and E Convertible Preferred Stock, and
"our preferred stock" means any of our Series A, B, C, D and E Convertible
Preferred Stock.
VOTING. Our preferred stock is voted on an "as converted" basis with our
common stock. This means that each share of Series A, B, C, D and E Convertible
Preferred Stock will initially have one vote, representing the number of votes
that those shares would have if they were converted into shares of our common
stock. In the event that the number of shares of common stock into which the
shares of any series of preferred stock may be converted is adjusted in the
future, the number of votes which shares of that series of preferred stock may
exercise will be adjusted accordingly. Upon the closing of the Contribution and
Reorganization Transaction, our Series A, B, C, D and E Convertible Preferred
Stock will together represent approximately 90% of our total outstanding voting
stock.
VETO RIGHTS. The consent of holders of 67% of our Series A, B, C, D and E
Convertible Preferred Stock voting together as a single class is required for
actions that:
- Redeem or otherwise acquire for value any shares of our capital stock or
capital stock of our subsidiaries, except for certain redemption rights
provided in our certificate of incorporation for the holders of our
Series E Convertible Preferred Stock and other redemptions in accordance
with stockholders agreements, option agreements or employment agreements
approved by our board of directors;
- Issue any equity securities or securities convertible into our equity
securities other than as provided in our stockholders agreement;
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- Increase or decrease the total number of authorized shares of preferred
stock, other than by conversion as permitted under the certificate of
incorporation;
- Pay or declare any dividends on any capital stock;
- Enter into a merger, consolidation, reorganization or recapitalization
transaction;
- Amend our certificate of incorporation or bylaws in any way that
adversely affects the rights or preferences of our preferred
stockholders; or
- Incur indebtedness, other than indebtedness existing on the completion of
the Contribution and Reorganization Transaction, indebtedness of $5
million or less or indebtedness incurred in the ordinary course of
business.
DIVIDENDS. We cannot pay any dividends on our common stock unless we have
first paid a corresponding dividend on our preferred stock.
LIQUIDATION PREFERENCE. Our preferred stockholders are entitled to a
liquidation preference equal to their initial purchase price for their preferred
shares (as adjusted for stock splits, stock dividends, recapitalizations and
similar events) plus any declared but unpaid dividends. Our Series E Convertible
Preferred Stock ranks prior to all of our other shares of capital stock upon
liquidation, including the other shares of all preferred stock. Following
payment to the holders of our Series E Convertible Preferred Stock, the
remaining shares of all preferred stock are ranked prior to our common stock,
and on a parity with each other. This preference currently entitles our
stockholders to payments of the following amounts upon our liquidation:
- $0.34 for each share of Series A Convertible Preferred Stock;
- $1.13 for each share of Series B Convertible Preferred Stock;
- $3.67 for each share of Series C Convertible Preferred Stock;
- $21.97 for each share of Series D Convertible Preferred Stock; and
- $21.97 for each share of Series E Convertible Preferred Stock.
REDEMPTION. The holders of our Series E Convertible Preferred Stock have
the right to require us to redeem some or all of their shares of Series E
Convertible Preferred Stock at a price equal to the original purchase price paid
for our Series E Convertible Preferred Stock if we have not either undergone an
IPO, listed our common stock for trading on a national securities exchange, or
had our stock traded in an over-the-counter market and quoted in an automated
quotation system of the National Association of Securities Dealers, Inc. on or
before November 3, 2001. (In each case, we will also need to meet certain
proceeds and valuation requirements as well.) This right is subject to the
limitations on redemptions contained in the Indenture and proposed to be
contained in the Supplemental Indenture, which will prohibit our making this
redemption for so long as this prohibition is in effect and the Notes are
outstanding.
Except in circumstances involving an acquisition, merger or similar
transaction in which the holders of the shares of Series A, B, C or D
Convertible Preferred Stock would receive as consideration for their shares
payment of an amount less than their applicable liquidation preference, we are
not required to redeem our Series A, B, C or D Convertible Preferred Stock.
Accordingly, the holders of Pathnet's Series A, B, and C Convertible Preferred
Stock who agreed to exchange their Pathnet stock for our stock in connection
with the Contribution and Reorganization Transaction will lose their existing
redemption rights under the Pathnet certificate of incorporation, except in
respect to such extraordinary transactions. These existing Pathnet redemption
rights are currently subject to the same contractual restrictions under the
Indenture, and Pathnet cannot effect the redemption of any of its shares so long
as this covenant remains in effect and the Notes are outstanding. In addition
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to the redemption rights described in the preceding paragraph, our Series E
shares have similar rights to elect to have their shares redeemed in the event
of an extraordinary corporate transaction for consideration less than the
applicable liquidation preference.
CONVERSION AND ANTI-DILUTION. Our preferred stockholders may convert each
share of their preferred stock at any time into one share of our common stock.
The conversion ratio may be increased or decreased as a result of stock splits,
dividends, recapitalizations and similar events. If we issue shares of our
common stock for prices less than the applicable conversion prices (which,
immediately following the closing of the Contribution and Reorganization
Transaction, will be equal to the liquidation preferences indicated above),
anti-dilution provisions in our certificate of incorporation will increase the
number of shares of our common stock into which each share of the affected
series of preferred stock would be converted. The shares of Series E Convertible
Preferred Stock possess more favorable conversion rights than do the Series A,
B, C and D Convertible Preferred Stock. In the event of any sale of shares of
our common stock (or securities convertible into shares and our common stock) at
a price less than the applicable conversion price, the conversion formula for
the shares of Series E Convertible Preferred Stock will adjust on a so-called
"full ratchet" basis. This means that holders of shares of Series E Convertible
Preferred Stock will be able to convert their shares of Series E Convertible
Preferred Stock into that number of shares of common stock that would have been
available to those holders if they had originally purchased their shares of
Series E Preferred Stock for any reduced price at which we issue any shares of
our common stock or securities convertible into common stock.
The shares of our Series A, B, C and D Convertible Preferred Stock also
have anti-dilution protection, which provides for adjustments based on a
volume-adjusted weighted average of any issue of our shares of common stock (or
securities convertible into common stock) at a price lower than the applicable
conversion price for the shares of that Series. You can review this formula in
the copy of our certificate of incorporation attached as an exhibit to the
registration statement filed in connection with this offering. If we were to
sell shares of our common stock (or securities convertible into common stock) at
a price lower than the applicable conversion value for any of the series of
convertible preferred stock, the dilutive effect (on the shares of our common
stock or any shares of preferred stock not participating in an adjustment) of an
anti-dilution adjustment under this formula may be substantially more pronounced
than the more commonly employed "weighted average" anti-dilution formula. Under
our volume-adjusted weighted average approach, we take account of the dilutive
effect of the "full ratchet" anti-dilution protection afforded to our Series E
shares, so that even a small issue of new shares of common stock at a low price
will have a significant effect on the conversion ratios of any of our Series A,
B, C or D Convertible Preferred shares for which the conversion ratio is also
adjusted. The anti-dilution provisions generally will not apply to our issue of
common stock pursuant to the exercise of employee stock options or the Pathnet
warrants that we plan to assume. See "Warrants" below.
Our preferred stock automatically converts into common stock if we complete
an IPO or if our common stock is either listed for trading on a national
securities exchange or is traded in an over-the-counter market and quoted in an
automated quotation system of the National Association of Securities Dealers,
Inc. and, in each case, we satisfy certain proceeds and valuation requirements.
REGISTRATION RIGHTS. We have granted registration rights to some holders
of our common stock, preferred stock, options and warrants for the shares of our
common stock already held or to be acquired upon conversion or exercise of these
securities. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS -- Our
Stockholders Agreement" for a description of these registration rights.
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OTHER PROVISIONS OF THE PATHNET TELECOM CERTIFICATE OF INCORPORATION AND BYLAWS
Our certificate of incorporation and bylaws contain a number of provisions
relating to our governance and internal operations, including these provisions:
- Following our issuance of the applicable classes of capital stock, the
holders of our Series A Convertible Preferred Stock will be entitled to
elect two directors by a separate class vote, the holders of our Series B
Convertible Preferred Stock will be entitled to elect one director by a
separate class vote; the holders of our Series C Convertible Preferred
Stock will be entitled to elect one director by a separate class vote;
and the holders of our Series D Convertible Preferred Stock and our
Series E Convertible Preferred Stock will be entitled to elect three
directors, voting together as a single class;
- Our CEO will also serve as a director;
- Subject to the rights of the holders of our preferred stock to elect
directors by class, the directors in office will fill any vacancy or
newly created directorship on our board of directors, with any new
director to serve until his or her successor is elected and qualified;
- Directors may be removed by the vote of stockholders holding a majority
of the voting power of our issued and outstanding capital stock, except
that, if directors are elected by a voting group of stockholders, only
that voting group may participate in the vote to remove them. In
addition, the board of directors may remove one or more directors for
cause (as defined in our bylaws) by a majority vote of all other
directors; and
- Special meetings of stockholders may be called by our board of directors,
the Chairman of our board of directors, our President or, at any time
before a public offering, by stockholders holding shares entitled to cast
at least 25% of the total votes cast by all stockholders at a meeting of
the stockholders, and the business permitted to be conducted at a special
meeting is limited to the business stated in the notice of the special
meeting or business that is related to the purpose of the special meeting
that is brought before the meeting by our board of directors.
The provisions of our certificate of incorporation and bylaws described
above relating to the removal of directors may discourage or make the
acquisition of control of us by means of a tender offer, open market purchase or
proxy contest more difficult. These provisions may also discourage specific
types of coercive takeover practices and inadequate takeover bids and may
encourage persons seeking to acquire control of us to first negotiate with our
board of directors. We believe that these provisions will benefit us and our
stockholders by enhancing our ability to negotiate with the proponent of any
unfriendly or unsolicited proposal to acquire or restructure us. We also believe
that the benefits of discouraging these proposals outweighs the disadvantages of
doing so, because, among other things, negotiation of these proposals could
result in better terms for our stockholders.
WARRANTS
Pathnet issued 1,116,500 warrants for its common stock to the initial
purchasers of the Notes in April 1998. In a separate and private transaction
that Pathnet proposes to conduct only with the qualified institutional buyers
permitted to hold those warrants, Pathnet will propose to amend the terms of the
existing warrants to clarify that upon the closing of the Contribution and
Reorganization Transaction, we will assume Pathnet's obligations under the
warrants and they will become exercisable for shares of our common stock. If
Pathnet fails to obtain the required consent of the holders of the Pathnet
warrants to amend the warrants as proposed, the Pathnet warrants will remain
outstanding and will be exercisable upon closing of the Contribution and
Reorganization Transaction.
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Pathnet's warrants currently permit the holders to purchase a total of
1,116,500 shares of Pathnet common stock at $0.01 per share. If Pathnet obtains
the consent of the qualified institution buyers permitted to holds its warrants,
we will have outstanding warrants permitting the holders to purchase a total of
1,116,500 shares of our common stock at $0.01 per share.
DIVIDEND POLICY
Pathnet has never declared or paid any cash dividends on its capital stock.
We have no plans to pay dividends on our common stock in the future, and
presently intend to retain any earnings to fund the growth of our business. Our
board of directors will determine the payment of any future dividends in light
of conditions then existing, including the results of our operations, financial
condition, cash requirements, restrictions in financing agreements, business
conditions and other factors. However, covenants contained in the Indenture (and
those proposed to be contained in the Supplemental Indenture) significantly
restrict our ability to pay dividends.
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FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain anticipated federal income
tax consequences under present law to holders of the Notes if the proposed
Indenture amendments are approved, the waivers are obtained and Pathnet pays the
consent fee to holders entitled thereto. This discussion is based on the
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), final
and temporary Treasury regulations thereunder (the "Regulations"), and
administrative and judicial interpretations thereof, all as in effect as of the
date hereof and all of which are subject to change (possibly on a retroactive
basis). Legislative, judicial, or administrative changes or interpretations
could alter or modify the tax discussion set forth below. This discussion does
not purport to deal with all aspects of federal income taxation that may be
relevant to holders of the Notes. The discussion does not address any aspects of
state, local or foreign taxation. Finally, substantial uncertainties resulting
from the lack of definitive judicial or administrative authority and
interpretations apply to various tax issues addressed herein, including certain
tax consequences arising in connection with the waivers, the proposed Indenture
amendments and payment of the consent fee pursuant to this solicitation. Pathnet
has not sought, nor does it intend to seek, any rulings from the Internal
Revenue Service relating to such issues or any other issues.
This discussion does not attempt to address all issues that may be relevant
to a particular holder of the Notes in light of such holder's personal
investment circumstances and does not apply to holders subject to special
treatment under the federal income tax laws such as financial institutions,
broker-dealers, insurance companies, foreign persons and entities, tax-exempt
organizations or taxpayers subject to the alternative minimum tax. This
discussion assumes that holders hold their Notes as a "capital asset"
(generally, property held for investment) within the meaning of Section 1221 of
the Code.
THE FOLLOWING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS
INCLUDED HEREIN FOR GENERAL INFORMATION ONLY. THE TAX TREATMENT OF A HOLDER OF
THE NOTES MIGHT BE SUBJECT TO SPECIAL RULES NOT DISCUSSED BELOW. ACCORDINGLY,
EACH HOLDER OF THE NOTES SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR AS TO THE
SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO SUCH HOLDER THAT
MAY ARISE IN CONNECTION WITH THIS SOLICITATION.
PROPOSED WAIVERS AND INDENTURE AMENDMENTS
Under general principles of tax law, the modification of a debt instrument
creates a deemed exchange (upon which gain or loss is realized) if the modified
debt instrument differs materially either in kind or in extent from the original
debt instrument.
Under the Regulations, the modification of a debt instrument is a
"significant" modification (i.e., upon which gain or loss is realized) if, based
on all the facts and circumstances and taking into account all modifications of
the debt instrument collectively, the legal rights or obligations that are
altered and the degree to which they are altered are "economically significant."
A modification that adds a guarantor is not a significant modification unless
such modification results in a change in payment expectations. The addition of a
guarantor results in a change in payment expectations if it results in a
substantial enhancement of the obligor's capacity to meet the payment
obligations under the debt instrument, and that capacity was primarily
speculative prior to the guarantee and is adequate after the guarantee. In
addition, a change in the yield of a debt instrument is a significant
modification under the Regulations if the yield of the modified instrument
(determined by taking into account any payments made to the holder as
consideration for the modification) varies from the yield on the unmodified
instrument (determined as of the date of the modification) by more than the
greater of 1/4 of one percent (25 basis points) or five percent of the annual
yield of the unmodified instrument.
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As discussed above, the proposed Indenture amendments would change several
terms of the Notes, and the holders would waive certain rights in connection
with the solicitation. Whether the legal rights or obligations that would be
altered and the degree to which they would be altered by the proposed Indenture
amendments and the waivers would be "economically significant" is not
specifically addressed by existing guidance and therefore is uncertain. However,
the legal rights and obligations that would be changed (other than the changes
resulting from the Pathnet Telecom Guarantees and the payment of the consent fee
discussed below) as a result of the proposed Indenture amendments principally
would impose new obligations on Pathnet Telecom and generally would change
Pathnet's obligations and rights only in minor respects. Similarly, although it
is uncertain, the one time waiver of the Excess Proceeds Offer obligation and
the Change of Control repurchase obligation should not constitute an
economically significant modification. Hence, the waivers and the proposed
Indenture amendments (other than the Guarantees and payment of the consent fee
described below) should not collectively result in a deemed exchange of the
Notes for "new" Notes ("New Notes").
The payment of the consent fee should not change the yield of the Notes by
an amount that will cause a significant modification under the Regulations. The
effect of the Pathnet Telecom Guarantees is less clear. It is expected that the
addition of the Pathnet Telecom Guarantees will enhance Pathnet's capacity to
meet its payment obligations under the Notes. Whether Pathnet's capacity to meet
the payment obligations will change from "primarily speculative" prior to the
Pathnet Telecom Guarantees to "adequate" after the Guarantees is a question of
fact that cannot be answered in advance with certainty. If Pathnet's capacity to
meet the payment obligations under the Notes does not change from "primarily
speculative" to "adequate," the Pathnet Telecom Guarantees should not create a
deemed exchange of the Notes for New Notes. In such case, except as described
below with respect to the consent fee, a holder should not recognize any gain or
loss as a result of the proposed Indenture amendments.
It is possible, however, that Pathnet's capacity to meet the payment
obligations will change from "primarily speculative" to "adequate," thereby
creating a deemed exchange of the Notes for New Notes. Even if a deemed exchange
results, the Notes and the New Notes have a maturity of more than five years,
and thus should be treated as "securities." As a result, the deemed exchange of
the Notes for New Notes should be characterized as a tax-free recapitalization
under Section 368(a)(1)(E) of the Code. In such case, except as described below
with respect to the consent fee, a holder should not recognize gain or loss as a
result of the deemed exchange.
If an exchange were deemed to occur under general principles of tax law or
under the standards set forth in the Regulations, and if the deemed exchange did
not constitute a tax-free recapitalization as described above, then a holder
generally would recognize gain or loss in an amount equal to the difference
between the holder's amount realized and the holder's adjusted tax basis in the
Notes deemed to have been exchanged. The holder's amount realized generally
would be the "issue price" of the New Notes. The "issue price" of the New Notes
likely would equal the stated redemption price at maturity of the New Notes,
assuming the New Notes are not "publicly traded" within the meaning of the
Regulations. It is uncertain whether the New Notes will be considered publicly
traded because, among other things, certain events after the date of the deemed
exchange could cause the New Notes to satisfy the publicly traded test set forth
in the Regulations. If the New Notes are publicly traded, the issue price would
be equal to the fair market value of the New Notes at the time of the deemed
exchange. All or a portion of any gain from the deemed exchange would constitute
ordinary income to the extent the holder purchased the Notes at a market
discount, i.e., at an amount less than the stated redemption price at maturity
of the Notes.
If a deemed exchange occurs, regardless of whether the exchange qualifies
as a tax-free recapitalization, the New Notes may be treated as issued with
original issue discount. The New
143
<PAGE> 147
Notes generally would have original issue discount if they have an issue price
that is less than their stated redemption price at maturity. As discussed above,
the issue price of the New Notes will depend in part on whether they are
"publicly traded" within the meaning of the Regulations. If there is a deemed
exchange and the New Notes are publicly traded, the New Notes likely will have
significant original issue discount. If the New Notes are treated as issued with
original issue discount, holders thereof generally will be required to include
such discount in income as it accrues, in advance of the receipt of cash
attributable to such income. In addition, a corporate holder may be entitled to
claim a dividends received deduction with respect to a portion of such original
issue discount in the event that the New Notes qualify as "applicable high yield
discount obligations" under Section 163 of the Code. If a holder's tax basis in
the New Notes deemed received exceeds the stated redemption price at maturity of
the Notes deemed to be exchanged therefor, a holder generally may elect to
amortize such premium.
