<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 22, 2000
REGISTRATION NO. 333-91469
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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AMENDMENT NO. 2
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
1201 PENNSYLVANIA AVENUE, N.W.
WASHINGTON, D.C. 20004
(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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<TABLE>
<S> <C> <C> <C> <C>
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(1)
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</TABLE>
(1) The registration fee has been calculated on the basis of the fair market
value of the securities being issued pursuant to Rule 457.
------------------
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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<PAGE> 2
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 February 22, 2000
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, Inc. is seeking
consents from the holders of those notes to the waiver and amendment of certain
provisions of the indenture governing the notes. Pathnet, Inc. is seeking these
consents in connection with a contribution and reorganization transaction in
which Pathnet, Inc. will become our wholly owned subsidiary. In addition to our
guarantees, 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 a consent fee payment of $25.00 per
$1,000 in face amount of notes owned of record by the consenting holder on the
record date. Pathnet, Inc. is also agreeing to purchase and pledge for the
benefit of the holders of the notes, additional United States Treasury
securities sufficient to cover the October 16, 2000 interest payment on the
notes. Pathnet, Inc. has conditioned its payment of the consent fee and pledge
of additional securities upon the receipt of the requisite consents to approve
the requested waivers and amendments.
PUBLIC OFFERING PRICE: None
PROCEEDS TO PATHNET TELECOM: None
THIS INVESTMENT INVOLVES SUBSTANTIAL RISK. SEE "RISK FACTORS" BEGINNING ON PAGE
6 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 , 2000.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
PROSPECTUS SUMMARY.......................................... 1
RISK FACTORS................................................ 6
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................................. 48
MANAGEMENT.................................................. 57
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............. 70
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT................................................ 74
DESCRIPTION OF CONTRIBUTION AND REORGANIZATION
TRANSACTION............................................... 77
THE PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED
INDENTURE AMENDMENTS...................................... 88
DESCRIPTION OF THE GUARANTEES............................... 102
DESCRIPTION OF THE CONSENT SOLICITATION PROCESS............. 103
DESCRIPTION OF THE NOTES AND THE INDENTURE.................. 106
DESCRIPTION OF OTHER INDEBTEDNESS AND OTHER FINANCING
ARRANGEMENTS.............................................. 140
DESCRIPTION OF CAPITAL STOCK................................ 142
FEDERAL INCOME TAX CONSEQUENCES............................. 148
PLAN OF DISTRIBUTION........................................ 153
LEGAL MATTERS............................................... 153
EXPERTS..................................................... 153
WHERE YOU CAN FIND MORE INFORMATION......................... 153
INDEX TO FINANCIAL STATEMENTS............................... F-1
GLOSSARY OF SELECTED TERMS.................................. A-1
</TABLE>
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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 -- in two separate tranches -- an aggregate
of $68 million in cash in return for (1) an aggregate of 2,867,546 shares
of our series E convertible preferred stock at a price of $21.97 per
share; (2) an option, exercisable by Colonial and certain of Colonial's
affiliates, to purchase up to 1,593,082 shares of our series E
convertible preferred stock at a price of $21.97 per share; (3) an option
to purchase a number of shares of our common stock equal to up to 10% of
the number of shares that we actually issue in an underwritten initial
public offering, at a price equal to 90% of the per share price that we
charge for the sale of the shares in our initial public offering; and (4)
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 as well as
fiber assets currently held by Pathnet's subsidiary, Pathnet Fiber
Optics, LLC.
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Following the conclusion of this contribution and reorganization
transaction, our beneficial ownership will be allocated among the participants
in the contribution and reorganization transaction as set forth in the following
table. For purposes of determining the beneficial ownership of our voting
capital stock following the completion of the contribution and reorganization
transaction, we assume in the table:
- Colonial's purchase of the second tranche of shares of our series E
preferred stock and the conversion of those shares into shares of our
common stock;
- except for the Colonial option to purchase shares of our common stock in
connection with our initial public offering, the exercise of all options
to purchase shares of our common stock;
- the exercise of the Colonial option to purchase additional shares of our
series E convertible preferred stock and the conversion of all of our
series of preferred stock into our common stock; and
- the conversion of all outstanding warrants to purchase shares of Pathnet
common stock into warrants to purchase shares of our common stock and the
full exercise of those warrants.
Because we cannot at this time determine the precise number of our shares
that are covered by Colonial's option to purchase our common stock prior to our
initial public offering, we have not assumed the exercise of that option in our
determination of beneficial ownership interests in the table.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF
CATEGORY OF EQUITY HOLDER OUR VOTING STOCK
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<S> <C>
Holders of existing shares of Pathnet Series A, B and C
preferred stock........................................... 44.4%
Holders of existing shares of Pathnet common stock (assuming
the conversion and exercise in full of all existing
warrants and options for Pathnet common stock into shares
of our common stock)...................................... 19.2%
The Burlington Northern and Santa Fe Railway Company........ 9.6%
Colonial Pipeline Company and affiliates.................... 17.2%
CSX Transportation, Inc. ................................... 9.6%
------
Total................................................... 100.0%
======
</TABLE>
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, (1) we are offering our guarantees for all of the notes, (2) Pathnet
will make a consent payment of $25 per $1,000 in face amount of the notes to
each of the consenting noteholders who held notes on the record date of the
consent solicitation, and (3) Pathnet will purchase and pledge as additional
security to the indenture trustee, for the benefit of the noteholders,
additional United States Treasury securities sufficient to cover the October 16,
2000 interest payment on the notes. 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.
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<PAGE> 7
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 , 2000,
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 $101.5 million through December 31, 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 was $13 billion in
1999, growing to $27 billion in 2004.
As of December 31, 1999, our network consisted of over 6,300 wireless route
miles, providing wholesale transport services to 30 cities, and 500 route miles
of installed fiber. We are constructing an additional 600 route miles of fiber
optic network scheduled for completion in the first half of 2000. 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 approximately 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 prioritizing route
development along corridors with high demand for inactive fiber optic strands
and conduit or by partnering with established companies in the joint development
of those routes.
This prospectus contains the trademark of Pathnet, which is the property of
Pathnet and is licensed to us.
Our principal executive office is located at 1015 31st Street, N.W.,
Washington, D.C. 20007, and our telephone number is (202) 625-7284.
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3
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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, 1998 and
1999 and the period from August 25, 1995 (the date of Pathnet's inception) to
December 31, 1999 and the summary historical balance sheet data as of December
31, 1999 have been derived from Pathnet's audited financial statements that are
included elsewhere in this prospectus. The unaudited pro forma balance sheet
data as of December 31, 1999 gives effect to the contribution and reorganization
transaction as if it occurred on January 1, 1999. We have provided the unaudited
pro forma balance sheet data for informational purposes only.
<TABLE>
<CAPTION>
PATHNET
-----------------------------------------------------------
PERIOD FROM
AUGUST 25, 1995
(DATE OF
YEAR ENDED DECEMBER 31, INCEPTION) TO
----------------------------------------- DECEMBER 31,
1997 1998 1999 1999
----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue................................ $ 162,500 $ 1,583,539 $ 3,311,096 $ 5,058,135
Operating loss......................... (4,131,243) (16,312,761) (31,280,939) (53,495,700)
Net loss............................... $(3,977,400) $(36,296,596) $(59,036,312) $(101,480,769)
Basic and diluted loss per common
share................................ $ (1.37) $ (12.51) $ (20.14)
Weighted average number of common
shares outstanding................... 2,900,000 2,902,029 2,931,644
OTHER FINANCIAL DATA:
Ratio of earnings to fixed charges..... <1 <1 <1
Deficiency of earnings to fixed
charges.............................. $(3,977,400) $(36,658,917) $(62,626,459)
</TABLE>
<TABLE>
<CAPTION>
December 31,
----------------------------
1999
----------------------------
HISTORICAL Pro Forma (a)
------------ -------------
(unaudited)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities (excluding
marketable securities pledged as collateral) (b).......... $138,402,131 $170,448,726
Property and equipment, net................................. 131,928,365 131,928,365
Intangible assets -- rights of way.......................... -- 187,275,006
Total assets................................................ 320,535,987 547,188,488
Long-term obligations (c)................................... 349,714,404 353,989,404
Total liabilities........................................... 380,303,073 383,749,675
Redeemable preferred stock.................................. 35,969,639 37,871,959
Stockholders' equity (deficit) (d).......................... (95,736,725) 125,566,854
</TABLE>
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(a) Our unaudited pro forma balance sheet data as of December 31, 1999 gives
effect to the contribution and reorganization transaction as if it occurred
on January 1, 1999. The unaudited pro forma balance sheet was derived by
adjusting Pathnet's historical balance sheet as of December 31, 1999 to
reflect the transaction described below:
- 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 second 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 2.5% consent fee to consenting holders
of the notes (assuming all noteholders provide their consent) of
approximately $8.8 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 noncurrent liabilities of $3,092,779.
(d) We have not included unaudited pro forma statement of operations information
to give effect to the contribution and reorganization transaction as if it
occurred on January 1, 1999. An unaudited pro forma statement of operations
would reflect only amortization expense of approximately $939,000 of
deferred financing cost attributable to the consent fee that we plan to pay
in connection with the contribution and reorganization transaction and
approximately $2,878,000 of anticipated transaction costs, of which
$2,398,000 will be expensed as incurred and the remainder offset against
stockholders' equity (deficit). The deferred financing cost will be
amortized and charged to interest expense over the remaining life of the
notes. Generally, we do not begin amortizing rights of way used in our
network until the network is completed and available for use. As of December
31, 1999, none of the rights of way contemplated by the contribution and
reorganization transaction were used in our fiber optic network. Because the
amortization of the deferred financing cost and expensed transaction costs
would have represented the only pro forma adjustments to the statement of
operations data, we have not presented unaudited pro forma statement of
operations data. Instead, we have adjusted our pro forma stockholders'
equity (deficit) to account for these expenses.
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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.
RISKS RELATING TO OUR COMPANY OPERATIONS
IF WE ARE UNABLE TO DEVELOP THE RIGHTS OF WAY THAT WE WILL RECEIVE IN THE
CONTRIBUTION AND REORGANIZATION TRANSACTION, OR IF THE DEVELOPMENT COSTS MORE OR
TAKES LONGER THAN WE ANTICIPATE, WE MAY NOT BE ABLE TO DEVELOP ALL PORTIONS OF
OUR NETWORK OR GENERATE THE REVENUES NECESSARY TO BECOME PROFITABLE.
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.
We cannot assure you that we will obtain the necessary property rights and
access to the segments that we wish to develop. 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. In addition, we cannot predict with
certainty the costs of developing segments of our network on these rights of
way. These costs could be significantly higher than we anticipate and may be
prohibitively expensive.
IF WE ARE UNABLE TO COMPLETE CONSTRUCTION OF THE NETWORK ROUTE SEGMENT ON WHICH
COLONIAL HAS CONDITIONED THE $25 MILLION SECOND TRANCHE OF ITS INVESTMENT IN OUR
SERIES E CONVERTIBLE PREFERRED STOCK, WE MAY NOT RECEIVE THOSE FUNDS FROM
COLONIAL AS PLANNED.
Our contribution agreement with Colonial requires us to complete the
buildout of our network along a route from Chicago, Illinois to Aurora (a suburb
of Denver), Colorado as a condition to our receiving the second tranche of the
Colonial investment. If we are unsuccessful in building this portion of the
network, we will not receive $25 million of the funds that we expect to receive
from Colonial in the contribution and reorganization transaction. The loss of
these funds could hinder our ability to implement our business plan.
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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.
IF WE CANNOT SUCCESSFULLY COORDINATE OUR NETWORK CONSTRUCTION AND OPERATIONS
WITH OUR RIGHTS OF WAY PROVIDERS' EXISTING OPERATIONS, WE MAY NOT BE ABLE TO
DEVELOP OR OPERATE OUR NETWORK AS PLANNED AND OUR REVENUES COULD BE MATERIALLY
IMPAIRED.
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 ARE UNDERTAKING A MAJOR EXPANSION OF THE BUSINESS PREVIOUSLY CONDUCTED BY
PATHNET AND WE MAY NOT BE ABLE TO MANAGE THIS EXPANSION EFFECTIVELY GIVEN OUR
LIMITED PAST OPERATING EXPERIENCE.
Pathnet was incorporated in August 1995 and is a development stage company
with only a limited operational history. As of December 31, 1999, Pathnet had
constructed approximately 6,300 wireless route miles and 500 fiber route miles
of our digital network. Pathnet had also completed 40 separate
installations -- often referred to as physical collocations -- of our
telecommunications network equipment at existing local telephone company central
offices. 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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The success of this expansion will depend upon, among other things, our
ability effectively to:
- implement our sales and marketing strategy;
- evaluate markets for our products and services;
- acquire additional rights of way;
- identify profitable network routes;
- secure additional financing for our network deployment;
- reach agreement with a sufficient number of appropriate co-development
partners to develop the network necessary to complete our business plan;
- 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. Moreover, because we are expanding our business plan into
new markets and technologies not previously used by Pathnet, we may not be able
to identify and manage all of the material risks that may arise as we pursue
this new business plan.
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 BUSINESS AND FINANCIAL PERFORMANCE MAY SUFFER IF
MARKET AND TECHNOLOGICAL DEVELOPMENTS RENDER OUR CHOSEN TECHNOLOGIES AND
STRATEGIES OBSOLETE OR UNRESPONSIVE TO MARKET DEMAND.
Our business strategy is to provide an integrated bundle of
telecommunications services and expand our operations and network. To implement
this strategy we will be investing heavily in a rapidly evolving industry. As a
result, our investments will be subject to a variety of risks in addition to
those described in the other "risk factors" set forth in this prospectus. These
additional risks include:
- market pricing pressures for the services and products we offer;
- changes in expenses associated with the construction and expansion of our
network and services;
- operating and technical problems;
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- availability of alternative technologies; and
- variations in market growth rates for our products and services.
These factors could adversely affect our business strategies by increasing
the cost and difficulty of implementing our business plans, or making it more
difficult for us to generate adequate revenues.
WE MAY BE UNABLE TO HIRE AND RETAIN SUFFICIENT QUALIFIED PERSONNEL, AND THE LOSS
OF ANY OF OUR KEY EMPLOYEES COULD MATERIALLY ADVERSELY AFFECT OUR ABILITY TO
CONSTRUCT OUR NETWORK, CONDUCT OUR NETWORK OPERATIONS AND IMPLEMENT OUR SALES
STRATEGY.
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 ability to implement the essential components of our
business plan.
THE LOSS OR INTERRUPTION OF RELATIONSHIPS WITH OR SERVICES FROM KEY SUPPLIERS OR
THIRD PARTY CONTRACTORS COULD DELAY AND INCREASE COSTS ASSOCIATED WITH THE
CONSTRUCTION OF OUR NETWORK.
We depend on third party suppliers for a number of components and parts
used in our network. We may be unable to obtain supplies or services from our
usual suppliers for reasons beyond our control. Although there may be
alternative suppliers of components for all of the components and transmission
equipment contained in our network or required to offer our products and
services, those alternatives may not be available to us on as favorable terms.
Any nationwide shortage, or extended delay or other 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.
OUR FAILURE TO IDENTIFY, DEPLOY AND MAINTAIN SOPHISTICATED BILLING, CUSTOMER
SERVICE AND INFORMATION SYSTEMS COULD HAVE A NEGATIVE EFFECT ON OUR PRODUCT AND
SERVICE OFFERINGS, CUSTOMER RELATIONS AND REVENUES.
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, we may not be able to offer services or products that our
customers require, our customer relations could be damaged, and our ability to
reach our financial and operational objectives could be compromised.
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OUR YEAR 2000 COMPLIANCE EFFORTS MAY NOT ULTIMATELY PROVE TO BE SUCCESSFUL,
WHICH COULD MATERIALLY INTERFERE WITH OUR NETWORK AND OTHER BUSINESS OPERATIONS.
The Year 2000 issue is the result of computer programs using two digits,
rather than four, to define the applicable year. Because of this programming
convention, software, hardware or firmware may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in system failures,
miscalculations or errors causing disruptions of operations or other business
problems, including, among others, an inability to process transactions, send
invoices, or engage in similar normal business activities. As of February 22,
2000, neither Pathnet nor us had experienced any significant Year 2000 issues.
However, we will not be able to fully assess the impact of Year 2000 issues on
our business and operations until later this year. 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."
IF WE DO NOT SUCCESSFULLY MANAGE ACQUISITIONS, STRATEGIC ALLIANCES AND JOINT
VENTURES THAT WE MAY NEED TO IMPLEMENT OUR BUSINESS PLAN, OUR FINANCIAL AND
OPERATIONAL PERFORMANCE MAY BE ADVERSELY AFFECTED.
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 December 31, 1999, Pathnet's operations
have resulted in cumulative net losses of $101.5 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
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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.
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 currently
available resources will, together with those received in the contribution and
reorganization transaction, be sufficient to fund the implementation of our long
term 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 MAY
INCREASE OUR OPERATING COSTS AND COULD HINDER OR PREVENT US FROM RAISING
ADDITIONAL REQUIRED FUNDS, INVESTING IN OUR OPERATIONS, OR WITHSTANDING A
DECLINE IN OUR PROJECTED REVENUES.
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 December 31, 1999, Pathnet had approximately
$380.3 million of indebtedness outstanding and total stockholders' equity
(deficit) of ($95.7) 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.
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OUR INABILITY TO OBTAIN ADDITIONAL FINANCING NEEDED IN THE FUTURE MAY DELAY OR
PREVENT THE COMPLETION OF OUR NETWORK AND THE ROLLOUT OF OUR PRODUCTS AND
SERVICES TO OUR CUSTOMERS.
We expect to need significant additional capital to complete the buildout
of our planned network and fulfill our long-term business strategies. We may be
unable to produce sufficient cash flows from ongoing operations to fund our
business plan and future growth. This could require us to alter our business
plan, including delaying, 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 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.
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.
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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 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 AND RESTRICT OUR OPERATIONS.
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
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affect, and, in certain cases significantly limit (and in some cases prohibit),
among other things, our ability and the ability of our subsidiaries to:
- incur additional indebtedness;
- create liens;
- make investments;
- pay dividends;
- issue stock; and
- sell assets.
For example, the indenture restricts and the supplemental indenture will
restrict our ability to incur indebtedness other than indebtedness to finance
the acquisition of equipment, inventory or network assets and other specified
indebtedness. In addition, if and when we (or our subsidiaries) borrow funds
under our proposed credit facility with Lucent or under other credit facilities
with other vendors or third parties who may provide financing, 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
DIFFICULTIES THAT WE MAY EXPERIENCE IN EXPANDING OUR NETWORK COULD INCREASE OUR
ESTIMATED COSTS AND DELAY SCHEDULED COMPLETION OF OUR NETWORK.
We plan to expand our existing network, enter new markets and broaden our
product and service offerings -- all of which are significant undertakings.
These activities will require us to install and operate additional facilities
and equipment, and develop, introduce and market new products and services. To
deploy these additional services we will need to modify and add to our existing
network architecture. We will also need to obtain and install our equipment in
the existing local telephone companies' central office collocation space as
described in further detail below. We may encounter administrative, technical,
operational, regulatory and other problems as a result of our expansion. Many of
these factors and problems are beyond our control. If we experience difficulties
in addressing and solving these problems, we may not be able to complete our
network buildout or expand our products and services as planned or in accordance
with our current cost or time estimates.
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WE MAY PURSUE RELATIONSHIPS WITH TELECOMMUNICATIONS PROVIDERS AND OTHER BUSINESS
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.
WE MAY NOT BE ABLE TO OBTAIN OR MAINTAIN APPROPRIATE RIGHTS OF WAY AND OTHER
ACCESS RIGHTS THAT WE NEED TO BUILD AND OPERATE OUR NETWORK, DEPRIVING US OF THE
REVENUES NECESSARY TO IMPLEMENT OUR BUSINESS PLAN.
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.
THIRD PARTY CHALLENGES TO OUR USE OF RIGHTS OF WAY OBTAINED FROM OTHERS MAY
DELAY, HINDER OR OTHERWISE LIMIT THE DEVELOPMENT AND OPERATION OF OUR NETWORK
AND IMPLEMENTATION OF OUR BUSINESS PLAN.
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.
IF WE ARE UNABLE TO OBTAIN THE ADDITIONAL PERMITS AND AGREEMENTS NECESSARY TO
OPERATE AND EXPAND OUR NETWORK, WE MAY BE UNABLE TO DEVELOP OUR NETWORK OR
GENERATE SUFFICIENT REVENUES.
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.
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IF WE ARE UNABLE TO OBTAIN AND MAINTAIN ON GOOD TERMS THE LEASEHOLD ACCESS OR
OTHER SERVICES AND MAINTENANCE AGREEMENTS ON WHICH WE RELY TO OPERATE THE
WIRELESS PORTIONS OF OUR NETWORK, IT MAY BECOME MORE EXPENSIVE, OR WE MAY EVEN
BE UNABLE, TO OPERATE THOSE PORTIONS OF OUR NETWORK.
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.
DISAGREEMENTS WITH OUR CO-DEVELOPMENT PARTNERS OR DIFFICULTIES WE MAY EXPERIENCE
IN OUR OTHER STRATEGIC RELATIONSHIPS COULD HINDER THE DEVELOPMENT OF OUR NETWORK
AND OUR EXPANSION INTO TARGET MARKETS.
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 MAY BE UNABLE TO OBTAIN ACCESS TO AND INTERCONNECTION WITH THE FACILITIES OF
EXISTING LOCAL TELEPHONE COMPANIES ON FAVORABLE TERMS, WHICH COULD DELAY,
INCREASE THE COST OF OR PREVENT US FROM PROVIDING LOCAL ACCESS SERVICES IN OUR
TARGET MARKETS.
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 central office space.
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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.
IF EXISTING LOCAL TELEPHONE COMPANIES ON WHOM WE DEPEND FOR INTERCONNECTION AND
OTHER NETWORK ELEMENTS REFUSE TO COOPERATE OR FAIL TO PERFORM THEIR AGREEMENTS
WITH US, WE MAY BE DELAYED IN OR EVEN PREVENTED FROM COMPLETING OUR NETWORK AND
OFFERING COMPETITIVE SERVICES TO OUR CUSTOMERS.
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 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.
IF THE QUALITY, AVAILABILITY OR MAINTENANCE OF EXISTING LOCAL TELEPHONE
COMPANIES' NETWORKS IS UNSATISFACTORY, OUR NETWORK MAY NOT BE SUFFICIENTLY
AVAILABLE OR RELIABLE TO MEET OUR BUSINESS PLANS OR CUSTOMER EXPECTATIONS.
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.
WIRELESS PATH FAILURES OR CABLE CUTS ON OUR NETWORK COULD INTERFERE WITH OUR
NETWORK OPERATIONS, DAMAGE OUR RELATIONSHIPS WITH OUR CUSTOMERS OR EXPOSE US TO
LIABILITY.
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 and we could be exposed to liability
claims.
RISKS RELATING TO OUR INDUSTRY
OUR BUSINESS AND INDUSTRY ARE VERY COMPETITIVE AND INCREASED COMPETITION COULD
REQUIRE US TO LOWER OUR PRICES OR PROVIDE MORE EXPENSIVE SERVICES THAT WOULD
ADVERSELY AFFECT OUR FINANCIAL PERFORMANCE.
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
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<PAGE> 22
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.
IF WE ENCOUNTER INCREASED COMPETITION FROM EXISTING AND FUTURE
TELECOMMUNICATIONS SYSTEMS ON ROUTES WHERE WE PLAN TO PROVIDE INFRASTRUCTURE
SERVICES AND WHOLESALE TRANSPORT SERVICES, WE MAY BE UNABLE TO COMPETE
EFFECTIVELY FOR THESE SERVICES OR WE MAY NEED TO REDUCE OUR PRICES IN A MANNER
THAT ADVERSELY AFFECTS OUR FINANCIAL PERFORMANCE.
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:
- long distance companies, 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, 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 or obtain
authority to provide long distance services in their local markets;
- competitive telecommunications companies, such as GST Telecommunications,
Inc., ITC/ Deltacom, Inc. and Metromedia Fiber Network, Inc.; and
- 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.
ADDITIONAL COMPETITION FROM LOCAL TELEPHONE COMPANIES OR OTHER
TELECOMMUNICATIONS SERVICES PROVIDERS AS THEY BEGIN TO PROVIDE OR EXPAND THEIR
LOCAL ACCESS SERVICES IN THE MARKETS THAT WE HAVE TARGETED MAY PREVENT US FROM
ACHIEVING OUR SALES GOALS.
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."
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<PAGE> 23
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;
- 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 FIBER OPTIC CABLE IN THE INDUSTRY MAY LEAD TO LOWER PRICES
FOR OUR PRODUCTS OR SERVICES.
The supply of fiber optic cable that is already buried in conduits but has
none of the associated transmission electronics installed has increased,
resulting in downward pricing pressure on sales of fiber optic strands. The FCC
recently issued an order requiring existing local telephone companies to make
inactive fiber optic strands 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 fiber
optic strands that we sell and services that we plan to offer, adversely
affecting our business, financial condition and results of operations.
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<PAGE> 24
IF WE FAIL TO RECOGNIZE OR MAKE THE INVESTMENTS NECESSARY TO KEEP PACE WITH
RAPID TECHNOLOGICAL CHANGES, OUR SERVICES MAY BECOME LESS DESIRABLE OR OBSOLETE
AND WE MAY FACE HIGHER COSTS OR BE UNABLE TO COMPETE EFFECTIVELY.
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 our ability
to meet our sales targets.
RISKS RELATING TO REGULATION
REGULATORY CHANGES COULD REQUIRE US TO POSTPONE OR MODIFY OUR BUSINESS PLANS OR
DEPRIVE US OF THE MEANS TO ESTABLISH OUR NETWORK IN OUR TARGET MARKETS.
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 cause our pricing and business models
to fluctuate dramatically or otherwise have a material adverse effect on us.
THE FCC MAY IMPLEMENT PROVISIONS OF THE TELECOMMUNICATIONS ACT OF 1996 IN A
MANNER THAT IS ADVERSE TO OUR BUSINESS PLANS AND STRATEGIES.
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.
OUR ABILITY TO OFFER LONG DISTANCE COMPANIES LOCAL ACCESS SERVICES AT
COMPETITIVE RATES MAY BE LIMITED BY NEW REGULATIONS AND LEGISLATIVE INITIATIVES.
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
20
<PAGE> 25
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 access services.