RECEIPT OF CONSENT FEE
Although there is no authority on point, holders of Notes should be
required to treat the consent fee as a fee paid for their consent. Accordingly,
the holders should recognize ordinary income for federal income tax purposes in
an amount equal to the consent fee to which they are entitled, when the consent
fee is received or accrued, in accordance with their method of accounting.
However, if a deemed exchange does occur, as discussed above, the exchange
should constitute a tax-free recapitalization under Section 368(a)(1)(E) of the
Code. In such case, the Internal Revenue Service might treat the consent fee as
part of the recapitalization exchange rather than as a separate fee, and a
holder receiving a consent fee generally would recognize taxable gain to the
extent of the lesser of (1) the consent fee received or (2) the gain realized by
the holder on the deemed exchange.
BACKUP WITHHOLDING
The receipt of a consent fee by a holder may be subject to backup
withholding at a rate of 31% of the consent fee payable to a particular holder
of a Note unless (1) the holder is a corporation or comes within certain other
exempt categories and, when required, demonstrates this fact, or (2) the holder
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding and otherwise complies with applicable requirements of
the backup withholding rules. The amount of any backup withholding from a
payment to a holder generally will be allowed as a credit against such holder's
federal income tax liability.
TAX CONSEQUENCES TO PATHNET
Assuming the waivers, the proposed Indenture amendments and payment of the
consent fee do not constitute a significant modification of the Notes resulting
in a deemed exchange for federal income tax purposes of the Notes for New Notes,
Pathnet will not recognize any gain or loss as a result of the waivers, the
amendments and payment of the consent fee. If a deemed exchange does occur,
Pathnet should not recognize gain or loss except that Pathnet will recognize
cancellation of indebtedness income to the extent that the "issue price" of the
New Notes is less than the principal amount of the Notes. As discussed above,
the issue price of the New Notes will depend, among other things, upon whether
the New Notes are publicly traded within the meaning of the Regulations. If, as
discussed above, the Notes bear original issue discount as a result of the
deemed exchange, Pathnet would have additional interest deductions available to
it by reason of such original issue discount. However, Pathnet's ability to
deduct the original issue discount may be deferred (or even disallowed in part)
if the New Notes have significant original issue discount and satisfy other
requirements set forth in Section 163 of the Code with respect to "applicable
high yield discount obligations." The New Notes should have significant original
issue discount only if there is a deemed exchange of the Notes for New Notes,
and the New Notes are publicly traded within the meaning of the Regulations.
144
<PAGE> 148
HOLDERS OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISOR TO DETERMINE THE
SPECIFIC TAX CONSEQUENCES TO SUCH HOLDERS OF THIS SOLICITATION, INCLUDING THE
LIKELIHOOD THAT THE WAIVERS, THE PROPOSED INDENTURE AMENDMENTS OR THE RECEIPT OF
THE CONSENT FEE WILL RESULT IN A DEEMED EXCHANGE OF THE NOTES, AS WELL AS THE
APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
145
<PAGE> 149
PLAN OF DISTRIBUTION
Pathnet will solicit consents from and offer payment of the consent fee to
all holders of the Notes. If the consent solicitation is successful and Pathnet
obtains, before the expiration of the consent solicitation process, the required
consents from the holders of a majority in outstanding principal amount of the
Notes, we will execute the Supplemental Indenture and issue our Guarantees to
all holders of the Notes.
LEGAL MATTERS
Certain legal matters relating to the Guarantees offered in this prospectus
will be passed upon on our behalf by Covington & Burling. Covington & Burling
has from time to time represented, and may continue to represent, us and our
affiliates in certain legal matters.
EXPERTS
Our financial statements as of December 31, 1997 and 1998 and for each of
the three years in the period ended December 31, 1998 included in this
prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent public accountants, given on the
authority of the firm as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549, a registration statement on Form S-1 under
the Securities Act of 1933 regarding the offering. As permitted by the rules and
regulations of the Securities and Exchange Commission, this prospectus does not
contain all the information contained in the registration statement. For further
information about us and the offering, you can read the registration statement
and the exhibits and financial schedules filed with the registration statement.
The statements contained in this prospectus about the contents of any contract
or other document are not necessarily complete. You can read a copy of each
contract or other document filed as an exhibit to the registration statement.
Pathnet is currently subject to the informational reporting requirements of
the Securities Exchange Act of 1934 and files periodic reports and other
information with the Securities and Exchange Commission. We are filing Form 10
to become a reporting company under the Securities Exchange Act of 1934. As a
reporting company, we will file periodic reports and other information with the
Securities and Exchange Commission. Pathnet plans to deregister as a reporting
company under the rules of the Securities and Exchange Commission when possible.
You can inspect the registration statement and the exhibits and schedules
to the registration statement, as well as the periodic reports, proxy statements
and other information we file with the Securities and Exchange Commission,
without charge at the Public Reference Section of the Securities and Exchange
Commission located at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information on the operation of the
Public Reference Section of the Securities and Exchange Commission by calling
the Securities and Exchange Commission at 1-800-SEC-0330. You can also inspect
and copy these filings at the regional offices of the Securities and Exchange
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and the Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. You can obtain copies of all or any portion of these filings
from the Public Reference Section of the Securities and Exchange Commission upon
payment of prescribed fees. Electronic
146
<PAGE> 150
filings made through the Electronic Data Gathering, Analysis, and Retrieval
system are also publicly available through the Securities and Exchange
Commission's Web site (http://www.sec.gov).
Pathnet is required under the terms of the Indenture to provide the
periodic reports it files with the Securities and Exchange Commission to each
holder of the Notes and to the Trustee under the Indenture. Upon the
effectiveness of the Supplemental Indenture, we will be required to provide the
periodic reports to holders of the Notes and the Trustee, and Pathnet will be
relieved of these obligations, subject to the requirements of applicable law.
147
<PAGE> 151
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PATHNET INC. AND SUBSIDIARIES -- AUDITED FINANCIAL
STATEMENTS
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996, and for the period
August 25, 1995 (date of inception) to December 31,
1998................................................... F-4
Consolidated Statements of Comprehensive Loss for the
years ended December 31, 1998, 1997 and 1996, and for
the period August 25, 1995 (date of inception) to
December 31, 1998...................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996, and for the period
August 25, 1995 (date of inception) to December 31,
1998................................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1998, 1997 and 1996,
and for the period August 25, 1995 (date of inception)
to December 31, 1998................................... F-7
Notes to Consolidated Financial Statements................ F-8
PATHNET INC. AND SUBSIDIARIES -- UNAUDITED INTERIM FINANCIAL
STATEMENTS
Consolidated Balance Sheets as of September 30, 1999
(unaudited) and December 31, 1998...................... F-25
Unaudited Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 1998
and for the period August 25, 1995 (date of inception)
to September 30, 1999.................................. F-26
Unaudited Consolidated Statements of Comprehensive Income
(Loss) for the three and nine months ended September
30, 1999 and 1998 and for the period August 25, 1995
(date of inception) to September 30, 1999.............. F-27
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 and for
the period August 25, 1995 (date of inception) to
September 30, 1999..................................... F-28
Notes to Unaudited Interim Consolidated Financial
Statements............................................. F-29
</TABLE>
F-1
<PAGE> 152
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Pathnet, Inc.
In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Pathnet, Inc. and its subsidiaries (a development stage enterprise)
(the Company) at December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998 and for the period August 25, 1995 (date of inception) to December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 14, 1999,
except for Note 14 for
which the date is November 22, 1999
F-2
<PAGE> 153
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 57,321,887 $ 7,831,384
Note receivable............................................. 3,206,841 --
Interest receivable......................................... 3,848,753 --
Marketable securities available for sale, at market......... 97,895,773 --
Prepaid expenses and other current assets................... 205,505 48,571
------------ -----------
Total current assets................................... 162,478,759 7,879,955
Property and equipment, net................................. 47,971,336 7,207,094
Deferred financing costs, net............................... 10,508,251 250,428
Restricted cash............................................. 10,731,353 760,211
Marketable securities available for sale, at market......... 71,899,757 --
Pledged marketable securities held to maturity.............. 61,824,673 --
------------ -----------
Total assets........................................... $365,414,129 $16,097,688
============ ===========
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable............................................ $ 10,708,263 $ 5,592,918
Accrued interest............................................ 8,932,294 --
Accrued expenses and other liabilities...................... 639,688 300,000
------------ -----------
Total current liabilities.............................. 20,280,245 5,892,918
12 1/4% Senior Notes, net of unamortized bond discount of
$3,787,875................................................ 346,212,125 --
------------ -----------
Total liabilities...................................... 366,492,370 5,892,918
------------ -----------
Series A convertible preferred stock, $0.01 par value,
1,000,000 shares authorized, issued and outstanding at
December 31, 1998 and 1997, respectively (liquidation
preference $1,000,000).................................... 1,000,000 1,000,000
Series B convertible preferred stock, $0.01 par value,
1,651,046 shares authorized, issued and outstanding at
December 31, 1998 and 1997, respectively (liquidation
preference $5,033,367).................................... 5,008,367 5,008,367
Series C convertible preferred stock, $0.01 par value,
2,819,549 shares authorized; 2,819,549 and 939,850 shares
issued and outstanding at December 31, 1998 and 1997,
respectively (liquidation preference $30,000,052)......... 29,961,272 9,961,274
------------ -----------
Total mandatorily redeemable preferred stock........... 35,969,639 15,969,641
------------ -----------
Common stock, $0.01 par value, 60,000,000 and 7,500,000
shares authorized at December 31, 1998 and 1997,
respectively; 2,902,358 and 2,900,000 shares issued and
outstanding at December 31, 1998 and 1997, respectively... 29,024 29,000
Common stock subscription receivable........................ -- (9,000)
Deferred compensation....................................... (978,064) --
Additional paid-in capital.................................. 6,156,406 381,990
Accumulated other comprehensive income...................... 208,211 --
Deficit accumulated during the development stage............ (42,463,457) (6,166,861)
------------ -----------
Total stockholders' equity (deficit)................... (37,047,880) (5,764,871)
------------ -----------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity (deficit)............. $365,414,129 $16,097,688
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 154
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 25, 1995
FOR THE YEAR ENDED DECEMBER 31, (DATE OF INCEPTION)
------------------------------------------ TO DECEMBER 31,
1998 1997 1996 1998
------------ ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Revenue..................... $ 1,583,539 $ 162,500 $ 1,000 $ 1,747,039
------------ ----------- ----------- ------------
Operating expenses:
Cost of revenue........... 7,547,620 -- -- 7,547,620
Selling, general and
administrative......... 9,615,867 4,247,101 1,333,294 15,625,349
Depreciation expense...... 732,813 46,642 9,024 788,831
------------ ----------- ----------- ------------
Total operating
expenses............. 17,896,300 4,293,743 1,342,318 23,961,800
------------ ----------- ----------- ------------
Net operating loss.......... (16,312,761) (4,131,243) (1,341,318) (22,214,761)
Interest expense............ (32,572,454) -- (415,357) (32,987,811)
Interest income............. 13,940,240 159,343 13,040 14,115,236
Write-off of initial public
offering costs............ (1,354,534) -- -- (1,354,534)
Other income (expense),
net....................... 2,913 (5,500) -- (2,587)
------------ ----------- ----------- ------------
Net loss............... $(36,296,596) $(3,977,400) $(1,743,635) $(42,444,457)
============ =========== =========== ============
Basic and diluted net loss
per common share.......... $ (12.51) $ (1.37) $ (0.60) $ (14.63)
============ =========== =========== ============
Weighted average number of
common shares
outstanding............... 2,902,029 2,900,000 2,900,000 2,900,605
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 155
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
<TABLE>
<CAPTION>
FOR THE PERIOD
AUGUST 25, 1995
FOR THE YEAR ENDED DECEMBER 31, (DATE OF INCEPTION)
------------------------------------------ TO DECEMBER 31,
1998 1997 1996 1998
------------ ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Net loss.................... $(36,296,596) $(3,977,400) $(1,743,635) $(42,444,457)
Other comprehensive income
Net unrealized gain on
marketable securities
available for sale.......... 208,211 -- -- 208,211
------------ ----------- ----------- ------------
Comprehensive loss.......... $(36,088,385) $(3,977,400) $(1,743,635) $(42,236,246)
============ =========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 156
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE YEAR ENDED AUGUST 25, 1995
DECEMBER 31, (DATE OF INCEPTION)
----------------------------------------- TO DECEMBER 31,
1998 1997 1996 1998
------------- ----------- ----------- -------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................... $ (36,296,596) $(3,977,400) $(1,743,635) $ (42,444,457)
Adjustment to reconcile net loss to net cash used in
operating activities
Depreciation expense................................ 732,813 46,642 9,024 788,831
Amortization of deferred financing costs............ 842,790 -- -- 842,790
Loss on disposal of asset........................... -- 5,500 -- 5,500
Write-off of deferred financing costs............... 581,334 -- -- 581,334
Interest expense resulting from amortization of
discount on the bonds payable..................... 307,125 -- -- 307,125
Stock based compensation............................ 701,295 -- -- 701,295
Interest expense for beneficial conversion feature
of bridge loan.................................... -- -- 381,990 381,990
Accrued interest satisfied by conversion of bridge
loan to Series B convertible preferred stock...... -- -- 33,367 33,367
Changes in assets and liabilities:
Interest receivable..................................... (4,846,952) -- -- (4,846,952)
Prepaid expenses and other current assets............... (156,935) (46,876) (1,695) (205,505)
Accounts payable........................................ 6,709 386,106 110,094 507,614
Accrued interest........................................ 8,932,294 -- -- 8,932,294
Accrued expenses and other liabilities.................. 339,688 269,783 17,572 639,687
------------- ----------- ----------- -------------
Net cash used in operating activities................. (28,856,435) (3,316,245) (1,193,283) (33,775,087)
------------- ----------- ----------- -------------
Cash flows from investing activities:
Expenditures for network in progress...................... (33,619,342) (1,739,782) -- (35,359,124)
Expenditures for property and equipment................... (2,769,076) (381,261) (46,653) (3,205,893)
Purchase of marketable securities available for sale...... (169,587,319) -- -- (169,587,319)
Purchase of marketable securities -- pledged as
collateral.............................................. (83,097,655) -- -- (83,097,655)
Sale of marketable securities -- pledged as collateral.... 22,271,181 -- -- 22,271,181
Restricted cash........................................... (9,971,142) (760,211) -- (10,731,353)
Issuance of note receivable to incumbent.................. (3,206,841) -- -- (3,206,841)
Repayment of note receivable.............................. 9,000 -- -- 9,000
------------- ----------- ----------- -------------
Net cash used in investing activities................. (279,971,194) (2,881,254) (46,653) (282,908,004)
------------- ----------- ----------- -------------
Cash flows from financing activities:
Issuance of voting and non-voting common stock............ -- -- -- 1,000
Proceeds from sale of preferred stock..................... 19,999,998 12,000,054 2,500,000 35,000,052
Proceeds from sale of Series B convertible preferred stock
representing the conversion of committed but undrawn
portion of bridge loan to Series B convertible preferred
stock................................................... -- -- 300,000 300,000
Proceeds from bond offering............................... 350,000,000 -- -- 350,000,000
Proceeds from bridge loan................................. -- -- 700,000 700,000
Exercise of employee common stock options................. 81 -- -- 81
Payment of issuance costs for preferred stock offerings... -- (38,780) (25,000) (63,780)
Payment of deferred financing costs....................... (11,681,947) (250,428) -- (11,932,375)
------------- ----------- ----------- -------------
Net cash provided by financing activities............. 358,318,132 11,710,846 3,475,000 374,004,978
------------- ----------- ----------- -------------
Net increase in cash and cash equivalents................... 49,490,503 5,513,347 2,235,064 57,321,887
Cash and cash equivalents at the beginning of period........ 7,831,384 2,318,037 82,973 --
------------- ----------- ----------- -------------
Cash and cash equivalents at the end of period.............. $ 57,321,887 $ 7,831,384 $ 2,318,037 $ 57,321,887
============= =========== =========== =============
Supplemental disclosure:
Cash paid for interest.................................... $ 22,271,234 $ -- $ -- $ 22,271,234
============= =========== =========== =============
Noncash investing and financing transactions:
Conversion of bridge loan plus accrued interest to
Series B convertible preferred stock.................. $ -- $ -- $ 733,367 $ 733,367
------------- ----------- ----------- -------------
Conversion of non-voting common stock to voting common
stock................................................. $ -- $ -- $ 14,500 $ 500
------------- ----------- ----------- -------------
Issuance of voting and non-voting common stock.......... $ -- $ -- $ -- $ 9,000
------------- ----------- ----------- -------------
Acquisition of network equipment financed by accounts
payable............................................... $ 10,200,650 $ 5,092,013 $ -- $ 10,200,650
------------- ----------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 157
PATHNET INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
PERIOD FROM AUGUST 25, 1995 (DATE OF INCEPTION) TO DECEMBER 31, 1995 AND FOR THE
YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
<TABLE>
<CAPTION>
NOTE ACCUMULATED
RECEIVABLE ADDITIONAL OTHER
COMMON STOCK FROM DEFERRED PAID-IN COMPREHENSIVE
SHARES AMOUNT STOCKHOLDER COMPENSATION CAPITAL INCOME
---------- -------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 25, 1995................. -- $ -- $ -- $ -- $ -- $ --
Issuance of Voting common stock............ 1,450,000 14,500 (4,500) -- -- --
Issuance of Non-voting common stock........ 1,450,000 14,500 (4,500) -- -- --
Net loss................................... -- -- -- -- -- --
---------- -------- ------- ----------- ---------- --------
BALANCE AT DECEMBER 31, 1995............... 2,900,000 29,000 (9,000) -- -- --
Cancellation of Non-voting common stock.... (1,450,000) (14,500) -- -- -- --
Issuance of Voting common stock............ 1,450,000 14,500 -- -- -- --
Interest expense for beneficial conversion
feature of bridge loan................... -- -- -- -- 381,990 --
Net loss................................... -- -- -- -- -- --
---------- -------- ------- ----------- ---------- --------
BALANCE AT DECEMBER 31, 1996............... 2,900,000 29,000 (9,000) -- 381,990 --
Net loss................................... -- -- -- -- -- --
---------- -------- ------- ----------- ---------- --------
BALANCE AT DECEMBER 31, 1997............... 2,900,000 29,000 (9,000) -- 381,990 --
Exercise of stock options.................. 2,358 24 -- -- 57 --
Repayment of note receivable............... -- -- 9,000 -- -- --
Deferred compensation expense related to
issuance of employee common stock
options.................................. -- -- -- (1,679,359) 1,679,359 --
Compensation expense related to issuance of
employee common stock options............ -- -- -- 701,295 -- --
Fair value of warrants to purchase common
stock.................................... -- -- -- -- 4,095,000 --
Net unrealized gain on marketable
securities available for sale............ -- -- -- -- -- 208,211
Net loss................................... -- -- -- -- -- --
---------- -------- ------- ----------- ---------- --------
BALANCE AT DECEMBER 31, 1998 2,902,358 $ 29,024 $ -- $ (978,064) $6,156,406 $208,211
========== ======== ======= =========== ========== ========
<CAPTION>
DEFICIT
ACCUMULATED
DURING
DEVELOPMENT
STAGE TOTAL
------------ ------------
<S> <C> <C>
BALANCE AT AUGUST 25, 1995................. $ -- $ --
Issuance of Voting common stock............ (9,500) 500
Issuance of Non-voting common stock........ (9,500) 500
Net loss................................... (426,826) (426,826)
------------ ------------
BALANCE AT DECEMBER 31, 1995............... (445,826) (425,826)
Cancellation of Non-voting common stock.... -- (14,500)
Issuance of Voting common stock............ -- 14,500
Interest expense for beneficial conversion
feature of bridge loan................... -- 381,990
Net loss................................... (1,743,635) (1,743,635)
------------ ------------
BALANCE AT DECEMBER 31, 1996............... (2,189,461) (1,787,471)
Net loss................................... (3,977,400) (3,977,400)
------------ ------------
BALANCE AT DECEMBER 31, 1997............... (6,166,861) (5,764,871)
Exercise of stock options.................. -- 81
Repayment of note receivable............... -- 9,000
Deferred compensation expense related to
issuance of employee common stock
options.................................. -- --
Compensation expense related to issuance of
employee common stock options............ -- 701,295
Fair value of warrants to purchase common
stock.................................... -- 4,095,000
Net unrealized gain on marketable
securities available for sale............ -- 208,211
Net loss................................... (36,296,596) (36,296,596)
------------ ------------
BALANCE AT DECEMBER 31, 1998 $(42,463,457) $(37,047,880)
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 158
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Pathnet, Inc. (Company) is a "carrier's carrier," providing low-cost
digital fiber and wireless communications capacity to under-served and second
and third tier U.S. markets. The Company's strategy is to partner with owners of
telecommunication assets, including utility, pipeline and railroad companies
(Incumbents), to upgrade and aggregate existing infrastructure to a
state-of-the-art SONET network. As of December 31, 1998, the Company had
approximately 2,000 route miles of completed network, approximately 5,000 route
miles of network under construction and approximately 10,000 route miles of
network under contract. Due to demand and opportunity, Pathnet expanded the
scope of its existing business strategy to include fiber. Pathnet offers
telecommunications service to inter-exchange carriers, local exchange carriers,
internet service providers, Regional Bell Operating Companies, cellular
operators and resellers.
The Company's business has been funded primarily through equity investments
by the Company's stockholders and a private placement in April 1998 of units
consisting of 12 1/4% Senior Notes due 2008 (Restricted Notes) and warrants
(Warrants) to purchase Common Stock (Debt Offering). On September 2, 1998, the
Company commenced an offer to exchange (Exchange Offer) all outstanding
Restricted Notes for up to $350.0 million aggregate principal amount of 12 1/4%
Senior Notes due 2008 (Registered Notes) which have been registered under the
Securities Act of 1933, as amended (Securities Act). The terms of the Registered
Notes are identical in all material respects to the terms of the Restricted
Notes, except that the Registered Notes have been registered under the
Securities Act and are generally freely transferable by holders thereof and are
issued without any covenant upon the Company regarding registration under the
Securities Act. The Exchange Offer expired on October 2, 1998 and all
outstanding Restricted Notes were exchanged for Registered Notes. (The
Restricted Notes and the Registered Notes are collectively referred to herein as
the "Senior Notes.")
A substantial portion of the Company's activities to date has involved
developing strategic relationships with Incumbents and building its network.
Accordingly, a majority of its revenues to date reflect only certain consulting
and advisory services in connection with the design, development and
construction of digital microwave infrastructure. The remainder of its revenues
to date (approximately 10% of its total revenues) was derived from the sale of
bandwidth along the Company's digital network. The Company has also been engaged
in constructing network, developing operating systems, constructing a network
operations center, raising capital and hiring management and other key
personnel. The Company has experienced significant operating and net losses and
negative operating cash flow to date and expects to continue to experience
operating and net losses and negative operating cash flow until such time as it
is able to generate revenue sufficient to cover its operating expenses.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
While the Company recently commenced providing telecommunication services
to customers and recognizing the revenue from the sale of such telecommunication
services, its principal activities to date have been securing contractual
alliances with Incumbents, designing and constructing network segments,
obtaining capital and planning its proposed service. Accordingly, the Company's
consolidated financial statements are presented as a development stage
enterprise, as prescribed by Statement of Financial Accounting Standards No. 7,
"Accounting and Reporting by Development
F-8
<PAGE> 159
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stage Enterprises." As a development stage enterprise, the Company has been
relying on the issuance of equity and debt securities, rather than recurring
revenues, for its primary sources of cash since inception.
CONSOLIDATION
The consolidated financial statements include the accounts of Pathnet, Inc.
and its wholly owned subsidiaries, Pathnet Finance I, LLC, Pathnet/Idaho Power
License, LLC, Pathnet Fiber Optics, LLC and Pathnet/BNSF Equipment, LLC. All
material intercompany accounts and transactions have been eliminated in
consolidation.
USE OF ESTIMATES
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reported period. The estimates involve judgments with
respect to, among other things, various future factors which are difficult to
predict and are beyond the control of the Company. Actual amounts could differ
from these estimates.
LOSS PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of shares of Common Stock outstanding during the
applicable period. Diluted earnings (loss) per share is computed by dividing net
income (loss) by the weighted average common and potentially dilutive common
equivalent shares outstanding during the applicable period. For each of the
periods presented, basic and diluted loss per share are the same. The exercise
of 2,885,833 employee Common Stock options, the exercise of warrants to purchase
1,116,500 shares of Common Stock, and the conversion of 5,470,595 shares of
Series A, B and C convertible preferred stock into 15,864,715 shares of Common
Stock as of December 31, 1998, which could potentially dilute basic earnings per
share in the future were not included in the computation of diluted loss per
share for the periods presented because to do so would have been antidilutive in
each case.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company believes that the carrying amount of certain of its financial
instruments, which include cash equivalents and accounts payable, approximate
fair value due to the relatively short maturity of these instruments. As of
December 31, 1998, the value of the Company's 12 1/4% Senior Notes was
approximately $245 million.
CASH EQUIVALENTS
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist of cash and cash equivalents, marketable
securities and associated interest receivable, note
F-9
<PAGE> 160
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receivable, and restricted cash. Marketable securities and associated interest
receivable include U.S. Treasury securities and debt securities of U.S.
Government agencies, certificates of deposit and money market funds, and
corporate debt securities. The note receivable is guaranteed by the parent
company of the note holder, a leading utility company. The Company has invested
its excess cash in a money market fund with a commercial bank. The money market
fund is collateralized by the underlying assets of the fund. The Company's
restricted cash is maintained in an escrow account (see Note 5) at a major bank.
The Company has not experienced any losses on its cash and cash equivalents and
restricted cash.
MARKETABLE SECURITIES
Management determines the appropriate classification of its investments in
marketable securities at the time of purchase and reevaluates such
determinations at each balance sheet date. Debt securities are classified as
held to maturity when the Company has the positive intent and ability to hold
the securities to maturity. The Company has classified certain securities as
held to maturity pursuant to a pledge agreement. Held to maturity securities are
stated at amortized cost. Debt securities for which the Company does not have
the intent or ability to hold to maturity are classified as available for sale,
along with any investments in equity securities. Securities are classified as
current or non-current based on the maturity date. Securities available for sale
are carried at fair value based on quoted market prices at the balance sheet
date, with unrealized gains and losses reported as part of accumulated other
comprehensive income.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and interest
are included in interest income or expense. Realized gains and losses are
included in other income (expense), net in the consolidated statements of
operations. The cost of securities sold is based on the specific identification
method. The Company's investments in debt and equity securities are diversified
among high credit quality securities in accordance with the Company's investment
policy.
PROPERTY AND EQUIPMENT
Property and equipment, consisting of network in progress, communications
network, office and computer equipment, furniture and fixtures and leasehold
improvements, is stated at cost. Network in progress costs incurred during
development are capitalized. Depreciation of the completed communications
network commences when the network equipment is ready for its intended use and
is computed using the straight-line method with estimated useful lives of
network assets ranging between three to ten years. Depreciation of the office
and computer equipment and furniture and fixtures is computed using the
straight-line method, generally over three to five years, based upon estimated
useful lives, commencing when the assets are available for service. Leasehold
improvements are amortized over the lesser of the useful lives of the assets or
the lease term. Expenditures for maintenance and repairs are expensed as
incurred. When assets are retired or disposed, the cost and the related
accumulated depreciation are removed from the accounts, and any resulting gain
or loss is recognized in operations for the period.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates the recoverability of its long-lived
assets. This evaluation consists of a comparison of the carrying value of the
assets with the assets' expected future cash
F-10
<PAGE> 161
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
flows, undiscounted and without interest costs. Estimates of expected future
cash flows represent management's best estimate based on reasonable and
supportable assumptions and projections. If the expected future cash flow,
undiscounted and without interest charges, exceeds the carrying value of the
asset, no impairment is recognized. Impairment losses are measured as the
difference between the carrying value of long-lived assets and their fair value.
DEFERRED INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Deferred income taxes result from temporary differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year-end,
based on enacted laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established when necessary, to reduce net deferred tax assets to the amount
expected to be realized. The provision for income taxes consists of the
Company's current provision for federal and state income taxes and the change in
the Company's net deferred tax assets and liabilities during the period.
REVENUE RECOGNITION
The Company earns revenue from the sale of telecommunication capacity and
for project management and consulting services. Revenue from the sale of
telecommunications capacity is earned when the service is provided. Revenue for
project management and consulting services is recognized over the related
project period as milestones are achieved. The Company defers revenue when
contractual payments are received in advance of the performance of services.
During 1998, one customer accounted for 98% of the Company's total revenue.
DEFERRED FINANCING COSTS
The Company has incurred costs related to the Debt Offering together with
costs associated with obtaining future debt financing arrangements. Such costs
are amortized over the term of the debt or financing arrangement other than when
financing has not been obtained, in which case, the costs are expensed
immediately.
COMPREHENSIVE LOSS
Effective March 31, 1998, the Company adopted Statement of Statement of
Financial Accounting Standards No 130 which requires additional reporting with
respect to certain changes in assets and liabilities that previously were
reported in stockholders' equity (deficit). Accordingly, the Company has
included Consolidated Statements of Comprehensive Loss for the years ended
December 31, 1998, 1997 and 1996, and for the period August 25, 1995 (date of
inception) to December 31, 1998 in the accompanying financial statements.
3. MARKETABLE SECURITIES
The Company's marketable securities are considered "available for sale,"
and, as such, are stated at market value. The net unrealized gains and losses on
marketable securities are reported as part of accumulated other comprehensive
income. Realized gains or losses from the sale of marketable securities are
based on the specific identification method.
F-11
<PAGE> 162
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the investments in marketable securities at
December 31, 1998:
<TABLE>
<CAPTION>
GROSS UNREALIZED
---------------------------------------------------
COST GAINS LOSSES MARKET VALUE
------------ -------- ------- ------------
<S> <C> <C> <C> <C>
Available for sale securities:
U.S. Treasury securities and debt
securities of U.S. Government
agencies.......................... $ 20,684,791 $ 11,436 $ -- $ 20,696,227
Certificates of deposit and
money market funds........... 7,098,225 116 878 7,097,463
Corporate debt securities....... 141,804,303 225,972 28,435 142,001,840
------------ -------- ------- ------------
$169,587,319 $237,524 $29,313 $169,795,530
============ ======== ======= ============
</TABLE>
Proceeds from the sales of available for sale securities and gross realized
gains and gross realized losses on sales of available for sale securities were
immaterial during the year ended December 31, 1998.
The amortized cost and estimated fair value of available for sale
securities by contractual maturity at December 31, 1998 is as follows:
<TABLE>
<CAPTION>
COST MARKET VALUE
------------ ------------
<S> <C> <C>
Due in one year or less......................... $ 97,863,395 $ 97,895,773
Due after one year through two years............ 71,723,924 71,899,757
------------ ------------
$169,587,319 $169,795,530
============ ============
</TABLE>
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
In addition to marketable securities, the Company has investments in
pledged marketable securities that are pledged as collateral for repayment of
interest on the Company's Senior Notes through April 2000 (see note 8) and are
classified as non-current assets on the consolidated balance sheet. As of
December 31, 1998 pledged marketable securities consisted of U.S. Treasury
securities classified as held to maturity with an amortized cost of
approximately $60.8 million, interest receivable on the pledged marketable
securities of approximately $998,000 and cash and cash equivalents of
approximately $41,000. Approximately $40.1 million of the investments
contractually mature prior to December 31, 1999 and approximately $20.7 million
contractually mature after December 31, 1999 and prior to April 30, 2000.
4. NOTE RECEIVABLE
Under the terms of a promissory note with an incumbent, the Company agreed
to advance up to $10 million principal for the purpose of funding the
incumbent's equipment expenditures under a Fixed Point Microwave Services
agreement. Expenses are initially incurred by the Company and are recharged at
cost to the incumbent as principal under the promissory note. The principal
amount of the promissory note is due and payable on March 31, 1999. Interest on
the promissory note accrues at the rate of 5 per cent per annum computed from
the date of commissioning of the network, which had not occurred as of December
31, 1998. Commissioning of the network occurs when the network
F-12
<PAGE> 163
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
has been completed and is performing in accordance with agreed upon
specifications. Approximately $3.2 million was outstanding under the promissory
note as of December 31, 1998.
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of the following at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
----------- ----------
<S> <C> <C>
Network in progress................................ $38,669,088 $6,831,795
Communications network............................. 6,890,686 --
Office and computer equipment...................... 2,267,647 248,880
Furniture and fixtures............................. 766,013 120,093
Leasehold improvements............................. 166,733 62,344
----------- ----------
48,760,167 7,263,112
Less: accumulated depreciation..................... (788,831) (56,018)
----------- ----------
Property and equipment, net........................ $47,971,336 $7,207,094
=========== ==========
</TABLE>
Network construction costs include all direct material and labor costs
together with related allocable interest costs, necessary to construct
components of a high capacity digital network which is owned and maintained by
the Company. During 1998, a portion of network was completed and made available
for use by the Company, and was transferred from network in process to
communications network. Network construction in progress at December 31, 1998
and 1997 respectively included approximately $10.2 million and $5.1 million,
respectively, of telecommunications equipment not yet paid for by the Company.
Corresponding amounts are included in accounts payable at December 31, 1998 and
1997, respectively.
6. DEFERRED FINANCING COSTS
During 1998, the Company incurred total issuance costs of approximately
$11.3 million in connection with the Debt Offering. For the year ended December
31, 1998, amortization of the costs of approximately $843,000 was charged to
interest expense.
As of December 31, 1997, debt-financing costs comprised approximately
$250,000 related to costs incurred in anticipation of obtaining debt-financing
arrangements with a vendor. During the year ended December 31, 1998, these
costs, together with additional debt financing costs incurred during the year of
approximately $364,000, were charged to interest expense as the related
financing arrangements were not consummated.
7. RESTRICTED CASH
Restricted cash comprises amounts held in escrow to collateralize the
Company's obligations under certain of its Fixed Point Microwave Services (FPM)
agreements. The funds in each escrow account are available only to fund the
projects to which the escrow is related. Generally, funds are released from
escrow to pay project costs as incurred. During the year ended December 31,
1998, the Company deposited approximately $10.3 million in escrow and no funds
were released from escrow.
F-13
<PAGE> 164
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT
During 1998, the Company completed the Debt Offering for total gross
proceeds of $350.0 million less total issuance costs of approximately $11.3
million. Upon issuance, approximately $345.9 million of the gross proceeds were
allocated to the Senior Notes and approximately $4.1 million were allocated to
the Warrants based upon estimated fair values. The Warrants expire on April 15,
2008. The estimated value attributed to the Warrants has been recorded as a
discount on the face value of the Senior Notes and as additional paid-in
capital. This discount is amortized as an increase to interest expense and the
carrying value of the debt over the related term using the interest method. The
Company has recorded approximately $307,000 of expense for the year ended
December 31, 1998, related to the amortization of this discount. Interest on the
Senior Notes accrues at an annual rate of 12 1/4%, payable semiannually, in
arrears, beginning October 15, 1998, with principal due in full on April 15,
2008. Interest expense, exclusive of the amortization of the discount, for the
year ended December 31, 1998 was $31.3 million. The Company used approximately
$81.1 million of the proceeds related to the Debt Offering to purchase U.S.
Government debt securities, which are restricted and pledged as collateral for
repayment of all interest due on the Senior Notes through April 15, 2000. The
Company made its first interest payment of approximately $22.3 million on
October 15, 1998. The Senior Notes are redeemable, in whole or part, at any time
on or after April 15, 2003 at the option of the Company, at the following
redemption prices plus accrued and unpaid interest (1) on or after April 15,
2003; 106% of the principal amount, (2) on or after April 15, 2004; 104% of the
principal amount, (3) on or after April 15, 2005; 102% of the principal amount
and (4) on or after April 15, 2006; 100% of the principal amount. In addition,
at any time prior to April 15, 2001, the Company may redeem within sixty days,
with the net cash proceeds of one or more public equity offerings, up to 35% of
the aggregate principal amount of the Senior Notes at a redemption price equal
to 112.25% of the principal amount plus accrued and unpaid interest provided
that at least 65% of the original principal amount of the Senior Notes remain
outstanding. Upon a change in control, as defined, each holder of the Senior
Notes may require the Company to repurchase all or a portion of such holder's
Senior Notes at a purchase price of cash equal to 101% of the principal amount
plus accrued and unpaid interest and liquidated damages if any.
The Senior Notes contain certain covenants which restrict the activities of
the Company including limitations of indebtedness, restricted payments,
issuances and sales of capital stock, affiliate transactions, liens, guarantees,
sale of assets and dividends.
9. CAPITAL STOCK TRANSACTIONS
COMMON STOCK
The initial capitalization of the Company, on August 28, 1995, occurred
through the issuance by the Company of 1,450,000 shares of voting common stock
and 1,450,000 shares of non-voting common stock.
On May 8, 1998, the Company filed a registration statement with the
Securities and Exchange Commission for an initial public offering of common
stock (Initial Public Offering). The Company subsequently postponed the Initial
Public Offering. In relation to the postponement of the Initial Public Offering,
the Company wrote off approximately $1.4 million in expenses, consisting
primarily of legal and accounting fees, printing costs, and Securities and
Exchange Commission and NASDAQ Stock Market fees. On July 24, 1998, the
Company's stockholders approved a 2.9-for-1 stock split
F-14
<PAGE> 165
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
which was effected on August 3, 1998, the record date. All share information has
been adjusted for this stock split for all periods presented.