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 AND THEIR AFFILIATES TO OFFER DIGITAL SUBSCRIBER LINE SERVICES TO
CUSTOMERS IN OUR TARGET MARKETS, INCREASING THE COMPETITION THAT WE FACE FOR
CUSTOMERS SEEKING THESE SERVICES.
In August 1998, the FCC proposed new rules that would allow existing local
telephone companies to provide Digital Subscriber Line services through separate
affiliates not subject to existing local telephone company regulation. The FCC
recently decided some of the other issues raised in that proceeding, but the
question of whether existing local telephone companies can provide unregulated
Digital Subscriber Line services through a separate affiliate remains
unresolved. Any decision that would permit an existing local telephone company
affiliate to 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.
IF WE ARE UNABLE TO OBTAIN AND MAINTAIN THE NECESSARY FCC LICENSES, WE MAY BE
UNABLE TO OPERATE 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.
IF WE DO NOT ACCURATELY PREDICT THE COST OF COMPLYING WITH FEDERAL AND STATE TAX
AND OTHER SURCHARGES ON OUR SERVICES, WE MAY NOT ACCURATELY ANTICIPATE THE COST
OF PROVIDING OUR SERVICES TO CUSTOMERS, AND OUR EARNINGS AND CUSTOMER
RELATIONSHIPS COULD BE ADVERSELY AFFECTED.
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
21
<PAGE> 26
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 REGULATORY BURDENS AND INTERFERE WITH OUR ABILITY TO
HOLD INVESTMENTS OR RAISE FINANCING FOR OUR BUSINESS.
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.
We are primarily engaged in a business other than investing, reinvesting,
owning, holding or trading securities. However, we could be deemed 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.
YOU MAY BE SUBJECT TO FEDERAL INCOME TAXATION AS A CONSEQUENCE OF THE WAIVERS,
CONSENT AND PROPOSED INDENTURE AMENDMENTS.
We believe that you, as a noteholder, will recognize income for federal
income tax purposes as a result of the waivers, consent and proposed indenture
amendments only to the extent of the consent fee you receive. However, due to
the lack of specific guidance and the inherently factual nature of the issues
involved, tax counsel is unable to render an opinion to this effect. If the
waivers, consent and proposed indenture amendments result in a "deemed exchange"
of the notes for federal income tax purposes, you would recognize gain or loss
on such deemed exchange if the notes do not constitute securities for purposes
of Section 354 of the Internal Revenue Code. In addition, regardless of whether
the notes constitute securities, if a deemed exchange occurs and the notes are
publicly traded within the meaning of the Internal Revenue Code, the notes
likely would be treated as having original issue discount. If the notes have
original issue discount, you generally will be required to include such discount
in income as it accrues in advance of the receipt of cash attributable to such
income. The tax consequences of the waivers, consent and proposed indenture
amendments are described more fully in "FEDERAL INCOME TAX CONSEQUENCES."
WE MAY INCUR SUBSTANTIAL FEDERAL INCOME TAXES AS A CONSEQUENCE OF THE WAIVERS,
CONSENT AND PROPOSED INDENTURE AMENDMENTS.
Pathnet currently intends to take the position that the waivers, consent
and proposed indenture amendments will not cause Pathnet to recognize any income
for federal income tax purposes. However, due to the lack of specific guidance
and the inherently factual nature of the issues involved,
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<PAGE> 27
tax counsel is unable to render an opinion to this effect. If the waivers,
consent and proposed indenture amendments result in a "deemed exchange" of the
notes for federal income tax purposes and the notes are treated as publicly
traded within the meaning of the Internal Revenue Code, Pathnet could recognize
a substantial amount of cancellation of indebtedness income. Moreover, we cannot
assure you that Pathnet's net operating losses in prior years could be used to
offset such income and thereby reduce any taxes payable with respect to such
income. The tax consequences of the waivers, consent and proposed indenture
amendments are described more fully in "FEDERAL INCOME TAX CONSEQUENCES."
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," "plans," "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. Beyond the date indicated on the outside back cover of this
prospectus (the 40th day following the effective 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.
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USE OF PROCEEDS
We will not receive any proceeds from the issue of our guarantees on your
notes. At December 31, 1999, the proceeds remaining from private placements of
equity securities and the 1998 offering of notes, less pledged funds for
interest payments, consisted of $154.8 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 second calendar quarter of 2000; $1 million at the initial closing for the
issuance of an option to purchase more of our shares; and $4 million at the
initial 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.
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CAPITALIZATION
The following table sets forth Pathnet's total cash, cash equivalents and
marketable securities and capitalization as of December 31, 1999 on an actual
basis and our unaudited cash, cash equivalents and marketable securities and
capitalization as of December 31, 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 January 1, 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 DECEMBER 31, 1999
-------------------------------
PATHNET PATHNET TELECOM
HISTORICAL PRO FORMA(A)
------------- ---------------
(UNAUDITED)
<S> <C> <C>
Cash, cash equivalents and marketable securities (excluding
marketable securities pledged as collateral)(b)........... $ 138,402,131 $ 170,448,726
============= =============
Pledged securities.......................................... $ 21,265,206 $ 21,265,206
============= =============
Long-term obligations:
Notes..................................................... $ 346,621,625 $ 346,621,625
------------- -------------
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.......... -- 37,871,959
------------- -------------
Total mandatorily redeemable preferred stock....... 35,969,639 37,871,959
------------- -------------
Stockholders' (deficit) equity:
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 shares authorized, 0 shares issued and
outstanding actual and pro forma........................ -- --
Common stock, par value $0.01 per share, 60,000,000 shares
authorized; 3,068,218 shares issued and outstanding
actual and pro forma.................................... 30,682 30,682
Deferred compensation..................................... (441,760) (441,760)
Additional paid in capital................................ 6,264,362 229,638,152
Accumulated other comprehensive loss...................... (90,240) (90,240)
Deficit accumulated during development stage(c)........... (101,499,769) (103,813,743)
------------- -------------
Total stockholders' (deficit) equity............... (95,736,725) 125,566,854
------------- -------------
Total capitalization............................... $ 286,854,539 $ 510,060,438
============= =============
</TABLE>
Footnotes on following page
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<PAGE> 30
- ---------------
(a) Our unaudited pro forma balance sheet data as of December 31, 1999 gives
effect to the contribution and reorganization transaction as if it occurred
on January 1, 1999. The unaudited pro forma balance sheet was derived by
adjusting Pathnet's historical balance sheet as of December 31, 1999 to
reflect the transaction described below:
- 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 second 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 2.5% consent fee to holders of the notes (assuming
all holders of notes consent to the contribution and reorganization
transaction) of approximately $8.8 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) We have not included unaudited pro forma statement of operations information
to give effect to the contribution and reorganization transaction as if it
occurred on January 1, 1999. An unaudited pro forma statement of operations
would reflect only amortization expense of approximately $939,000 of
deferred financing cost attributable to the consent fee that we plan to pay
in connection with the contribution and reorganization transaction and
approximately $2,878,000 of anticipated transaction costs, of which
$2,398,000 will be expensed as incurred and the remainder offset against
stockholders' equity (deficit). The deferred financing cost will be
amortized and charged to interest expense over the remaining life of the
notes. Generally, we do not begin amortizing rights of way used in our
network until the network is completed and available for use. As of December
31, 1999, none of the rights of way contemplated by the contribution and
reorganization transaction were used in our fiber optic network. Because the
amortization of the deferred financing cost and expensed transaction costs
would have represented the only pro forma adjustments to the statement of
operations data, we have not presented unaudited pro forma statement of
operations data. Instead, we have adjusted our pro forma deficit accumulated
during the development stage to account for these expenses.
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<PAGE> 31
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, 1997,
1998 and 1999 and for the period from August 25, 1995 (the date of Pathnet's
inception) to December 31, 1999 and the summary historical balance sheet data as
of December 31, 1998 and 1999 have been derived from Pathnet's audited financial
statements that are included elsewhere in this prospectus. The summary
historical statements of operation data for the period from August 25, 1995
(date of inception) to December 31, 1995 and for the year ended December 31,
1996 and the balance sheet data as of December 31, 1995, 1996 and 1997 have been
derived from Pathnet's audited financial statements that are not included
elsewhere in this prospectus. The unaudited pro forma balance sheet data as of
December 31, 1999 gives effect to the contribution and reorganization
transaction as if it occurred on January 1, 1999. We have provided the unaudited
pro forma balance sheet data for informational purposes only.
<TABLE>
<CAPTION>
PATHNET
-------------------------------------------------------------------------------------------
PERIOD FROM PERIOD FROM
AUGUST 25, 1995 AUGUST 25, 1995
(DATE OF YEAR ENDED (DATE OF
INCEPTION) TO DECEMBER 31, INCEPTION) TO
DECEMBER 31, ------------------------------------------------------- DECEMBER 31,
1995 1996 1997 1998 1999 1999
--------------- ----------- ----------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................. $ -- $ 1,000 $ 162,500 $ 1,583,539 $ 3,311,096 $ 5,058,135
---------- ----------- ----------- ------------ ------------ -------------
Operating expenses:
Cost of revenue................... -- -- -- 7,547,620 12,694,909 20,242,529
Selling, general and
administrative.................. 429,087 1,333,294 4,247,101 9,615,867 14,669,747 30,295,096
Contribution and reorganization
expenses........................ -- -- -- -- 1,022,998 1,022,998
Depreciation and amortization
expense......................... 352 9,024 46,642 732,813 6,204,381 6,993,212
---------- ----------- ----------- ------------ ------------ -------------
Total operating expenses............ 429,439 1,342,318 4,293,743 17,896,300 34,592,035 58,553,835
---------- ----------- ----------- ------------ ------------ -------------
Operating loss...................... (429,439) (1,341,318) (4,131,243) (16,312,761) (31,280,939) (53,495,700)
Interest expense(a)................. -- (415,357) -- (32,572,454) (41,010,069) (73,997,880)
Interest income..................... 2,613 13,040 159,343 13,940,240 13,111,953 27,227,189
Write off of initial public offering
costs............................. -- -- -- (1,354,534) -- (1,354,534)
Other income (expense), net......... -- -- (5,500) 2,913 142,743 140,156
---------- ----------- ----------- ------------ ------------ -------------
Net loss............................ $ (426,826) $(1,743,635) $(3,977,400) $(36,296,596) $(59,036,312) $(101,480,769)
========== =========== =========== ============ ============ =============
Basic and diluted loss per common
share............................. $ (0.15) $ (0.60) $ (1.37) $ (12.51) $ (20.14)
Weighted average number of common
shares outstanding................ 2,900,000 2,900,000 2,900,000 2,902,029 2,931,644
OTHER FINANCIAL DATA (UNAUDITED):
Ratio of earnings to fixed
charges........................... <1 <1 <1 <1 <1
Deficiency of earnings to fixed
charges........................... $ (426,826) $(1,743,635) $(3,977,400) $(36,658,917) $(62,626,459)
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---- ----------- ----------- ------------ ---------------------------
HISTORICAL PRO FORMA(B)
------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities (excluding marketable
securities pledged as collateral)(c).... $ 82,973 $ 2,318,037 $ 7,631,384 $227,117,417 $138,402,131 $170,448,726
Property and equipment, net............... 8,551 46,180 7,207,094 47,971,336 131,928,365 131,928,365
Intangible assets -- rights of way........ -- -- -- -- -- 187,275,006
Total assets.............................. 91,524 2,365,912 16,097,688 365,414,129 320,535,987 547,188,488
Long-term obligations(d).................. -- -- -- -- 349,714,404 353,989,404
Total liabilities......................... 17,350 145,016 5,892,918 366,492,370 380,303,073 383,749,675
Redeemable preferred stock................ 500,000 4,008,387 15,969,641 35,969,639 35,969,639 37,871,959
Stockholders' equity (deficit)(e)......... $(425,826) $(1,787,471) $(5,764,871) $(37,047,880) $(95,736,725) $125,566,854
</TABLE>
27
<PAGE> 32
- ---------------
(a) The 1996 expense relates to the beneficial conversion feature of a loan at
December 31, 1996.
(b) Our unaudited pro forma balance sheet data as of December 31, 1999 gives
effect to the contribution and reorganization transaction as if it occurred
on January 1, 1999. The unaudited pro forma balance sheet was derived by
adjusting Pathnet's historical balance sheet as of December 31, 1999 to
reflect the transaction described below.
- 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 second 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 2.5% consent fee to holders of the notes (assuming
all holders of notes consent to the contribution and reorganization
transaction) of approximately $8.8 million.
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 noncurrent liabilities of $3,092,779
(e) We have not included unaudited pro forma statement of operations
information to give effect to the contribution and reorganization
transaction as if it occurred on January 1, 1999. An unaudited pro forma
statement of operations would reflect only amortization expense of
approximately $939,000 of deferred financing cost attributable to the
consent fee that we plan to pay in connection with the contribution and
reorganization transaction and approximately $2,878,000 of anticipated
transaction costs, of which $2,398,000 will be expensed as incurred and
the remainder offset against stockholders' equity (deficit). The
deferred financing cost will be amortized and charged to interest
expense over the remaining life of the notes. Generally, we do not begin
amortizing rights of way used in our network until the network is
completed and available for use. As of December 31, 1999, none of the
rights of way contemplated by the contribution and reorganization
transaction were used in our fiber optic network. Because the
amortization of the deferred financing cost and expensed transaction
costs would have represented the only pro forma adjustments to the
statement of operations data, we have not presented unaudited pro forma
statement of operations data. Instead, we have adjusted our pro forma
stockholders' equity (deficit) to account for these expenses.
28
<PAGE> 33
BUSINESS
Our actual results could differ materially from those anticipated in
forward-looking statements in this section 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. In reviewing this section, you may
wish to refer to the glossary at the back of this prospectus for definitions of
technical terms.
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. We have partnered with owners of
telecommunications assets, including utility, pipeline and railroad companies,
to upgrade and aggregate wireless infrastructure to a microwave network using
high capacity Synchronous Optical Network Technology, also known as "SONET".
Through 1998, we signed agreements with eight such incumbents and had over 6,000
miles of wireless network under development.
In early 1999, we expanded the scope of our business strategy to include
fiber optic technology to enable us to deliver to our customers -- including
long distance companies, existing local telephone companies, Internet service
providers, competitive telecommunications companies, cellular operators and
resellers -- high bandwidth services as well as dark fiber and fiber optic
strands that have some but not all of the electronics required to transmit voice
or data signals. Our network will enable our customers, 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
- 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 approximately 20,000 route
miles utilizing fiber and SONET microwave. We intend to continue to develop our
backbone on a "smart-build" basis by prioritizing route development along
corridors with high demand for dark fiber and conduit or partnering with
established companies in the joint development of those routes. We expect our
network will terminate in central offices in our target markets where we intend
to collocate and use existing local telephone company unbundled network elements
or other third party local network assets in the provision of service to our
customers.
As of December 31, 1999, our network consisted of over 6,300 wireless route
miles, providing wholesale transport services to 30 cities, and 500 route miles
of installed fiber. We are constructing an additional 600 route miles of fiber
network, which is scheduled for completion in the first half of 2000. 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
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<PAGE> 34
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.
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 13 states, with
applications pending in an additional 8 states, which will allow us to
obtain unbundled network elements from the existing local telephone
companies;
- Executed interconnection agreements with three existing local telephone
companies: US West, Ameritech and Southwestern Bell;
- Executed agreements providing for collocations with 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. long
distance companies;
- 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 global
markets;
- Rapid development of new technologies such as Digital Subscriber Line
technology that allow carriers to exploit existing local network
infrastructure to deliver multiple media (including voice, data, video
and Internet) at high speed over 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 existing local telephone companies to provide additional
direct interconnection and collocation to their competitors.
We intend to exploit these developments and employ emerging convergent
technologies in the deployment of our backbone network and local access
platform. We believe the emergence and
30
<PAGE> 35
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 was $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 networks of existing local
telephone companies -- has limited appeal because it can be expensive
and, in many cases, the network components of existing local telephone
companies lack the broadband capabilities that these telecommunications
service providers need to
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<PAGE> 36
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 other 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 December 31, 1999, we had entered into
strategic relationships with eight companies who have provided the
foundation for our existing 6,300-route mile wireless 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
competitive telecommunications company status in each state where we
provide service and we anticipate signing interconnection agreements with
all of the relevant existing local telephone companies. These
interconnection agreements allow us to construct our microwave tributary
routes directly to the existing local telephone company's central office
facility, allowing us to use the existing central
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<PAGE> 37
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 existing local telephone companies at favorable rates and terms,
including space in the existing local telephone company's central offices
that is 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 "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 delivering network reliability of 99.999% per network
segment.
- 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.
PROJECTED DEVELOPMENT OF BUSINESS PLAN
With the funds and other assets received in the contribution and
reorganization transaction, and additional equity financings, we plan to
complete the first phase of our long term business plan. Our long term business
plan calls for us to develop an approximately 20,000 mile network and provide
services to over 200 second and third tier markets. In the first phase of this
plan we expect to complete development of approximately 12,500 route miles of
network and approximately 400 collocations by the end of 2002. We project the
development of our network and associated physical collocations through June 30,
2001 to be as follows:
<TABLE>
<CAPTION>
PROJECTED
PROJECTED PHYSICAL PROJECTED
NETWORK MILES COLLOCATIONS CITIES
------------- ------------ ---------
<S> <C> <C> <C>
As of December 31, 1999......................... 6,800 40 30
End of Second Quarter 2000...................... 7,600 85 50
End of Fourth Quarter 2000...................... 9,100 150 80
End of Second Quarter 2001...................... 10,500 230 120
</TABLE>
We will draw on the following sources of cash to fund the first phase of
our long term business plan:
- our current cash resources;
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<PAGE> 38
- the anticipated proceeds (after associated expenses) from both tranches
of Colonial's investment in our shares of series E convertible preferred
stock as part of the contribution and reorganization transaction;
- borrowings under senior secured vendor financing that we propose to
execute in connection with the purchase of fiber optic cable and
associated network equipment;
- payments from our co-development partners and sales to infrastructure and
bandwidth services customers; and
- additional equity investment(s) of at least $100 million.
Based on our projected development costs, we believe that these resources
will be sufficient to satisfy the anticipated cash requirements (including both
network development and operating losses) of the first phase of our long term
business plan. However, we will require additional resources to fund the
remaining phases of our current long term business plan, and cannot assure you
that these projections will prove to be accurate or that our development costs
will not exceed those that we currently anticipate.
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. One of the conduits
will contain a fiber optic cable consisting of a specified number of fiber optic
strands. The conduits and any installed strands will be equally divided between
Pathnet and Worldwide Fiber, and the costs to construct the route will be shared
equally by the parties. In addition, Pathnet will pay Worldwide Fiber a
management fee equal to 10% of Pathnet's share of the development costs. 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, was completed in the fourth quarter 1999, and the second segment,
Omaha to Aurora, is scheduled to be completed by the end of the second 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 inactive fiber optic strands on the route,
and will share the revenues from such sales. The joint marketing agreement also
permits each party to retain fiber optic strands for its own use, subject to
certain restrictions on resale, and to swap a certain number of fiber optic
strands to third parties.
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. This system, constructed on power
transmission lines, will contain a specified number of fiber optic strands. The
costs to construct the system will be borne equally between Pathnet and the
other parties. In connection with the co-development agreement, we entered into
a joint marketing agreement under which each party will reserve a portion of the
fiber strands for its own operations, a subset of which will be available for
swaps with third parties. The remaining fiber strands will be jointly sold, with
Pathnet as the exclusive marketing agent. Any revenues derived from the sale of
those fiber strands will be shared equally between Pathnet and Tri-State, after
deduction of a Pathnet marketing fee. We expect this system to be completed in
the second half of 2000.
ALLIANCE PROGRAM. We have entered into capacity purchase agreements with
two other carriers, IXC and Frontier, enabling us to resell capacity on their
networks. This allows us to extend our network reach to POPs, which are
locations that serve as focal points for a carrier's network and
34
<PAGE> 39
where transmission or switching equipment is usually installed, 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. We also typically pay
the co-development partner a portion of the revenue derived from our selling the
excess bandwidth on that co-development partner's route. Generally, the
co-development partner receives up to 20% of the revenues earned after the
systems have been in place for 48 months. In addition, these agreements
generally require the co-development partner to make capital investments toward
the upgrade of its system infrastructure to make it suitable for installation of
the equipment used in our digital network which, in most cases, includes
significant modifications to structures, towers, battery plants and equipment
shelters. 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 Inc.;
- Northern Border Pipeline Company; and
- Northeast Missouri Electric Power Cooperative.
TOWER LEASE AGREEMENTS. We entered into a leasing arrangement with
American Tower Corporation 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 LONG TERM LEASES. 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
35
<PAGE> 40
time of delivery and acceptance of the fiber or conduit, although other
payment options may be available. In addition, depending upon the nature
of our contractual terms, we will treat our sales of dark fiber and
conduit as sales-type leases or operating leases. We typically require
our customers to make ongoing payments for maintenance services.
- DARK FIBER FOR LEASE OR LEASE TO PURCHASE. We will also lease dark fiber
for a term less than the period for which the indefeasible usage rights
are typically granted. Leases will be typically structured with monthly
payments over the term of the lease. Generally, we expect to realize a
premium in lease pricing for bearing the risk that the lease will not be
renewed for the balance of the life of the asset. We plan to offer
customers the option to lease to purchase.
- 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 high speed
including 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 existing local telephone company's central office and
our use of unbundled network element transport). We believe that we offer
more flexible commitment levels with higher reliability than are
currently available on traditional multiplexed services. As of December
31, 1999, we offered inter-city wholesale transport services on our 6,300
route mile-wireless network as well as via our Alliance Program.
- LOCAL WHOLESALE TRANSPORT SERVICES. Once we establish collocation in the
central offices of existing local telephone companies 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 high rates of speed including 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 existing
local telephone companies in second tier and third tier markets and
through the local networks we have established using a combination of
unbundled network elements 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 using our facilities, thus
avoiding the need to place any equipment at a collocation site. We will
focus this VPOP service on second and third tier markets. We expect that
our VPOP service will allow our customers to virtually
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extend the reach of their networks while expending less resources and
incurring far less risk than if that customer had expanded and built its
own network.
SALES AND MARKETING STRATEGY
Our wholesale customers tend to be very knowledgeable about the nature of
the services and technology available in the marketplace. As a result, our
marketing efforts are largely limited to ensuring that our products and services
are visible and well represented in the market. As part of our marketing
strategy, we attempt to position ourselves as the provider of choice for
telecommunication service providers because of the quality of our service, the
control we provide customers over their service platforms, the reliability of
our services and our low cost position. We believe our cost 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 long distance companies: we intend to provide low cost
Digital Subscriber Line-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;
- Competitive telecommunications companies and competitive long distance
companies: we can extend reach to new markets by providing a more
efficient means for competitive telecommunications companies to originate
or terminate voice traffic and a lower cost source of inter-city
wholesale transport or infrastructure services;
- Internet service providers: we intend to offer low cost Digital
Subscriber Line technology to deliver broadband access. We expect to be
able to extend Internet service providers' 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
Internet service providers exchange each other's traffic.
- Existing local telephone companies: we expect to provide lower cost
network services within the existing local telephone company's own region
and wholesale transport services and local access services out of region
as existing telephone companies 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.
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THE PATHNET NETWORK
BACKBONE NETWORK
We plan to create an approximately 20,000 route mile nationwide network.
Tributaries using either fiber or wireless technology will connect our backbone
to our targeted markets. We believe that connecting the second and third tier
markets to a national backbone is the key to funneling traffic between these
markets and first tier markets.
NETWORK ROUTE SELECTION AND SMARTBUILD APPROACH. In order to utilize
capital effectively, we employ a "smart-build" approach. This means that we seek
to reduce our risks in undertaking the build by:
- Obtaining one or more co-development partners to share in the costs;
- Determining the levels of customer demand before construction (by
obtaining direct customer input on the route); and
- In certain cases, seeking to effect pre-construction sales of dark fiber
and conduit.
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
telecommunications company competitors. We estimate market demand 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
developing 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 fiber strands and conduits along the route;
- Quantity of fiber strands to be retained and allocated for swaps to
obtain fiber strands on routes owned by others; 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
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already installed by another company. In this way, swaps will allow us to
leverage our network, gain more geographical coverage and decrease our time to
market.
In order to connect our network with our customers, we develop
interconnections from our backbone network into our targeted underserved and
second and third tier markets. We design and install our interconnections using
the most cost effective technology to meet the market's needs that may include
building fiber optic cable, acquiring existing fiber, installing wireless
components, or combinations of these technologies.
LOCAL ACCESS CONVERGENT PLATFORM
We believe establishing a local presence in our target markets will
position us to deploy a convergent local network access platform that will
enable multiple customer applications to be combined at a single physical local
access connection and then travel onto our advanced, fast packet-based backbone
infrastructure. From this convergent platform, we expect to enable our
telecommunications service provider customers to launch their own services to
better serve their customers.
We intend to obtain state certification or authorization as a competitive
telecommunications company in each state in which we are required to do so, and
to sign interconnection agreements with the relevant existing local telephone
companies in our target markets. Once we have obtained the appropriate state
authorization and entered into interconnection agreements with the existing
local telephone companies, we will be able to construct our central office
collocation facilities at the premises of, and obtain and use network elements
from, the existing local telephone companies. As of the date of this prospectus,
we were authorized to provide our products and services in 13 states and have
interconnection agreements with US West, Ameritech and Southwestern Bell.
As of December 31, 1999, we had 40 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 existing local telephone company 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 unbundled network element transport from the
existing local telephone companies in order to provide our products and services
throughout the market. In addition to these unbundled network elements, 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 that 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
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to 15 years. This agreement with NEC provides for fixed prices during the first
three years of its term.
We have also entered into a Purchase Agreement with the Andrew Corporation
in which we agreed exclusively to recommend to our co-development partners
certain products manufactured by Andrew. In return, Andrew agreed to sell those
products to our co-development partners and to us for a three year period,
renewable for two additional one-year periods at our option. The agreement
generally provides for discounted pricing based on projected order volume.
NETWORK RELIABILITY
We have constructed our network operations center in Washington, D.C. This
network operations center 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. Our network operations center
ensures the efficient and reliable performance of the network through pro-active
early identification and prevention of potential network disruptions. In
addition, our network operations center 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 our network operations
center include network fault and event management, network and service level
performance management and analysis as well as remote configuration of all
network elements. Our network operations center has full fallback capability and
it appears to be 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 long
distance companies (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.), existing local telephone companies (such
as US West, BellSouth, Bell Atlantic, SBC and GTE Corporation) and competitive
telecommunications companies (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 existing local telephone companies and other competitive
telecommunications companies. Many of the largest existing local telephone
companies 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 existing local
telephone companies 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
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bundling of services surges. New technologies, further deregulation and other
changes in our regulatory environment will create further competitive pressures
as we enter our target markets.