PREFERRED STOCK
As part of its initial capitalization on August 25, 1995, the Company
initiated a private offering of 1 million shares of Series A convertible
preferred stock for $1 million. Pursuant to the terms of the Investment and
Stockholders' Agreement by and among the Company and certain stockholders of the
Company (Investment and Stockholders Agreement), the offering closed in two
phases of $500,000 each. As of the signing of the Investment and Stockholders
Agreement, the Company received $500,000, representing the first closing on this
offering in 1995. In addition, the offering provided for a convertible bridge
loan in the amount of $1 million. The bridge loan carried an interest rate of
12% per annum and was due and payable in full on the earlier to occur of the
anniversary date of the bridge loan issuance or the closing date of the
Company's next equity financing. The bridge loan was converted into Series B
preferred stock at 73% of the price of the Series B convertible preferred stock
issued in the next equity financing.
In February 1996, the Company issued 500,000 shares of Series A convertible
preferred stock to the original investors in exchange for $500,000, representing
the second closing under the Investment and Stockholders Agreement. In August
1996, the Company drew $700,000 on a bridge loan with the original investors.
On December 23, 1996, the Company consummated a private offering of 609,756
shares of Series B convertible preferred stock for $2 million less issuance
costs of $25,000 pursuant to the Investment and Stockholders Agreement. In
addition, simultaneously, the $700,000 bridge loan plus $33,367 of accrued
interest was converted into 306,242 shares of Series B convertible preferred
stock. The Company recognized $271,107 of interest expense to account for the
beneficial conversion feature of the bridge loan. In addition, $300,000
representing the committed but undrawn portion of the bridge loan, was paid to
the Company for the sale of 125,292 shares of Series B convertible preferred
stock at a discounted rate. The Company recognized $110,883 of interest expense
to account for the beneficial conversion feature of the committed but undrawn
bridge loan. On June 18, 1997, pursuant to the Investment and Stockholders
Agreement, the Company received an additional $2 million in a second closing in
exchange for 609,756 shares of Series B convertible preferred stock. There were
no issuance costs associated with the second closing.
On October 31, 1997, pursuant to the Investment and Stockholders Agreement,
the Company consummated a private offering of 939,850 shares of Series C
convertible preferred stock for approximately $10 million, less issuance costs
of $38,780. On April 8, 1998, pursuant to the Investment and Stockholders
Agreement, the Company consummated a second closing of 1,879,699 shares of
Series C convertible preferred stock for an aggregate purchase price of
approximately $20.0 million. There were no issuance costs associated with the
second closing.
Each share of Series A, Series B and Series C convertible preferred stock
entitles each holder to a number of votes per share equal to the number of
shares of Common Stock into which each share of Series A, Series B and Series C
convertible preferred stock is currently convertible.
The holders of the Series A, Series B and Series C convertible preferred
stock are entitled to receive dividends in preference to and at the same rate as
dividends are paid with respect to the common stock. In the event of any
liquidation, dissolution or winding up of the Company, whether
F-15
<PAGE> 166
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
voluntary or involuntary, holders of each share of Series A, Series B and Series
C convertible preferred stock outstanding are entitled to be paid before any
payment shall be made to the holders of any class of common stock or any stock
ranking on liquidation junior to the convertible preferred stock, an amount, in
cash, equal to the original purchase price paid by such holder plus any declared
but unpaid dividends.
In the event the assets of the Company are insufficient to pay liquidation
preference amounts, then all of the assets available for distribution shall be
distributed pro rata so that each holder receives that portion of the assets
available for distribution as the number of shares of convertible preferred
stock held by such holder bears to the total number of shares of convertible
preferred stock then outstanding.
Shares of the Series A, Series B, and Series C convertible preferred stock
may be converted at any time, at the option of the holder, into voting common
stock. The number of shares of voting common stock entitled upon conversion is
the quotient obtained by dividing the face value of the Series A, Series B and
Series C convertible preferred stock by the Applicable Conversion Rate, defined
as the Applicable Conversion Value of $0.34, $1.13 or $3.67 per share,
respectively.
Each share of convertible preferred stock shall automatically be converted
into the number of shares of voting common stock which such shares are
convertible upon application of the Applicable Conversion Rate immediately upon
the closing of a qualified underwritten public offering covering the offer and
sale of capital stock which is defined as: (1) the Company is valued on a
pre-money basis at greater than $50 million, (2) the gross proceeds received by
the Company exceed $20 million, and (3) the Company uses a nationally recognized
underwriter approved by holders of a majority interest of the Series A, Series B
and Series C convertible preferred stock voting together.
If the Company issues any additional shares of common stock of any class at
a price less than the Applicable Conversion Value, in effect for the Series A,
Series B or Series C convertible preferred stock immediately prior to such
issuance or sale, then the Applicable Conversion Value shall be adjusted
accordingly.
In the event a qualified public offering has not occurred prior to December
23, 2000, the holder of shares of Series A or Series B preferred stock can
require the Company to redeem the shares of Series A and Series B convertible
preferred stock. After receipt from any one holder of an election to have any
shares redeemed, the Company is required to send a notice to the Series A and
Series B preferred stockholders on December 24, 2000 of the redemption price. If
after sending the redemption notice to Series A and Series B preferred
stockholders, the Company receives requests for redemption on or prior to
January 11, 2001, from the holders of at least 67% of the Series A and Series B
convertible preferred stock taken together, the Company must redeem all shares
of Series A and Series B convertible preferred stock. Payment of the redemption
price is due on January 23, 2001, for a cash price equal to the original
purchase price paid by such holders for each share of Series A and Series B
convertible preferred stock as adjusted for any stock split, stock distribution
or stock dividends with respect to such shares. The successful completion of a
qualified public offering is not within the control of the Company. Therefore,
the Company does not present the Series A and Series B preferred stock as a
component of stockholders' equity.
In the event that a qualified public offering has not occurred prior to
November 3, 2001, the holder of shares of Series C preferred stock can require
the Company to redeem the shares of Series C convertible preferred stock. After
receipt from any one holder of an election to have any
F-16
<PAGE> 167
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
shares redeemed, the Company is required to send a notice to the Series C
preferred stockholders on November 4, 2001 of the redemption price. If after
sending the redemption notice to Series C preferred stockholders, the Company
receives requests for redemption on or prior to November 21, 2001, from the
holders of at least 67% of the Series C convertible preferred stock, the Company
must redeem all shares of Series C convertible preferred stock. Payment of the
redemption price is due on December 3, 2001 for a cash price equal to the
original purchase price paid by such holders for each share of Series C
convertible preferred stock as adjusted for any stock split, stock distribution
or stock dividends with respect to such shares. The successful completion of a
qualified public offering is not within the control of the Company. Therefore,
the Company does not present the Series C preferred stock as a component of
stockholders' equity.
Notwithstanding the provisions for optional redemption described above,
pursuant to a Consent Waiver and Amendment effective March 24, 1998 among the
Company and certain stockholders of the Company, the holders of the Series A,
Series B and Series C convertible preferred stock agreed that no optional
redemption of the Series A, Series B or Series C convertible preferred stock may
be made by the Company prior to 90 days after (1) the final maturity dated of
the Senior Notes (2) or such earlier date (after the redemption date specified
for such preferred stock) as the Senior Notes shall be paid in full.
10. STOCK OPTIONS
On August 28, 1995, the Company adopted the 1995 Stock Option Plan (1995
Plan), under which incentive stock options and non-qualified stock options could
be granted to the Company's employees and certain other persons and entities in
accordance with law. The Compensation Committee, which administers the 1995
Plan, determined the number of options granted, the vesting period and the
exercise price of each award made under the 1995 Plan. The 1995 Plan will
terminate August 28, 2005 unless terminated earlier by the Board of Directors.
During 1998, the Compensation Committee determined that no further awards would
be granted under the 1995 Plan.
Options granted to date under the 1995 Plan generally vest over a three
period and expire either 30 days after termination of employment or 10 years
after date of grant. As of December 31, 1998, a total of 70,731 non-qualified
stock options and 424,393 incentive stock options were issued at an exercise
price of $0.03 per share, an amount estimated to equal or exceed the per share
fair value of the common stock at the time of grant. As of December 31, 1998,
the options issued at an exercise price of $0.03 had a weighted average
contractual life of 6.68 years. As of December 31, 1998, 490,410 of the options
issued at an exercise price of $0.03 were exercisable.
On August 1, 1997, the Company adopted the 1997 Stock Incentive Plan (1997
Plan), under which incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, performance awards and certain other
types of awards may be granted to the Company's employees and certain other
persons and entities in accordance with the law. To date, only non-qualified
stock options have been granted under the 1997 Plan. The Compensation Committee,
which administers the 1997 Plan, determines the number of options granted, the
vesting period and the exercise price of each award granted under the 1997 Plan.
The 1997 Plan will terminate July 31, 2007 unless earlier terminated by the
Board of Directors.
Options granted under the 1997 Plan generally vest over a three to seven
year period and expire: (1) ten years after the date of grant, (2) two years
after the date of the participant's termination without cause, disability or
death, (3) three months after the date of the participant's resignation,
F-17
<PAGE> 168
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) on the date of the participant's termination with cause or (5) on the date
of any material breach of any confidentiality or non-competition covenant or
agreement entered into between the participant and the Company.
The options issued on October 31, 1997, at $3.67, vest on October 31, 2004
provided, however (1) if the Company has met 80% of its revenue and Earnings
Before Interest, Taxes, Depreciation and Amortization (EBITDA) budget for the
calendar year ended December 31, 1998, which budget is approved by the Board of
Directors of the Company, 50% of the shares covered by the options shall vest
and become exercisable on January 1, 1999, (2) if the Company has met 80% of its
revenue and EBITDA budget for the calendar year ending December 31, 1999, which
budget is approved by the Board of Directors of the Company, the remaining 50%
of the shares covered by the options shall vest and become exercisable on
January 1, 2000, and (3) in the event that the first 50% of the shares covered
by the options did not vest on January 1, 1999 as set forth in (1) above and the
Company not only meets 80% of its revenue and EBITDA budget for the year ending
December 31, 1999 but exceeds 80% of its revenue and EBITDA budget for the year
ending December 31, 1999, which budget is approved by the Board of Directors of
the Company, in an amount at least equal to the deficiency that occurred in the
year ending December 31, 1998, 100% of the shares covered by the options shall
vest and become exercisable on January 1, 2000. Unvested and uncancelled options
issued at $3.67 immediately become fully vested and exercisable upon a change of
control or a qualified public offering, as defined in the option agreement.
The options issued at $1.13 vest ratably over three or four consecutive
years subject to certain acceleration provisions set forth in an employment
agreement such as the immediate vesting upon a change in control or a qualified
initial public offering. Under certain circumstances and subject to the terms of
the Senior Notes, upon the election of the employee upon termination of
employment, the Company will be required to pay the employee the fair value of
the vested options held on the date of such termination.
As of December 31, 1998, a total of 2,390,707 non-qualified options were
issued and outstanding, 1,523,323 at an exercise price of $1.13 per share,
520,134 at an exercise price of $3.67 per share and 347,250 at an exercise price
of $5.20 per share. Of the options issued at $1.13, 425,790 shares were
exercisable at December 31, 1998. None of the options issued at $3.67 or $5.20
were exercisable at December 31, 1998. As of December 31, 1998, the weighted
average contractual life of the options issued at $1.13, $3.67 and $5.20 was 8.9
and 8.9 and 9.9 years, respectively.
During the year ended December 31, 1998, 667,373 and 89,721 options were
issued at an exercise price of $1.13 and $3.67 per share, respectively. The
estimated fair value of the Company's underlying common stock in each case was
determined to be $1.99 per share and $16.00, respectively. Accordingly, the
Company calculated deferred compensation expense of approximately $1.7 million
related to the options granted during the year and recognized compensation
expense of approximately $701,000. The Company will recognize the balance of the
compensation expense over the remainder of the vesting period of the options.
F-18
<PAGE> 169
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity was as follows:
<TABLE>
<CAPTION>
1995 PLAN 1997 PLAN
-------------------------------- ------------------------
NON- NON- WEIGHTED
INCENTIVE QUALIFIED QUALIFIED AVERAGE
STOCK STOCK STOCK EXERCISE
OPTIONS OPTIONS PRICE OPTION PRICE PRICE
--------- --------- ------ --------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding,
December 31,
1995............... 410,248 70,731 $0.034 -- -- $0.034
Granted.............. 14,147 7,074 $0.034 -- -- $0.034
Exercised............ -- -- -- -- -- --
Canceled............. -- -- -- -- -- --
------- ------ ---------
Options outstanding,
December 31,
1996............... 424,395 77,805 $0.034 -- -- $0.034
Granted.............. -- -- -- 1,289,167 $1.13-$3.67 $1.980
Exercised............ -- -- -- -- -- --
Canceled............. -- -- -- -- -- --
------- ------ ---------
Options outstanding,
December 31,
1997............... 424,395 77,805 $0.034 1,289,167 $1.13-$3.67 $1.430
Options granted...... -- -- -- 1,107,094 $1.13-$5.20 $2.622
Options exercised.... -- (2,358) $0.034 -- -- --
Options cancelled.... -- (4,716) $0.034 (5,554) $1.13-$5.20 $3.145
------- ------ ---------
Options outstanding
at December 31,
1998............... 424,395 70,731 $0.034 2,390,707 $1.13-$5.20 $1.888
======= ====== =========
</TABLE>
The Company measures compensation expense for its employee stock-based
compensation using the intrinsic value method and provides pro forma disclosures
of net loss as if the fair value method had been applied in measuring
compensation expense. Under the intrinsic value method of accounting for
stock-based compensation, when the exercise price of options granted to
employees is less than the fair value of the underlying stock on the date of
grant, compensation expense is to be recognized over the applicable vesting
period
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------
1998 1997 1996
----------- ---------- ----------
<S> <C> <C> <C>
Net loss as reported....................... $36,296,596 $3,977,400 $1,743,635
Pro forma net loss......................... $36,859,594 $3,978,164 $1,747,570
Basic and diluted net loss per share as
reported................................. $ (12.51) $ (1.37) $ (0.60)
Pro forma basic and diluted net loss per
share.................................... $ (12.70) $ (1.37) $ (0.60)
</TABLE>
The fair value of each option is estimated on the date of grant using a
type of Black-Scholes option pricing model with the following weighted-average
assumptions used for grants during the years ended December 31, 1997 and 1996,
respectively: dividend yield of 0%, expected volatility of
F-19
<PAGE> 170
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
0%, risk-free interest rate of 6.55% and 6.35% and expected terms of 5.0 and 5.8
years. The following weighted-average assumptions were used for grants during
the year ended December 31, 1998: dividend yield of 0%, expected volatility of
0%, risk-free interest rate of 5.18% and expected terms of 5.5 years.
As of December 31, 1998 and 1997, the weighted average remaining
contractual life of the options is 8.63 years and 9.21 years, respectively. As
of December 31, 1998 and 1997 the pro forma tax effects would include an
increase to the deferred tax asset and the valuation allowance of approximately
$225,000, and $300 respectively; therefore, there is no pro forma tax effect.
11. VENDOR AGREEMENTS
Pursuant to a Master Agreement entered into by the Company and NEC on
August 8, 1997, as amended, the Company has the option to acquire, by March 31,
2003, a total of $200 million worth of certain equipment, services and licensed
software to be used by the Company in its network under pricing and payment
terms that the Company believes are favorable. In addition, NEC has agreed,
subject to certain conditions, to warranty equipment purchased by the Company
from NEC for three years, if defective, to repair or replace certain equipment
promptly and to maintain a stock of critical spare parts for up to 15 years. The
Company's agreement with NEC provides for fixed prices during the first three
years of its term. As of December 31, 1998, the Company had purchased $31.1
million of equipment under this agreement.
Pursuant to a supply agreement entered into by the Company and Lucent
Technologies (Lucent) on December 18, 1998, the Company agreed that Lucent
should be its exclusive supplier of fiber optic cable for its nationwide, voice
and data network. Lucent may provide financing of up to approximately $400
million of fiber purchases for the construction of the Company's network and may
provide or arrange financing for future phases of the fiber portion of the
Company's network. The total amount of financing over the life of this
seven-year agreement is not to exceed $1.8 billion. Certain material terms of
the Company's transactions with Lucent are currently under review by Lucent and
the Company. There can be no assurance that the financing contemplated by the
supply agreement will be consummated or, if consummated, consummated on the
terms and conditions described above. The supply agreement provides that Lucent
will provide the Company with a broad level of support, including fiber optic
equipment, network planning and design, technical and marketing support, and
financing. As of December 31, 1998, no purchases were made by the Company under
this agreement.
12. COMMITMENTS AND CONTINGENCIES
The Company maintains office space in Washington, D.C., Kansas and Texas.
The most significant lease relates to the Company's headquarters facility in
Washington, D.C. The partnership leasing the space in Washington, D.C. is
controlled by a director of the Company. The lease expires on August 31, 1999,
and is renewable by the Company for two additional one-year periods. Rent paid
to this related party during the year ended December 31, 1998, 1997 and 1996,
was $281,890, $60,980 and $0, respectively. The Company has no amounts due to
the related party as of December 31, 1998.
On December 30, 1998, the Company entered into a lease agreement for the
lease of tower site space, sufficient to perform its obligations under a fixed
point microwave agreement (FPMA) with an incumbent. Under the terms of the
lease, the Company is obligated to rent of $130,000 per month for
F-20
<PAGE> 171
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
a period expiring on the later of (1) the expiration of the FPMA as to that
site, or (2) ten years from the effective date of the agreement. The agreement
provides for an increase in the rent payable commencing on December 1, 1999 and
on each succeeding year thereafter to December 1, 2008, by an amount equal to 4
per cent of the rent then in effect.
The Company's future minimum rental payments under noncancellable operating
leases are as follows:
<TABLE>
<S> <C>
1999............................................... $ 2,177,440
2000............................................... 1,913,822
2001............................................... 1,967,214
2002............................................... 2,033,577
2003 and thereafter................................ 12,089,432
-----------
Total......................................... $20,181,485
===========
</TABLE>
Rent expense for the years ended December 31, 1998, 1997, and 1996 was
$389,969, $114,673 and $4,399, respectively.
The Company earns microwave telecommunication capacity revenue under an
indefeasible right of use (IRU) agreement dated December 1, 1998, of $137,000
per month commencing December 1998 and expiring on the later of (1) the
expiration of the FPMA as to that site, or (2) ten years from the effective date
of the agreement. The IRU agreement provides for an increase in the rent
receivable commencing on December 1, 1999 and on each succeeding year thereafter
to December 1, 2008, by an amount equal to 4 per cent of the rent then in
effect.
In exchange for a non-compete agreement, the Company has agreed to pay a
senior management employee a severance payment of $275,000, if such employee's
employment with the Company is terminated.
As at December 31, 1998, the Company had capital commitments of
approximately $28.0 million relating to telecommunications and transmission
equipment.
F-21
<PAGE> 172
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. INCOME TAXES
The tax effect of temporary differences that give rise to significant
portions of the deferred tax asset at December 31, 1998 and 1997, is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1997
------------ -----------
<S> <C> <C>
Deferred revenue.................................... $ 949 $ 117,000
Capitalized start-up costs.......................... 1,370,937 1,271,227
Capitalized research and development costs.......... 66,111 79,333
Net operating loss carryforward..................... 15,325,484 754,458
16,763,481 2,222,018
Less valuation allowance............................ (16,763,481) (2,222,018)
------------ -----------
Net deferred tax asset.............................. $ -- $ --
============ ===========
</TABLE>
Capitalized costs represent expenses incurred in the organization and
start-up of the Company. For federal income tax purposes, these costs are being
amortized over sixty months.
The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income in the periods in which those temporary
differences are deductible. The Company has provided a valuation allowance
against its deferred tax assets as they are long-term in nature and their
ultimate realization cannot be determined.
14. SUBSEQUENT EVENT
On November 4, 1999, the Company, together with Pathnet Telecommunications
Inc. (PTI) a Delaware company formed on November 1, 1999, entered into
agreements providing for strategic investments from Colonial Pipeline Company,
Burlington Northern and Santa Fe Corporation and CSX Corporation to PTI. Upon
the closing of this transaction, PTI will receive the right to develop over
12,000 miles of the investors' rights of way with an estimated value of $187.0
million in return for 8,511,607 shares of PTI's Series D convertible preferred
stock. In addition to providing a portion of the right of way access, Colonial
Pipeline will pay $68.0 million of cash to PTI comprised of $38.0 million at the
initial closing for 1,729,631 shares of PTI's Series E redeemable preferred
stock, $25.0 million for 1,137,915 shares of PTI's Series E redeemable preferred
stock (upon the completion of a fiber optic network segment build that the
Company expects to complete during the first calendar quarter of 2000), $1.0
million for the issuance of an option to purchase 1,593,082 shares of PTI's
Series E redeemable preferred stock for $21.97 per share and shares of PTI's
common stock in connection with an initial public offering and $4.0 million for
rights in 2,200 conduit miles of our future network. Further, upon the closing
of this transaction, all of the Company's common stock will be exchanged for
common stock of PTI. In addition, all of the Company's 5,470,595 shares of
mandatorily redeemable preferred stock will be converted into 15,864,715 of
PTI's convertible preferred stock. The new investors collectively will receive
an approximate one-third equity stake in PTI, as well as proportionate
representation on the PTI Board of Directors. As part of this transaction and
the reconstitution of the Pathnet Board, Dave Schaeffer, former Chairman of
Pathnet and an existing director, resigned from the Company's Board of Directors
effective November 4, 1999.
F-22
<PAGE> 173
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The terms of the strategic investment transaction require that consents be
obtained from the holders of a majority of the Company's existing Senior Notes.
As a result, on November 22, 1999, PTI filed a preliminary prospectus with the
Securities and Exchange Commission, to offer all holders of the Senior Notes a
guarantee of the obligations of the Company to make interest and principal
payments. Concurrent with this offer, the Company is seeking consents from the
holders of the Senior Notes to the waiver and the amendment of certain
provisions of the Indenture. Pathnet expects to close this transaction
immediately following receipt of the required consents and other required
regulatory approvals.
In November 1999, the Company executed a lease for 40,000 square feet of
office space in Reston, Virginia which will become the Company's new
headquarters in the first half of 2000. The lease term is 10 years with annual
rent of approximately $1.0 million.
F-23
<PAGE> 174
[THIS PAGE INTENTIONALLY LEFT BLANK]
F-24
<PAGE> 175
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 98,896,417 $ 57,321,887
Note receivable............................................. -- 3,206,841
Interest receivable......................................... 1,957,216 3,848,753
Marketable securities available for sale, at market......... 69,420,476 97,895,773
Prepaid expenses and other current assets................... 453,541 205,505
------------ ------------
Total current assets................................... 170,727,650 162,478,759
Property and equipment, net................................. 106,123,850 47,971,336
Deferred financing costs, net............................... 9,695,423 10,508,251
Restricted cash............................................. 3,952,769 10,731,353
Marketable securities available for sale, at market......... 5,103,435 71,899,757
Pledged marketable securities held to maturity.............. 42,379,701 61,824,673
Other assets................................................ 591,727 --
------------ ------------
Total assets........................................... $338,574,555 $365,414,129
============ ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable............................................ $ 12,378,214 $ 10,708,263
Accrued interest............................................ 19,651,047 8,932,294
Accrued expenses and other current liabilities.............. 1,093,897 639,688
------------ ------------
Total current liabilities.............................. 33,123,158 20,280,245
12 1/4% Senior Notes, net of unamortized bond discount of
$3,480,750 and $3,787,875 respectively.................... 346,519,250 346,212,125
Other non-current liabilities............................... 263,734 --
------------ ------------
Total liabilities...................................... 379,906,142 366,492,370
------------ ------------
Series A convertible preferred stock, $0.01 par value,
1,000,000 shares authorized, issued and outstanding at
September 30, 1999 and December 31, 1998, respectively
(liquidation preference $1,000,000)....................... 1,000,000 1,000,000
Series B convertible preferred stock, $0.01 par value,
1,651,046 shares authorized, issued and outstanding at
September 30, 1999 and December 31, 1998, respectively
(liquidation preference $5,033,367)....................... 5,008,367 5,008,367
Series C convertible preferred stock, $0.01 par value,
2,819,549 shares authorized, issued and outstanding at
September 30, 1999 and December 31, 1998, respectively
(liquidation preference $30,000,052)...................... 29,961,272 29,961,272
------------ ------------
Total mandatorily redeemable preferred stock........... 35,969,639 35,969,639
------------ ------------
Common stock, $0.01 par value, 60,000,000 shares authorized
at June 30, 1999 and December 31, 1998, respectively;
2,977,593 and 2,902,358 shares issued and outstanding at
September 30, 1999 and December 31, 1998, respectively.... 29,776 29,024
Deferred compensation....................................... (575,836) (978,064)
Additional paid-in capital.................................. 6,162,866 6,156,406
Accumulated other comprehensive (loss) income............... (45,465) 208,211
Deficit accumulated during the development stage............ (82,872,567) (42,463,457)
------------ ------------
Total stockholders' equity (deficit)................... (77,301,226) (37,047,880)
------------ ------------
Total liabilities, mandatorily redeemable
preferred stock and stockholders' equity
(deficit)....................................... $338,574,555 $365,414,129
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-25
<PAGE> 176
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED AUGUST 25, 1995
SEPTEMBER 30, SEPTEMBER 30, (DATE OF INCEPTION)
--------------------------- --------------------------- TO SEPTEMBER 30,
1999 1998 1999 1998 1999
------------ ------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C>
Revenue..................... $ 584,084 $ 475,000 $ 2,275,003 $ 1,050,000 $ 4,022,042
------------ ------------ ------------ ------------ ------------
Operating expenses:
Cost of revenue........... 4,258,609 1,621,211 9,579,064 5,385,718 17,126,684
Selling, general and
administrative......... 3,197,164 2,694,505 9,500,235 6,721,862 25,125,584
Depreciation expense...... 2,143,238 203,725 3,714,170 315,247 4,503,001
------------ ------------ ------------ ------------ ------------
Total operating
expenses............. 9,599,011 4,519,441 22,793,469 12,422,827 46,755,269
------------ ------------ ------------ ------------ ------------
Net operating loss.......... (9,014,927) (4,044,441) (20,518,466) (11,372,827) (42,733,227)
Interest expense............ (9,987,494) (11,151,467) (30,318,331) (21,862,169) (63,306,142)
Interest income............. 3,318,719 4,728,582 10,511,464 9,574,286 24,626,700
Write-off of initial public
offering costs............ -- (1,354,534) -- (1,354,534) (1,354,534)
Other income (expense),
net....................... (243,504) 1,661 (83,777) 500 (86,364)
------------ ------------ ------------ ------------ ------------
Net loss............... $(15,927,206) $(11,820,199) $(40,409,110) $(25,014,744) $(82,853,567)
============ ============ ============ ============ ============
Basic and diluted loss per
common share.............. $ (5.44) $ (4.07) $ (13.88) $ (8.62) $ (28.54)
============ ============ ============ ============ ============
Weighted average number of
common shares
outstanding............... 2,926,081 2,902,358 2,911,512 2,901,917 2,902,594
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-26
<PAGE> 177
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED AUGUST 25, 1995
SEPTEMBER 30, SEPTEMBER 30, (DATE OF INCEPTION)
--------------------------- --------------------------- TO SEPTEMBER 30,
1999 1998 1999 1998 1999
------------ ------------ ------------ ------------ -------------------
<S> <C> <C> <C> <C> <C>
Net loss.................... $(15,927,206) $(11,820,199) $(40,409,110) $(25,014,744) $(82,853,567)
Other comprehensive income
(loss):
Net unrealized gain (loss)
on marketable
securities available
for sale............... 75,759 488,345 (253,676) 436,490 (45,465)
------------ ------------ ------------ ------------ ------------
Comprehensive loss.......... $(15,851,447) $(11,331,854) $(40,662,786) $(24,578,254) $(82,899,032)
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-27
<PAGE> 178
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
FOR THE PERIOD
FOR THE NINE MONTHS ENDED AUGUST 25, 1995
SEPTEMBER 30, (DATE OF INCEPTION)
----------------------------- TO SEPTEMBER 30,
1999 1998 1999
------------ ------------- -------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(40,409,110) $ (25,014,744) $ (82,853,567)
Adjustment to reconcile net loss to net cash used in
operating activities
Depreciation expense.................................... 3,714,170 315,247 4,503,001
Amortization of deferred financing costs................ 853,563 558,785 1,696,353
Loss on disposal of fixed assets........................ 8,345 -- 13,845
Profit on disposal of investments....................... (157,983) -- (157,983)
Write-off of deferred financing costs................... -- 613,910 581,334
Interest expense resulting from amortization of discount
on the bonds payable.................................. 307,125 204,750 614,250
Amortization of premium on pledged securities........... (288,643) -- (288,643)
Stock based compensation................................ 402,228 489,435 1,103,523
Interest expense for beneficial conversion feature of
bridge loan........................................... -- -- 381,990
Accrued interest satisfied by conversion of bridge loan
to Series B convertible preferred stock............... -- -- 33,367
Changes in assets and liabilities:
Accounts receivable..................................... -- -- --
Interest receivable..................................... 1,891,537 (3,936,127) (2,955,415)
Prepaid expenses and other assets....................... (839,763) (119,796) (1,045,268)
Accounts payable........................................ (2,140,999) 53,711 (1,633,385)
Accrued interest........................................ 10,718,753 20,484,724 19,651,047
Accrued expenses and other liabilities.................. 717,943 1,808,548 1,357,630
------------ ------------- -------------
Net cash used in operating activities................. (25,222,834) (4,541,557) (58,997,921)
------------ ------------- -------------
Cash flows from investing activities:
Expenditures for network in progress...................... (57,461,993) (9,183,109) (92,821,117)
Expenditures for property and equipment................... (607,101) (8,548,737) (3,812,994)
Proceeds on disposal of fixed assets...................... 5,015 -- 5,015
Sale of marketable securities held for resale............. 95,175,926 -- 95,175,926
Purchase of marketable securities available for sale...... -- (191,232,621) (169,587,319)
Purchase of marketable securities -- pledged as
collateral.............................................. -- (83,224,243) (83,097,655)
Maturity and sale of marketable securities -- pledged as
collateral.............................................. 19,733,615 -- 42,004,796
Restricted cash........................................... 6,778,584 (9,887,042) (3,952,769)
Repayment of note receivable.............................. 3,206,841 9,000 9,000
------------ ------------- -------------
Net cash provided by (used in) investing activities... 66,830,887 (302,066,752) (216,077,117)
------------ ------------- -------------
Cash flows from financing activities:
Issuance of voting and non-voting common stock............ -- -- 1,000
Proceeds from sale of preferred stock..................... -- 19,999,998 35,000,052
Proceeds from sale of Series B convertible preferred stock
representing the conversion of committed but undrawn
portion of bridge loan to Series B convertible preferred
stock................................................... -- -- 300,000
Proceeds from bond offering............................... -- 350,000,000 350,000,000
Proceeds from bridge loan................................. -- -- 700,000
Exercise of employee common stock options................. 7,212 81 7,293
Payment of issuance costs for preferred stock offerings... -- -- (63,780)
Payment of deferred financing costs....................... (40,735) (11,664,523) (11,973,110)
------------ ------------- -------------
Net cash provided by (used in) financing activities... (33,523) 358,335,556 373,971,455
------------ ------------- -------------
Net increase in cash and cash equivalents................... 41,574,530 51,727,247 98,896,417
Cash and cash equivalents at the beginning of period........ 57,321,887 7,831,384 --
------------ ------------- -------------
Cash and cash equivalents at the end of period.............. $ 98,896,417 $ 59,558,631 $ 98,896,417
============ ============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-28
<PAGE> 179
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Pathnet, Inc. (Company) is a facilities based wholesale telecommunications
services provider that targets under-served and second and third tier U.S.
markets. Pathnet offers telecommunications service to inter-exchange carriers,
local exchange carriers, internet service providers, Regional Bell Operating
Companies, cellular operators and resellers.
During the third quarter of 1999, Pathnet continued to construct and deploy
digital networks utilizing both wireless and fiber-optic technologies. Pursuant
to its agreement with Worldwide Fiber USA (WFI), the Company began to construct
and market a multi-conduit fiber-optic network between Chicago, Illinois and
Denver, Colorado during the second quarter. In addition, in August the Company
announced it will co-develop a 400 mile fiber network connecting Grand Junction,
Colorado to Albuquerque, New Mexico with Tri State Generation and Transmission
Association, Inc. (See note 9 to these Financial Statements).
As of September 30, 1999, the Company had approximately 6,100 route miles
of completed network and approximately 1,400 route miles of network under
construction.
The Company's business is funded primarily through equity investments by
the Company's stockholders and $350.0 million aggregate principal amount of
12 1/4% Senior Notes due 2008 (Senior Notes) which have been registered under
the Securities Act of 1933, as amended.
A substantial portion of the Company's initial activities involved
developing strategic relationships with co-developers such as railroads,
pipelines and utilities and building its network. Accordingly, the majority of
its revenues to date reflect certain consulting and advisory services in
connection with the design, development and construction of digital microwave
infrastructure. The remainder of its revenues to date (approximately 47%) has
been derived from the sale of bandwidth along the Company's digital network. The
Company has experienced significant operating and net losses and negative
operating cash flow to date and expects to continue to experience operating and
net losses and negative operating cash flow until such time as it is able to
generate revenue sufficient to cover its operating expenses.
2. BASIS OF PRESENTATION
The Company recently commenced providing telecommunication services to
customers and recognizing the revenue from the sale of such telecommunication
services, its principal activities to date have been securing contractual
alliances with its co-development partners, designing and constructing
networkpaths, obtaining capital and planning its proposed service. Accordingly,
the Company's consolidated financial statements are presented as a development
stage enterprise, as prescribed by Statement of Financial Accounting Standards
No. 7, "Accounting and Reporting by Development Stage Enterprises." As a
development stage enterprise, the Company has been relying on the issuance of
equity and debt securities, rather than recurring revenues, for its primary
sources of cash since inception.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" ("SFAS No.
131"). SFAS No. 131 changes the way public companies report segment information
in annual financial statements and also requires those companies to report
selected segment information in interim financial reports to stockholders. It
also establishes standards for related disclosures about products and services,
geographic areas, and major customers. Management believes the Company's current
operations
F-29
<PAGE> 180
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
comprise only one segment, the sale of telecommunications capacity, and as such,
adoption of SFAS No. 131 does not impact the disclosures made in the Company's
financial statements.
The interim financial data as of September 30, 1999 and for the nine months
ended September 30, 1999 and September 30, 1998 is unaudited; however, in the
opinion of the Company, the interim data includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair statement of the
results for the interim periods. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted. These unaudited
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the period ended December 31, 1998 filed with the Securities
and Exchange Commission. The results of operations for the three and nine months
ended September 30, 1999 are not necessarily indicative of the operating results
to be expected for the full year.
3. REVENUE RECOGNITION
The Company earns revenue from the sale of telecommunications capacity and
for project management and consulting services. Revenue from the sale of
telecommunications capacity is earned when the service is provided. Revenue for
project management and consulting services is recognized based on the percentage
of the services completed. The Company defers revenue when contractual payments
are received in advance of the performance of services.
Revenue from the sale of telecommunications capacity includes revenue
earned under indefeasible right of use agreements. The Company recognizes
revenue under such agreements on a straight-line basis over their term.
4. LOSS PER SHARE
Basic earnings (loss) per share is computed by dividing net income (loss)
by the weighted average number of shares of Common Stock outstanding during the
applicable period. Diluted earnings (loss) per share is computed by dividing net
income (loss) by the weighted average common and potentially dilutive common
equivalent shares outstanding during the applicable period. For each of the
periods presented, basic and diluted loss per share are the same. The exercise
of 3,119,434 employee Common Stock options, the exercise of warrants to purchase
1,116,500 shares of Common Stock, and the conversion of 5,470,595 shares of
Series A, B and C convertible preferred stock into 15,864,715 shares of Common
Stock as of September 30, 1999, which could potentially dilute basic earnings
per share in the future, were not included in the computation of diluted loss
per share for the periods presented because to do so would have been
antidilutive in each case.
5. MARKETABLE SECURITIES
Certain of the Company's marketable securities are considered "available
for sale," and, as such, are stated at market value. The net unrealized gains
and losses on marketable securities are reported as part of accumulated other
comprehensive income (loss). Realized gains or losses from the sale of
marketable securities are based on the specific identification method.
F-30
<PAGE> 181
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of the investments in marketable securities at
September 30, 1999:
<TABLE>
<CAPTION>
GROSS UNREALIZED
-----------------
COST GAINS LOSSES MARKET VALUE
----------- ------- ------- ------------
<S> <C> <C> <C> <C>
Available for sale securities:
U.S. Treasury securities and debt securities
of U.S. Government agencies................... $28,398,072 $ -- $45,760 $28,352,312
Corporate debt securities................... 44,660,067 43,212 33,750 44,669,529
Debt Securities issued by foreign
governments.............................. 1,511,237 -- 9,167 1,502,070
----------- ------- ------- -----------
$74,569,376 $43,212 $88,677 $74,523,911
=========== ======= ======= ===========
</TABLE>
Gross realized gains on sales of available for sale securities were
approximately $0 and $158,000 during the three and nine months ended September
30, 1999 respectively. Gross realized gains and gross realized losses on sales
of available for sale securities were immaterial during the three and nine
months ended September 30, 1998.