GOVERNMENT REGULATION
OVERVIEW. Our telecommunications businesses are subject to varying degrees
of federal, state and local regulation. We are a telecommunications carrier
under the terms of the federal Communications Act. As a telecommunications
carrier, we are subject to FCC and state utility commission regulation of our
activities. Local authorities also may regulate the permitting and construction
of our telecommunications facilities.
The Telecommunications Act created a uniform national policy in favor of
competition in all telecommunications market segments. As described below, the
rules and policies implementing the Telecommunications Act remain subject to
agency action and litigation at both the federal and state level. We nonetheless
believe that the national policy in favor of competition that was created by the
Telecommunications Act will lead to increased market opportunities for us.
Because these opportunities require additional agency action before the
Telecommunications Act is fully implemented, and because these actions may be
subject to court review, we cannot predict the pace at which the law will be
fully implemented.
We are required to file federal and state tariffs describing the prices,
terms and conditions of our services, and these tariffs are subject to varying
degrees of regulatory oversight and approval. We must also comply with state and
local license or permit requirements relating to the installation and 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 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 existing local telephone
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companies for the provision of competitive telecommunications services. These
laws and regulations require existing local telephone companies 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 the existing local telephone
company's 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 the existing local
telephone company's 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 existing local
telephone companies and new competitors to complete calls originated by
competing carriers under reciprocal arrangements at prices based on a
reasonable approximation of incremental cost, or through the mutual
exchange of traffic without explicit payment;
- Establish wholesale prices for their services to promote resale of
services and facilities by new competitors;
- Establish "number portability" so that customers can maintain their
existing phone numbers when they switch from one telecommunications
provider to another without impairing quality, reliability or
convenience;
- Establish "dialing parity" so that customers will not detect a difference
in quality or complexity in dialing telephone numbers or accessing
operators and emergency services; and
- Provide nondiscriminatory access to telephone poles, ducts, conduits and
rights of way.
Applicable FCC regulations require existing local telephone companies 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 that existing local telephone companies must make
available, finding that the FCC had
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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 existing local
telephone companies 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 existing local
telephone companies. The ability to obtain unbundled network elements is an
important element of our business, and we believe that the FCC's actions in this
area have generally been positive. However, we cannot predict the extent to
which the existing rules will be sustained in the face of additional legal
action and the scope of the rules that are yet to be crafted by the FCC. For
example, the FCC may restrict the use of unbundled network elements 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 existing local telephone companies
in each state. The final rates approved typically depend on the existing local
telephone company's 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
existing local telephone companies 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 comprehensive interconnection agreements with three major
existing local telephone companies (US West, Ameritech and Southwestern Bell)
covering 17 states. These agreements include the provision of unbundled network
elements to be used in connection with competitive telecommunications services.
We have also entered into a collocation agreement with another existing local
telephone company, BellSouth, covering 9 states. We expect this collocation
agreement to be part of a more comprehensive interconnection agreement currently
under negotiation. In addition, we are negotiating additional interconnection
and collocation agreements in other states. 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 existing local telephone companies
interpreting the FCC regulations may seek to frustrate our collocation or
interconnection 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
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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 existing local
telephone companies 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
existing local telephone companies to make new alternative arrangements for
providing central office space. However, the FCC's new rules are currently
subject to judicial review, 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 existing local telephone companies' facilities can negatively impact
our future plans for providing certain services.
Our expected provision of Digital Subscriber Line services is largely
unregulated by the Telecommunications Act or the FCC because we, and the
telecommunications companies that are our target customers for these services,
are not existing local telephone companies. Moreover, our customers providing
Digital Subscriber Line 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
obligations 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 existing local
telephone companies to provide their own Digital Subscriber Line services
through separate affiliates that are not subject to existing local telephone
company regulation. Although the FCC recently decided some of the other issues
raised in that proceeding, the question of whether existing local telephone
companies can provide unregulated Digital Subscriber Line services through a
separate affiliate remains unresolved. Some members of Congress also have
expressed interest in giving existing local telephone companies additional
pricing flexibility for high speed data services and expanding the geographic
area in which existing local telephone companies may offer these services to
their customers. Any expansion of existing local telephone companies' 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 existing local
telephone companies to share telephone lines with Digital Subscriber Line
service providers, an action that may foster competition by allowing competitors
to offer Digital Subscriber Line services without their customers having to
purchase 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.
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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 Digital Subscriber Line services
to our second and third tier markets. To provide unbundled Digital Subscriber
Line capable lines to connect each customer to our equipment, we will use
networks owned by existing local telephone companies. The terms upon which we
connect our network to existing local telephone companies' networks are
specified in interconnection agreements that we must negotiate with the existing
local telephone companies operating in our existing and target markets. Federal
law requires existing local telephone companies 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 existing local telephone companies
to comply with their obligations under these interconnection agreements could
result in customer dissatisfaction and the loss of potential customers.
We also are regulated by the FCC as the holder of a substantial number of
common carrier fixed point-to-point microwave licenses that we use on the
wireless portion of our network. Under the FCC's rules, we must coordinate our
proposed frequency use with other existing users of the spectrum to prevent
interference. After completing that process, we (and, in some cases, our co-
development partners) must apply to the FCC for the issuance of a license to
permit us to transmit information on the frequencies we desire to use. To obtain
a license we must demonstrate that the owner of the transmission site has
complied with the reporting, notification and technical requirements of the
Federal Aviation Administration for the construction, installation, location,
lighting and painting of transmitter towers and antennae like ours. Once the
license is obtained, we must make routine regulatory filings and obtain the
FCC's prior consent for any assignment of the license or any substantial change
in control of the entity holding the license and for certain modifications to a
licensed facility. We cannot assure you that we, or any of our co-development
partners who desire to be the licensee for their portion of our network, will
obtain all of the licenses or approvals necessary for the operation of our
business, the transfer of any license or the modification of any facility, or
that the FCC will not impose burdensome conditions or limitations on any such
license, transfer or approval.
Our ownership also is regulated by the FCC to ensure that we do not exceed
the foreign ownership restrictions imposed by the Communications Act. Under the
Communications 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 to a provision that limits direct foreign ownership of
FCC licenses to 20%. The FCC does not have discretion to waive
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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 and the District of Columbia as a competitive local exchange carrier or
other competitive telecommunications carrier under the regulations of each
state's regulatory commission. We currently are authorized or permitted to
provide at least a portion of our proposed services in 13 states: Colorado,
Florida, Idaho, Indiana, Iowa, Michigan, Minnesota, Montana, Nebraska (local
access services only), Oregon, Texas, Wisconsin and Wyoming (long distance
services only). We have pending applications before an additional eight state
commissions. Although we do not anticipate any issues that would prevent us from
obtaining authorization as a competitive telecommunications carrier in each of
the states in which we will apply, we cannot assure you that all required state
authorizations will be granted.
In most states, we are required to file tariffs setting forth the general
terms, conditions and prices for services classified as intrastate by the
particular state commission in question. Most states require us to list the
services provided and the specific rate for each service. Under various states'
rules, however, we have regulatory flexibility to set price ranges for specific
services and, in some cases, prices can be set on an individual customer basis.
We also may be required to file applications with some states for the assignment
of our state certifications to any other entity and for any transfer of
substantial control that we decide to undertake in the future. Some states also
may require a filing prior to the issuance of substantial debt or equity
securities or other transactions that would result in a lien upon the property
we use to provide intrastate telecommunications services. States generally
require us to file various reports and pay certain fees, including state
universal service subsidies. Like the FCC, most state commissions are empowered
to consider complaints filed against carriers subject to their jurisdiction. We
cannot assure you that our state certificates will not be revoked or amended by
state commissions.
LOCAL REGULATION. We may be required to obtain local permits for street
opening and construction permits to install and expand fiber optic networks.
Local zoning authorities often regulate our use of towers for microwave and
other telecommunications sites. We also are subject to general regulations
concerning building codes and local licensing. The Telecommunications Act
requires that fees charged to telecommunications carriers be applied in a
competitively neutral manner, but there can be no assurance that existing local
telephone companies 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 material 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.
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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. In
addition, Pathnet has registered its service mark "A NETWORK OF OPPORTUNITIES"
and its logo with the United States Patent and Trademark Office.
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. We also own, or are
contracted to purchase, three small parcels of one to five acres of undeveloped
real property along our network backbone, on which we plan to construct
telecommunications equipment shelters for the fiber optic portions of our
network.
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. 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 under a lease that expires
in 2003.
We believe that all of our properties are well maintained.
EMPLOYEES
As of January 31, 2000, we employed 126 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.
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 financial position, results of operations or cash flows.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Our actual results could differ materially from those anticipated in
forward-looking statements made in this section 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." In reviewing
this section, you may wish to refer to the glossary at the back of this
prospectus for definitions of technical terms.
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 December 31, 1999, our network consisted of over 6,300 wireless route
miles providing wholesale transport services to 30 cities and 500 miles of
installed fiber available for sale. We are constructing an additional 600 route
miles of fiber optic network scheduled for completion in the first half of 2000.
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 have some form of exclusivity -- that we will receive from our new
investors in the contribution and reorganization transaction. 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. Our financial
performance will vary from market to market, and the time when
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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 fiber optic strands 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 existing local telephone companies 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 wholesale transport and local access
services we expect components such as access costs (including
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fees for use of the local loop, rent, power and other fees charged by existing
local telephone companies, 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
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
During the year ended December 31, 1999, we continued to focus on:
- Developing relationships and strategic alliances with owners of valuable
telecommunications assets such as rights of way and with co-development
partners,
- Building out our network,
- 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 existing local
telephone companies, and
- Developing our infrastructure including the hiring of key management
personnel.
REVENUE. For the twelve months ended December 31, 1999 and 1998, we
generated revenues of approximately $3.3 million and $1.6 million, respectively.
This increase is attributable to revenues from our sales of telecommunications
services, which were $2.4 million in 1999 compared with approximately $165,000
in 1998. We expect that a substantial portion 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 twelve months ended December 31, 1999 and
1998, we incurred operating expenses of approximately $34.6 million and $17.9
million, respectively. The increase is primarily a result of additional staff
costs incurred in developing our infrastructure, depreciation expenses as more
of our network came on line and administrative costs related to obtaining
regulatory status. Cost of revenue reflects direct costs we incurred in
performing construction and management services and providing telecommunications
services.
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INTEREST EXPENSE. Interest expense for the twelve months ended December
31, 1999 and 1998 was approximately $41.0 million and $32.6 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 twelve months ended December 31,
1999 and 1998 was approximately $13.1 million and $13.9 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.
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 personal communication system (or
PCS) provider 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.
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;
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- Procure, design and construct central office and other collocation and
interconnection sites; and
- Continue development of our corporate infrastructure.
Capital expenditures were approximately $80.2 million for the year ended
December 31, 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 December 31, 1999, we had capital commitments of approximately $89.9
million relating to the development of our network pursuant to existing
agreements. From December 31, 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;
- Commence construction on up to three additional fiber routes; and
- 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 December 31, 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 December 31, 1999, we had approximately $138.4 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 (including 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 second 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, together with those
received in the contribution and reorganization transaction, will be sufficient
to fund the implementation of our long term business plan, 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.
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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.
ANTICIPATED FUNDING SOURCES AND CASH USES
Assuming that we close the contribution and reorganization transaction on
or before March 31, 2000, we anticipate that our total cash expenditures for the
first phase of our long term business plan for the period from January 1, 2000,
through June 30, 2001, will be approximately $619 million. Our projected sources
and uses for the first phase of our long term business plan for the period
January 1, 2000, through June 30, 2001 are set forth in the table below:
PROJECTED SOURCES AND USES
(IN MILLIONS)
<TABLE>
<S> <C>
Sources:
Cash balances at December 31, 1999
Unrestricted Cash........................................... $139
Construction/Development Project Escrows.................... 16
Interest Escrow for Notes................................... 21
----
176
Payments Received from Co-development Partners and
Infrastructure and Bandwidth Services Customers........... 200
Drawings Under Senior Secured Vendor Financings............. 75
Investment from Colonial Pipeline........................... 68
Additional Equity Investment................................ 100
----
Total Sources.......................................... $619
====
Uses:
Operating Expenses.......................................... $ 95
Fiber Optic Network Construction............................ 270
Lighting of Fiber Optic Routes.............................. 60
Interconnection and Collocation Development................. 70
Net Interest Expense/Income................................. 55
Other....................................................... 5
Unrestricted cash balance at June 30, 2001.................. 64
----
Total Uses............................................. $619
====
</TABLE>
FUNDING SOURCES
Our primary funding sources consist of the following:
- UNRESTRICTED AND RESTRICTED CASH BALANCES. As of December 31, 1999, our
unrestricted cash balances totaled $139 million. As of December 31, 1999,
we had restricted cash balances totaling $37 million, consisting of $16
million escrowed against our obligations under co-development agreements
with third parties and $21 million in pledged securities escrowed for the
April 2000 interest payment on the notes.
- PAYMENTS RECEIVED FROM CO-DEVELOPMENT PARTNERS AND INFRASTRUCTURE AND
BANDWIDTH SERVICES CUSTOMERS. We expect to receive approximately $200
million from co-development partners and infrastructure and bandwidth
services (local access and wholesale transport) customers from January 1,
2000, through June 30, 2001. We expect to generate payments from
co-development agreements along future route segments similar to our
existing agreement with Tri-State together with sales of dark fiber and
conduit to infrastructure
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customers for the purpose of reducing our retained cost of our retained
fiber optic strands. We currently project that these payments will
substantially reduce our retained capital cost of our retained fiber
optic strands for the first phase of our long term business plan.
- DRAWINGS UNDER SENIOR SECURED VENDOR FINANCINGS. We intend to enter into
senior secured financing agreements with the vendors providing equipment
for our network. We expect that the economic terms of these agreements
will be similar to the Lucent credit facility that we have negotiated for
our fiber optic cable purchases. We expect these vendors to include those
providing fiber optic cable, fiber optic lighting optronics equipment and
equipment supporting Digital Subscriber Line and Time Division
Multiplexing, or TDM,-based services. We expect to draw approximately $75
million in senior secured financing from our equipment vendors from
January 1, 2000 through June 30, 2001.
- EQUITY INVESTMENT FROM COLONIAL. As described in the Prospectus Summary,
we expect to receive from Colonial as part of the contribution and
reorganization transaction an aggregate of $68 million in cash in return
for two tranches of shares of our series E preferred stock, an option to
acquire additional shares of our capital stock, and rights to conduit
along certain of our corridors.
- ADDITIONAL EQUITY INVESTMENT. We expect to raise approximately $100
million in new equity financing from January 1, 2000 through June 30,
2001. We have not yet identified the sources of this equity investment.
CASH USES
- OPERATING EXPENSES. We expect to incur approximately $95 million in cash
operating expenses from January 1, 2000, through June 30, 2001.
- FIBER OPTIC NETWORK CONSTRUCTION AND LIGHTING OF FIBER OPTIC ROUTES. The
first phase of our business plan involves approximately 12,500 miles of
network route mile construction. We expect to have completed development
of approximately 10,500 routes miles of network capacity by June 30, 2001
consisting of:
- approximately 6,500 miles of wireless network (of which 6,300 miles
were complete as of December 31, 1999);
- 2,600 miles of dark fiber (of which 500 miles were complete as of
December 31, 1999); and
- 1,400 miles of dark fiber acquired through barter exchanges of fiber
optic cable with third parties.
Within these cost projections, we have included our costs of lighting and
making fully operational two of our retained fiber optic strands in each
network route segment. Upon completing the construction of each network
segment, we plan to light these two strands to a minimum initial capacity
of OC-192.
- INTERCONNECTION AND COLLOCATION DEVELOPMENT. In the first phase of our
long term business plan, we expect, on or before June 30, 2001, to
interconnect our fiber optic backbone network to approximately 120
cities. We contemplate that these interconnections will require us to
develop interconnection paths between our backbone network and cities in
which we establish interconnections. These interconnections
paths -- essentially tributaries from our network backbone -- vary in
distance from several hundred feet to 75 miles. In addition, we expect to
develop over 200 collocations as of June 30, 2001.
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- NET INTEREST EXPENSE/INCOME. Projected interest expense from January 1,
2000, through June 30, 2001 consists principally of semi-annual interest
payments on the notes and cash interest paid on senior secured vendor
financing facilities, offset by interest income from short-term
investments of cash balances.
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. 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.
In December 1999, we completed the inventory, assessment and remediation of
mission critical hardware systems and software applications, including network
computing and network systems engineering. We have developed and tested
contingency plans in the event that certain of our suppliers or service
providers may not have been Year 2000 compliant.
In preparation for the Year 2000 transition, we provided 24-hour coverage
from December 31, 1999 through January 3, 2000 in our network operating center
and our corporate data center. We encountered no Year 2000 related problems and
observed no interruption of service during that time.
As part of our Year 2000 plan, we requested confirmation from our
communications equipment vendors and other key suppliers, financial institutions
and customers that their systems would be Year 2000 compliant. Responses
received indicated a high level of Year 2000 compliance at these companies.
Although we have incurred no Year 2000 problems to date, we cannot assure you
that the systems of companies with which we do business are Year 2000 compliant.
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 replaced 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 represented less than 1% of 1999 capital expenditures and were
funded out of cash flow from operations. To the extent we will have to replace a
significant portion of our technology systems, which currently appears unlikely,
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, in part, forward-looking statements. 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
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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 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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<PAGE> 61
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 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, from October 1996 to November 1998, Mr. Rouse was Executive Vice
President, Engineering, Systems and Operations of Intermedia, responsible for
network services, engineering and systems. Before that, from October 1986 to
October 1996, he served in several positions at MCI beginning as the Director of
New York City Operations and spending the last three years as Senior Vice
President of Network Services for MCI/Concert. As Senior Vice President of
Network Services for MCI/Concert, he was responsible for integrating the network
and product functionality between MCI and British Telecom as well as building
global networks. From March 1986 until September 1986, Mr. Rouse served as the
Regional Vice President for Eastern Operations for US West. In addition, Mr.
Rouse spent 17 years, from June 1969 until March 1986,
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<PAGE> 62
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.
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. From
February 1997 to April 1999, Mr. Craig served as the Senior Director Treasury
Management for Omnipoint Communications, Mr. Craig was responsible for corporate
planning and forecasting. In this position, 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, from
February 1996 to February 1997 at UniSite and from September 1995 to February
1997 at 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, from 1983 to 1995, 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. From 1982 through 1983 and from 1977 through 1980, Mr.
Craig served as a Senior Accountant at the Cowper Companies and from 1980 to
1982 he practiced as a certified public accountant with Touche Ross & Co.
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 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 Corporation of Virginia, Inc., from 1991
to 1996, where he was responsible for Jamont's corporate finance, strategic
planning and corporate development.
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 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 from November 1996 to August 1999. 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. From April 1988 to
November 1996, 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, from June 1986 to
April 1988, 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,
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<PAGE> 63
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.
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," which the stockholders
agreement defines as an underwritten 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, 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
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<PAGE> 64
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.
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, 1999, 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 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 Delaware General Corporation Law. 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;
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<PAGE> 65
- 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 Delaware General Corporation Law, in summary, empowers a
Delaware corporation, within certain limitations, to indemnify its officers,
directors, employees and agents against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement, actually and reasonably
incurred by them in connection with any suit or proceeding other than by or on
behalf of the corporation, if they acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interest of the
corporation, and, with respect to a criminal action or proceeding, had no
reasonable cause to believe their conduct was unlawful.
With respect to actions by or on behalf of the corporation, Section 145 of
the Delaware General Corporation Law 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 three
fiscal years as illustrative of the total compensation that we (including
Pathnet) will pay to our executive officers.
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<PAGE> 66
The table below presents information about compensation earned by Pathnet's
CEO and each of Pathnet's six other Named Executive Officers. 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................ 1999 $400,000 $300,000 $40,733(1) --
President and Chief 1998 400,000 -- 40,289(2) --
Executive Officer 1997 166,154(3) -- 9,857(4) 858,754
Michael A. Lubin................. 1999 135,019 47,120 -- --
Vice President, General 1998 136,840 5,000 -- 15,000
Counsel and Secretary 1997 136,115 -- -- --
William R. Smedberg V............ 1999 182,886 139,000 -- 50,000
Executive Vice President, 1998 111,250 28,267 -- 78,656
Corporate Development 1997 100,384 -- -- --
James M. Craig................... 1999 122,206(5) 78,750 -- 125,000
Executive Vice President, Chief
Financial Officer and Treasurer
Shawn F. O'Donnell............... 1999 58,739(6) 57,500 -- 50,000
Senior Vice President of
Engineering and Construction
Robert A. Rouse.................. 1999 239,276(7) 133,751 36,943(8) 350,000
Executive Vice President, Chief
Operating Officer and President
of Network Services
Kevin J. Bennis.................. 1999 207,138(9) 27,500 -- --
Executive Vice President and 1998 246,353(10) -- 185,602(11) 382,500
President Communications
Services
</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 $7,227 for club dues; $13,368 for lodging; $15,090 for airfare;
and $5,048 for other transportation.
(2) Consists of $16,277 for club dues; $7,756 for lodging; $11,685 for airfare;
and $4,571 for other transportation.
(3) Mr. Jalkut began his employment with Pathnet in August 1997, and his salary
was $400,000 per annum in 1997.
(4) Reimbursement for travel expenses.
(5) Mr. Craig began his employment with Pathnet on April 19, 1999, and his
salary was $175,000 per annum in 1999.
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<PAGE> 67
(6) Mr. O'Donnell began his employment with Pathnet on August 9, 1999, and his
salary was $150,000 per annum in 1999.
(7) Mr. Rouse began his employment with Pathnet on April 26, 1999, and his
salary was $325,000 per annum in 1999.
(8) Reimbursement for moving expenses.
(9) Mr. Bennis' employment with Pathnet was terminated on September 17, 1999.
(10) Mr. Bennis began his employment with Pathnet on February 9, 1998, and his
salary was $275,000 per annum.
(11) Consisting of $48,093 in residence settlement charges in Georgia, $99,319
residence settlement charges in Virginia, $22,780 in other moving expenses
and $15,410 in rent.
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<PAGE> 68
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, 1999.
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>
POTENTIAL REALIZABLE VALUE AT
NUMBER OF PERCENT OF ASSUMED ANNUAL RATE OF STOCK
SECURITIES TOTAL OPTIONS PRICE APPRECIATION FOR THE
UNDERLYING GRANTED TO EXERCISE OPTION TERM(1)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------------------
GRANTED FISCAL YEAR $/SHARE DATE 0% 5% 10%
---------- -------------- -------- ---------- --- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Richard A. Jalkut.............. -- --% $ -- -- $-- $ -- $ --
Michael A. Lubin............... -- -- -- -- -- -- --
William R. Smedberg V.......... 50,000(2) 6.88 5.20 5/13/2009 0 163,513 414,373
James M. Craig................. 125,000(2) 17.21 5.20 5/13/2009 0 408,782 1,035,933
Shawn F. O'Donnell............. 50,000(2) 6.88 5.20 8/5/2009 0 163,513 414,373
Robert A. Rouse................ 350,000(2) 48.18 5.20 5/13/2009 0 1,144,588 2,900,611
Kevin J. Bennis................ -- -- -- -- -- -- --
</TABLE>
- ---------------
(1) The information disclosed assumes, solely for purposes of demonstrating
potential realizable value of the stock options, that the estimated fair
value per share of common stock of Pathnet was $5.20 per share as of the
date of grant 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 in 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.
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<PAGE> 69
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table lists information about the number and value of stock
options held by each of the Named Executive Officers as of December 31, 1999.
None of the Named Executive Officers holds stock appreciation rights.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED
OPTIONS AT VALUE OF UNEXERCISED
SHARES DECEMBER 31, 1999 IN-THE-MONEY OPTIONS(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Richard A. Jalkut............. -- -- 572,502 286,252 5,650,595 2,825,307
Michael A. Lubin.............. -- -- 145,215 11,250 1,573,621 65,250
William R. Smedberg V......... -- -- 58,686 69,970 513,093 492,191
James M. Craig................ -- -- 0 125,000 0 725,000
Shawn F. O'Donnell............ -- -- 0 50,000 0 290,000
Robert A. Rouse............... -- -- 0 350,000 0 2,030,000
Kevin J. Bennis............... 90,625 $894,469 0 0 0 0
</TABLE>
- ---------------
(1) Based on an assumed market price of Pathnet's common stock of $11.00 per
share as of December 31, 1999.
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 December 31, 1999, Pathnet had awarded options on all shares
reserved under Pathnet's 1995 Plan, at an exercise price of $0.03 per share. The
1995 Plan will permit our board of directors, or a committee of the board, to
exercise broad discretion to grant stock options to our employees. If additional
shares are authorized under the 1995 Plan, the 1995 Plan will permit the board
of directors to exercise its discretion to determine:
- The exercise price of the options;
- Any vesting provisions, including whether accelerated vesting will occur
with a "Change in Control"; and
- The term of the options, which cannot exceed 10 years.
Within one year following the closing of the contribution and
reorganization transaction, our stockholders must approve our assumption of the
1995 Plan and the options awarded under the Plan.
1997 STOCK INCENTIVE PLAN
At the closing of the contribution and reorganization transaction, we will
assume Pathnet's 1997 Stock Incentive Plan, which will become our 1997 Plan.
Additionally, upon the close of the contribution and reorganization transaction,
we will assume and amend all existing awards under Pathnet's 1997 Plan so that
the awards will be exercisable for our shares of common stock rather than
Pathnet common stock. Our stockholders also must approve our assumption of the
1997 Plan
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<PAGE> 70
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.
Under our 1997 Plan, the board of directors may establish performance
criteria for purposes of performance awards. The 1997 Plan will also allow the
board of directors to specify performance criteria for stock options, stock
appreciation rights and restricted stock awards that are designated as
performance compensation awards. Performance criteria may be described in terms
of either company-wide objectives or objectives that are related to the
performance of the individual participant or a division, department, region or
function within Pathnet Telecom. Performance criteria applicable to any award to
a participant who is, or is determined by the board of directors likely to
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<PAGE> 71
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 1997 Plan provides 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.
Under the 1997 Plan, if Richard Jalkut's or Robert Rouse's employment,
whichever the case may be, is terminated after a Change of Control, then certain
of their options will be deemed to become vested immediately before the "Change
in Control." Both Mr. Jalkut and Mr. Rouse have agreed with Pathnet that the
contribution and reorganization transaction does not constitute a "Change in
Control" under Pathnet's 1997 Plan.
In August 1997, Mr. Jalkut was granted an option to purchase 296,122 shares
of common stock under Pathnet's 1997 Plan, which vests in equal installments
over three years; the number of shares and the exercise price were subsequently
adjusted in a stock split.
As of December 31, 1999, there were options covering 2,251,204 shares of
Pathnet's common stock outstanding under Pathnet's 1997 Plan.
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SCHAEFFER BOARD RESIGNATION
In October 1997, Mr. Schaeffer was an employee of Pathnet and was granted
an option to purchase 148,418 shares of common stock under Pathnet's 1997 Plan;
the number of shares and the exercise price were subsequently adjusted in a
stock split. Mr. Schaeffer is no longer an officer or director of Pathnet and
has not been an officer or director of Pathnet Telecom. In a letter agreement
dated November 4, 1999, in which Mr. Schaeffer resigned from his position as a
director of Pathnet, Pathnet and Mr. Schaeffer agreed that Mr. Schaeffer holds
options for a total of 107,389 shares of Pathnet common stock, which are fully
vested at an exercise price of $3.67 per share. We will assume these option
grants and convert them to options for shares of our common stock at closing of
the contribution and reorganization transaction.
JALKUT EMPLOYMENT AGREEMENT
Pathnet is currently a party to an employment agreement with Mr. Jalkut.
Under this employment agreement, Mr. Jalkut will receive a minimum annual base
salary of $400,000 (or any greater amount approved by a majority of the board of
directors), bonuses and other benefits determined by the board of directors.
Additionally, Mr. Jalkut is entitled to receive reimbursement of certain
expenses, all of which expenses may not exceed $50,000 per year. In accordance
with his employment agreement, on August 4, 1997, Mr. Jalkut received
nonqualified stock options for 296,122 shares of common stock at an exercise
price of $3.28 per share; the number of shares and the option price were
subsequently adjusted in a stock split. These options vest ratably over three
years. We have granted Mr. Jalkut registration rights for the shares he will
receive upon exercise of his options. If we terminate Mr. Jalkut's employment he
may elect, within 10 business days of his termination, to have us pay him,
subject to the terms of the Indenture and the Supplemental Indenture, the
aggregate fair value of his options then vested or held by him. We will be
required to make any payments in accordance with his employment agreement.
During his employment and for two years after his termination, Mr. Jalkut's
employment agreement requires him to refrain from investing in businesses or
activities that compete with us, soliciting our employees or otherwise competing
with us, by, for example, working with or for one of our competitors. Mr.
Jalkut's employment agreement also prevents him from disclosing or using our
confidential or proprietary information at any time.
Other than the restrictions on Mr. Jalkut described above and our
obligation to pay severance for one year following the termination of Mr.
Jalkut's employment (depending on the basis for his termination), Mr. Jalkut's
employment agreement will terminate in the event of his death and may be
terminated:
- By us:
(a) Without cause (as defined in his employment agreement), by giving
60 days' prior written notice; or
(b) For cause, generally subject to a 30-day written notice of the
board's intention to terminate him for cause;
(c) Upon Mr. Jalkut's disability (as defined in his employment
agreement); and
- By Mr. Jalkut:
(a) Without cause, by giving 180 days' prior written notice; and
(b) Immediately, upon a constructive termination (as defined in his
employment agreement).
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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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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> 75
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 an underwritten 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> 76
Although they may not initiate a "demand" under this provision, the holders
of our registrable securities identified above may participate on a proportional
basis in any registration demanded by Mr. Schaeffer under this provision of the
stockholders agreement.
In exercising these demand registration rights, the stockholders must in
all cases have selected an underwriter reasonably acceptable to us who is
prepared to underwrite the offering of the shares on a firm commitment basis. We
have additional obligations to assist in the registration and underwriting of
any shares that these holders seek to sell pursuant to their registration
rights. We have a right to defer each of those demand registrations for up to 60
days, if our legal counsel has advised us that filing a registration statement
relating to such a demand registration would require us either (1) to disclose a
material impending transaction and we have determined in good faith that the
disclosure would have a material adverse effect on us, or (2) to conduct a
special audit.
Pathnet has separate "demand registration" obligations under a Warrant
Registration Rights Agreement executed in conjunction with Pathnet's note and
warrant offering in April 1998. Under that agreement, the holders of a majority
of the Pathnet warrants may require Pathnet on one occasion after an initial
public offering to register under the Securities Act their shares of common
stock received upon the exercise of their warrants, subject to Pathnet's right
to defer the registration of those shares for up to 60 days in similar
circumstances. As we discuss below in "DESCRIPTION OF THE CONTRIBUTION AND
REORGANIZATION TRANSACTION -- Disposition of Existing Pathnet Stock Options and
Warrants," we are proposing to the holders of these rights that we assume
Pathnet's obligations under this Warrant Registration Rights Agreement. If the
requisite holders of the Pathnet warrants consent to the proposed amendments, we
may be required by the terms of the Warrant Registration Rights Agreement to
register additional shares of our common stock upon the exercise of these
warrants.
Piggyback Rights
We will also grant to each of these groups of our stockholders (and, if we
assume Pathnet's obligations to the holders of its warrants, then also to those
warrant holders) so-called "piggyback" registration rights, under which they can
require us to register their shares of common stock whenever we register any of
our equity securities under the Securities Act. These piggyback registration
rights will be subject to underwriter "cutbacks," which means that our managing
underwriter may decide to limit the number of shares added to a registration
that we initiate because the underwriter has concluded that including the
additional "piggyback" shares would have an adverse impact on the marketing of
the securities to be sold in the underwritten offering. These piggyback
registration rights will not apply to any registration relating to a public
offering pursuant to demand registration rights granted to the Pathnet
warrantholders, to the registration of securities with our employee benefit
plans, on any SEC form that does not permit secondary offerings, or to
securities we issue in a merger, exchange offer or similar transaction.
We are required to bear up to $60,000 of registration expenses for each
demand registration under our stockholders agreement. In addition, we have
agreed to indemnify the registration rights holders against, and provide
contribution for, liabilities under the Securities Act, the Securities Exchange
Act of 1934 or other federal or state laws regarding the registration of our
securities. However, we will not indemnify the registration rights holders
against, or provide them contribution for, any untrue statements or omissions
made by us in reliance on and in conformity with information furnished to us in
writing by the registration rights holders.
Preemptive Rights
Under our stockholders agreement, each of our preferred stockholders and
Mr. Schaeffer have the right to participate in certain of our sales of
securities. Specifically, on each occasion between the
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<PAGE> 77
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 December 31, 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
December 31, 1999. Unless otherwise noted, the address of each of our Named
Executive Officers and directors is 1015 31st Street, N.W., Washington, D.C.
20007.
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<PAGE> 79
<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%
FBR Technology Venture Partners, L.P.(m).......... 0 0.00% 0 0.00% 0 0.00%
BNSF(n)........................................... 0 0.00% 0 0.00% 0 0.00%
Colonial(o)....................................... 0 0.00% 0 0.00% 0 0.00%
CSX(p)............................................ 0 0.00% 0 0.00% 0 0.00%
David Schaeffer(q)................................ 2,900,000 94.52% 0 0.0% 0 0.0%
Richard A. Jalkut................................. 0 0.00% 0 0.00% 0 0.00%
Michael A. Lubin.................................. 0 0.00% 0 0.00% 0 0.00%
William R. Smedberg V............................. 0 0.00% 0 0.00% 0 0.00%
Kevin J. Bennis(r)................................ 90,625 2.95% 0 0.00% 0 0.00%
Kevin J. Maroni(s)................................ 0 0.00% 1,372,668 47.33% 1,220,099 25.48%
Peter J. Barris(t)................................ 0 0.00% 522,000 18.00% 685,014 14.31%
Stephen A. Reinstadtler(u)........................ 0 0.00% 0 0.00% 884,146 18.47%
Patrick J. Kerins(v).............................. 0 0.00% 0 0.00% 884,146 18.47%
All Directors and Executive Officers as a Group... 0 0.00% 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%
FBR Technology Venture Partners, L.P.(m).......... 272,556 3.33% 0 0.00% 0 0.00%
BNSF(n)........................................... 0 0.00% 3,413,746 40.11% 0 0.00%
Colonial(o)....................................... 0 0.00% 1,684,115 19.79% 2,867,546 100.00%
CSX(p)............................................ 0 0.00% 3,413,746 40.11% 0 0.00%
David Schaeffer(q)................................ 0 0 0 0.00% 0 0.00%
Richard A. Jalkut................................. 0 0.00% 0 0.00% 0 0.00%
Michael A. Lubin.................................. 0 0.00% 0 0.00% 0 0.00%
William R. Smedberg V............................. 0 0.00% 0 0.00% 0 0.00%
Kevin J. Bennis(r)................................ 0 0.00% 0 0.00% 0 0.00%
Kevin J. Maroni(s)................................ 2,726,812 33.35% 0 0.00% 0 0.00%
Peter J. Barris(t)................................ 1,374,051 16.80% 0 0.00% 0 0.00%
Stephen A. Reinstadtler(u)........................ 1,006,500 12.31% 0 0.00% 0 0.00%
Patrick J. Kerins(v).............................. 1,006,500 12.31% 0 0.00% 0 0.00%
All Directors and Executive Officers as a Group... 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 56.32%
Spectrum Equity Investors II, L.P.(d)............. 0 1,363,406 30.77%
New Enterprise Associates VI, Limited
Partnership(e)................................... 0 2,581,065 45.69%
Onset Enterprise Associates II, L.P.(f)........... 0 1,803,648 37.02%
Onset Enterprise Associates III, L.P.(f).......... 0 272,553 8.16%
Paul Capital Partner Funds(g)..................... 0 507,408 14.19%
Thomas Domencich(h)............................... 0 207,573 6.34%
Toronto Dominion Capital (USA) Inc.(i)............ 0 1,890,646 38.13%
Grotech Partners IV, L.P.(j)...................... 0 1,890,646 38.13%
Utech Climate Challenge Fund, L.P.(k)............. 0 578,352 15.86%
Utility Competitive Advantage Fund, LLC(l)........ 0 366,980 10.68%
FBR Technology Venture Partners, L.P.(m).......... 0 272,556 8.16%
BNSF(n)........................................... 0 3,413,746 52.67%
Colonial(o)....................................... 1,593,082 6,144,743 66.70%
CSX(p)............................................ 0 3,413,746 52.67%
David Schaeffer(q)................................ 107,389 3,007,389 94.70%
Richard A. Jalkut................................. 572,502 572,502 15.72%
Michael A. Lubin.................................. 145,215 145,215 4.52%
William R. Smedberg V............................. 128,656 128,656 4.02%
Kevin J. Bennis(r)................................ 0 90,625 2.95%
Kevin J. Maroni(s)................................ 0 5,319,579 63.42%
Peter J. Barris(t)................................ 0 2,581,065 45.69%
Stephen A. Reinstadtler(u)........................ 0 1,890,646 38.13%
Patrick J. Kerins(v).............................. 0 1,890,646 38.13%
All Directors and Executive Officers as a Group... 903,172 12,585,108 80.40%
</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 December 31, 1999.
(b) Only Options exercisable within 60 days after December 31, 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 December
31, 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.
(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.
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(m) FBR Technology Venture Partners, L.P.'s address is 11600 Sunrise Valley
Drive, Suite 460, Reston, VA 20191.
(n) BNSF's address is 2500 Lou Menk Drive, Fort Worth, Texas, 76131.
(o) Colonial Pipeline Company's address is 945 East Paces Ferry Road, NE,
Atlanta, Georgia, 30326.
(p) CSX's address is c/o CSX Real Property, Inc., 301 West Bay Street, J915,
Jacksonville, Florida, 32202.
(q) Mr. Schaeffer is no longer an officer or director of Pathnet and is not an
officer or director of Pathnet Telecom. Mr. Schaeffer's address is 11017
Riverwood Dr., Potomac, MD 20854.
(r) Mr. Bennis is no longer employed by Pathnet, but he is included in the
beneficial ownership computation of all directors and officers as a group
because Mr. Bennis would have been a Named Executive Officer except that he
was not an executive officer of Pathnet at the end of the fiscal year 1999.
(s) 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.
(t) 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.
(u) 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.
(v) Mr. Kerins, Managing Director of the general partner of Grotech Partners
IV, LP, disclaims beneficial ownership of the shares owned by Grotech
Partners IV, LP.
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DESCRIPTION OF CONTRIBUTION AND REORGANIZATION TRANSACTION
TRANSACTION OVERVIEW
OVERVIEW. We have entered into agreements providing for the contribution
and reorganization transaction with each of BNSF, CSX, Colonial and all of the
existing stockholders of Pathnet. This section describes the material 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 (see "THE
PATHNET SENIOR NOTEHOLDER WAIVERS AND OTHER PROPOSED INDENTURE
AMENDMENTS -- Waiver of Pathnet Obligations" for additional information
on this purchase):
- 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;
- all other fiber network assets, properties and contracts held by
Pathnet;
- a license to Pathnet's tradenames, trademarks and other intellectual
property;
- all goodwill and going concern rights associated with each of the
items listed above; and
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- fiber assets Pathnet will receive from its subsidiary, Pathnet Fiber
Optics, LLC under an assignment and acceptance agreement.
- 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 of the remaining
proceeds from Pathnet's initial equity investments and the issue of its
notes to assist in the development of our fiber optic rights of way
received from BNSF, CSX and Colonial.
Following the conclusion of the contribution and reorganization
transaction, our beneficial ownership will be allocated among the participants
in the contribution and reorganization transaction as set forth in the following
table. For purposes of determining the beneficial ownership of our voting
capital stock following the completion of the contribution and reorganization
transaction, we assume in the table:
- Colonial's purchase of the second tranche of shares of our series E
preferred stock and the conversion of those shares into shares of our
common stock;
- except for the Colonial option to purchase shares of our common stock in
connection with our initial public offering, the exercise of all options
to purchase shares of our common stock;
- the exercise of the Colonial option to purchase additional shares of our
series E convertible preferred stock and the conversion of all of our
series of preferred stock into our common stock; and
- the conversion of all outstanding warrants to purchase shares of Pathnet
common stock into warrants to purchase shares of our common stock and the
full exercise of those warrants;
Because we cannot at this time determine the precise number of our shares
that are covered by Colonial's option to purchase our common stock prior to our
initial public offering, we have not assumed the exercise of that option in our
determination of beneficial ownership interests in the table.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF
CATEGORY OF EQUITY HOLDER OUR VOTING STOCK
------------------------- -----------------------
<S> <C>
Holders of existing shares of Pathnet Series A, B and C
preferred stock........................................... 44.4%
Holders of existing shares of Pathnet common stock (assuming
the conversion and exercise in full of all existing
warrants and options for Pathnet common stock into shares
of our common stock)...................................... 19.2%
BNSF........................................................ 9.6%
Colonial and affiliates..................................... 17.2%
CSX......................................................... 9.6%
------
Total................................................... 100.0%
======
</TABLE>
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.
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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 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.
One bondholder has informed us that it believes the Indenture requires the
unanimous consent of the bondholders in order for us to obtain the requested
waivers of provisions of the Indenture in connection with the contribution and
reorganization transaction. We and our counsel have carefully considered this
claim, and have concluded that it is plainly inconsistent with the terms of the
Indenture and is therefore without merit. We have so informed this bondholder of
our view.
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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 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
Contribution and Reorganization 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 shares of series
E convertible preferred stock 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 second 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
will pay us a non-refundable fee of $1 million for the purchase of these
options. Under the Colonial
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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 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 up to $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. This second
option must be exercised by Colonial at least ten days 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. The price at which Colonial may purchase
our shares under this option will be 90% of the price per share of the common
stock offered by us to the public, as reflected in the final prospectus filed
with respect to our 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
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representations and warranties with respect to the business and financial
condition of Pathnet, nor do they contain the indemnification provisions
contained in the contribution agreements with CSX, BNSF and Colonial.
STRUCTURE OF THE PATHNET BUSINESS FOLLOWING THE CONCLUSION OF THE CONTRIBUTION
AND REORGANIZATION TRANSACTION
The structure of the issued and outstanding stock and debt security of
Pathnet business immediately following the closing of the contribution and
reorganization transaction will be as follows:
[PATHNET GRAPHIC]
To facilitate vendor financing and other business relationships that will
be required to permit us to continue to develop and maintain our network, we may
in the future need to incorporate other subsidiaries ("sister" companies to
Pathnet or other subsidiaries of Pathnet). We plan to enter into vendor
financing arrangements, including a pending fiber optic purchase agreement and
related vendor financing facility with Lucent Technologies, Inc., that would
require us to incorporate those separate subsidiaries and to contribute some of
our assets to those subsidiaries. See "DESCRIPTION OF OTHER INDEBTEDNESS AND
OTHER FINANCING ARRANGEMENTS -- Proposed Credit Facility with Lucent."
To support additional vendor and other financing, we (or our relevant
subsidiaries) may in the future need to pledge or secure our assets, together
with any other assets provided by the vendors, in order to obtain vendor
financing. Because the notes and our guarantees are unsecured, any security that
we provide to a vendor will be senior to your interests as holders of the notes.
Moreover, after the contribution and reorganization transaction, we may
establish subsidiaries for purposes of such
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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, increasing to 12,500 miles by June 30,
2005.
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
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specific developments ("Construction Exclusivity"). For an additional four years
after the end of the CSX Exclusivity Period, any party that requests the right
to develop a segment of the Conrail Miles where we have commenced construction
must first negotiate with us to provide for their communications and development
needs. If we do not reach an agreement within a specified time 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 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.
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Our rights under the access agreements and the lease agreements are subject
to the rights of others with existing contractual arrangements with BNSF, CSX
and Colonial. Other provisions in the lease agreements and the access agreements
describe our obligations to maintain certain levels of 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 December 31, 1999, options to purchase an aggregate of
2,675,597 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 Incentive 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
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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.
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
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- 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.
In addition to the conditions outlined above, it is a general condition to
closing all of the contribution agreements that they not have been terminated.
If we have not closed the contribution and reorganization transaction on or
before the contribution agreement termination date of March 31, 2000, provisions
in the contribution agreements will permit the parties to elect to terminate
those agreements and refuse to complete the contribution and reorganization
transaction. As a result, if we do not obtain the necessary consents from the
holders of the notes and complete the other steps necessary to close the
contribution and reorganization transaction on or before the March 31
termination date, one or more parties to the contribution and reorganization
transaction -- potentially including BNSF, CSX or Colonial -- may elect to
terminate their contribution agreements with us. Moreover, if we have not
completed the contribution and reorganization transaction by the termination
date, and regardless of whether the participants in the transaction have elected
not to exercise their termination rights, applicable federal securities law may
prevent us from completing the contribution and reorganization transaction as
currently structured. In either of those circumstances, we may be unable to
complete the contribution and reorganization transaction.
Although not a condition to the closing of the contribution and
reorganization transaction, we must complete the buildout of our network from
Chicago, Illinois to Aurora (a suburb of Denver), Colorado in order to receive
the second tranche of Colonial's investment in our shares of series convertible
preferred stock. This second tranche consists of $25 million of the aggregate
$68 million cash investment by Colonial.
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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 including all inventories of
work-in-progress, raw materials, finished products, supplies, spare parts
and other materials relating to the 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, Tri State and others
dated August 5, 1999 relating to the development of the fiber optic
network between Albuquerque, New
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Mexico and Grand Junction, Colorado and the related escrow arrangements and
other documents and agreements with Tri-State, including the associated right of
way under the Fiber Optic Cable Construction and Use Agreement with Public
Service Company of New Mexico, dated June 9, 1999 and the Fiber Optic
Cable License Agreement with Public Service Company of New Mexico, dated
December 23, 1999;
- The fiber optic development agreement, joint marketing agreement and
other related documents and agreements with CapRock Telecommunications
Corp. and CapRock Telecommunications, Inc.; relating to the development
of an approximately 340 route mile fiber route between El Paso, Texas and
Albuquerque, New Mexico;
- All other fiber network assets, properties and contracts held by Pathnet
including:
-- all rights in and to insurance and indemnity claims;
-- all prepaid expenses, advances and deposits; and
-- all rights, choices in actions and claims (known or unknown, matured
or unmatured, accrued or contingent) against third parties;
- A license to Pathnet's tradenames, trademarks and other intellectual
property;
- All goodwill and going concern rights associated with each of the items
listed above; and
- Fiber assets Pathnet will receive from its subsidiary, Pathnet Fiber
Optics, LLC under an assignment and acceptance agreement
For more detailed information on the transfer of assets described above,
you may refer to the Form of Assignment and Acceptance Agreement between Pathnet
and us and the Form of Assignment and Acceptance Agreement between Pathnet Fiber
Optics, LLC and Pathnet, both of which are filed as exhibits to the registration
statement of which this prospectus is a part.
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.
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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.
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.
</TABLE>
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<TABLE>
<CAPTION>
CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
--------- ----------------- --------------------------
<S> <C> <C>
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.
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.
</TABLE>
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<TABLE>
<CAPTION>
CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
--------- ----------------- --------------------------
<S> <C> <C>
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.
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.
</TABLE>
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<TABLE>
<CAPTION>
CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
--------- ----------------- --------------------------
<S> <C> <C>
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.
RESTRICTED PAYMENTS Restricts Pathnet and its Restricted Changes the cash dividend
LIMITATION Subsidiaries from declaring cash declaration and capital stock
dividends on Pathnet capital stock, redemption restrictions to apply to
redeeming capital stock or subordinated Pathnet Telecom rather than to
debt of Pathnet, or making investments Pathnet.
(other than Permitted Investments), Imposes parallel restrictions on
unless Pathnet could, after such Pathnet Telecom's ability to make
payment, incur additional Indebtedness other Restricted Payments.
under the Permitted Indebtedness
covenant and the aggregate amount of
permitted Restricted Payments does not
exceed an amount determined as
described in the Restricted Payments
covenant.
</TABLE>
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<TABLE>
<CAPTION>
CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
--------- ----------------- --------------------------
<S> <C> <C>
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.
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.
</TABLE>
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<TABLE>
<CAPTION>
CHANGES AS PROPOSED IN THE
PROVISION CURRENT INDENTURE SUPPLEMENTAL INDENTURE
--------- ----------------- --------------------------
<S> <C> <C>
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.
SECURITY Pathnet acquired Government Securities Pathnet will acquire additional
and pledged them to the Trustee as Government Securities and pledge
security for the benefit of the holders them to the Trustee as security for
of the Notes with respect to the the benefit of the holders of the
payment of the first four scheduled Notes with respect to the October
interest payments on the Notes (through 16, 2000 interest payment on the
the April 15, 2000 interest payment Notes.
date).
</TABLE>
The following description provides a narrative summary 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 you should refer to the Supplemental
Indenture, which is filed as an exhibit to the registration statement of which
this prospectus is a part, for further information regarding the provisions
summarized here. Capitalized terms used in this description have the meaning
given to them in the Indenture as amended by the Supplemental Indenture unless
we refer to the "original Indenture," in which case terms are used as defined in
that version.
- CERTAIN DEFINITIONS IN THE INDENTURE. The definitions used in the
original Indenture will be amended to the extent necessary to effect the
proposed amendments to the original Indenture
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<PAGE> 101
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 Section 102 or 103 of the
Supplemental Indenture, retain the meaning given to them in the
Indenture.
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- 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);
- Section 1006 (maintenance of properties);
- Section 1007 (insurance);
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- 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;
- 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);
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- 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 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.
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- 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.
- SECURITY. Article 12 of the Indenture currently requires Pathnet to
acquire Government Securities and pledge them to the Trustee 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 (through the
April 15, 2000 interest payment date). This provision is expanded in the
Supplemental Indenture to provide for a similar escrow obligation with
respect to the October 16, 2000 interest payment on the Notes.
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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 Guarantee, 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
$25.00 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 (1) Pathnet extends the solicitation (referred to
in this section as the "expiration date"), or (2) the solicitation is
unsuccessful. If Pathnet extends the solicitation, the term "expiration date"
will mean the latest date and time to which the exchange offer is extended. In
addition Pathnet agrees to purchase and pledge, for the benefit of the holders
of the notes, additional United States Treasury securities sufficient to cover
the October 16, 2000 interest payment on the notes conditioned upon Pathnet's
receipt of the requisite consents.
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
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- 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:
- 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.
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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 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 fee for their services
as Solicitation Agent in connection with the solicitation equal to 0.25 percent
of the principal amount of each Note for which consent is given.
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 the material terms of the current
Indenture and the Notes. The description does not restate the Indenture or the
Notes in their entirety and you should refer 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 for additional information about terms of the Indenture and the
Notes. 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. For your convenience should you wish to
read more detail about any particular provision of the Indenture or the Notes,
parenthetical section references are provided in this section that refer to the
section or sections of the Indenture 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)
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
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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 December 31, 1999 Pathnet had approximately $0.3 million in
outstanding Indebtedness other than the Notes and approximately $33.3 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)
SECURITY
At the time of issuance of the Notes, Pathnet purchased and pledged to the
Trustee, in accordance with the terms of the Indenture and the Pledge Agreement,
dated April 8, 1998, certain United States Treasury securities as security for
the benefit of the holders of the Notes with respect
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to the payment of the first four scheduled interest payments on the Notes. In
addition, in connection with the contribution and reorganization transaction,
Pathnet has offered to purchase and pledge to the Trustee, in accordance with
the terms of the Supplemental Indenture and of an amended and restated Pledge
Agreement to be executed and delivered upon consummation of that transaction,
approximately $20.9 million of additional United States Treasury securities as
security for the benefit of the holders of the Notes with respect to the payment
of the October 16, 2000 interest payment on the Notes. These securities are held
by the Trustee in an escrow account. Immediately before any date on which an
interest payment to which any such securities relate 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, or the fifth scheduled interest payment date, namely October 16, 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, as amended and restated, after Pathnet has made
the fourth scheduled interest payment and the October 16, 2000 interest payment
following consummation of the contribution and reorganization transaction 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
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of such Indebtedness under the clause permitting the Indebtedness classified in
that manner. (Section 1011)
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
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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 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 as described herein.
"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.
"GAAP" means generally accepted accounting principles in the United States
that are in effect on the date of the Indenture.
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"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);
(b) all obligations of such Person under or in respect of Interest
Rate Agreements and Currency Agreements;
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(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 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.