The amortized cost and estimated fair value of available for sale
securities by contractual maturity at September 30, 1999 is as follows:
<TABLE>
<CAPTION>
COST MARKET VALUE
----------- ------------
<S> <C> <C>
Due in one year or less.............................. $69,428,897 $69,420,476
Due after one year through two years................. 5,140,479 5,103,435
----------- -----------
$74,569,376 $74,523,911
=========== ===========
</TABLE>
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
In addition to marketable securities, the Company has investments in
pledged marketable securities that are pledged as collateral for repayment of
interest on the Company's Senior Notes through April 2000 and are classified as
non-current assets on the consolidated balance sheet. As of September 30, 1999,
pledged marketable securities consisted of U.S. Treasury securities classified
as held to maturity with an amortized cost of approximately $20.9 million and
cash and cash equivalents of approximately $21.5 million. All of the investments
contractually mature by March 31, 2000.
F-31
<PAGE> 182
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of the following at
September 30, 1999 and December 31, 1998:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Network in progress................................. $ 37,793,073 $38,669,088
Communications network.............................. 68,974,361 6,890,686
Office and computer equipment....................... 2,053,485 2,267,647
Furniture and fixtures.............................. 1,484,068 766,013
Leasehold improvements.............................. 301,407 166,733
------------ -----------
110,606,394 48,760,167
Less: accumulated depreciation...................... (4,482,544) (788,831)
------------ -----------
Property and equipment, net......................... $106,123,850 $47,971,336
============ ===========
</TABLE>
Network in progress includes (i) all direct material and labor costs
incurred on the construction of the network together with related allocable
interest costs, necessary to construct components of a high capacity digital
network which is owned and maintained by the Company, and (ii) network related
inventory parts and equipment. The network in progress balance on September 30,
1999 includes approximately $15.2 million for costs incurred under the Company's
agreement with WFI to construct a digital fiber optic network and $2.5 million
for a right of use under a agreement with Northern Border Pipeline for microwave
access. When a portion of the network has been completed and made available for
use by the Company, the accumulated costs are transferred from network in
process to communications network and depreciated over time. As of September 30,
1999, the Company incurred non-cash capital expenditure of approximately $14.0
million.
7. RESTRICTED CASH
Restricted cash comprises amounts held in escrow to secure the Company's
obligations under certain of its Fixed Point Microwave Services Agreements. The
funds in each escrow account are available only to fund the project to which the
escrow is related until such project has been completed, at which time surplus
funds will be returned to the Company. Generally, funds are released from escrow
to pay project costs when such costs are incurred and agreed upon under the
contract. During the three and nine months ended September 30, 1999,
approximately $4.0 million and $7.1 million were released from escrow,
respectively.
8. COMMITMENTS AND CONTINGENCIES
As of September 30, 1999, the Company had commitments of up to
approximately $79.9 million relating to purchases of telecommunication and
transmission equipment and its agreement with WFI. (See note 9 to these
Financial Statements).
F-32
<PAGE> 183
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. FIBER AGREEMENTS
On March 31, 1999, the Company signed two agreements with WFI to construct
and market a multi-conduit fiber-optic network between Chicago, Illinois and
Denver, Colorado. The total shared projected cost for this project is in excess
of $100 million. The 1,100-mile network between Chicago and Denver will pass
through Des Moines, Iowa; Omaha, Nebraska; and Lincoln, Nebraska. WFI will
lead-manage the project with construction to be completed in two segments. The
first segment, Chicago to Omaha, is expected to be complete in late 1999 with
the second segment, Omaha to Denver, scheduled to be completed in the first
quarter of 2000.
On August 6, 1999, the Company announced a co-development agreement with
Tri-State Generation and Transmission Association, Inc. (Tri-State), to
construct a 400-mile fiber network connecting Grand Junction, Colorado to
Albuquerque, New Mexico. The total projected combined cost for this route is
approximately $40 million. Tri-State and some of its member cooperatives will
contribute up to 50% of the network build costs.
10. SUBSEQUENT EVENT
On November 4, 1999, the Company, together with Pathnet Telecommunications
Inc. (PTI) a Delaware company formed on November 1, 1999, entered into
agreements providing for strategic investments from Colonial Pipeline Company,
Burlington Northern and Santa Fe Corporation and CSX Corporation to PTI. Upon
the closing of this transaction, PTI will receive the right to develop over
12,000 miles of the investors' rights of way with an estimated value of $187.0
million in return for 8,511,607 shares of PTI's Series D convertible preferred
stock. In addition to providing a portion of the right of way access, Colonial
Pipeline will pay $68.0 million of cash to PTI comprised of $38.0 million at the
initial closing for 1,729,631 shares of PTI's Series E redeemable preferred
stock, $25.0 million for 1,137,915 shares of PTI's Series E redeemable preferred
stock (upon the completion of a fiber optic network segment build that the
Company expects to complete during the first calendar quarter of 2000), $1.0
million for the issuance of an option to purchase 1,593,082 shares of PTI's
Series E redeemable preferred stock for $21.97 per share and shares of PTI's
common stock in connection with an initial public offering and $4.0 million for
rights in 2,200 conduit miles of our future network. Further, upon the closing
of this transaction, all of the Company's common stock will be exchanged for
common stock of PTI. In addition, all of the Company's 5,470,595 shares of
mandatorily redeemable preferred stock will be converted into 15,864,715 of
PTI's convertible preferred stock. The new investors collectively will receive
an approximate one-third equity stake in PTI, as well as proportionate
representation on the PTI Board of Directors. As part of this transaction and
the reconstitution of the Pathnet Board, Dave Schaeffer, former Chairman of
Pathnet and an existing director, resigned from the Company's Board of Directors
effective November 4, 1999.
The terms of the strategic investment transaction require that consents be
obtained from the holders of a majority of the Company's existing Senior Notes.
As a result, on November 22, 1999, PTI filed a preliminary prospectus, with the
Securities and Exchange Commission, to offer all holders of the Senior Notes a
guarantee of the obligations of the Company to make interest and principal
payments. Concurrent with this offer, the Company is seeking consents from the
holders of the Senior Notes to the waiver and the amendment of certain
provisions of the Indenture. Pathnet expects to close this transaction
immediately following receipt of the required consents and other required
regulatory approvals.
F-33
<PAGE> 184
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1999, the Company executed a lease for 40,000 square feet of
office space in Reston, Virginia which will become the Company's new
headquarters in the first half of 2000. The lease term is 10 years with annual
rent of approximately $1.0 million.
F-34
<PAGE> 185
GLOSSARY OF SELECTED TERMS
Bandwidth..................... Refers to the maximum amount of data that can
be transferred through a communication channel
in a given time.
CAP (Competitive Access
Provider)................... An alternative, competitive local exchange
carrier.
Carrier....................... A provider of telecommunications services to
the public.
Carrier's Carrier............. A provider of communications transmission
services that specializes in the wholesale
provision of telecommunications bandwidth and
services to other carriers and service
providers.
Cellular Operators............ A provider of wireless radio telephone service
which operates using multiple transceiver sites
linked to a central computer for coordination.
Central Offices............... A telecommunications center where switches and
other telecommunications facilities are housed.
CAPs may connect with ILEC networks either at
this location or through a remote location.
Circuit....................... An electronic, radio or optical connection over
which communications may occur.
CLEC (Competitive Local
Exchange Carrier)........... A category of telephone service provider that
offers services similar to the former monopoly
local telephone company, as recently allowed by
changes in telecommunications law and
regulation. A competitive telecommunications
company may also provide other types of
telecommunications services (long distance,
Internet access, etc.)
CLEC Certification............ Granted by a state public service commission or
public utility commission, this certification
provides telecommunications services providers
with the legal standing to offer local exchange
telephone services in direct competition with
the ILEC and other competitive
telecommunications companies. Such
certifications are granted on a state-by-state
basis.
Collocation................... A location where a carrier's or customer's
equipment interconnects with the network of a
carrier inside the carrier's facility.
Communications Act of 1934.... The first major federal legislation that
established rules for broadcast and
non-broadcast communications, including both
wireless and wire line telephone service.
Conduit....................... A pipe that is installed to house the fiber
optic cable installed as part of the network.
Dark Fiber.................... Fiber optic cables which do not have connected
to them the electronics required to transmit
voice or data signals.
A-1
<PAGE> 186
Dialing Parity................ A technology employed so that end user
customers will not detect a difference in
quality and is ease of dialing telephone
numbers or accessing operators and emergency
services.
Digital....................... Describes a method of storing, processing and
transmitting information through the use of
distinct electronic or optical pulses that
represent the binary digits 0 and 1. Digital
transmission and switching technologies employ
a sequence of these pulses to convey
information, as opposed to the continuously
variable analog signal. The precise digital
numbers minimize distortion, such as graininess
or "snow," in the case of video transmission,
or static or other background distortion in the
case of audio transmission.
Digital Divide................ The growing disparity between telecommunication
services available in the largest markets and
those services available in second and third
tier markets.
DSL (Digital Subscriber
Line)......................... A transmission technology enabling high-speed
access in the local copper loop, often for the
last mile between the network service
provider -- i.e., an ILEC, CLEC or an
ISP -- and end user.
DSLAM (Digital Subscriber Line
Access Multiplexer)......... A multiplexer which houses individual circuit
cards used to provide DSL service.
DS-0, DS-1, DS-3.............. Standard telecommunications industry digital
signal formats, which are distinguishable by
bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-0 service has a bit
rate of up to 64 kilobits per second. DS-1
service has a bit rate of 1.544 megabits per
second and DS-3 service has a bit rate of 45
megabits per second. DS-0 is also equivalent to
one standard telephone line.
DWDM (Dense Wavelength
Division Multiplexing)...... A technology that allows multiple optical
signals to be combined so that they can be
aggregated as a group and transported over a
single fiber to increase capacity.
Existing Local Telephone
Company....................... An ILEC.
Facilities Based.............. A carrier owning the physical network assets or
a portion of the physical network assets
necessary to provide telecommunication
services.
56.6 Kbps..................... Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56.6 Kbps of data. Currently in
widespread use by medium and large businesses
primarily for entry level high-speed data and
very low-speed video applications.
FAA (Federal Aviation
Agency)....................... The United States government federal regulatory
agency with the authority to oversee air
traffic originating or terminating in the
United States.
A-2
<PAGE> 187
FCC (Federal Communications
Commission)................. The United States government federal regulatory
agency with the authority to regulate all
interstate and international communications
media (i.e., radio, television, wire, etc.)
originating or terminating in the United
States.
Fiber Optics.................. Fiber optic technology involves sending laser
light pulses across glass stands in order to
transmit digital information. Fiber is immune
to electrical interference and environmental
factors that effect copper wiring and satellite
transmission.
ILEC (Incumbent Local Exchange
Carrier).................... The existing local telephone company; one of
the RBOCs or GTE, or one of such companies'
successors.
Interconnection Agreement..... A contract between an ILEC and a CLEC for the
interconnection of the ILEC's and CLEC's
networks, for the purpose of mutual passing of
traffic between the networks, allowing
customers of one of the networks to call users
served by the other network. These agreements
set out the financial and operational aspects
of such interconnection.
Internet...................... The name used to describe the global open
network of computers that permits a person with
access to the Internet to exchange information
with any other computer connected to the
network.
IRU........................... Indefeasible right to use. A long-term lease of
approximately 10 or 20 years to specific
strands of fiber optic cable or to conduit.
ISP (Internet Service
Provider)..................... A telecommunications service provider who
provides access to the Internet for dial access
and/or dedicated access.
IXC (Interexchange Carrier)... A provider of telecommunications services
between exchanges, or cities; also called long
distance carrier. A long distance carrier may
offer services over its own or another
carrier's facilities.
Lit Fiber..................... Fiber activated or equipped with the requisite
optical transmission equipment necessary to use
the fiber for transmission.
Local Access Services......... Our access services which allow our customers
to serve their customers in second and third
tier markets using our network components
including our collocations in the ILECs central
offices.
Local Loops................... The physical wires that run from the end user's
telephone set to the ILEC's central office.
Long Distance Carriers
(Interexchange Carriers).... Long distance carriers providing services
between LATAs, on an interstate or intrastate
basis. A long distance carrier may be
facilities-based or offer service by reselling
the services of a facilities-based carrier.
A-3
<PAGE> 188
Multiplexing.................. An electronic or optical process that combines
several lower speed transmission signals into
one higher speed signal.
Network....................... An integrated system designed to provide for
the direction, transport and recording of
telecommunications traffic.
NOC........................... Our Network Operations Center.
Number Portability............ The ability of a local exchange service
customer of an ILEC to keep their existing
telephone number, while moving their service to
a CLEC.
OC-3.......................... OC-3 SONET high capacity optical
telecommunications line capable of transmitting
data at 155.52 Mbps.
OC-12......................... OC-12 SONET high capacity optical
telecommunications line capable of transmitting
data at 622.08 Mbps.
OC-48......................... OC-48 SONET high capacity optical
telecommunications line capable of transmitting
data at 2488.32 Mbps.
OC-192........................ OC-192 SONET high capacity optical
telecommunications line capable of transmitting
data at 9.6 Gbps.
OC............................ OC is a measure of SONET transmission optical
carrier level, which is equal to the
corresponding number of DS-3s (e.g. OC-3 is
equal to 3 DS-3s (DS-3 service has a bit rate
of 45 megabits per second and typically
transmits 672 simultaneous voice conversations)
and OC-48 is equal to 48 DS-3s).
Packet/Cell Switching
Network....................... A method of transmitting messages as digitized
bits, assembled in groups called packets or
cells. These packets and cells contain
industry-standard defined numbers of data bits,
along with addressing information and data
integrity bits. Packet/Cell Switching networks,
originally used only for the transmission of
digital data, are being implemented by carriers
to transport digitized voice, along with other
data. The switching (or routing) of the packets
or cells of data replace the "circuit-
switching" or traditional voice telephone
calls. Packet and cell switching is considered
to be a more cost efficient method of
delivering voice and data traffic.
Physical Collocation.......... A collocation where we or a similarly licenced
common carrier has installed and maintains
network termination equipment at IGC central
offices.
POP (Point-of-Presence)....... A location where a carrier has installed
transmission equipment in a service areas that
serves as, or relays calls to, a network
switching center of the carrier, or location in
customer buildings where a carrier has
installed electronics and/or facilities.
Private Line.................. A private, dedicated telecommunications link
between different customer locations (excluding
long distance carrier POPs).
A-4
<PAGE> 189
Reciprocal Compensation....... The compensation paid by one carrier to send
traffic to another carrier's network.
RBOC (Regional Bell Operating
Company).................... The five remaining local telephone companies
(formerly part of AT&T) established as a result
of the AT&T divestiture decree. These include
BellSouth, Bell Atlantic, US West and SBC.
Reseller...................... A carrier that does not own transmission
facilities, but obtains communications services
from another carrier on a wholesale basis for
resale to the public.
Route Mile.................... One mile of the actual geographic length of the
high capacity telecommunications fiber route.
ROW (Right of Way)............ Rights of way licenses and permits (creating a
contractual interest and not an interest in
land) from third party landowners and
governmental authorities which permit the
holder to install conduit and fiber.
Smart Build................... A strategy for building network where routes
are prioritized for development based on demand
for dark fiber and conduit and the availability
of suitable co-development partners.
SONET (Synchronous Optical
Network).................... A set of standards for optical communications
transmission systems that define the optical
rates and formats, signals characteristics,
performance, management and maintenance
information to be embedded within the signals
and the multiplexing techniques to be employed
in optical communications transmission systems.
SONET facilities the interoperability of
dissimilar vendors equipment. SONET benefits
customers by minimizing the equipment necessary
for various telecommunications applications and
supports networking diagnostic and maintenance
features.
Telecommunications Act........ The Telecommunications Act of 1996.
Telecommunications Service
Providers................... Our customer base which includes IXCs, CLECs,
ISPs, ILECs, cellular operators and resellers.
TELRIC (Total Element Long Run
Incremental Cost)........... Under the FCC Rules, implementing the
Telecommunications Act, the forward-looking,
cost-based methodology pursuant to which prices
for interconnection with and unbundled access
to local telephone networks is to be
determined.
Time Division Multiplexing.... An electronic process that combines multiple
communications channels onto a single,
higher-speed channel by interleaving portions
of each in a consistent manner over time.
UNEs.......................... An unbundled network element; an individual
facility, piece of equipment or feature or
functionality of such facility or equipment
used in the provision of a telecommunications
service, that a existing local telephone
company is required to
A-5
<PAGE> 190
provide to requesting telecommunications
companies at incremental cost based rates.
Universal Service............. The goal of providing telephone service to
every household in the U.S. with at least one
access line for basic telephone service, funded
by a surcharge on prime lines.
VPOP (Virtual Point of
Presence)..................... Our VPOP service is comprised of a bundle of
services which combines our wholesale transport
services and our local access services.
Year 2000..................... The potential computer system and software
application problem posed by the improper
recognition of the year 2000 or the inability
to process data that includes that date.
A-6
<PAGE> 191
------------------------------------------------------
------------------------------------------------------
THROUGH AND INCLUDING , 1999 (THE 40TH DAY AFTER THE DATE OF
THIS PROSPECTUS), THE SOLICITATION AGENT AND ANY OTHERS EFFECTING TRANSACTIONS
IN THESE SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE
REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE SOLICITATION
AGENT'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. THIS IS IN ADDITION TO A
SOLICITATION AGENT'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO AN UNSOLD ALLOTMENT OR SUBSCRIPTION.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
About This Prospectus.................. 1
Prospectus Summary..................... 3
Risk Factors........................... 7
Use of Proceeds........................ 24
Capitalization......................... 25
Selected Consolidated Financial and
Operating Data....................... 27
Business............................... 29
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 47
Management............................. 55
Certain Relationships and Related
Transactions......................... 67
Security Ownership of Certain
Beneficial Owners and Management..... 71
Description of Contribution and
Reorganization Transaction........... 74
The Pathnet Senior Noteholder Waivers
and Other Proposed Indenture
Amendments........................... 83
Description of the Guarantees.......... 96
Description of the Consent Solicitation
Process.............................. 97
Description of the Notes and the
Indenture............................ 100
Description of Other Indebtedness and
Other Financing Arrangements......... 134
Description of Capital Stock........... 136
Federal Income Tax Consequences........ 142
Plan of Distribution................... 146
Legal Matters.......................... 146
Experts................................ 146
Where You Can Find More Information.... 146
Index to Financial Statements.......... F-1
Glossary of Selected Terms............. A-1
</TABLE>
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[PATHNET LOGO]
PATHNET TELECOMMUNICATIONS, INC.
SENIOR GUARANTEES OF PATHNET, INC.
12 1/4% SENIOR NOTES DUE 2008
------------------
PROSPECTUS (SUBJECT TO COMPLETION)
------------------
, 1999
------------------------------------------------------
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<PAGE> 192
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses payable in connection
with the offering of the shares being registered hereby, other than underwriting
discounts and commissions. All the amounts shown are estimates, except the
Securities and Exchange Commission registration fee and Blue Sky fees and
expenses. We will bear all of these expenses*:
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee......... $60,326
Blue Sky fees and expenses.................................. $ 1,300
Accounting fees and expenses................................ **
Legal fees and expenses..................................... **
Printing and engraving fees................................. **
Solicitation Agent fees and expenses........................ **
Information Agent fees and expenses......................... **
Miscellaneous............................................... **
Trustee fees and expenses...................................