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"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
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
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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;
(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
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"Limitation on Restricted Payments" covenant to make a Restricted Payment
or to make any Permitted Investments under clause (h) of the definition of
Permitted Investments; provided that such Indebtedness does not mature
prior to the Stated Maturity of the Notes and has an Average Life longer
than the Notes;
(j) Indebtedness of Pathnet or any Restricted Subsidiary under one or
more Credit Facilities; provided that the aggregate principal amount of any
Indebtedness incurred pursuant to this clause (j) (including any amounts
refinanced or refunded under this clause (j)) does not exceed at any time
outstanding the greater of (x) 80% of eligible accounts receivable of
Pathnet as of the last fiscal quarter for which financial statements are
prepared or (y) $50.0 million; and any Indebtedness issued in exchange for,
or the net proceeds of which are used to refinance or refund, Indebtedness
issued under this clause (j) in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, and reasonable
fees and expenses);
(k) Indebtedness of Pathnet or a Restricted Subsidiary issued in
exchange for, or the net proceeds of which are used to refinance or refund,
then outstanding Indebtedness of Pathnet or a Restricted Subsidiary,
incurred under the ratio test set forth in clause (i) or (ii) of the
"Limitation on Indebtedness" covenant or under clauses (b) through (f),
(h), (i) and (m) of this definition of "Permitted Indebtedness," and any
refinancings thereof in an amount not to exceed the amount so refinanced or
refunded (plus premiums, accrued interest, and reasonable fees and
expenses); provided that such new Indebtedness shall only be permitted
under this clause (k) if (A) in case the Notes are refinanced in part, or
the Indebtedness to be refinanced ranks equally with the Notes, such new
Indebtedness, by its terms or by the terms of any agreement or instrument
pursuant to which such new indebtedness is issued or remains outstanding,
is expressly made to rank equally with, or subordinate in right of payment
to, the remaining Notes, (B) in case the Indebtedness to be refinanced is
subordinated in right of payment to the Notes, such new Indebtedness, by
its terms or by the terms of any agreement or instrument pursuant to which
such new Indebtedness is issued or remains outstanding, is expressly made
subordinate in right of payment to the Notes at least to the same extent
that the Indebtedness to be refinanced is subordinated to the Notes and (C)
such new Indebtedness, determined as of the date of incurrence of such new
Indebtedness, does not mature prior to the Stated Maturity of the
Indebtedness to be refinanced or refunded, and the Average Life of such new
Indebtedness is at least equal to the remaining Average Life of the
Indebtedness being refinanced or refunded; provided further that no
Indebtedness incurred under this clause (k) in exchange for, or the
proceeds of which refinance or refund any Indebtedness incurred under the
ratio test set forth under clause (i) or (ii) of the "Limitation on
Indebtedness" covenant will mature prior to the Stated Maturity of the
Notes or have an Average Life shorter than the Notes; provided further that
in no event may Indebtedness of Pathnet be refinanced by means of any
Indebtedness of any Restricted Subsidiary issued pursuant to this clause
(k);
(l) Indebtedness arising by reason of the recharacterization of a sale
of accounts receivable to an Accounts Receivable Subsidiary; and
(m) Indebtedness of Pathnet or any Restricted Subsidiary in addition
to that permitted to be incurred pursuant to clauses (a) through (l) above
in an aggregate principal amount not in excess of $30.0 million at any time
outstanding.
"Permitted Investment" means any of the following:
(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;
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(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 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
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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;
(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;
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(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.
"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 initially dated as of the
Issue Date and as amended on the date of consummation of the contribution and
reorganization transaction, by and between the Trustee and Pathnet, governing
the disbursement of funds from the Escrow Account.
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"Pledged Securities" means the securities purchased by Pathnet, 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 Telecommunications 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
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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 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)
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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 describes the material structure and terms of our
capital stock. 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. 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 to
the
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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
In April 1998, Pathnet issued warrants entitling the holders to purchase
1,116,500 shares of its common stock (after accounting for adjustments and
splits) to the initial purchasers of the notes. 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 the material 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. Covington & Burling, tax
counsel to Pathnet in connection with the proposed Indenture amendments, has
reviewed this discussion and is of the opinion that, except as to matters upon
which they have expressly declined to express an opinion, as disclosed herein,
to the extent this discussion summarizes matters of law or legal conclusions, it
is accurate in all material respects. 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 ("IRS") 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 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 or pledges collateral on a recourse debt is
not a significant modification unless such modification results in a change in
payment expectations. The addition of a guarantor or pledge of collateral
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 or pledge and is adequate after the guarantee or pledge. 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
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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.
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, the pledge of collateral to
secure the October 16, 2000 interest payment on the notes following the
consummation of the contribution and reorganization transaction 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, Pathnet believes that 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, Pathnet currently expects to take the position that the waivers and the
proposed Indenture amendments (other than the guarantees, the pledge of
collateral and payment of the consent fee described below) would not
collectively result in a deemed exchange of the notes for "new" notes ("New
Notes"). Due to the inherently factual nature of this determination and the lack
of specific guidance, however, Covington & Burling is unable to render an
opinion that a deemed exchange will not occur. Accordingly, we cannot assure you
that the IRS or a court would not determine that the waivers and the proposed
Indenture amendments (other than the guarantees, the pledge of collateral and
payment of the consent fee described below) cause a deemed exchange of the notes
for 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 and the pledge of collateral to secure
the October 16, 2000 interest payment on the notes following the consummation of
the contribution and reorganization transaction is less clear. We expect that
the addition of the Pathnet Telecom guarantees and the pledge of collateral 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 and the pledge
of collateral to "adequate" after the guarantees and the pledge of collateral is
a question of fact that cannot be answered in advance with certainty.
Accordingly, Covington & Burling expresses no opinion on whether Pathnet's
capacity to meet the payment obligations will change from "primarily
speculative" to "adequate." If Pathnet's capacity to meet the payment
obligations under the notes does not change from "primarily speculative" to
"adequate," the Pathnet Telecom guarantees and the pledge of collateral 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 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
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 provided, as discussed
below, both the notes and the New Notes constitute securities within the meaning
of Section 354 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.
Whether a debt instrument constitutes a "security" within the meaning of
Section 354 of the Code depends upon the terms, conditions and other facts and
circumstances relating to the instrument. Generally, instruments with terms to
maturity of ten years or more are treated as
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securities, and instruments with terms to maturity of five years or less are
generally not treated as securities. Nevertheless, the IRS and the courts have
taken the position that the term to maturity is not the sole determinative
factor, and other factors must be considered, including the degree of
participation and continuing interest in the business, the extent of proprietary
interest compared with the similarity of the debt to a cash payment, the
purposes of the advances, the degree of subordination of the debt, the debt's
exposure to the risks of the enterprise, and other factors. Based upon an
evaluation of these and other factors, Pathnet believes that the notes and the
New Notes should constitute securities within the meaning of Section 354 of the
Code. However, due to the inherently factual nature of this determination,
Covington & Burling is unable to render an opinion that the IRS or a court would
not determine that the notes and the New Notes are securities.
If an exchange were deemed to occur under general principles of tax law or
under the standards set forth in the Regulations, and if either the notes or the
New Notes did not constitute securities within the meaning section 354 of the
Code, 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 neither the notes nor the New Notes are
"publicly traded" within the meaning of the Regulations. It is uncertain whether
the notes or 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.
Accordingly, Covington & Burling expresses no opinion on whether the notes or
the New Notes will be publicly traded within the meaning of the Regulations. If
the notes or 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 both the notes and the
New Notes constitute securities within the meaning of section 354 of the Code,
the New Notes may be treated as issued with original issue discount. The New
Notes generally would have original issue discount if they have an issue price
that is less than their stated redemption price at maturity. As discussed above,
the issue price of the New Notes will depend in part on whether the notes or the
New Notes are "publicly traded" within the meaning of the Regulations. If there
is a deemed exchange and the notes or 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.
TAX CONSEQUENCES TO HOLDERS THAT DO NOT CONSENT
Provided that holders of a majority in principal amount of the notes
provide the necessary consents and waivers, the proposed Indenture amendments
and waivers will apply to all holders -- not merely those who consent.
Accordingly, the federal income tax consequences to holders that do not consent
will be the same as those described above for holders that provide their
consent.
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RECEIPT OF CONSENT FEE
There is no authority specifically addressing whether the consent fee
should be treated as a fee paid to the holders for their consent or,
alternatively, as a premium that is part of a deemed exchange. Accordingly,
Covington & Burling is unable to render an opinion on this matter. Pathnet
currently intends to treat the consent fee as a fee paid to the holders for
their consent. In such case, 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 occurs and the
exchange constitutes a tax-free recapitalization, the IRS 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. As discussed above, Covington &
Burling expresses no opinion as to whether a deemed exchange will occur. Pathnet
currently expects to take the position that a deemed exchange will not occur. If
a deemed exchange does occur, Pathnet will 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 notes or the New Notes are publicly traded within
the meaning of the Regulations. If the notes or the New Notes are publicly
traded, the issue price of the New Notes could be significantly less than the
principal amount of the notes, thereby causing Pathnet to recognize a
substantial amount of cancellation of indebtedness income. Moreover, we cannot
assure you that Pathnet's net operating losses in prior years could be used to
offset such income and thereby reduce any taxes payable with respect to such
income.
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 will have
significant original issue discount as a result of the waivers, the proposed
Indenture amendments, and payment of the consent fee only if there is a deemed
exchange of the notes for New Notes, and the notes or the New Notes are publicly
traded within the meaning of the Regulations.
151
<PAGE> 156
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.
152
<PAGE> 157
PLAN OF DISTRIBUTION
Pathnet will solicit consents from and offer payment of the consent fee to
all holders of the notes, and will purchase and pledge, for the benefit of the
holders of the notes, additional securities sufficient to cover the October 16,
2000 interest payment on the notes, in each case contingent upon Pathnet's
receipt of the requisite consents. 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, 1999 and 1998 and for each of
the three years in the period ended December 31, 1999 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.
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. The Securities
153
<PAGE> 158
and Exchange Commission also maintains an Internet site at http://www.sec.gov
that contains reports and information statements regarding issues, including
Pathnet Telecom, that file electronically with the Securities and Exchange
Commission.
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.
154
<PAGE> 159
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, 1999 and
1998................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997 and for the period
August 25, 1995 (date of inception) to
December 31, 1999...................................... F-4
Consolidated Statements of Comprehensive Loss for the
years ended December 31, 1999, 1998 and 1997, and for
the period August 25, 1995 (date of inception) to
December 31, 1999...................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997, and for the period
August 25, 1995 (date of inception) to
December 31, 1999...................................... F-6
Consolidated Statements of Stockholders' Equity (Deficit)
for the period August 25, 1995 (date of inception) to
December 31, 1999 and for the years ended December 31,
1997, 1998 and 1999.................................... F-7
Notes to Consolidated Financial Statements................ F-8
</TABLE>
F-1
<PAGE> 160
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, 1999 and 1998, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1999, 1998 and 1997 and for the period August 25, 1995 (date of inception)
to December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
McLean, Virginia
February 22, 2000
F-2
<PAGE> 161
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $ 90,661,837 $ 57,321,887
Note receivable............................................. -- 3,206,841
Interest receivable......................................... 1,048,417 3,848,753
Marketable securities available for sale, at market......... 42,651,836 97,895,773
Prepaid expenses and other current assets................... 1,437,464 205,505
------------- ------------
Total current assets.................................... 135,799,554 162,478,759
Property and equipment, net................................. 131,928,365 47,971,336
Deferred financing costs, net............................... 9,649,680 10,508,251
Restricted cash............................................. 16,452,916 10,731,353
Marketable securities available for sale, at market......... 5,088,458 71,899,757
Pledged marketable securities held to maturity.............. 21,265,206 61,824,673
Other assets................................................ 351,808 --
------------- ------------
Total assets............................................ $ 320,535,987 $365,414,129
============= ============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable............................................ $ 18,543,195 $ 10,708,263
Accrued interest............................................ 8,932,293 8,932,294
Accrued expenses and other liabilities...................... 3,113,181 639,688
------------- ------------
Total current liabilities............................... 30,588,669 20,280,245
12 1/4% Senior Notes, net of unamortized bond discount of
$3,378,375 and $3,787,875................................. 346,621,625 346,212,125
Other noncurrent liabilities................................ 3,092,779 --
------------- ------------
Total liabilities....................................... 380,303,073 366,492,370
------------- ------------
Series A convertible preferred stock, $0.01 par value,
1,000,000 shares authorized, issued and outstanding at
December 31, 1999 and 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
December 31, 1999 and 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
December 31, 1999 and 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,
3,068,218 and 2,902,358 shares issued and outstanding at
December 31, 1999 and 1998, respectively.................. 30,682 29,024
Deferred compensation....................................... (441,760) (978,064)
Additional paid-in capital.................................. 6,264,362 6,156,406
Accumulated other comprehensive (loss) income............... (90,240) 208,211
Deficit accumulated during the development stage............ (101,499,769) (42,463,457)
------------- ------------
Total stockholders' equity (deficit).................... (95,736,725) (37,047,880)
------------- ------------
Total liabilities, mandatorily redeemable preferred
stock and stockholders' equity (deficit)............... $ 320,535,987 $365,414,129
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 162
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,
1999 1998 1997 1999
------------ ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Revenue................................ $ 3,311,096 $ 1,583,539 $ 162,500 $ 5,058,135
------------ ------------ ----------- -------------
Operating expenses:
Cost of revenue...................... 12,694,909 7,547,620 -- 20,242,529
Selling, general and
administrative.................... 14,669,747 9,615,867 4,247,101 30,295,096
Contribution and reorganization
expenses.......................... 1,022,998 -- -- 1,022,998
Depreciation expense................. 6,204,381 732,813 46,642 6,993,212
------------ ------------ ----------- -------------
Total operating expenses.......... 34,592,035 17,896,300 4,293,743 58,553,835
------------ ------------ ----------- -------------
Operating loss......................... (31,280,939) (16,312,761) (4,131,243) (53,495,700)
Interest expense....................... (41,010,069) (32,572,454) -- (73,997,880)
Interest income........................ 13,111,953 13,940,240 159,343 27,227,189
Write-off of initial public offering
costs................................ -- (1,354,534) -- (1,354,534)
Other income (expense), net............ 142,743 2,913 (5,500) 140,156
------------ ------------ ----------- -------------
Net loss.......................... $(59,036,312) $(36,296,596) $(3,977,400) $(101,480,769)
============ ============ =========== =============
Basic and diluted net loss per common
share................................ $ (20.14) $ (12.51) $ (1.37)
============ ============ ===========
Weighted average number of common
shares outstanding................... 2,931,644 2,902,029 2,900,000
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 163
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,
1999 1998 1997 1999
------------ ------------ ----------- -------------------
<S> <C> <C> <C> <C>
Net loss............................... $(59,036,312) $(36,296,596) $(3,977,400) $(101,480,769)
Other comprehensive (loss) income:
Net unrealized (loss) gain on
marketable
securities available for sale........ (298,451) 208,211 -- (90,240)
------------ ------------ ----------- -------------
Comprehensive loss..................... $(59,334,763) $(36,088,385) $(3,977,400) $(101,571,009)
============ ============ =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 164
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,
1999 1998 1997 1999
------------ ------------- ----------- -------------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(59,036,312) $ (36,296,596) $(3,977,400) $(101,480,769)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation expense.................................... 6,204,381 732,813 46,642 6,993,212
Amortization of deferred financing costs................ 1,138,722 842,790 -- 1,981,512
Loss on sale of equipment............................... 17,370 -- 5,500 22,870
Gain on sale of marketable securities................... (157,983) -- -- (157,983)
Write-off of deferred financing costs................... -- 581,334 -- 581,334
Interest expense resulting from amortization of discount
on the bonds payable.................................. 409,500 307,125 -- 716,625
Amortization of premium on pledged securities........... 537,251 -- -- 537,251
Amortization of deferred compensation................... 536,304 701,295 -- 1,237,599
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:
Interest receivable..................................... 3,370,552 (4,846,952) -- (1,476,400)
Prepaid expenses and other current assets............... (1,583,767) (156,935) (46,876) (1,789,272)
Accounts payable........................................ 689,533 6,709 386,106 3,683,391
Accrued interest........................................ -- 8,932,294 -- 8,932,293
Accrued expenses and other liabilities.................. 2,816,674 339,688 269,783 3,456,361
------------ ------------- ----------- -------------
Net cash used in operating activities................. (45,057,775) (28,856,435) (3,316,245) (76,346,619)
------------ ------------- ----------- -------------
Cash flows from investing activities:
Expenditures for network in progress...................... (79,378,740) (33,619,342) (1,739,782) (117,224,107)
Expenditures for property and equipment................... (910,668) (2,769,076) (381,261) (4,116,561)
Proceeds from sale of equipment........................... 5,624 -- -- 5,624
Sale of marketable securities available for sale.......... 170,446,259 51,542,384 -- 221,988,643
Purchase of marketable securities available for sale...... (48,531,491) (221,129,703) -- (269,661,194)
Purchase of pledged marketable securities held to
maturity................................................ -- (83,097,655) -- (83,097,655)
Sale of pledged marketable securities held to maturity.... 39,452,000 22,271,181 -- 61,723,181
Restricted cash........................................... (5,721,563) (9,971,142) (760,211) (16,452,916)
Issuance of note receivable to incumbent.................. -- (3,206,841) -- (3,206,841)
Repayment of note receivable.............................. 3,206,841 9,000 -- 3,215,841
------------ ------------- ----------- -------------
Net cash provided by (used in) investing activities..... 78,568,262 (279,971,194) (2,881,254) (206,825,985)
------------ ------------- ----------- -------------
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 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................. 109,614 81 -- 109,695
Payment of issuance costs for preferred stock offerings... -- -- (38,780) (63,780)
Payment of deferred financing costs....................... (280,151) (11,681,947) (250,428) (12,212,526)
------------ ------------- ----------- -------------
Net cash (used in) provided by financing activities..... (170,537) 358,318,132 11,710,846 373,834,441
------------ ------------- ----------- -------------
Net increase in cash and cash equivalents................... 33,339,950 49,490,503 5,513,347 90,661,837
Cash and cash equivalents at the beginning of period........ 57,321,887 7,831,384 2,318,037 --
------------ ------------- ----------- -------------
Cash and cash equivalents at the end of period.............. $ 90,661,837 $ 57,321,887 $ 7,831,384 $ 90,661,837
============ ============= =========== =============
Supplemental disclosure:
Cash paid for interest.................................... $ 43,081,220 $ 22,271,234 $ -- $ 65,352,454
============ ============= =========== =============
Noncash investing and financing transactions:
Conversion of bridge loan plus accrued interest to
Series B convertible preferred stock.................. $ -- $ -- $ -- $ 733,367
------------ ------------- ----------- -------------
Conversion of non-voting common stock to voting common
stock................................................. $ -- $ -- $ -- $ 500
------------ ------------- ----------- -------------
Issuance of voting and non-voting common stock.......... $ -- $ -- $ -- $ 9,000
------------ ------------- ----------- -------------
Acquisition of network equipment financed by accounts
payable and other long-term obligations............... $ 20,359,001 $ 10,200,650 $ 5,092,013 $ 20,359,001
------------ ------------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 165
PATHNET INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
NOTE OTHER
COMMON STOCK RECEIVABLE ADDITIONAL COMPREHENSIVE
--------------------- FROM DEFERRED PAID-IN INCOME
SHARES AMOUNT STOCKHOLDER COMPENSATION CAPITAL (LOSS)
---------- -------- ----------- ------------ ---------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT AUGUST 25, 1995 (date of
inception)................................. -- $ -- $ -- $ -- $ -- $ --
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 --
Amortization of deferred 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
Exercise of stock options.................... 165,860 1,658 107,956
---------- -------- ------- ----------- ---------- --------
Amortization of deferred compensation expense
related to issuance of employee common
stock options.............................. -- -- -- 536,304 -- --
Net unrealized gain on marketable securities
available for sale......................... -- -- -- -- -- (298,451)
Net loss..................................... -- -- -- -- -- --
---------- -------- ------- ----------- ---------- --------
BALANCE AT DECEMBER 31, 1999................. 3,068,218 $ 30,682 $ -- $ (441,760) $6,264,362 $(90,240)
========== ======== ======= =========== ========== ========
<CAPTION>
DEFICIT
ACCUMULATED
DURING
DEVELOPMENT
STAGE TOTAL
------------- ------------
<S> <C> <C>
BALANCE AT AUGUST 25, 1995 (date of
inception)................................. $ -- $ --
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.................................... -- --
Amortization of deferred 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)
Exercise of stock options.................... 109,614
------------- ------------
Amortization of deferred compensation expense
related to issuance of employee common
stock options.............................. -- 536,304
Net unrealized gain on marketable securities
available for sale......................... -- (298,451)
Net loss..................................... (59,036,312) (59,036,312)
------------- ------------
BALANCE AT DECEMBER 31, 1999................. $(101,499,769) $(95,736,725)
============= ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE> 166
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Pathnet, Inc. (Company) is 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. The Company's network will
enable its customers including existing local telephone companies, long distance
companies, 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 own networks.
During 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 August 1999, 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. (Tri-State). In November 1999, Pathnet signed an agreement with CapRock
Telecommunications Corporation (CapRock) to construct a 350-mile multi-conduit,
fiber network between Albuquerque, New Mexico and El Paso, Texas.
As of December 31, 1999, the Company's network consisted of over 6,300
wireless route miles providing wholesale transport services to 30 cities and 500
miles of installed fiber. The Company is constructing an additional 600 route
miles of fiber network, which is scheduled for completion in the first half of
2000.
Since inception, the Company's business has been 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, most of its
earlier revenues reflected only project management and advisory services in
connection with the design, development and construction of its network.
Revenues from the sale of telecommunication services along the Company's digital
network are approximately 51% to date. 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 losses.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The Company recently commenced providing telecommunication services to
customers and recognizing the revenue from the sale of such telecommunication
services. The Company's principal activities to date have been securing
contractual alliances with its co-development partners, designing and
constructing network path segments, obtaining capital and planning its proposed
service. Accordingly, the Company's consolidated financial statements are
presented as a development stage enterprise, as prescribed by Statement of
Financial Accounting Standards No. 7, "Accounting and Reporting by Development
Stage Enterprises." As a development stage enterprise, the Company has
F-8
<PAGE> 167
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 2,675,597 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, 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.
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, 1999, the fair value of the Company's 12 1/4% Senior Notes was
approximately $220.5 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 receivable, and restricted
cash. Marketable securities and associated interest receivable include U.S.
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<PAGE> 168
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Treasury securities and debt securities of U.S. Government agencies,
certificates of deposit and money market funds, and corporate debt securities.
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 7) 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 noncurrent 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 (loss).
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, including interest, 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 twenty 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 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
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<PAGE> 169
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
Revenue from the sale of telecommunications capacity includes revenue
earned under indefeasible right to use agreements. The Company recognizes
revenue earned under such agreements on a straight-line basis over their term.
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.
SEGMENT REPORTING
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 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.
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
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<PAGE> 170
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
accumulated other comprehensive income (loss). Realized gains or losses from the
sale of marketable securities are based on the specific identification method.
The following is a summary of the investments in marketable securities at
December 31, 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........................... $ 19,363,417 $ -- $59,490 $ 19,303,927
Corporate debt securities............. 26,959,695 8,880 30,088 26,938,407
Debt securities issued by foreign
governments........................ 1,507,422 -- 9,462 1,497,960
------------ -------- ------- ------------
$ 47,830,534 $ 8,800 $99,040 $ 47,740,294
============ ======== ======= ============
</TABLE>
Gross realized gains on sales available for sale securities were
approximately $158,000 during the year ended December 31, 1999. 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 market value of available for sale securities by
contractual maturity at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
COST MARKET VALUE
----------- ------------
<S> <C> <C>
Due in one year or less..................................... $42,688,416 $42,651,835
Due after one year through two years........................ 5,142,118 5,088,459
----------- -----------
$47,830,534 $47,740,294
=========== ===========
</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, 1999 pledged marketable securities consisted of U.S. Treasury
securities classified as held to maturity with an amortized cost of
approximately $20.8 million, interest receivable on the pledged marketable
securities of approximately $356,000 and cash and cash equivalents of
approximately $112,000. All of the investments contractually mature March 31,
2000.
4. NOTE RECEIVABLE
In 1998, under the terms of a promissory note with an incumbent, the
Company agreed to advance up to $10.0 million principal for the purpose of
funding the incumbent's equipment expenditures under a Fixed Point Microwave
Services agreement. Equipment expenditures initially incurred by the Company
were recharged at cost to the incumbent as principal under the promissory note.
The principal amount of the promissory note was paid during 1999.
F-12
<PAGE> 171
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of the following at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------ -----------
<S> <C> <C>
Network in progress........................................ $ 63,123,322 $38,669,088
Communications network..................................... 71,604,029 6,890,686
Office and computer equipment.............................. 2,262,934 2,267,647
Furniture and fixtures..................................... 1,555,771 766,013
Leasehold improvements..................................... 337,181 166,733
------------ -----------
138,883,237 48,760,167
Less: accumulated depreciation............................. (6,954,872) (788,831)
------------ -----------
Property and equipment, net................................ $131,928,365 $47,971,336
============ ===========
</TABLE>
Network in progress includes (i) all direct material and labor costs
together with related allocable interest costs, necessary to construct
components of a high capacity digital wireless and fiber optic network and (ii)
network related inventory parts and equipment. The network in progress balance
as of December 31, 1999 includes approximately $36.8 million for costs incurred
under the Company's agreement with WFI to construct a digital fiber optic
network and $2.7 million for a right of use under an 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 progress to communications network and depreciated.
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, 1999 and 1998, amortization of the costs of approximately $1.1 million and
$843,000 was charged to interest expense, respectively.
7. RESTRICTED CASH
Restricted cash comprises amounts held in escrow to collateralize the
Company's obligations under certain of its development 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, 1999, the Company deposited
approximately $13.4 million in escrow and $7.7 million was released from escrow.
During the year ended December 31, 1998, the Company deposited approximately
$10.3 million in escrow and no funds were released from escrow.
8. LONG-TERM DEBT
During 1998, the Company completed the Debt Offering for total gross
proceeds of $350.0 million less total issuance costs of approximately $11.3
million. Upon issuance, approximately $345.9 million of the gross proceeds was
allocated to the Senior Notes and approximately $4.1 million was 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.
F-13
<PAGE> 172
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has recorded approximately $410,000 and $307,000 of expense for the
years ended December 31, 1999 and 1998, respectively, 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. For the years ended December 31,
1999 and 1998, interest on the Senior Notes was approximately $42.9 million and
$31.3 million, respectively, of which approximately $3.6 million and $362,000,
respectively, was capitalized as network under development. 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 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 25, 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 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
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<PAGE> 173
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
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<PAGE> 174
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-16
<PAGE> 175
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 25, 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, 1999, a total of 70,731 non-qualified
stock options and 353,662 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, 1999,
the options issued at an exercise price of $0.03 had a weighted average
contractual life of 5.7 years. As of December 31, 1999, 424,393 of the options
issued at an exercise price of $0.03 were exercisable.
On August 1, 1997, the Company adopted the 1997 Stock Incentive Plan (1997
Plan), under which incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, performance awards and certain other
types of awards may be granted to the Company's employees and certain other
persons and entities in accordance with the law. To date, only non-qualified
stock options have been granted under the 1997 Plan. The Compensation Committee,
which administers the 1997 Plan, determines the number of options granted, the
vesting period and the exercise price of each award granted under the 1997 Plan.
The 1997 Plan will terminate July 31, 2007 unless earlier terminated by the
Board of Directors.
Options granted under the 1997 Plan generally vest over a three to seven
year period and expire: (1) ten years after the date of grant, (2) two years
after the date of the participant's termination without cause, disability or
death, (3) three months after the date of the participant's resignation, (4) on
the date of the participant's termination with cause or (5) on the date of any
material breach of any confidentiality or non-competition covenant or agreement
entered into between the participant and the Company.
The options issued on October 31, 1997, at $3.67, vest on October 31, 2004
provided, however (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
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<PAGE> 176
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 ended 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 ended December 31, 1999 but exceeds 80% of its revenue and EBITDA
budget for the year ended 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 ended 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. In an agreement dated November 4, 1999, 107,389 options
became fully vested at $3.67 per share and the remaining options were cancelled.
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, 1999, a total of 2,251,204 non-qualified options were
issued and outstanding, 1,119,957 at an exercise price of $1.13 per share,
197,110 at an exercise price of $3.67 per share and 934,137 at an exercise price
of $5.20 per share. As of December 31, 1999, a total of 976,785 non-qualified
options were exercisable, 761,921 at an exercise price of $1.13 per share,
129,818 at an exercise price of $3.67 per share and 85,046 at an exercise price
of $5.20 per share. As of December 31, 1999, the weighted average contractual
life of the options issued at $1.13, $3.67 and $5.20 was 7.7 and 8.1 and 9.2
years, respectively.
During the year ended December 31, 1998, 667,373, 89,721 and 350,000
options were issued at an exercise price of $1.13, $3.67 and $5.20 per share,
respectively. The estimated fair value of the Company's underlying common stock
in each case was determined to be $1.99, $16.00 and $5.20 per share,
respectively. Accordingly, the Company calculated deferred compensation expense
of approximately $1.7 million related to the options to be recognized as
compensation expense over their vesting period. The compensation expense
recognized during the years ended December 31, 1999 and 1998 was approximately
$536,000 and $701,000, respectively.
During the year ended December 31, 1999, 726,450 options were issued at an
exercise price of $5.20 per share representing the estimated fair value of the
Company's underlying common stock.
F-18
<PAGE> 177
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, 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
Options granted.............. -- -- -- 726,450 $5.20 $5.2000
Options exercised............ (70,733) -- $0.034 (95,127) $0.03-$1.13 $0.6609
Options cancelled............ -- -- -- (770,826) $1.13-$5.20 $2.9313
------- ------ ------ ---------
Options outstanding at
December 31, 1999.......... 353,662 70,731 $0.034 2,251,204 $1.13-$5.20 $2.5636
======= ====== =========
</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,
--------------------------------------
1999 1998 1997
----------- ----------- ----------
<S> <C> <C> <C>
Net loss as reported............................. $59,036,312 $36,296,596 $3,977,400
Pro forma net loss............................... $59,222,962 $36,859,594 $3,978,164
Basic and diluted net loss per share as
reported....................................... $ (20.14) $ (12.51) $ (1.37)
Pro forma basic and diluted net loss per share... $ (20.20) $ (12.70) $ (1.37)
</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, 1998 and 1997,
respectively: dividend yield of 0%, expected volatility of 0%, risk-free
interest rate of 5.18% and 6.55% and expected terms of 5.5 and 5.0 years. The
following weighted average assumptions were used for grants during the year
ended December 31, 1999: dividend yield of 0%, expected volatility of 0%,
risk-free interest rate of 5.16% and expected terms of 5.8 years.
F-19
<PAGE> 178
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
As of December 31, 1999 and 1998, the weighted average remaining
contractual life of the options is 7.9 years and 8.6 years, respectively.
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, 1999, the Company had purchased $51.9
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, 1999, no purchases were made by the Company under
this agreement.
12. COMMITMENTS AND CONTINGENCIES
The Company maintains office space in Washington, D.C., Virginia, Kansas
and Texas. The most significant leases relate to the Company's new headquarters
facilities in Reston, Virginia and Washington, D.C.
On December 30, 1998, the Company entered into a lease agreement for the
lease of tower site space, sufficient to perform its obligations under a fixed
point microwave agreement (FPMA) with an incumbent. Under the terms of the
lease, the Company is obligated to rent of $130,000 per month for a period
expiring on the later of (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 percent
of the rent then in effect.
F-20
<PAGE> 179
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's future minimum rental payments under noncancellable operating
leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000........................................................ $ 3,388,583
2001........................................................ 3,216,376
2002........................................................ 3,284,920
2003........................................................ 3,205,368
2004 and thereafter......................................... 19,097,648
-----------
Total............................................. $32,192,895
===========
</TABLE>
Rent expense for the years ended December 31, 1999, 1998 and 1997 was
approximately $821,000, $390,000, and $115,000, 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 percent of the rent then in effect.
As of December 31, 1999, the Company had capital commitments of
approximately $89.9 million relating to purchases of telecommunications and
transmission equipment under its agreements with WFI, Tri-States and CapRock
(See note 14).
During 1999, the Company entered into a contractual agreement that provided
for extended payment terms over a four-year period for the purchase of
approximately $2.7 million in network equipment. Accordingly, such amount has
been included in other noncurrent liabilities in the Company's consolidated
balance sheet as of December 31, 1999.
From time to time, the Company is subject to claims arising in the ordinary
course of business. In the opinion of management, no such matter individually or
in the aggregate, exists which is expected to have a material effect on the
results of operations, cash flows or financial position of the Company.
F-21
<PAGE> 180
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 net deferred tax asset at December 31, 1999 and 1998, is as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred revenue.......................................... $ 3,646 $ 949
Capitalized start-up costs................................ 1,005,353 1,370,937
Capitalized research and development costs................ 48,482 66,111
Depreciation.............................................. (2,844,859) --
Net operating loss carryforward........................... 40,571,930 15,325,484
Other timing differences.................................. 110,078 --
------------ ------------
38,894,630 16,763,481
Less valuation allowance.................................. (38,894,630) (16,763,481)
------------ ------------
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. FIBER AGREEMENTS
In March 1999, the Company entered into a co-development agreement with WFI
for the design, engineering and construction by WFI of a multiple conduit
fiber-optic system. One of the conduits will contain a fiber optic cable
consisting of a specified number of fiber optic strands. The conduits and any
installed strands will be equally divided between the parties, and the cost to
construct the route will be shared equally by the Company and WFI. In addition,
the Company will pay WFI a management fee equal to 10% of the Company's share of
the development costs. The total shared projected costs for the project is in
excess of $100 million. The system will be approximately 1,100 route miles long,
between Aurora, Colorado (a suburb of Denver) and Chicago, Illinois. The first
segment, Chicago, Illinois to Omaha, Nebraska, was completed in the fourth
quarter 1999, and the second segment, Omaha to Aurora, is scheduled to be
completed by the end of the second quarter of 2000. In connection with the co-
development agreement, the Company entered into a joint marketing agreement with
WFI under which both WFI and the Company will attempt to sell certain inactive
fiber optic strands on the route, and will share the revenues from such sales.
The joint marketing agreement also permits each party to retain fiber optic
strands for its own use, subject to certain restrictions on resale, and to swap
a certain number of the fiber optic strands to third parties.
In August 1999, the Company entered into a co-development agreement with
Tri-State and four regional electric cooperatives for design, engineering and
construction of an aerial fiber system, approximately 420 route miles long,
between Albuquerque, New Mexico and Grand Junction, Colorado. This system,
constructed on power transmission lines, will contain a specified number of
fiber optic strands. The cost to construct the system will be borne equally
between the Company and the other parties. The total projected combined cost for
this route is approximately $48 million. In
F-22
<PAGE> 181
PATHNET, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
connection with the co-development agreement, the Company entered into a joint
marketing agreement under which each party will reserve a portion of the fiber
strands for its own operations, a subset of which will be available for swaps
with third parties, the remaining fiber strands will be jointly sold, with the
Company as the exclusive marketing agent.
Any revenues derived from the sale of those fiber strands will be shared
equally between the Company and Tri-State, after deduction of a Company
marketing fee. We expect this system to be completed in the second half of 2000.
In December 1999, the Company announced a co-development agreement with
CapRock to construct a multi-conduit, fiber network between Albuquerque, New
Mexico and El Paso, Texas. The total projected cost for this 350 mile network
segment is approximately $40 million with a scheduled completion date of
year-end 2000.
15. CONTRIBUTION AND REORGANIZATION
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 second 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 resulting in the Company becoming a wholly-owned subsidiary
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
in exchange for a proposed payment of approximately $8.8 million. 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. On
February 22, 2000, the Company expects to file an amendment to its preliminary
prospectus with the Securities and Exchange Commission. The Company expects to
close this transaction immediately following receipt of the required consents
and other required regulatory approvals. For the year ended December 31, 1999,
the Company had expensed $1,022,998 of fees related to this transaction.
F-23
<PAGE> 182
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F-24
<PAGE> 183
GLOSSARY OF SELECTED TERMS
<TABLE>
<S> <C>
Bandwidth....................................... Refers to the maximum amount of data that can be
transferred through a communication channel in a
given time.
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.
Competitive telecommunications companies may
connect with existing local telephone company
networks either at this location or through a
remote location.
Circuit......................................... An electronic, radio or optical connection over
which communications may occur.
Collocation..................................... A location where a carrier's or customer's
equipment interconnects with the network of a
carrier inside the carrier's facility.
Competitive Telecommunications
Company....................................... A category of telephone service provider, sometimes
referred to as a "CLEC", 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.)
Competitive Telecommunications Company
Certification................................. Granted by a state public service commission or
public utility commission, this certification
provides telecommunications services providers with
the legal standing to offer intrastate telephone
services in direct competition with the existing
local telephone company and other competitive
telecommunications companies. Such certifications
are granted on a state-by-state basis.
Conduit......................................... A pipe that is installed to house the fiber optic
cable installed as part of the network.
Dark Fiber...................................... Fiber optic strands which do not have connected to
them the electronics required to transmit voice or
data signals.
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.
</TABLE>
A-1
<PAGE> 184
<TABLE>
<S> <C>
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 existing local telephone company, competitive
telecommunications company or an Internet service
provider -- 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 incumbent local telephone company, sometimes
referred to as an "ILEC"; including the RBOCs, GTE,
or one of such companies' successors.
Facilities Based................................ A carrier owning the physical network assets or a
portion of the physical network assets necessary to
provide telecommunication services.
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.
</TABLE>
A-2
<PAGE> 185
<TABLE>
<S> <C>
Interconnection Agreement....................... A contract between an existing local telephone
company and a competitive telecommunications
company for the interconnection of the existing
local telephone company's and competitive
telecommunications company'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.
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.
LATAs (Local Access and Transport Areas)........ The approximately 160 geographic areas that define
the areas between which most RBOCs currently are
prohibited from providing long distance services.
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 existing local telephone
company central offices.
Local Loops..................................... The physical wires that run from the end user's
telephone set to the existing local telephone
company's central office.
Long Distance Companies......................... Long distance carriers, sometimes referred to as
interexchange carriers or IXCs, 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.
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.
Number Portability.............................. The ability of a local exchange service customer of
an existing local telephone company to keep their
existing telephone number, while moving their
service to a competitive telecommunications
company.
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.
</TABLE>
A-3
<PAGE> 186
<TABLE>
<S> <C>
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" of 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 existing local telephone
company central offices.
POP (Point-of-Presence)......................... A location where a carrier has installed
transmission equipment in a service area 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).
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.
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.
</TABLE>
A-4
<PAGE> 187
<TABLE>
<S> <C>
SONET (Synchronous Optical Network
Technology)................................... 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 facilitates 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 Service Providers............ Our customer base which includes long distance
companies, competitive telecommunications
companies, Internet service providers, existing
local telephone companies, cellular operators and
resellers.
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.
Unbundled Network Element (UNE)................. An individual facility, piece of equipment or
feature or functionality of such facility or
equipment used in the provision of a
telecommunications service, that an existing local
telephone company is required to 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.
</TABLE>
A-5
<PAGE> 188
------------------------------------------------------
------------------------------------------------------
THROUGH AND INCLUDING , 2000 (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>
Prospectus Summary..................... 1
Risk Factors........................... 6
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........................... 48
Management............................. 57
Certain Relationships and Related
Transactions......................... 70
Security Ownership of Certain
Beneficial Owners and Management..... 74
Description of Contribution and
Reorganization Transaction........... 77
The Pathnet Senior Noteholder Waivers
and Other Proposed Indenture
Amendments........................... 88
Description of the Guarantees.......... 102
Description of the Consent Solicitation
Process.............................. 103
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Description of the Notes and the
Indenture............................ 106
Description of Other Indebtedness and
Other Financing Arrangements......... 140
Description of Capital Stock........... 142
Federal Income Tax Consequences........ 148
Plan of Distribution................... 153
Legal Matters.......................... 153
Experts................................ 153
Where You Can Find More Information.... 153
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)
------------------
, 2000
------------------------------------------------------
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<PAGE> 189
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
II-1
<PAGE> 190
THE CONTRIBUTION AND REORGANIZATION TRANSACTION" in the 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(1) Form of 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(1) Form of Amended and Restated Pledge Agreement
4.7(1) Form of Guarantee (contained within Exhibit 4.3)
5.1(1) Opinion of Covington & Burling, regarding legality of
securities
8.1(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 and Santa Fe Railway Company
10.4(4)(3) Form of Optic Access Agreement, by and between Pathnet
Telecommunications, Inc. and The Burlington Northern and
Santa Fe Railway Company
10.5(4)(3) Form of Optic Lease Agreement, by and between Pathnet
Telecommunications, Inc. and The Burlington Northern and
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(4)(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.
</TABLE>
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<PAGE> 191
<TABLE>
<CAPTION>
NO. NAME OF AGREEMENT
--- -----------------
<C> <S>
10.11(4)(3) Form of Fiber Optic License Agreement, by and between
Pathnet Telecommunications, Inc. and CSX Transportation,
Inc.
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.
10.24.1(1) Form of Assignment and Acceptance Agreement, by and between
Pathnet, Inc. and Pathnet Telecommunications, Inc., Form of
$70 million Promissory Note by Pathnet Telecommunications,
Inc. in favor of Pathnet, Inc. and Form of License of Marks
by and between Pathnet Telecommunications, Inc. and Pathnet,
Inc.
10.24.2(1) Form of Assignment and Acceptance Agreement, by and between
Pathnet, Inc. and Pathnet Fiber Optics, LLC
10.25+(2) Non-Qualified Stock Option Agreement, dated August 4, 1997,
by and between Pathnet, Inc. and Richard A. Jalkut
</TABLE>
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<PAGE> 192
<TABLE>
<CAPTION>
NO. NAME OF AGREEMENT
--- -----------------
<C> <S>
10.26+(2) Non-Qualified Stock Option Agreement, dated October 31,
1997, by and between Pathnet, Inc. and David Schaeffer
10.27(1) Form of $50 million Promissory Note by Pathnet
Telecommunications, Inc. in favor of Pathnet, Inc.
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
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(4) List of Subsidiaries of Pathnet Telecommunications, Inc.
23.1(1) Consent of PricewaterhouseCoopers LLP
</TABLE>
II-4
<PAGE> 193
<TABLE>
<CAPTION>
NO. NAME OF AGREEMENT
--- -----------------
<C> <S>
23.2(1) Consent of Covington & Burling
24(4) Power of Attorney (included on signature page)
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(1) 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(1) Consent Solicitation Documentation
</TABLE>
- ---------------
+ 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.
II-5
<PAGE> 194
(b) Financial Statement Schedule
Schedule II -- Valuation and qualifying accounts and report of
PricewaterhouseCoopers LLP thereon.
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required, are
inapplicable or have been disclosed in the notes to other financial statements
and therefore have been omitted.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant under the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of 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> 195
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Amendment No. 2 to registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in
Washington, District of Columbia on the twenty-second day of February, 2000.
PATHNET TELECOMMUNICATIONS, INC.
By: /s/ JAMES M. CRAIG
--------------------------------------
James M. Craig
Executive Vice President, Chief
Financial Officer and Treasurer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 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 February 22, 2000
- --------------------------------------------------- Executive Officer
Richard A. Jalkut (Principal Executive
Officer) and Director
/s/ JAMES M. CRAIG Executive Vice President February 22, 2000
- --------------------------------------------------- Chief Financial Officer
James M. Craig and Treasurer (Principal
Financial Officer and
Controller)
/s/ PETER J. BARRIS* Director February 22, 2000
- ---------------------------------------------------
Peter J. Barris
/s/ KEVIN J. MARONI* Director February 22, 2000
- ---------------------------------------------------
Kevin J. Maroni
/s/ PATRICK J. KERINS* Director February 22, 2000
- ---------------------------------------------------
Patrick J. Kerins
/s/ STEPHEN A. REINSTADTLER* Director February 22, 2000
- ---------------------------------------------------
Stephen A. Reinstadtler
</TABLE>
* James M. Craig, by signing his name hereto, does hereby sign this Amendment
No. 2 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
PATHNET, INC.
PATHNET TELECOMMUNICATIONS, INC.
THE BANK OF NEW YORK
------------------------------
FORM OF SUPPLEMENTAL INDENTURE
Dated as of [ ], 2000
To
Indenture, Dated as of April 8, 1998,
Between
Pathnet, Inc.
and
The Bank of New York, as Trustee
------------------------------
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
RECITALS.................................................................... 1
AMENDMENTS TO "DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION"..... 2
Section 101. Introduction................................................. 2
Section 102. Revised Definitions.......................................... 3
"Accounts Receivable Subsidiary"........................................ 3
"Amended and Restated Pledge Agreement.................................. 3
"Amendment Date......................................................... 3
"Asset Sale............................................................. 3
"Board of Directors..................................................... 4
"Board Resolution....................................................... 4
"Cash Equivalents....................................................... 4
"Change of Control...................................................... 5
"Consolidated Adjusted Net Income....................................... 6
"Consolidated Indebtedness.............................................. 6
"Consolidated Indebtedness to Consolidated Operating Cash Flow Ratio.... 6
"Consolidated Interest Expense.......................................... 7
"Consolidated Operating Cash Flow....................................... 7
"Consolidated Tax Expense............................................... 8
"Credit Facilities...................................................... 8
"Currency Agreements.................................................... 8
"Debt Securities........................................................ 8
"Disinterested Director................................................. 8
"Escrow Account......................................................... 9
"Event of Default....................................................... 9
"Fair Market Value...................................................... 10
"Guarantee.............................................................. 10
"Incumbent.............................................................. 10
"Incumbent Agreement.................................................... 10
"Incur.................................................................. 10
"Indebtedness........................................................... 11
"Invested Capital....................................................... 12
"Investment............................................................. 12
"Net Cash Proceeds...................................................... 12
"New Pledged Securities................................................. 13
"Officers' Certificate.................................................. 13
"Parent................................................................. 13
"Permitted Holder....................................................... 13
"Permitted Indebtedness................................................. 13
"Permitted Investment................................................... 15
"Permitted Liens........................................................ 17
"Permitted Telecommunications Asset Sale................................ 19
"Permitted Telecommunications Joint Venture............................. 19
"Pledged Securities..................................................... 19
"Redeemable Capital Stock............................................... 19
"Restricted Company Subsidiary.......................................... 19
"Restricted Entity...................................................... 19
"Restricted Parent Subsidiary........................................... 19
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
"Restricted Subsidiary.................................................. 19
"Sale-Leaseback Transaction............................................. 19
"Significant Subsidiary................................................. 20
"Subsidiary............................................................. 20
"Telecommunications Assets.............................................. 20
"Telecommunications Business............................................ 20
"Telecommunications Indebtedness........................................ 21
"Unrestricted Subsidiary................................................ 21
Section 103. Definitions for Purposes of Section 1017(a).................. 22
"Accounts Receivable Subsidiary......................................... 22
"Allowable Company Indebtedness......................................... 22
"Asset Sale............................................................. 22
"Board of Directors..................................................... 23
"Board Resolution....................................................... 23
"Cash Equivalents....................................................... 23
"Consolidated Adjusted Net Income....................................... 23
"Consolidated Indebtedness.............................................. 24
"Consolidated Indebtedness to Consolidated Operating Cash Flow Ratio.... 24
"Consolidated Interest Expense.......................................... 24
"Consolidated Operating Cash Flow....................................... 25
"Consolidated Tax Expense............................................... 25
"Event of Default....................................................... 25
"Fair Market Value...................................................... 27
"Incumbent.............................................................. 27
"Incumbent Agreement.................................................... 27
"Incur.................................................................. 27
"Indebtedness........................................................... 27
"Invested Capital....................................................... 29
"Investment............................................................. 29
"Net Cash Proceeds...................................................... 29
"Permitted Indebtedness................................................. 30
"Permitted Investment................................................... 32
"Permitted Liens........................................................ 33
"Permitted Restriction.................................................. 35
"Permitted Telecommunications Asset Sale................................ 35
"Permitted Telecommunications Joint Venture............................. 35
"Permitted Transaction.................................................. 35
"Restricted Payment..................................................... 37
"Restricted Subsidiary.................................................. 40
"Sale-Leaseback Transaction............................................. 40
"Significant Subsidiary................................................. 41
"Telecommunications Assets.............................................. 41
"Telecommunications Business............................................ 41
"Telecommunications Indebtedness........................................ 41
"Unrestricted Company Subsidiary........................................ 42
</TABLE>
-ii-
<PAGE> 4
<TABLE>
<S> <C>
Section 104. Amendment to Section 103..................................... 42
AMENDMENTS TO "NOTE FORMS".................................................. 43
Section 105. Amendment to Section 202.................................... 43
Section 106. Amendment to Section 203..................................... 46
Section 107. Addition of Section 203A..................................... 48
Section 108. Amendment to Section 501..................................... 53
AMENDMENTS TO "CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE"........ 53
Section 109. Amendment to Article Eight................................... 53
AMENDMENTS TO "SUPPLEMENTAL INDENTURES"..................................... 55
Section 110. Amendment to Section 901..................................... 55
Section 111. Amendment to Section 902..................................... 56
AMENDMENTS TO "COVENANTS"................................................... 57
Section 112. Amendment to Section 1002.................................... 57
Section 113. Amendment to Section 1003.................................... 58
Section 114. Amendment to Section 1004.................................... 59
Section 115. Amendment to Section 1005.................................... 59
Section 116. Amendment to Section 1006.................................... 60
Section 117. Amendment to Section 1007.................................... 60
Section 118. Amendment to Section 1008.................................... 61
Section 119. Amendment to Section 1009.................................... 61
Section 120. Amendment to Section 1010.................................... 62
Section 121. Amendment to Section 1011.................................... 63
Section 122. Amendment to Section 1012.................................... 63
Section 123. Amendment to Section 1013.................................... 66
Section 124. Amendment to Section 1014.................................... 67
Section 125. Amendment to Section 1015.................................... 68
Section 126. Amendment to Section 1016.................................... 68
Section 127. Amendment to Section 1017.................................... 69
Section 128. Amendment to Section 1018.................................... 71
AMENDMENTS TO "SECURITY".................................................... 72
Section 129. Amendments to Article 12..................................... 72
AMENDMENTS TO "DEFEASANCE AND COVENANT DEFEASANCE".......................... 72
Section 130. Amendments to Article 13..................................... 72
PARENT GUARANTEE............................................................ 77
Section 131. Guarantee.................................................... 77
MISCELLANEOUS............................................................... 77
Section 132. Waiver....................................................... 77
Section 133. Acts of Holders.............................................. 77
Section 134. Notice of Holders; Waiver.................................... 78
Section 135. Counterparts................................................. 79
Section 136. Governing Law................................................ 79
Section 137. Separability Clause.......................................... 79
Section 138. Headings..................................................... 79
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C>
Section 139. Effect of Supplemental Indenture............................. 79
Section 140. Indenture in Full Force and Effect as Supplemented........... 79
</TABLE>
-iv-
<PAGE> 6
SUPPLEMENTAL INDENTURE, dated as of [ ], 2000 (the "Supplemental
Indenture"), among PATHNET, INC., a Delaware corporation (herein called the
"Company") having its principal office at 1015 31st Street, N.W., Washington
D.C. 20007, PATHNET TELECOMMUNICATIONS, INC., a Delaware corporation (herein
called the "Parent") having its principal office at 1015 31st Street, N.W.,
Washington D.C. 20007, and THE BANK OF NEW YORK, a New York banking corporation,
as Trustee (herein called the "Trustee") to the Indenture, dated as of April 8,
1998, between the Company and the Trustee (the "Original Indenture").