-------
Total.................................................. $ **
=======
</TABLE>
- ---------------
** To be filed by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
For a description of provisions under our charter documents and other
agreements and under Delaware law addressing indemnification of our directors
and officers, please refer to "MANAGEMENT -- Limitation of Liability and
Indemnification" in the prospectus.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Pathnet Telecom was incorporated on November 1, 1999. Before the execution
of the contribution agreements implementing the Contribution and Reorganization
Transaction, there were no sales of our unregistered securities. In connection
with the execution of the contribution agreements implementing the Contribution
and Reorganization Transaction, we agreed to issue an aggregate of 26,105,953
shares of our preferred stock to BNSF, CSX, Colonial and the existing holders of
Pathnet preferred stock, and 2,977,593 shares of our common stock to the
existing holders of Pathnet common stock. The shares of preferred stock do not
include any additional shares of Series E Convertible Preferred Stock that may
be issued under the Colonial option agreement. Following the initial closing and
receipt of the $25 million cash payment from Colonial upon the completion of the
Chicago-Aurora (a suburb of Denver), Colorado fiber build, we will issue
additional shares of our Series E Convertible Preferred Stock to Colonial under
the Colonial contribution agreement. At that time an aggregate of 27,243,868
shares of our preferred stock will be issued. These shares of stock will be
issued in reliance upon the exemption from registration contained in Section
4(2) of the Securities Act and Regulation D thereunder. The issue of shares
pursuant to the contribution agreements is subject to no conditions within the
control of the acquiring parties, and the registrant takes the position that
transactions are completed within the meaning of Rule 152 under the Securities
Act. Please refer to "DESCRIPTION OF CAPITAL STOCK" and "DESCRIPTION OF THE
CONTRIBUTION AND REORGANIZATION TRANSACTION" in the
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<PAGE> 193
prospectus for more information on the issuance of shares in the Contribution
and Reorganization Transaction.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<CAPTION>
NO. NAME OF AGREEMENT
--- -----------------
<C> <S>
3.1(4) Certificate of Incorporation of Pathnet Telecommunications,
Inc.
3.2(4) Bylaws of Pathnet Telecommunications, Inc.
4.1(4) Form of Stockholders Agreement, by and among Pathnet
Telecommunications, Inc. and certain stockholders of Pathnet
Telecommunications, Inc.
4.2+ Indenture, dated as of April 8, 1998, between Pathnet, Inc.
and The Bank of New York, Inc. as Trustee
4.3* Supplemental Indenture
4.4+ Form of Note
4.5+ Pledge Agreement, dated as of April 8, 1998, among Pathnet,
Inc., The Bank of New York as Trustee and The Bank of New
York as the Securities Intermediary
4.6* Form of Guarantees (contained within Exhibit 4.3)
5.1* Opinion of Covington & Burling, regarding legality of
securities
8.1* Opinion of Covington & Burling, regarding tax matters
10.1(4)(2) Pathnet Telecommunications, Inc. 1995 Stock Option Plan, as
amended (as adopted by Pathnet Telecommunications, Inc.)
10.2(4)(2) Pathnet Telecommunications, Inc. 1997 Stock Incentive Plan,
as amended by Amendment No. 1 to 1997 Plan dated March 24,
1998 (as adopted by Pathnet Telecommunications, Inc.)
10.3+++++ Contribution Agreement, dated as of November 2, 1999, by and
among Pathnet Telecommunications, Inc., Pathnet, Inc. and
The Burlington Northern Santa Fe Railway Company
10.4(4)(3) Form of Optic Access Agreement, by and between Pathnet
Telecommunications, Inc. and The Burlington Northern Santa
Fe Railway Company
10.5(4)(3) Form of Optic Lease Agreement, by and between Pathnet
Telecommunications, Inc. and The Burlington Northern Santa
Fe Railway Company
10.6+++++ Contribution Agreement, dated as of November 2, 1999, by and
among Pathnet Telecommunications, Inc., Pathnet, Inc. and
Colonial Pipeline Company
10.7(4)(3) Form of Master Right of Way Lease Agreement, by and between
Pathnet Telecommunications, Inc. and Colonial Pipeline
Company
10.8(1)(3) Form of Fiber Optic Access and Purchase Agreement, by and
between Pathnet Telecommunications, Inc. and Colonial
Pipeline Company
10.9(4) Form of Option Agreement, by and between Pathnet
Telecommunications, Inc. and Colonial Pipeline Company
10.10+++++ Contribution Agreement, dated as of November 2, 1999, by and
among Pathnet Telecommunications, Inc., Pathnet, Inc. and
CSX Transportation, Inc.
10.11(4)(3) Form of Fiber Optic License Agreement, by and between
Pathnet Telecommunications, Inc. and CSX Transportation,
Inc.
</TABLE>
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<PAGE> 194
<TABLE>
<CAPTION>
NO. NAME OF AGREEMENT
--- -----------------
<C> <S>
10.12(4)(3) Form of Right of Way Operating Agreement, by and between
Pathnet Telecommunications, Inc. and CSX Transportation,
Inc.
10.13+++++ Contribution Agreement, dated as of November 2, 1999, by and
among Pathnet Telecommunications, Inc., Pathnet, Inc. and
The Preferred Stockholders of Pathnet, Inc.
10.14+++++ Contribution Agreement, dated as of November 2, 1999, by and
among Pathnet Telecommunications, Inc., Pathnet, Inc. and
Common Stockholders of Pathnet, Inc.
10.15+++++ Contribution Agreement, dated November 4, 1999, by and among
Pathnet Telecommunications, Inc., Pathnet, Inc. and David
Schaeffer
10.16+ Warrant Agreement, dated as of April 8, 1998, between
Pathnet, Inc. and The Bank of New York, as warrant agent
10.17+ Warrant Registration Rights Agreement, dated as of April 8,
1998, among Pathnet, Inc., Spectrum Equity Investors, L.P.,
New Enterprise Associates VI, Limited Partnership, Onset
Enterprise Associates II, L.P., FBR Technology Venture
Partners, L.P., Toronto Dominion Capital (U.S.A.) Inc.,
Grotech Partners IV, L.P., Richard A. Jalkut, David
Schaeffer and the Initial Purchasers
10.18+ Lease Agreement, dated August 9, 1997, by and between
Pathnet, Inc. and 6715 Kenilworth Avenue General Partnership
relating to Pathnet Inc.'s offices in Georgetown, including
Amendment to Lease Agreement dated March 5, 1998, and Second
Amendment to Lease dated June 1, 1998
10.19+++ Amendment No. 3 to Lease Agreement, dated September 1, 1998,
by and between Pathnet, Inc. and 6715 Kenilworth Avenue
General Partnership
10.20+ Notes Registration Rights Agreement, dated April 8, 1998, by
and among Pathnet, Inc. and Merrill Lynch & Co., Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Bear Stearns &
Co. Inc., TD Securities (USA) Inc. and Salomon Brothers
10.21+(2) Employment Agreement, dated August 4, 1997, by and between
Pathnet, Inc. and Richard A. Jalkut, as amended by Amendment
to Employment Agreement, dated April 6, 1998
10.22++++++(2) Letter Agreement, dated April 7, 1999, between Pathnet, Inc.
and Robert Rouse, relating to Mr. Rouse's employment with
Pathnet, Inc.
10.23+(2) Non-Disclosure, Assignment of Inventions and Non Competition
Agreement, dated February 2, 1998, by and between Pathnet,
Inc. and Kevin Bennis.
10.24* Assignment and Acceptance, by and between Pathnet, Inc. and
Pathnet Telecommunications, Inc.
10.25+(2) Non-Qualified Stock Option Agreement, dated August 4, 1997,
by and between Pathnet, Inc. and Richard A. Jalkut
10.26+(2) Non-Qualified Stock Option Agreement, dated October 31,
1997, by and between Pathnet, Inc. and David Schaeffer
10.27 [Intentionally Omitted]
Alliance Program Agreements:
10.28(4)(3) IXC Master Services Agreement, dated June 17, 1999, by and
between IXC Communications Services, Inc. and Pathnet, Inc.,
as amended by Amendment No. 1 dated August 26, 1999 and
Amendment No. 2, dated October 13, 1999
</TABLE>
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<PAGE> 195
<TABLE>
<CAPTION>
NO. NAME OF AGREEMENT
--- -----------------
<C> <S>
10.29(4)(3) Capacity Agreement, dated August 10, 1999, between Frontier
Communications of the West, Inc. and Pathnet, Inc.
Collocation and Interconnection Agreements:
10.30(4) Collocation Agreement, dated July 29, 1999, by and between
BellSouth Telecommunications, Inc. and Pathnet, Inc.
10.31(4) Interim Collocation Agreement, dated August 12, 1999,
between U S West Communications, Inc. and Pathnet, Inc.
Equipment Supply Contracts:
10.32+ Master Agreement, dated August 8, 1997, between Pathnet,
Inc. and NEC America, Inc. as amended by Amendment No. 1 to
Master Agreement, dated November 9, 1997, Amendment No. 2 to
Master Agreement, dated April 2, 1998, Amendment No. 3 to
Master Agreement, dated May 4, 1998, and Amendment No. 4 to
Master Agreement, dated July 10, 1998
10.33+++ Amendment No. 5 to Master Agreement, dated November 20,
1998, by and between Pathnet, Inc. and NEC America, Inc.
10.34+ Purchase Agreement, dated July 1, 1995, between Andrew
Corporation and Path Tel, Inc., as amended by Amendment One,
dated September 16, 1996 and Amendment Two, dated July 1,
1997
10.35 [Intentionally Omitted]
10.36+++++ Agreement, dated March 31, 1999, between Pacific Fiber Link,
LLC and Pathnet, Inc.
10.37+++++ Marketing Agreement, dated March 31, 1999, between Pacific
Fiber Link, LLC and Pathnet, Inc.
10.38+++++ Dark Fiber Network Agreement, dated August 5, 1999, by and
among Pathnet, Inc., Tri-State Generation and Transmission
Association, Inc., Empire Electric Association, Inc., La
Plata Electric Association, Inc., Delta-Montrose Electric
Association, Inc. and San Miguel Power Association, Inc.
10.39(4) Form of Letter agreement, dated November 4, 1999, by and
among Pathnet, Inc., David Schaeffer, Spectrum Equity
Investors, L.P., Spectrum Equity Investors II, L.P., New
Enterprise Associates VI, Limited Partnership and Grotech
Partners IV, L.P.
10.40(4) Licence of Marks, dated November 10, 1999, by and between
Pathnet, Inc. and Pathnet Telecommunications, Inc.
12(4) Statement re: Computation of Ratios
21(1) List of Subsidiaries of Pathnet Telecommunications, Inc.
23.1(1) Consent of PricewaterhouseCoopers LLP
23.2(4) Consent of Covington & Burling
24(4) Power of Attorney (included on signature page)
</TABLE>
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<PAGE> 196
<TABLE>
<CAPTION>
NO. NAME OF AGREEMENT
--- -----------------
<C> <S>
25.1+++++++ Statement of the eligibility and qualification of the Bank
of New York as Trustee under the Indenture relating to
Pathnet, Inc.'s 12 1/4% Senior Notes due 2008 on Form T-1
25.2* Statement of the eligibility and qualification of the Bank
of New York as Trustee under the Supplemental Indenture
relating to Pathnet, Inc.'s 12 1/4% Senior Notes due 2008 on
Form T-1.
27(4) Financial Data Schedule
99.1(4) Consent of the Yankee Group
99.2* Consent Solicitation Documentation
</TABLE>
- ---------------
* To be filed by amendment.
+ Incorporated by reference to the corresponding exhibit to Pathnet,
Inc.'s Registration Statement on Form S-1 (Registration No. 333-52247)
filed by Pathnet, Inc. with the Securities and Exchange Commission
(the "Commission") on May 8, 1998, as amended by Amendment No. 1 to
such Registration Statement filed with the Commission on July 16,
1998, and as further amended by Amendment No. 2 to such Registration
Statement filed with the Commission on July 27, 1998, and as further
amended by Amendment No. 3 to such Registration Statement filed with
the Commission on August 10, 1998.
++ Incorporated by reference to Pathnet, Inc.'s Form 10-K (File No.
000-24745) filed by Pathnet, Inc. with the Commission on March 18,
1999.
+++ Incorporated by reference to Pathnet, Inc.'s Form 10-Q (File No.
000-24745) filed by Pathnet, Inc. with the Commission on May 17, 1999.
++++ Incorporated by reference to Pathnet, Inc.'s Form 10-Q (File No.
000-24745) filed by Pathnet, Inc. with the Commission on August 9,
1999.
+++++ Incorporated by reference to Pathnet, Inc.'s Form 10-Q (File No.
000-24745) filed by Pathnet, Inc. with the Commission on November 15,
1999.
++++++ Incorporated by reference to Pathnet, Inc.'s Form 8-K (File No.
000-24745) filed by Pathnet, Inc. with the Commission on April 29,
1999.
+++++++ Incorporated by reference to the corresponding exhibit to Pathnet,
Inc.'s Registration Statement on Form S-4 (Registration No. 333-53467)
filed by Pathnet, Inc. with the Commission on May 22, 1998, as amended
by Amendment No. 1 to such Registration Statement filed with the
Commission on August 12, 1998, and as further amended by Amendment No.
2 to such Registration Statement filed with the Commission on August
21, 1998, and as further amended by Amendment No. 3 to such
Registration Statement filed with the Commission on August 31, 1998.
(1) Filed herewith.
(2) Constitutes management contract or compensatory arrangement.
(3) Certain portions of this exhibit have been omitted based on a request
for confidential treatment filed separately with the Commission.
(4) Filed previously.
(b) Financial Statement Schedule
Schedule II -- Valuation and qualifying accounts and report of
PricewaterhouseCoopers LLP thereon.
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<PAGE> 197
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required, are
inapplicable or have been disclosed in the notes to other financial statements
and therefore have been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant under the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(b) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
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<PAGE> 198
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 1 to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in
Washington, District of Columbia on the sixteenth day of December, 1999.
PATHNET TELECOMMUNICATIONS, INC.
By: /s/ MICHAEL A. LUBIN
--------------------------------------
Michael A. Lubin
Vice President, General Counsel and
Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to registration statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RICHARD A. JALKUT* President, Chief December 16, 1999
- --------------------------------------------------- Executive Officer
Richard A. Jalkut (Principal Executive
Officer) and Director
/s/ JAMES M. CRAIG* Executive Vice President December 16, 1999
- --------------------------------------------------- Chief Financial Officer
James M. Craig and Treasurer (Principal
Financial Officer and
Controller)
/s/ PETER J. BARRIS* Director December 16, 1999
- ---------------------------------------------------
Peter J. Barris
/s/ KEVIN J. MARONI* Director December 16, 1999
- ---------------------------------------------------
Kevin J. Maroni
/s/ PATRICK J. KERINS* Director December 16, 1999
- ---------------------------------------------------
Patrick J. Kerins
/s/ STEPHEN A. REINSTADTLER* Director December 16, 1999
- ---------------------------------------------------
Stephen A. Reinstadtler
</TABLE>
* Michael A. Lubin, by signing his name hereto, does hereby sign this Amendment
No. 1
to Registration Statement on behalf of each of the directors and officers of
the Registrant after
whose typed names asterisks appear as attorney-in-fact pursuant to the Power
of Attorney
previously provided as part of this Registration Statement.
II-7
<PAGE> 1
Portions of this exhibit have been omitted and filed separately with the
Securities and Exchange Commission. These portions are designated "[ * * * ]".
Exhibit 10.8
FIBER OPTIC ACCESS AND PURCHASE AGREEMENT
This FIBER OPTIC ACCESS AND PURCHASE AGREEMENT ("Agreement") is entered
into as of this ___ day of ______________, 1999 between PATHNET
TELECOMMUNICATIONS, INC., a Delaware corporation ("PTI") and COLONIAL PIPELINE
COMPANY, a Delaware and Virginia corporation ("Colonial").
WHEREAS, Colonial and PTI have entered into that certain Contribution
Agreement dated _______________, 1999 (the "Contribution Agreement"), pursuant
to which, among other things, Colonial has agreed to contribute certain assets
to PTI and PTI has agreed to issue certain shares of stock to Colonial, as more
particularly described therein;
WHEREAS, contemporaneous herewith, Colonial and PTI have entered into the
Lease pursuant to which, subject to the terms and conditions of such Lease and
this Agreement, Colonial has leased to PTI specified portions of the Colonial
Rights-of-Way to be designated, from time to time, in order to permit PTI to
construct, install, operate, maintain, replace, reconstruct, remove and/or
relocate (collectively, "Construct or Operate") a Telecommunications Network (as
hereinafter defined);
WHEREAS, Colonial and PTI have entered into the Lease on the condition that
PTI and Colonial agree to certain additional terms regarding PTI's
Telecommunications Network as described herein; and
WHEREAS, Colonial also desires to purchase from PTI, and PTI also desires
to sell to Colonial, a Conduit within PTI's Telecommunications Network, on the
terms and conditions described herein.
NOW, THEREFORE, in consideration of the foregoing premises and the mutual
covenants and promises of the parties and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties agree
as follows:
1. Definitions.
For purposes of this Agreement, the following terms shall have the meanings
set forth below:
(a) "Affiliate" shall mean an entity that, directly or indirectly, is
controlled, under common control with, or controls another entity, or
the successor to an entity by merger or purchase of all or
substantially all of such entity's stock or assets.
(b) "Colonial Conduit" shall be defined as provided in Section 7 hereof.
(c) "Colonial Rights-of-Way" shall have the meaning ascribed to such term
in the Lease.
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<PAGE> 2
(d) "Colonial System" shall have the meaning ascribed to such term in the
Lease.
(e) "Conduits" shall have the meaning ascribed to such term in the Lease.
(f) "Designated Affiliate" shall mean the entities named in Exhibit B,
attached hereto and incorporated by reference herein.
(g) "Disposition" in reference to the Colonial Conduit or to any
telecommunications capacity shall mean the sale, assignment, barter,
swap, lease, license, sub-license, making available to, or other
transfer or grant of rights therein or in respect thereof, and the
terms "Dispose" and "Disposed" shall be interpreted accordingly.
(h) "Landowner" shall have the meaning ascribed to such term in the Lease.
(i) "Lease" shall mean that certain Master Right-of-Way Lease Agreement
entered into by Colonial and PTI in substantially the form attached as
Exhibit A hereto.
(j) "Lease Date" shall mean the date on which the Lease is executed and
becomes binding and effective on the parties thereto.
(k) "Restriction Release Date" shall mean the earlier of the date (i)
which is five (5) years following the Lease Date; or (ii) on which
PTI makes an assignment for the benefit of creditors, files a
voluntary petition in bankruptcy, or an involuntary petition in
bankruptcy is filed against PTI (unless such petition is dismissed or
stayed within ninety (90) days).