RECITALS
The Company and the Trustee have entered into the Original
Indenture. The Company has issued $350,000,000 in aggregate principal amount of
12-1/4% Senior Notes due 2008. The Company originally issued the notes in a
so-called A/B private placement transaction pursuant to which, in September 1998
(as required by the terms of the Original Indenture), the Company exchanged the
privately placed notes for substantially identical series notes (the "Notes") in
an offering registered under the Securities Act. The Notes, which were
registered with the SEC in the "B" portion of the "A/B" exchange offering,
continue to be governed by the terms of the Original Indenture;
The Company and the Parent are proposing to enter into a
contribution and re-organization transaction (the "Transaction"). In connection
with the Transaction, the Parent and the Company have entered into a series of
Contribution Agreements with the parties to the Transaction pursuant to which
the Parent will (i) issue shares of Series D Convertible Preferred Stock, with a
par value of $0.01 per share and Series E Convertible Preferred Stock, with a
liquidation preference of $0.01 per share in exchange for the contribution of
leasehold interests in rights of way owned by the several counterparties to the
Contribution Agreements, and (ii) exchange shares of Common Stock, par value
$0.01 per share and Series A, B and C Convertible Preferred Stock, each with a
par value of $0.01 per share, for shares of Common Stock, par value $0.01 per
share, and Series A, B and C Preferred Stock, each with a liquidation preference
of $0.01 per share, of the Company held by existing holders of such securities
of the Company;
In connection with the Transaction, the Parent will deliver an
irrevocable and unconditional guarantee of the Company's obligations under the
Notes;
In addition, the Parent has agreed to accept covenant obligations
similar to the covenant obligations that are currently imposed on the Company
under the Original Indenture and the Parent and the Company wish to ensure that
transactions between the Company and the Parent or the Company and certain other
subsidiaries of the Parent are permitted to the same extent that such
transactions were permitted between the Company and its Restricted Subsidiaries
under the Original Indenture;
Pursuant to Section 902 of the Original Indenture, the parties
hereto desire to enter into this Supplemental Indenture and the holders of at
least a majority in aggregate principal amount of the Outstanding Notes have
consented to the amendments to the Original
<PAGE> 7
Indenture set forth in this Supplemental Indenture as required by Section 902 of
the Original Indenture;
Any references herein to the "Indenture" shall be deemed to be a
reference to the Original Indenture as amended by this Supplemental Indenture,
and unmodified references to Sections or Subsections are to such Sections or
Subsections of the Indenture;
It is the intent of the parties that this Supplemental
Indenture be effective as of the date set forth above;
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the foregoing premises and for other
good and valuable consideration, the receipt of which is hereby acknowledged, it
is mutually covenanted and agreed for the equal and proportionate benefit of all
Holders of the Notes as follows:
AMENDMENTS TO "DEFINITIONS
AND OTHER PROVISIONS OF GENERAL APPLICATION"
SECTION 101. INTRODUCTION.
(a) The definitions in the Original Indenture are amended in this
Supplemental Indenture to the extent necessary (1) to impose covenant
obligations upon the Parent that are substantively equivalent to those imposed
on the Company under the Original Indenture, and (2) to permit transactions
between the Parent and the Company or any other Restricted Subsidiaries of the
Parent that may be created in the future to the extent that such transactions
are permitted between the Company and its Restricted Subsidiaries under the
Original Indenture. These amended definitions are contained in Section 102 of
this Supplemental Indenture.
(b) It is the intent of the parties to this Supplemental Indenture
to preserve unmodified the substance of the covenant and other obligations
imposed upon the Company under the Original Indenture.
(c) Section 902(2) of the Original Indenture provides that the
obligation of the Company (1) to make and consummate an Excess Proceeds Offer
with respect to any Asset Sale by the Company or any of its Restricted
Subsidiaries in accordance with Section 1017 of the Original Indenture, and (2)
to make and consummate a Change of Control Offer in the event of a Change of
Control of the Company in accordance with Section 1010 of the Original Indenture
(together, the "Specified Obligations") cannot be amended, changed or modified
without the consent of the Holder of each Outstanding Note affected thereby.
Section 902(2) of the Original Indenture further provides that the definitions
relating to the Specified Obligations cannot be amended, changed or modified so
as to amend, change or modify the obligations of the Company with respect to the
Specified Obligations without the consent of the Holder of each Outstanding Note
affected thereby.
(d) In order to effect the amendments described in paragraph (a)
above, it is necessary to amend certain defined terms that are otherwise used in
Section 1017 of the Original Indenture. In order to comply with the provisions
of Section 902(2) of the Original Indenture, as
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described in paragraph (c) above, the obligations on the Company and the
Restricted Company Subsidiaries pursuant to Section 1017 of the Original
Indenture have been reproduced without the inclusion of references to the Parent
in Section 122(a) of this Supplemental Indenture, and will be incorporated as
Section 1017(a) of the Indenture. The definitions from Section 102 of this
Supplemental Indenture used in Section 1017(a) of the Indenture are also
reproduced without the inclusion of references to the Parent. Certain technical
modifications to these definitions are necessary to preserve the economic
substance of these Company-specific covenants and obligations. These "Section
1017(a) only" definitions are set forth in Section 103 of this Supplemental
Indenture.
(e) It is not necessary to reproduce the obligations of the Company
and the Restricted Company Subsidiaries pursuant to Section 1010 without the
inclusion of reference to the Parent in order to comply with Section 902(2).
This is because the proposed amendment does not modify or amend the obligation
of the Company and its Restricted Company Subsidiaries to make and consummate a
Change of Control Offer, but rather provides that such obligation is also
triggered by a Change of Control of the Parent. The definition of "Change of
Control" is modified accordingly and the revised definition is contained in
Section 102 of this Supplemental Indenture. All other capitalized terms used in
Section 1010 are defined within that Section or have the meaning given to them
in the Original Indenture.
(f) Defined terms set forth in Section 101 of the Original Indenture
that do not need to be amended for the purposes of this Supplemental Indenture,
and are not included in the revised definitions in Section 102 or 103 of this
Supplemental Indenture, retain the meaning given to them in the Original
Indenture.
(g) Wherever used in this Supplemental Indenture, "including" shall
be deemed to mean "including without limitation".
SECTION 102. REVISED DEFINITIONS.
For all purposes of this Supplemental Indenture, except as otherwise
expressly provided herein and subject to Section 103 of this Supplemental
Indenture, the defined terms listed below shall have the meanings ascribed
thereto below. For the avoidance of doubt, any capitalized terms used in Section
1017(a) shall have the meanings ascribed thereto in Section 103 of this
Supplemental Indenture, and to the extent any such term is also defined in this
Section 102, the definition contained in this Section 102 shall not apply to
such term as used in Section 1017(a);
"ACCOUNTS RECEIVABLE SUBSIDIARY" means any Restricted Company
Subsidiary or Restricted Parent Subsidiary that is, directly or indirectly,
wholly owned by the Company or the Parent (as the case may be) (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 any Restricted Entity, (ii) the sale or financing of accounts
receivable or interests therein and (iii) other activities directly related
thereto.
"AMENDED AND RESTATED PLEDGE AGREEMENT" means the amended and
restated pledge agreement dated as of the date hereof, by and between the
Trustee and the Company, governing the disbursement of funds in the Escrow
Account.
"AMENDMENT DATE" means the date as of which this Supplemental
Indenture is executed by the parties hereto.
"ASSET SALE" means any sale, issuance, conveyance, transfer, lease
or other disposition (including by way of merger, consolidation or
Sale-Leaseback Transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i)
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any Capital Stock of any Subsidiary; (ii) all or substantially all of the
properties and assets of the Parent or any Subsidiary; or (iii) any other
properties or assets of the Parent 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 Article Eight of this Indenture (B) of the Parent to any
Restricted Parent Subsidiary, or of any Restricted Parent Subsidiary to the
Parent or any other Restricted Parent Subsidiary in accordance with the terms of
this Indenture, (C) having an aggregate Fair Market Value of less than
$2,000,000 (or the equivalent thereof in any other currency) in any given fiscal
year, (D) by the Parent or a Restricted Parent Subsidiary to a Person who is not
an Affiliate of the Parent in exchange for Telecommunications Assets (or not
less than 66 2/3% of the outstanding Voting Stock of a Person that becomes a
Restricted Subsidiary, the assets of which consist primarily of
Telecommunications Assets) or related telecommunications services where, in the
good faith judgment of the board of directors of the Parent evidenced by a board
resolution, the Fair Market Value of such Telecommunications Assets (or such
Voting Stock) or services so received is at least equal to the Fair Market Value
of the properties or assets disposed of or, if less, the difference is received
by the Parent 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 Section 1012 of the Indenture when made, (F)
constituting accounts receivable of the Parent or a Restricted Parent Subsidiary
to an Accounts Receivable Subsidiary or, in consideration of Fair Market Value
thereof, to Persons that are not Affiliates of the Parent or any Subsidiary of
the Parent 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 Section 1011 of the Indenture, (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 Section 1012 of the Indenture.
"BOARD OF DIRECTORS" means (i) either the board of directors of the
Company or any duly authorized committee of that board, when used with respect
to the Company, or (ii) either the board of directors of the Parent or any duly
authorized committee of that board, when used with respect to the Parent.
"BOARD RESOLUTION" means a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Parent to have been duly adopted by
the Board of Directors of the Parent and to be in full force and effect on the
day of such certification and delivered to the Trustee; unless used with respect
to the Company when references to the "Parent" in the preceding sentence shall
be replaced by references to the "Company".
"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);
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(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 $500,000,000;
(c) commercial paper with a maturity of 180 days or less issued by a
corporation that is not an affiliate of the Parent and is organized under the
laws of any state of the United States and rated at least A-1 by S&P or at least
P-1 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 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 Company or of the Parent.
(b) the Company or the Parent consolidates with, or merges with or
into, another Person or conveys, transfers, leases or otherwise disposes of all
or substantially all of its assets to any Person, or any Person consolidates
with, or merges with or into, the Company or the Parent, in any such event
pursuant to a transaction in which the outstanding Voting Stock of the Company
or the Parent (as the case may be) is converted into or exchanged for cash,
securities or other property, other than any such transaction (i) where the
outstanding Voting Stock of the Company or the Parent (as the case may be) is
not converted or exchanged at all (except to the extent necessary to reflect a
change in the jurisdiction of incorporation of the Company or the Parent (as the
case may be)) or is converted into or exchanged for (A) Voting Stock (other than
Redeemable Capital Stock) of the surviving or transferee corporation or (B)
cash, securities and other property (other than Capital Stock of the Surviving
Entity) in an amount that could be paid by the Parent as a Restricted Payment as
described in Section 1012 of the Indenture in the event of a conversion or
exchange by the Parent or that could be paid by the Company as a Restricted
Payment as described in Section 1012 of the Indenture in the event of a
conversion or exchange by the Company and (ii) immediately after such
transaction, no "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than Permitted Holders, is the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that
a Person shall be deemed to have "beneficial ownership" of all securities that
such Person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of more
than 50% of the total outstanding Voting Stock of the surviving or transferee
corporation;
(c) during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the Company or
the Board of Directors of the Parent (together with any new directors whose
election to such Board of Directors, or whose nomination for election by the
stockholders of the Company or the Parent (as the case may be) was approved by a
vote of 66 2/3% of the directors then still in office who were either directors
at the beginning of such period or whose election or nomination for election was
previously so approved) cease for any reason to constitute a majority of the
Board of Directors of the Company or the Parent (as the case may be) then in
office; or
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(d) the Company is liquidated or dissolved or adopts a plan of
liquidation or dissolution other than in a transaction which constitutes a
Permitted Transaction, or the Parent is liquidated or dissolved or adopts a plan
of liquidation or dissolution other than in a transaction which complies with
the provisions of Article 8 of the Indenture.
"CONSOLIDATED ADJUSTED NET INCOME" means, with respect to any
period, the consolidated net income (or loss) of all Restricted Entities 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 a
Restricted Entity), including Unrestricted Subsidiaries, in which any Restricted
Entity has an ownership interest, except to the extent of the amount of
dividends or other distributions actually paid to any Restricted Entity in cash
dividends or distributions during such period;
(d) the net income (or loss) of any Person combined with any
Restricted Entity on a "pooling of interests" basis attributable to any period
prior to the date of combination;
(e) the net income of the Company or any Restricted Subsidiary to
the extent that the declaration or payment of dividends or similar distributions
by the Company or 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 the Company or such Restricted Subsidiary
or its stockholders (except, for purposes of determining compliance with Section
1011 of the Indenture, any restriction permitted under clause (vii) or (viii) of
Section 1018 of the Indenture; and
(f) any net income (or loss) from the Company or any Restricted
Subsidiary that was an Unrestricted Subsidiary at any time during such period
other than any amounts actually received from the Company or such Restricted
Subsidiary.
"CONSOLIDATED INDEBTEDNESS" means, with respect to any period, the
aggregate amount of Indebtedness of all Restricted Entities 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 of all Restricted Entities to (ii) Consolidated Operating Cash Flow
of all Restricted Entities for the two preceding fiscal quarters for which
financial information is available immediately prior to the date of
determination, multiplied by two; provided further that any Indebtedness
incurred or retired by any Restricted Entity 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 further that, in making any such computation, the
aggregate amount of Indebtedness under any revolving credit or similar facility
shall be deemed to include an amount of funds equal to the average daily balance
of such Indebtedness during such two fiscal quarter period); and provided
further that (x) if the transaction giving rise to the need to calculate the
Consolidated Indebtedness to Consolidated
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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, any Restricted Entity shall have
engaged in any Asset Sale in respect of any company, entity or business,
Consolidated Operating Cash Flow for such period shall be reduced by an amount
equal to the Consolidated Operating Cash Flow (if positive), or increased by an
amount equal to the Consolidated Operating Cash Flow (if negative), directly
attributable to the company, entity or business that is the subject of such
Asset Sale and any related retirement of Indebtedness as if such Asset Sale and
any related retirement of Indebtedness had occurred on the first day of such
period; or (z) if during such two fiscal quarter period any Restricted Entity
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 any
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 consolidated interest expense of all Restricted Entities for
such period, including (i) amortization of debt discount, (ii) the net cost of
Interest Rate Agreements (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation, (iv) accrued interest, (v)
the consolidated amount of any interest capitalized by the Company or the Parent
and (vi) amortization of debt issuance costs; plus
(b) the consolidated interest component of Capitalized Lease
Obligations of all Restricted Entities paid, accrued and/or scheduled to be paid
or accrued during such period; excluding, however, any amount of such interest
of any Restricted Subsidiary if the net income of such Restricted Subsidiary is
excluded in the calculation of Consolidated Adjusted Net Income pursuant to
clause (e) of the definition thereof (but only in the same proportion as the net
income of such Restricted Subsidiary is excluded from the calculation of
Consolidated Adjusted Net Income pursuant to clause (e) of the definition
thereof); provided that in making such computation, (x) the Consolidated
Interest Expense attributable to interest on any Indebtedness computed on a pro
forma basis and (A) bearing a floating interest rate shall be computed as if the
rate in effect on the date of computation had been the applicable rate for the
entire period and (B) which was not outstanding during the period for which the
computation is being made but which bears, at the option of the Parent, a fixed
or floating rate of interest, shall be computed by applying, at the option of
the Parent, 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 of all Restricted Entities for such
period:
(a) increased by (to the extent deducted in computing Consolidated
Adjusted Net Income) the sum of (i) the Consolidated Tax Expense of such
Restricted Subsidiaries as are subject to the immediately preceding
parenthetical clause for such period (other than taxes
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attributable to extraordinary, unusual or non-recurring gains or losses); (ii)
Consolidated Interest Expense of all Restricted Entities for such period; (iii)
depreciation of all Restricted Entities for such period, determined on a
consolidated basis in accordance with GAAP; (iv) amortization of all Restricted
Entities for such period, determined on a consolidated basis in accordance with
GAAP; and (v) any other non-cash charges that were deducted in computing
Consolidated Adjusted Net Income (excluding any non-cash charge which requires
an accrual or reserve for cash charges for any future period) of the Restricted
Entities for such period in accordance with GAAP; and
(b) decreased by any non-cash gains of the Restricted Entities 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 all
Restricted Entities for such period as determined on a consolidated basis in
accordance with GAAP.
"CREDIT FACILITIES" means, with respect to a Restricted Entity, one
or more debt facilities or commercial paper facilities with banks or other
institutional lenders providing for revolving credit loans, terms 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 AGREEMENTS" means any spot or forward exchange agreements
and currency swap, currency option or other similar financial agreements or
arrangements entered into by the any Restricted Entity.
"DEBT SECURITIES" means any debt securities (including any
Guarantee of such securities) issued by any Restricted Entity 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-affiliates 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 the Company or 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".
"DISINTERESTED DIRECTOR" means, with respect to any transaction or
series of transactions in respect of which the board of directors of the
Company is required to deliver a resolution thereof under this Indenture, a
member of the board of directors of the Company who does not have any material
direct or indirect financial interest in or with respect to such transaction or
series of transactions, and with respect to any transaction or series of
transactions in respect of which the board of directors of the Parent is
required to deliver a resolution thereof under this Indenture, a member of the
board of directors of the Parent who does not have any material direct or
indirect financial interest in or with respect to such transaction or series of
transactions. For purposes of this definition, no Person shall be deemed not to
be a Disinterested Director solely because such Person or an Affiliate of such
Person holds or beneficially owns Capital Stock of the Company, the Parent or
any of their Restricted Subsidiaries.
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"ESCROW ACCOUNT" means the account established with the Trustee in
its name pursuant to the terms of the Original Pledge Agreement for the deposit
of Pledged Securities.
"EVENT OF DEFAULT", means any one of the following events (whatever
the reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by operation of law or pursuant to any judgment,
decree or order of any court or any order, rule or regulation of any
administrative or governmental body):
(a) default in the payment of any interest 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);
(b) default in the payment of the principal of (or premium, if any,
on) any Note at its Maturity (upon acceleration, optional redemption, required
purchase or otherwise);
(c) default in the performance, or breach, of any covenant or
agreement of the Company or of the Parent contained in this 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 (a) or (b) or in
clause (B), (C) or (D) of this clause (c)) and continuance of such default or
breach for a period of 30 days after written notice shall have been given to the
Company or the Parent (as the case may be) by the Trustee or to the Company or
the Parent 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 Section 1017; (C) default in the performance or breach of
the provisions of Article Eight; and (D) default in the performance or breach of
Section 1010;
(d) (A) one or more defaults in the payment of principal of or
premium, if any, or interest on Indebtedness of the Company or the Parent or any
Significant Subsidiary aggregating $7,500,000 or more, when the same becomes due
and payable at the Stated Maturity thereof, and such default or defaults shall
have continued after any applicable grace period and shall not have been cured
or waived or (B) Indebtedness of the Company or the Parent or any Significant
Subsidiary aggregating $7,500,000 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;
(e) one or more final judgments, orders or decrees of any court or
regulatory agency shall be rendered against the Company or the Parent or any
Significant Subsidiary or their respective properties for the payment of money,
either individually or in an aggregate amount, in excess of $7,500,000 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;
(f) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Company or the Parent or any Significant Subsidiary
as bankrupt or insolvent, or approving as properly filed a petition seeking
reorganization, arrangement, adjustment or composition of or in respect of the
Company or the Parent or any Significant Subsidiary under the Federal Bankruptcy
Code or any other applicable federal or state law, or appointing a receiver,
liquidator, assignee, trustee, sequestrator (or other similar official) of the
Company or the Parent or any Significant Subsidiary or of any substantial part
of its property, or ordering the winding up or liquidation of its affairs, and
the continuance of any such decree or order unstayed and in effect for a period
of 90 consecutive days;
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(g) the institution by the Company or the Parent or any Significant
Subsidiary of proceedings to be adjudicated a bankrupt or insolvent, or the
consent by it to the institution of bankruptcy or insolvency proceedings against
it, or the filing by it of a petition or answer or consent seeking
reorganization or relief under the Federal Bankruptcy Code or any other
applicable federal or state law, or the consent by it to the filing of any such
petition or to the appointment of a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company or the Parent or any
Significant Subsidiary or of any substantial part of its property, or the making
by it of an assignment for the benefit of creditors, or the admission by it in
writing of its inability to pay its debts generally as they become due;
(h) the Amended and Restated Pledge Agreement ceases to be in full
force and effect before payment in full of the obligations thereunder; or
the Guarantee ceases to be in full force and effect before payment
in full of the obligations thereunder.
"FAIR MARKET VALUE" means, with respect to any asset or property,
the sale value that would be obtained in an arms' length transaction between an
informed and willing seller under no compulsion to sell and an informed and
willing buyer under no compulsion to buy. Unless otherwise specified in the
Indenture, Fair Market Value shall be determined by the Board of Directors of
the Parent acting in good faith and as of the date on which such determination
is made.
"GUARANTEE" means the guarantee dated as of [ ], 2000 by the
Parent for the benefit of each of the Holders of the outstanding Notes, a copy
of which is attached to this Supplemental Indenture as Exhibit 1.
"INCUMBENT" means any railroad, utility, governmental entity,
pipeline or other licensed owner (which ownership is determined immediately
prior to any transaction with a Restricted Entity) of Telecommunications Assets
to be used in the network of the Company or the Parent 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 a Restricted
Entity pursuant to such agreement).
"INCUMBENT AGREEMENT" means an agreement between an Incumbent and a
Restricted Entity pursuant to which, among other things, such Incumbent receives
a payment equal to such Restricted Entity'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 such
Restricted Entity and upon or with respect to which such Restricted Entity has
constructed or intends to construct a portion of its network.
"INCUR" OR "INCUR" means, with respect to any Indebtedness, to
incur, create, issue, assume, guarantee or otherwise become directly or
indirectly liable or responsible for the payment of, or otherwise incur, such
Indebtedness, contingently or otherwise; provided that neither the accrual of
interest nor the accretion of original issue discount shall be considered an
incurrence of Indebtedness. With respect to Indebtedness to be borrowed under a
binding commitment previously entered into that provides for the Company or the
Parent to Incur Indebtedness on a revolving basis, the Company or the Parent (as
the case may be) shall be deemed to have Incurred the greater of:
(a) the Indebtedness actually Incurred; or
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(b) all or a portion of the amount of such unborrowed commitment
that the Company or the Parent (as the case may be) shall have so designated to
be Incurred in an Officer's Certificate delivered to the Trustee (in which case
the Company or the Parent (as the case may be) 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);
(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 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 the Parent 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
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Indebtedness shall be required to be determined pursuant to this 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.
"INVESTED CAPITAL" means the sum of:
(a) 75% of the aggregate net cash proceeds received by the Company
from the issuance of (or capital contributions with respect to) any Qualified
Capital Stock of the Company subsequent to the Issue Date, or received by the
Parent from the issuance of (or capital contribution with respect to) Qualified
Capital Stock of the Parent subsequent to the Amendment Date, other than the
Issuance of Qualified Capital Stock to the Company or to a Restricted
Subsidiary; and
(b) 75% of the aggregate net proceeds from sales of Redeemable
Capital Stock of the Company or the Parent or Indebtedness of the Company or the
Parent convertible into Qualified Capital Stock of the Company or the Parent (as
the case may be), in each case upon such redemption or conversion thereof into
Qualified Capital Stock.
"INVESTMENT" means, with respect to the Parent's or the Company's
investment with any Person, any direct or indirect advance, loan or other
extension of credit or capital contribution to (by means of any transfer of cash
or other property to others or any payment for property or services for the
account or use of others) or any purchase, acquisition or ownership by such
Person of any Capital Stock, bonds, notes, debentures or other securities or
evidences of Indebtedness issued or owned by, any other Person and all other
items that would be classified as investments on a balance sheet prepared in
accordance with GAAP. In addition, the portion (proportionate to the Company's
or the Parent's equity interest in such Subsidiary) of the Fair Market Value of
the net assets of any Subsidiary at the time that such Subsidiary is designated
an Unrestricted Subsidiary shall be deemed to be an "Investment" made by the
Company or the Parent (as the case may be) in such Unrestricted Subsidiary at
such time and the portion (proportionate to the Company's or the Parent'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.
"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 any Restricted Entity), 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 any Restricted Entity) owning a beneficial
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<PAGE> 18
interest in the assets subject to the Asset Sale and (v) appropriate amounts to
be provided by any Restricted Entity, as the case may be, as a reserve required
in accordance with GAAP against any liabilities associated with such Asset Sale
and retained by any Restricted Entity after such Asset Sale, including 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 of
the Parent or the Company, as the case may be, 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 in Section 1012(b)(3), the proceeds of such
issuance or sale in the form of cash or Cash Equivalents, including payments in
respect of deferred payment obligations when received in the form of, or stock
or other assets when disposed of for, cash or Cash Equivalents (except to the
extent that such obligations are financed or sold with recourse to the Parent or
any Subsidiary of the Parent), 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.
"NEW PLEDGED SECURITIES" means the securities purchased by the
Company to be deposited in the Escrow Account as security for the fifth
scheduled interest payment on the Notes pursuant to the Indenture.
"OFFICERS' CERTIFICATE" means a certificate signed by the Chairman,
the CEO, the President or any executive vice president or vice president, and by
the Treasurer, an assistant treasurer, the Secretary or an assistant secretary
of the Company (when used with respect to the Company) or of the Parent (when
used with respect to the Parent), and, in each case, delivered to the Trustee.
"PARENT" means Pathnet Telecommunications, Inc. a corporation
organized and existing under the laws of the state of Delaware.
"PARENT REQUEST" or "PARENT ORDER" means a written request or order
signed in the name of the Parent by its Chairman, its Chief Executive Officer
("CEO"), its President, any executive vice president or vice president or the
Treasurer and delivered to the Trustee.
"PERMITTED HOLDER" means, when used with respect to the Company,
Spectrum Equity Investors, L.P., New Enterprise Associates VI, Limited
Partnership, Onset Enterprise Associates II, L.P., FBR Technology Venture
Partners L.P., Toronto Dominion Capital (USA), Inc. and Grotech Partners IV,
L.P, any general partner of any such Person on the Issue Date, and any Person
controlled by any such general partner, David Schaeffer or Richard A. Jalkult
and, when used with respect to the Parent or any other Affiliate of the Parent
other than the Company, means [ ].