(l) "Segment" shall have the meaning ascribed to such term in the Lease.
(m) "Telecommunications Network" shall mean a network or other
communications system capable of transmitting voice, data, images or
other information over strands of optical fiber, copper wire, radio
waves, or other transmission media.
2. Right to Lease. Upon the closing of the transaction contemplated by
the Contribution Agreement, PTI and Colonial shall enter into the Lease and all
other documentation reasonably necessary to more fully effectuate the terms
thereof.
3. Limited Exclusivity. Except with respect to the Colonial Conduit
(which can be commercialized or used in accordance with the provisions of
Section 7 below) and as otherwise contemplated hereunder and in the Lease, for a
period of ten (10) years following the Lease Date:
(a) Colonial shall not, directly or indirectly, lease to, license to,
make available to, or otherwise permit the use of by any other party,
including, without limitation, any Affiliates of Colonial, any portion of
the Colonial Rights-of-Way for the Construction or Operation of a
Telecommunications Network; and
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<PAGE> 3
(b) Colonial shall not, directly or indirectly, use or permit the use
of any portion of the Colonial Rights-of-Way for the Construction or
Operation of a Telecommunications Network.
The foregoing restrictions shall not apply to any portion of the Colonial
Rights-of-Way that reverts to Colonial pursuant to Section 1.4 of the Lease.
4. Provision of Telecommunications Capacity to Colonial. Subject to
availability, as determined by PTI from time to time in its reasonable
discretion and taking into account the reasonably anticipated level of traffic
on PTI's Telecommunications Network, Colonial shall have the right to purchase
telecommunications capacity on PTI's Telecommunications Network at the best
price and terms that such capacity has been or is being offered by PTI to its
preferred customers. The foregoing telecommunications capacity may not be used
in any manner that competes with PTI or its Affiliates, including, without
limitation, used for any purpose other than for the internal communications
purposes of Colonial and its Affiliates, and may not be Disposed of or used in
connection with any other Telecommunications Network or any other
telecommunications venture or business.
5. Compensation for Similar Transactions. If, at any time from the date
of this Agreement until [ * * * ], PTI and/or one of its affiliates or
successors shall enter into an agreement or other contractual relationship with
any Designated Affiliate pursuant to which PTI and/or one of its Affiliates or
successors shall have the right or license to use, lease or occupy all or
portions of the right-of-way of one or more of the Designated Affiliates for
development of a Telecommunications Network, PTI shall pay to Colonial a fee
equal to [ * * * ] per mile of right-of-way which is covered by each such
agreement or relationship. The payment of such fee shall be made within ten (10)
business days of the execution of such agreement or other contractual
relationship.
6. [INTENTIONALLY DELETED]
7. Purchase and Sale of Colonial Conduit.
(a) In addition to the transactions contemplated by the Contribution
Agreement, but simultaneously with the closing of such transactions, Colonial
shall pay to PTI the sum of Four Million Dollars ($4,000,000.00). In
consideration thereof, PTI agrees that along: (i) any Segment of the Colonial
Rights-of-Way in which PTI installs Conduits and in which Colonial's engineers
have determined that PTI can install eight (8) or more Conduits within such
Segment or applicable portion thereof; (ii) any Segment of the Colonial
Rights-of-Way in which PTI notifies Colonial that it desires to commercialize
and deploy less than [ * * * ]; and (iii) any other rights-of-way acquired by
PTI along the market corridor of the Colonial System that are necessary as
substitutions for or supplements to portions of the Colonial Rights-of-Way in
which PTI installs Conduits, PTI will
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<PAGE> 4
convey one such Conduit installed by PTI within any such Segment or substituted
area to Colonial for the exclusive use, ownership or control by Colonial, its
successors and assigns (as applicable, the "Colonial Conduit"); provided,
however, that Colonial shall be entitled to only 2200 miles of Colonial Conduit
in the aggregate.
(b) Colonial shall own and have full title to such Colonial Conduit
from and after the installation thereof within any such Segment or substituted
area, and PTI promptly thereafter shall execute such documents as shall be
reasonably required to evidence the title thereto vested in Colonial. PTI
covenants and agrees not to assign, mortgage, hypothecate, pledge, encumber,
permit a lien to be placed on, or otherwise transfer all or any portion of the
Colonial Conduit.
(c) Notwithstanding the foregoing Subsection 7(a), the parties hereto
agree and acknowledge that:
(i) (aa) in the event that [ * * * ] have determined that the
installation by PTI of at least [ * * * ] within a particular Segment or
applicable portion thereof is not commercially feasible because of [ * * *]
and (bb) if PTI desires to commercialize and deploy all of the available
Conduits permitted by Colonial within such Segment, then there will not be
a Colonial Conduit available for the exclusive use by Colonial within that
Segment or the applicable portion thereof; and
(ii) as of the fifth (5th) anniversary of the Lease Date, PTI may
not have installed its Telecommunications Network (and, thus, the Colonial
Conduit) within Segments aggregating at least 2,200 miles of the Colonial
System.
In either of the circumstances described in clauses (i) and (ii) above, the
parties will negotiate in good faith to make available to Colonial, at no
charge, a suitable alternative to such Colonial Conduit, which alternative may
include the right to use fiber within a conduit, the right to an undivided
percentage interest in a conduit, and/or the right to use fibers or conduit on
other portions of PTI's network, in each case such alternative having a fair
market value comparable to such of the Colonial Conduit as shall have not been
provided. Within (x) six (6) months (if during the first year of this
Agreement), or (y) two (2) months (if after the first year of this Agreement)
after Colonial has knowledge that there will not be a Colonial Conduit
available in a particular Segment or portion of the Colonial System, Colonial
may deliver written notice to PTI (the "Equivalency Request Notice"),
designating the nature and type of equivalency that Colonial requests to
receive from and after the Restriction Release Date. If Colonial and PTI have
not agreed on the nature and type of such equivalency within thirty (30) days
after PTI's receipt of the Equivalency Request Notice, then either party may
institute arbitration proceedings in accordance with Section 14 of the Lease.
(d) Until the Restriction Release Date:
(i) the Colonial Conduit may not be used in any manner that
competes or facilitates competition with PTI or its Affiliates;
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<PAGE> 5
(ii) the Colonial Conduit may be used only for the internal
communications purposes of Colonial and its Affiliates; provided that,
although Colonial may be reimbursed by any such Affiliates for applicable
costs and expenses, Colonial may not earn a profit on such operations for
internal communications purposes; and
(iii) neither the Colonial Conduit, nor any optical fibers or
other communications media installed therein, nor any capacity on such
media, may be Disposed of or otherwise made available to third parties, or
(other than as set forth in item (ii) above) used in connection with any
Telecommunications Network or any other telecommunications venture or
business.
(e) From and after the Restriction Release Date, Colonial shall be
free to sell, assign, license or transfer the Colonial Conduit or any portion
thereof to any third party whatsoever, subject, however, to the provisions of
Section 8 below.
(f) Prior to the Restriction Release Date, PTI will maintain the
Colonial Conduit in the same manner as applies to PTI's maintenance activities
on the Colonial Rights-of-Way under the terms of the Lease so that such Colonial
Conduit is equal to or better in quality and capacity as the conduit in all
other portions of the PTI Telecommunications Network. After the Restriction
Release Date, PTI shall have no responsibility in connection with the
maintenance of the Colonial Conduit.
(g) From and after the date hereof, Colonial will be responsible for
all expenses (other than those described in Subsection 7(f) above) of operating
the Colonial Conduit for the purposes described Subsections 7(d)(ii) and 7(e)
above, as applicable. Furthermore, PTI shall not be responsible for any taxes
that are attributable to the existence and use of the Colonial Conduit by
Colonial; provided, however, that nothing herein shall be deemed to acknowledge
or imply that any taxes necessarily will be imposed upon or attributable to the
existence and use of the Colonial Conduit by Colonial.
8. Disposition of the Colonial Conduit.
(a) Subject to Subsection 8(d) below, PTI and its Affiliates shall
have a right of first refusal as to the Colonial Conduit as described in this
Subsection 8(a) (the "Right of First Refusal"). During the period beginning on
the Restriction Release Date and ending on the [ * * * ] anniversary of the
Lease Date, in the event that Colonial desires to Dispose of the Colonial
Conduit, in whole or in part, Colonial shall provide written notice to PTI
describing the terms of such Disposition, including the price of the
Disposition, the term of any lease or license, and the identity of the proposed
transferee (the "Notice of Terms"). Within sixty (60) days thereafter, PTI may
elect, upon written notice to Colonial, to accept the Disposition on the terms
described in Colonial's Notice of Terms. In the event that PTI so elects to
accept such Notice of Terms, Colonial shall Dispose of the Colonial Conduit to
PTI on the terms set forth in such Notice of Terms or on such other terms as
the parties may mutually agree. If PTI fails to make such election within such
sixty (60) day period, PTI shall be deemed to have declined the
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<PAGE> 6
opportunity to exercise its Right-of-First Refusal as proposed by Colonial in
the Notice of Terms.
(b) In the event that PTI declines or is deemed to have declined the
opportunity to exercise its Right of First Refusal, Colonial shall be free to
Dispose of the Colonial Conduit to the transferee proposed in the Notice of
Terms on terms not materially different than the terms so described in the
Notice of Terms, provided that if Colonial and the transferee fail to consummate
the Disposition within ninety (90) days of the date PTI declines or is deemed
to have declined the Right of First Refusal, then PTI will again have a Right
of First Refusal as to the portion of the Colonial Conduit described in the
Notice of Terms.
(c) Provided Colonial complies with the foregoing provisions, the
consummation of any Disposition of a portion of the Colonial Conduit will
extinguish PTI's Right of First Refusal as to such portion, unless the
Disposition is for a period that terminates prior to the [ * * * ] of the Lease
Date, in which event, upon expiration of such Disposition, PTI will again have a
Right of First Refusal as to such portion on the terms set forth in Subsection
8(a) above.
(d) The foregoing Right of First Refusal shall apply only to the
extent that the Colonial Conduit or any applicable portion thereof [ * * * ].
9. Confidentiality. The parties hereto shall keep confidential all terms
of this Agreement, except to the extent that disclosure thereof is required by
law, agreed by the parties in writing. In the event either party hereto is
required to disclose any terms of this Agreement pursuant to applicable law, at
least three (3) days prior to disclosing the same (or such shorter period
permitted by law), such party shall notify the other party hereto in writing and
provide copies of the terms that the party intends to disclose. The language of
the press release announcing this transaction shall be mutually agreed upon
between the parties hereto. The parties acknowledge that the transaction
contemplated herein is part of a larger transaction in which certain other
parties are contemplating contribution of right of way to PTI in exchange for
equity interests in PTI and that disclosure of certain terms of this Agreement
to such parties may be necessary or appropriate in connection with the larger
transaction. PTI shall be permitted to make such disclosures, provided that PTI
limits such disclosures to the extent reasonably necessary to consummate the
larger transaction.
10. Assignment.
(a) Neither this Agreement, nor any of the rights granted to PTI by
the terms of this Agreement, shall be assigned by PTI without Colonial's prior
written consent, which shall not be unreasonably withheld, except that PTI may,
upon prior notice to Colonial, but without the necessity of obtaining Colonial's
prior consent, assign this Agreement to an Affiliate of PTI. Nothing herein
shall prohibit PTI from involving customers or strategic or co-development
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<PAGE> 7
partners in development of the Telecommunications Systems within the Colonial
Rights-of-Way on such terms as PTI may determine in its sole discretion,
provided that: (i) all such activities are conducted in accordance with the
terms of this Agreement and the Lease, (ii) PTI shall not be released from, and
shall remain fully liable to Colonial for all of its covenants, liabilities and
obligations hereunder and under the Lease and for the acts or omissions of all
parties claiming by, through or under PTI within any Colonial Rights-of-Way;
(iii) PTI shall remain the sole point of contact with Colonial; and (iv) all
activities of parties claiming by, through or under PTI within any Colonial
Rights-of-Way are conducted under PTI's supervision.
(b) Colonial shall have the right to assign, license or otherwise
transfer this Agreement and/or its rights or obligations hereunder as it
pertains to a particular Segment (or discrete portion thereof) of the Colonial
Rights-of-Way in connection with a sale or other transfer of Colonial's rights
within such Segment (or discrete portion thereof) to any third party; provided,
however, that any such assignment or transfer shall be made subject to the terms
and conditions of this Agreement and any such assignee or transferee shall
continue to perform Colonial's obligations to PTI under the terms and conditions
of this Agreement. In addition to Colonial's rights under Subsection 7(c)
hereof, Colonial also shall have the right, without PTI's consent, to assign or
otherwise transfer this Agreement and/or its rights or obligations hereunder:
(i) to any entity that, indirectly or directly, is controlled by, controls or is
under common control with Colonial, or to any entity into which Colonial may be
merged or consolidated or which purchases all or substantially all of the assets
of Colonial; or (ii) as collateral in connection with any financings by any
lender.
11. Notices. All notices, demands, requests, or other writings delivered
pursuant to this Agreement shall be in writing and may be given personally or
may be delivered by depositing the same in the United States mail, certified,
registered or equivalent, return receipt requested, postage prepaid, properly
addressed, and sent to the following addresses:
If to Colonial: Colonial Pipeline Company
945 E. Paces Ferry Rd., N.E.
Atlanta, Georgia 30326-0855
Attention: General Counsel
Fax: 404-841-2315
with a copy to: Arnall Golden & Gregory, LLP
1201 West Peachtree Street, Suite 2800
Atlanta, Georgia 30309-2450
Attention: Donald I. Hackney, Jr., Esquire
Fax: 404-873-8639
If to PTI: Pathnet Telecommunications, Inc.
1661 Gateway Boulevard
Richardson, Texas 75080
Attention: Senior Vice President, Engineering
Fax: 972-231-9728
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<PAGE> 8
with a copy to: Pathnet Telecommunications, Inc.
1015 31st St., N.W.
Washington, D.C. 20007
Attention: General Counsel
Fax: 202-625-7369
or to such other address as either party may from time to time designate by
written notice to the other party. Notices given by mail as aforesaid shall be
deemed received and effective as of the first Business Day following such
dispatch; provided, however, that if any such notice or other communication also
shall be sent by telecopy or fax machine, such notice shall be deemed given at
the time and on the date of machine transmittal if the sending party receives a
written send verification on its machines and forwards a copy thereof with its
mailed or courier delivered notice or communication.
12. Force Majeure. Any failure or delay in the performance by a party
hereto of its obligations hereunder shall not constitute a breach of this
Agreement, and each party's obligations to complete actions by specific
deadlines shall be delayed, to the extent attributable to causes beyond that
party's control, including, but not limited to, acts of God, governmental action
(whether in its sovereign or contractual capacity), fire, flood, or other
catastrophe, national emergency, insurrection, riot, and war.
13. Severability. If any provision of this Agreement or the application
thereof, shall be held invalid, illegal or unenforceable in whole or in part,
the remainder of this Agreement and the application thereof shall not be
affected, and shall be enforceable to the full extent permitted by law, and the
portion hereof found to be invalid shall be enforced to the fullest extent
permitted by law, and, if possible, shall be reformed to carry out as much as
possible the intent of the parties as expressed herein.
14. Amendment. This Agreement may be amended only by a written instrument
executed by both parties hereto. No failure to exercise and no delay in
exercising, on the part of a party hereto, any right, power or privilege
hereunder shall operate as a waiver of any other provision of this Agreement, or
as a waiver of that right, power or privilege either before, or after, the
period of waiver.
15. Entire Agreement. This Agreement and all Exhibits attached hereto,
constitute the entire agreement of the parties hereto with respect to the
subject matters hereof, and supersede any and all prior negotiations,
understandings and agreements, whether oral or written with respect hereto.
16. Applicable Law. This Agreement shall be interpreted and enforced in
accordance with the laws of the State of Georgia, without regard to the
conflicts of laws provisions thereof.
17. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same instrument.
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<PAGE> 9
IN WITNESS WHEREOF, authorized representatives of Colonial and PTI have
executed this Agreement as of the date first set forth herein.
COLONIAL PIPELINE COMPANY PATHNET TELECOMMUNICATIONS, INC.
By: By:
---------------------------- -----------------------------
Name: Name:
Title: Title:
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<PAGE> 10
EXHIBIT A
FORM OF LEASE
(SEE EXHIBIT 10.7)
<PAGE> 11
EXHIBIT B
DESIGNATED AFFILIATES
1. Specified Companies.
Capline Pipeline Company
Chicap Pipeline
Cushing-Chicago Pipeline
Dixie Pipeline Company
Explorer Pipeline Company
Inland Corporation
Kaw Pipeline
Olympic Pipeline
West Shore Pipe Line (Including Badger)
West Texas Gulf Pipe Line
Wolverine Pipe Line
Yellowstone Pipe Line
2. Affiliates of Colonial's Owners.
All pipeline companies in which 75% or more of the outstanding voting equity
interests therein are held by one or more entities which are 100% owned,
directly or indirectly, by any one or more of: (i) the following current owners
of Colonial's outstanding common stock (the "Colonial Owners"); (ii) any entity
which is the 100% owner, directly or indirectly, of such Colonial Owners; or
(iii) any entity that is 100% owned, directly or indirectly, by any of the
entities included in clause (ii). For purposes of this paragraph, the Colonial
Owners shall consist of:
Atlantic Richfield Company (ARCO Pipeline)
Amoco Pipeline Holding Company (BP Amoco Pipeline)
CITGO Pipeline Investment Company
Conoco Pipe Line Company
Koch Petroleum Corporation
Marathon Oil Company (Marathon Ashland Pipe Line, LLC)
Mobil Pipe Line Company
Phillips Petroleum International Investment Company
Texaco Trading and Transporation Inc. (Equilon Pipeline Company, LLC)
Union Oil Company of California
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES OF
PATHNET TELECOMMUNICATIONS, INC.
<TABLE>
<CAPTION>
Jurisdiction of
---------------
Subsidiaries of Pathnet Incorporation or Additional names under which
----------------------- ---------------- ----------------------------
Telecommunications, Inc. Organization subsidiary does business
------------------------ ------------ ------------------------
<S> <C> <C>
Pathnet, Inc. Delaware Pathnet Communications, Inc.
Pathnet Fiber Optics, LLC Delaware None
Pathnet/Idaho Power Delaware None
License, LLC
Pathnet/Idaho Power Delaware None
Equipment, LLC
</TABLE>
<PAGE> 1
EXHIBIT 23.1
Consent of Independent Accountants
We hereby consent to the use in this Registration Statement on Form S-1 (File
No. 333-) of our report dated February 14, 1999, except for Note 14 for which
the date is November 22, 1999, relating to the consolidated financial
statements of Pathnet, Inc. and Subsidiaries (a development stage company),
which appear in such Registration Statement. We also consent to the reference
to us under the heading "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
McLean, Virginia
December 14, 1999