"PERMITTED INDEBTEDNESS" means:
(a) Indebtedness of the Company pursuant to the Notes or of the
Parent pursuant to the Guarantee;
(b) Indebtedness of the Company or any Restricted Company Subsidiary
outstanding on the Issue Date or Indebtedness of the Parent or any Restricted
Parent Subsidiary outstanding on the Amendment Date;
(c) Indebtedness of the Company or the Parent owing to any
Restricted Subsidiary or of the Parent owing to the Company (but only so long as
such Indebtedness is held by such Restricted Subsidiary) or by the Company, as
the case may be; provided that any Indebtedness of the Company or the Parent (as
the case may be) owing to any such Restricted
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<PAGE> 19
Subsidiary or the Company 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 by the Company or
the Parent (as the case may be) of its obligations under the Notes or the
Guarantee; and provided further that any transaction pursuant to which any
Restricted Subsidiary or the Company to which such Indebtedness is owed ceases
to be a Restricted Subsidiary or, in the case of the Company, a Subsidiary of
the Parent, shall be deemed to be an incurrence of Indebtedness by the Parent or
the Company that is not permitted by this clause (c);
(d) Indebtedness of any Restricted Subsidiary owing to the Company
or the Parent, of the Company owing to the Parent or of any Restricted
Subsidiary owing to another Restricted Subsidiary;
(e) Indebtedness of any Restricted Entity in respect of performance,
surety or appeal bonds or under letter of credit facilities provided in the
ordinary course of business and, in the case of letters of credit, under which
recourse to the Company or the Parent is limited to the cash securing such
letters of credit;
(f) Indebtedness of any Restricted Entity under Currency Agreements
and Interest Rate Agreements entered into in the ordinary course of business;
provided that such agreements are designed to protect any Restricted Entity
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 any Restricted Entity consisting of guarantees,
indemnities or obligations in connection with (1) Telecommunications
Indebtedness, (2) Indebtedness permitted under clause (j) or (m) of this
"Permitted Indebtedness" definition or (3) in respect of purchase price
adjustments in connection with the acquisition of or disposition of assets,
including shares of Capital Stock;
(i) Indebtedness of the Company or the Parent (or consolidated
Indebtedness of the Company and the Parent) 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 an issuance and sale by the Company to a Restricted
Subsidiary or issuance and sale by the Parent to the Company or to any
Restricted Subsidiary, of Qualified Capital Stock of the Company or the Parent,
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 Section
1012 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 any Restricted Entity 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
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<PAGE> 20
time outstanding the greater of (x) 80% of eligible consolidated accounts
receivable of the Company and the Parent as of the last fiscal quarter for which
financial statements are prepared or (y) $50,000,000 (or the equivalent thereof
in one or more foreign currencies); and any Indebtedness issued in exchange for,
or the net proceeds of which are used to refinance or refund, Indebtedness
incurred 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 any Restricted Entity issued in exchange for, or
the net proceeds of which are used to refinance or refund, then-outstanding
Indebtedness of any Restricted Entity incurred under the ratio test set forth in
clause (i) or (ii) of Section 1011 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 Section 1011 will mature prior to the Stated
Maturity of the Notes or have an Average Life shorter than the Notes; provided
further that in no event may Indebtedness of the Company or the Parent be
refinanced by means of any Indebtedness of any Restricted Subsidiary (in the
case of the Company) or of the Company or any Restricted Subsidiary (in the case
of the Parent) 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 any Restricted Entity in addition to that
permitted to be incurred pursuant to clauses (a) through (l) above in an
aggregate principal amount not in excess of $30,000,000 (or the equivalent
thereof in one or more foreign currencies) at any time outstanding.
"PERMITTED INVESTMENT" means any of the following:
(a) Investments in Cash Equivalents; provided that the term "with a
maturity of 180 days or less" in clauses (a), (b) and (c) of the definition of
"Cash Equivalents" is changed to "with a maturity of one year or less" for the
purposes of this definition of "Permitted Investments" only;
(b) Investments in any Restricted Entity;
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<PAGE> 21
(c) Investments by any Restricted Entity in another Person if, as a
result of such Investment, (i) such other Person becomes a Restricted Entity or
(ii) such other Person is merged or consolidated with or into, or transfers or
conveys all or substantially all of its assets to a Restricted Entity;
(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 by the Company or any Restricted Company Subsidiary
in existence on the Issue Date and Investments by the Parent or any Restricted
Parent Subsidiary in existence on the Amendment Date;
(f) Investments in the Pledged Securities to the extent required by
the Amended and Restated Pledge Agreement;
(g) Investments in an amount not to exceed $1,000,000 (or the
equivalent thereof in one or more foreign currencies) 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 the
Company and the Parent, Redeemable Capital Stock of the Company and the Parent
convertible into Qualified Capital Stock of the Company or the Parent (as the
case may be), and Indebtedness of the Company and the Parent convertible into
Qualified Capital Stock of the Company or the Parent (as the case may be), in
the latter two cases upon such redemption or conversion thereof into Qualified
Capital Stock of the Company or the Parent (as the case may be), issued by any
Restricted Entity 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 to a Restricted Subsidiary), 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 Section 1012;
(i) Investments in trade receivables, prepaid expenses, negotiable
instruments held for collection and lease, utility and worker's compensation,
performance and other similar deposits or escrow;
(j) Loans, advances and extensions of credit to employees made in
the ordinary course of business of the Company or the Parent not in excess of
$500,000 (or the equivalent thereof in one or more foreign currencies) in any
fiscal year;
(k) Bonds, notes, debentures or other securities evidencing
indebtedness received as a result of Asset Sales permitted under Section 1017;
(l) Endorsements for collection or deposit in the ordinary course of
business by any Restricted Entity of bank drafts and similar negotiable
instruments of any 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;
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<PAGE> 22
(n) Investments in or acquisitions of Capital Stock, indebtedness,
securities or other property of Persons (other than Affiliates of the Company or
the Parent) received by the any Restricted Entity in the bankruptcy or
reorganization of or by such Person or any exchange of such Investment with the
issuer thereof or taken in settlement of or other resolution of claim or
disputes, and, in each case, extensions, modifications and renewals thereof;
(o) Investments in any Person to which Telecommunications Assets
used in an Initial System have been transferred and which person has provided to
a Restricted Entity the right to use such assets pursuant to an Incumbent
Agreement; provided that, in the good faith determination of the Board of
Directors of the Parent or the Company, as the case may be, the present value of
the future payments expected to be received by the Company or the Parent in
respect of any such Investment plus the Fair Market Value of any capital stock
or other securities received in connection therewith shall be 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 $20,000,000 (or the equivalent thereof in one
or more foreign currencies).
"PERMITTED LIENS" means:
(a) Liens existing on the Issue Date, when used with respect to the
Company or any Restricted Company Subsidiary, or Liens existing on the Amendment
Date, when used with respect to the Parent or any Restricted Parent Subsidiary;
(b) Liens on any property or assets of the Company or any Restricted
Subsidiary granted in favor of any Restricted Entity;
(c) Liens on any property or assets of the Company or any Restricted
Subsidiary securing the Notes or the Guarantee;
(d) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease permitted by this 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 any Restricted Entity 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,
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<PAGE> 23
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 any
Restricted Entity incurred in the ordinary course of business;
(j) Liens arising by reason of any judgment, decree or order of any
court so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such judgment,
decree or order shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired;
(k) Liens securing Acquired Indebtedness created prior to (and not
in connection with or in contemplation of) the incurrence of such Indebtedness
by any Restricted Entity; provided that such Lien does not extend to any
property or assets of any Restricted Entity other than the assets acquired in
connection with the incurrence of such Acquired Indebtedness;
(l) Liens securing obligations of the Company or the Parent 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 any Restricted
Entity 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 any Restricted Entity 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 Amended and
Restated Pledge Agreement;
(q) any extension, renewal or replacement, in whole or in part, of
any Lien described in the foregoing clauses (a) through (o); provided that any
such extension, renewal or replacement shall be no more restrictive in any
material respect than the Lien so extended, renewed or replaced and shall not
extend to any additional property or assets;
(r) Liens with respect to the equipment and related assets of the
Company or the Parent installed on their respective networks in favor of Persons
that have licensed, leased, transferred or granted to any Restricted Entity a
right to use Telecommunications Assets or financed the purchase of
Telecommunications Assets or securing the obligations of such Restricted Entity
under an Incumbent Agreement; provided that such Liens will (1) be created on
terms that the Company or the Parent (as the case may be) reasonably believes to
be no less favorable to the Company or the Parent 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;
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<PAGE> 24
(s) Liens relating to revenues of any Restricted Entity arising as a
result of obligations under an Incumbent Agreement; and
(t) Liens on the property or assets or Capital Stock of Accounts
Receivable Subsidiaries and Liens arising out of any sale of Accounts Receivable
in the ordinary course of business (including in connection with a financing
transaction) to or by an Accounts Receivable Subsidiary or to Persons that are
not Affiliates of the Company or the Parent.
"PERMITTED TELECOMMUNICATIONS ASSET SALE" means any transfer,
conveyance, sale, lease or other disposition of a capital asset that is a
Telecommunications Asset, the proceeds of which are treated as revenues
(including deferred revenues) by the Parent or the Company in accordance with
GAAP.
"PERMITTED TELECOMMUNICATIONS JOINT VENTURE" means a corporation,
partnership or other entity engaged in one or more Telecommunications Business
in which the Company or the Parent owns, directly or indirectly, an equity
interest.
"PLEDGED SECURITIES" means the securities, consisting of Government
Securities, deposited in the Escrow Account pursuant to the Original Pledge
Agreement together with the New Pledged Securities.
"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 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 that then provisions
contained in Section 1017 and Section 1010 are to holders of the Notes and the
Guarantees, and such Capital Stock specifically provides that such Person will
not repurchase or redeem any such Capital Stock pursuant to any provision prior
to the repurchase by the Company or the Parent of such Notes and Guarantees as
are required to be repurchased pursuant to Section 1017 and Section 1010.
"RESTRICTED COMPANY SUBSIDIARY" means any Subsidiary of the Company
other than an Unrestricted Subsidiary.
"RESTRICTED ENTITY" means (i) any Restricted Subsidiary, (ii) the
Parent, and (iii) the Company.
"RESTRICTED PARENT SUBSIDIARY" means any Subsidiary of the Parent
other than (i) the Company, (ii) a Restricted Company Subsidiary, and (iii) an
Unrestricted Subsidiary.
"RESTRICTED SUBSIDIARY" means any Restricted Company Subsidiary and
any Restricted Parent Subsidiary.
"SALE-LEASEBACK TRANSACTION" means any direct or indirect
arrangement, or series of related arrangements, with any Person (other than a
Restricted Entity) or to which any Person (other than a Restricted Entity) is a
party, providing for the leasing to a Restricted Entity of any property for an
aggregate term exceeding three years, whether owned by the Company,
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<PAGE> 25
the Parent or by any Subsidiary of either of them at the Issue Date or later
acquired, which has been or is to be sold or transferred by such Restricted
Entity 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 any Restricted Entity of Telecommunications Assets to, and the
leasing by any Restricted Entity of such assets from, a Permitted
Telecommunications Joint Venture shall not constitute a Sale-Leaseback
Transaction.
"SIGNIFICANT SUBSIDIARY" means at any date of determination, the
Company and any Restricted Subsidiary that, together with its Subsidiaries, (i)
for the most recent fiscal year of the Parent accounted for more than 10% of the
consolidated revenues of the Parent and the Restricted Parent Subsidiaries, (ii)
as of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Parent and the Restricted Parent Subsidiaries, or
(iii) owns one or more FCC licenses the aggregate cost or Fair Market Value of
which represents 5% or more of the net asset value of the Parent and the
Restricted Parent Subsidiaries on a consolidated basis as of the end of such
fiscal year, in the case of (i), (ii) or (iii) as set forth on the most recently
available consolidated financial statements of the Parent for such fiscal year.
"SUBSIDIARY" means, any Person a majority of the equity ownership or
Voting Stock of which is at the time owned, directly or indirectly, by the
Parent or by one or more other Subsidiaries or by the Parent and one or more
other Subsidiaries, unless used with respect to the Company, in which event as
shall mean any Person a majority of the equity ownership or Voting Stock of
which is at the time owned, directly or indirectly, by the Company or by one or
more other of its Subsidiaries or by the Company and one or more other its
Subsidiaries.
"TELECOMMUNICATIONS ASSETS" means, with respect to any Person,
assets (including rights of way, trademarks and licenses) other than current
assets that are utilized by such Person, directly or indirectly, for the design,
development, construction, installation, integration or provision of the
Company's or the Parent's network, including, without limitation, any businesses
or services in which the Company or the Parent is currently engaged and
including any computer systems used in a Telecommunications Business.
Telecommunications Assets 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 a Restricted Entity, such other Person either is, or
immediately following the relevant transaction shall become, a Restricted
Subsidiary pursuant to this Indenture or a Permitted Telecommunications Joint
Venture subject to the limitations set forth under clause (p) of the definition
of "Permitted Investment" contained in Section 102 of this Supplemental
Indenture. The determination of what constitutes Telecommunications Assets shall
be made by the Board of Directors of the Parent and evidenced by a Board
Resolution delivered to the Trustee.
"TELECOMMUNICATIONS BUSINESS" means, the business of (i)
transmitting, or providing services relating to the transmission of, voice,
video or data through owned or leased transmission facilities, (ii)
constructing, creating, developing, acquiring or marketing Telecommunication
Assets or other communications related network equipment, software and other
devices for use in a telecommunications business or (iii) evaluating,
participating or pursuing any other activity or opportunity that is primarily
related to those identified in clause (i) or (ii) above; provided that the
determination of what constitutes a Telecommunications Business shall be made in
good faith by the Board of Directors of the Parent or the Company, as the case
may be.
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"TELECOMMUNICATIONS INDEBTEDNESS" means Indebtedness of any
Restricted Entity 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 any Restricted Entity of any new
Telecommunications Assets; provided that the proceeds of such Indebtedness are
expended for such purposes within such 315-day period; and provided further that
the Net Cash Proceeds from the issuance of such Indebtedness does not exceed, as
of the date of incurrence thereof, 100% of the lesser of the cost or Fair Market
Value of such Telecommunications Assets; provided further that, to the extent an
Incumbent Agreement is characterized as a Capitalized Lease Obligation, it shall
be considered Telecommunications Indebtedness.
"UNRESTRICTED SUBSIDIARY" means:
(a) any Subsidiary that at the time of determination shall be an
Unrestricted Subsidiary (as designated by the Board of
Directors of the Parent as provided below); and
(b) any Subsidiary of an Unrestricted Subsidiary.
The Board of Directors of the Parent may designate any Subsidiary
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary so long as (i) neither the Company, the Parent nor any other
Subsidiary is directly or indirectly liable for any Indebtedness of such
Subsidiary, (ii) no default with respect to any Indebtedness of such Subsidiary
would permit (upon notice, lapse of time or otherwise) any holder of any other
Indebtedness of the Company or the Parent 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 Section 1012, (iv) no Restricted
Entity has a contract, agreement, arrangement, understanding or obligation of
any kind, whether written or oral, with such Subsidiary other than those that
might be obtained at the time from persons who are not Affiliates of the Parent,
and (v) none of the Company, the Parent, nor any other Subsidiary of either of
them has any obligation (1) to subscribe for additional shares of Capital Stock
or other equity interest in such Subsidiary, or (2) to maintain or preserve such
Subsidiary's financial condition or to cause such Subsidiary to achieve certain
levels of operating results. Any such designation by the Board of Directors of
the Parent shall be evidenced to the Trustee by filing a Board Resolution with
the Trustee giving effect to such designation. The Board of Directors 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 this Indenture and the Company or the Parent (as the case may be)
could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to Section 1011.
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SECTION 103. DEFINITIONS FOR PURPOSES OF SECTION 1017(a).
The following definitions will apply for the purposes of
interpretation of Section 1017(a) and the defined terms contained in this
Section 103. Capitalized terms used in Section 1017(a) or in this Section 103
which are not defined in this Section 103 shall be given the meaning ascribed to
them in Section 102 of this Supplemental Indenture, or, if such term is not
defined in such Section 102, in Section 101 of the Indenture.
"ACCOUNTS RECEIVABLE SUBSIDIARY" means any Restricted Company
Subsidiary that is, directly or indirectly, wholly owned by the Company (other
than directors qualifying shares) and organized for the purpose of and engaged
in (i) purchasing, financing and collecting accounts receivable obligations of
customers of any Restricted Company Subsidiary, (ii) the sale or financing of
accounts receivable or interests therein and (iii) other activities directly
related thereto.
"ALLOWABLE COMPANY INDEBTEDNESS" means Indebtedness incurred by the
Company if, at the time of such incurrence, the Consolidated Indebtedness to
Consolidated Operating Cash Flow Ratio would have been less than or equal to (i)
6.0 to 1.0 but greater than zero, for Indebtedness incurred on or prior to
December 31, 2001, or (ii) 5.0 to 1.0 but greater than zero for Indebtedness
incurred thereafter.
"ASSET SALE" means any sale, issuance, conveyance, transfer, lease
or other disposition (including by way of merger, consolidation or
Sale-Leaseback Transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Capital Stock
of any Subsidiary of the Company; (ii) all or substantially all of the
properties and assets of the Company or any Subsidiary of the Company; or (iii)
any other properties or assets of the Company or any Subsidiary of the Company,
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 constitutes a Permitted Transaction, (B) of the Company to
any Restricted Company Subsidiary, or of any Restricted Company Subsidiary to
the Company or any other Restricted Company Subsidiary in accordance with the
terms of this Indenture, (C) having an aggregate Fair Market Value of less than
$2,000,000 (or the equivalent thereof in any other currency) in any given fiscal
year, (D) by the Company or a Restricted Company Subsidiary to a Person who is
not an Affiliate of the Company in exchange for Telecommunications Assets (or
not less than 66 2/3% of the outstanding Voting Stock of a Person that becomes a
Restricted Company Subsidiary, the assets of which consist primarily of
Telecommunications Assets) or related telecommunications services where, in the
good faith Judgment of the Board of Directors of the Company evidenced by a
Board Resolution, the Fair Market Value of such Telecommunications Assets (or
such Voting Stock) or services so received is at least equal to the Fair Market
Value of the properties or assets disposed of or, if less, the difference is
received by the Company in cash in an amount at least equal to such difference,
(E) constituting Capital Stock of an Unrestricted Company Subsidiary or other
Investment that was not a Restricted Payment when made, (F) constituting
accounts receivable of the Company or a Restricted Company Subsidiary to an
Accounts Receivable Subsidiary or in consideration of Fair Market Value thereof,
to Persons that are not Affiliates of the Company or any Subsidiary of the
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Company in the ordinary course of business, including in connection with
financing transactions, (G) in connection with a Sale-Leaseback Transaction
otherwise permitted to be incurred as Permitted Indebtedness or as Allowable
Company Indebtedness, (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 Company Subsidiary if not a Restricted
Payment.
"BOARD OF DIRECTORS" means, either the board of directors of the
Company or any duly authorized committee of that board.
"BOARD RESOLUTION" means, a copy of a resolution certified by the
Secretary or an Assistant Secretary of the Company to have been duly adopted by
the Board of Directors of the Company and to be in full force and effect on the
date of such certification, and delivered to the Trustee.
"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 acceptance 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 $500,000,000;
(c) commercial paper with a maturity of 180 days or less issued by a
corporation that is not an Affiliate of the Company and is organized under the
laws of any state of the United States and rated at least A-1 by S&P or at least
P-1 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.
"CONSOLIDATED ADJUSTED NET INCOME" means, with respect to any
period, the consolidated net income (or loss) of the Company and all Restricted
Company Subsidiaries for such period as determined in accordance with GAAP,
adjusted by excluding, without duplication:
(a) any net after-tax extraordinary gains or losses (less all fees
and expenses relating thereto);
(b) any net after-tax gains or losses (less all fees and expenses
relating thereto) attributable to asset dispositions other than in the ordinary
course of business;
(c) the portion of net income (or loss) of any Person (other than
the Company or a Restricted Company Subsidiary), including Unrestricted
Subsidiaries, in which the Company or any Restricted Company Subsidiary has an
ownership interest, except to the extent of the amount of dividends or other
distributions actually paid to the Company or any Restricted Company Subsidiary
in cash dividends or distributions during such period;
(d) the net income (or loss) of any Person combined with the Company
or any Restricted Company Subsidiary on a "pooling of interests" basis
attributable to any period prior to the date of combination;
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(e) the net income of any Restricted Company Subsidiary to the
extent that the declaration or payment of dividends or similar distributions by
such Restricted Company 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 Company Subsidiary or its
stockholders (except, for purposes of determining whether any Indebtedness is
Allowable Company Indebtedness, any Permitted Restriction); and
(f) any net income (or loss) from any Restricted Company Subsidiary
that was an Unrestricted Company Subsidiary at any time during such period other
than any amounts actually received from such Restricted Company Subsidiary.
"CONSOLIDATED INDEBTEDNESS" means, with respect to any period, the
aggregate amount of Indebtedness of the Company and its Restricted Company
Subsidiaries outstanding at the date of determination as determined on a
consolidated basis in accordance with GAAP.
"CONSOLIDATED INDEBTEDNESS TO CONSOLIDATED OPERATING CASH FLOW
RATIO" means, at any date of determination, the ratio of (i) Consolidated
Indebtedness to (ii) Consolidated Operating Cash Flow for the two preceding
fiscal quarters for which financial information is available immediately prior
to the date of determination, multiplied by two; provided that any Indebtedness
incurred or retired by the Company or any of its Restricted Company 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
further that, in making any such computation, the aggregate amount of
Indebtedness under any revolving credit or similar facility shall be deemed to
include an amount of funds equal to the average daily balance of such
Indebtedness during such two fiscal quarter period); and provided further that
(x) if the transaction giving rise to the need to calculate the Consolidated
Indebtedness to Consolidated Operating Cash Flow Ratio would have the effect of
increasing or decreasing Consolidated Indebtedness or Consolidated Operating
Cash Flow in the future, Consolidated Indebtedness and Consolidated Operating
Cash Flow 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, the Company or
any of its Restricted Company Subsidiaries shall have engaged in any Asset Sale
in respect of any company, entity or business, Consolidated Operating Cash Flow
for such period shall be reduced by an amount equal to the Consolidated
Operating Cash Flow (if positive), or increased by an amount equal to the
Consolidated Operating Cash Flow (if negative), directly attributable to the
company, entity or business that is the subject of such Asset Sale and any
related retirement of Indebtedness as if such Asset Sale and any related
retirement of Indebtedness had occurred on the first day of such period; or (z)
if during such two fiscal quarter period the Company or any of its Restricted
Company 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 any 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 consolidated interest expense of the Company and its
Restricted Company Subsidiaries for such period, including (i) amortization of
debt discount, (ii) the net cost of
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Interest Rate Agreements (including amortization of discounts), (iii) the
interest portion of any deferred payment obligation, (iv) accrued interest, (v)
the consolidated amount of any interest capitalized by the Company and (vi)
amortization of debt issuance costs, plus
(b) the consolidated interest component of Capitalized Lease
Obligations of the Company and its Restricted Company Subsidiaries paid, accrued
and/or scheduled to be paid or accrued during such period; excluding, however,
any amount of such interest of any Restricted Company Subsidiary if the net
income of such Restricted Company 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
Company Subsidiary is excluded from the calculation of Consolidated Adjusted Net
Income pursuant to clause (e) of the definition thereof); provided that in
making such computation, (x) the Consolidated Interest Expense attributable to
interest on any Indebtedness computed on a pro forma basis and (A) bearing a
floating interest rate shall be computed as if the rate in effect on the date of
computation had been the applicable rate for the entire period and (B) which was
not outstanding during the period for which the computation is being made but
which bears, at the option of the Company, a fixed or floating rate of interest,
shall be computed by applying, at the option of the Company, either the fixed or
floating rate, (y) the Consolidated Interest Expense attributable to interest on
any Indebtedness under a revolving credit facility computed on a pro forma basis
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 of such
Restricted Company Subsidiaries as are subject to the immediately preceding
parenthetical clause for such period (other than taxes attributable to
extraordinary, unusual or non-recurring gains or losses); (ii) Consolidated
Interest Expense for such period; (iii) depreciation of the Company and the
Restricted Company Subsidiaries for such period, determined on a consolidated
basis in accordance with GAAP; (iv) amortization of the Company and the
Restricted Company Subsidiaries for such period, determined on a consolidated
basis in accordance with GAAP; and (v) any other non-cash charges that were
deducted in computing Consolidated Adjusted Net Income (excluding any non-cash
charge which requires an accrual or reserve for cash charges for any future
period) of the Company and its Restricted Company Subsidiaries for such period
in accordance with GAAP; and
(b) decreased by any non-cash gains of the Company and the
Restricted Company Subsidiaries that were included in computing Consolidated
Adjusted Net Income.
"CONSOLIDATED TAX EXPENSE" means, for any period, the provision for
U.S. federal, state, provincial, local and foreign income taxes of the Company
and the Restricted Company Subsidiaries for such period as determined on a
consolidated basis in accordance with GAAP.
"EVENT OF DEFAULT" means any one of the following events (whatever
the reason for such Event of Default and whether it shall be voluntary or
involuntary or be effected by
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<PAGE> 31
operation of law or pursuant to any judgment, decree or order of any court or
any order, rule or regulation of any administrative or governmental body):
(a) default in the payment of any interest 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);
(b) default in the payment of the principal of (or premium, if any,
on) any Note at its Maturity (upon acceleration, optional redemption, required
purchase or otherwise);
(c) default in the performance, or breach, of any covenant or
agreement of the Company contained in this 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 (a) or (b) or in clause (B), (C)
or (D) of this clause (c)) and continuance of such default or breach for a
period of 30 days after written notice shall have been given to the Company by
the Trustee or to the Company and the Trustee by the Holders of at least 25% in
aggregate principal amount of the Notes then Outstanding; (B) default in the
performance or breach of the provisions of Section 1017; (C) completion of any
transaction or series of transactions pursuant to which the Company consolidates
with or merges into any other Person or sells, assigns, conveys, transfers,
leases or otherwise disposes of all of the properties and assets of the Company
and the Restricted Subsidiaries on a consolidated basis to any other Person or
Persons, which does not constitute a Permitted Transaction; and (D) default in
the performance or breach of Section 1010;
(d) (A) one or more defaults in the payment of principal of or
premium, if any, or interest on Indebtedness of the Company or any Significant
Subsidiary aggregating $7,500,000 or more, when the same becomes due and payable
at the Stated Maturity thereof, and such default or defaults shall have
continued after any applicable grace period and shall not have been cured or
waived or (B) Indebtedness of the Company or any Significant Subsidiary
aggregating $7,500,000 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;
(e) one or more final judgments, orders or decrees of any court or
regulatory agency shall be rendered against the Company or any Significant
Subsidiary or their respective properties for the payment of money, either
individually or in an aggregate amount, in excess of $7,500,000 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;
(f) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Company or any Significant Subsidiary as bankrupt or
insolvent, or approving as properly filed a petition seeking reorganization,
arrangement, adjustment or composition of or in respect of the Company or any
Significant Subsidiary under the Federal Bankruptcy Code or any other applicable
federal or state law, or appointing a receiver, liquidator, assignee, trustee,
sequestrator (or other similar official) of the Company or any Significant
Subsidiary or of any substantial part of its property, or ordering the winding
up or liquidation of its affairs, and the continuance of any such decree or
order unstayed and in effect for a period of 90 consecutive days;
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<PAGE> 32
(g) the institution by the Company or any Significant Subsidiary of
proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to
the institution of bankruptcy or insolvency proceedings against it, or the
filing by it of a petition or answer or consent seeking reorganization or relief
under the Federal Bankruptcy Code or any other applicable federal or state law,
or the consent by it to the filing of any such petition or to the appointment of
a receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Company or any Significant Subsidiary or of any substantial
part of its property, or the making by it of an assignment for the benefit of
creditors, or the admission by it in writing of its inability to pay its debts
generally as they become due; or
(h) the Pledge Agreement ceases to be in full force and effect
before payment in full of the obligations thereunder.
"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 herein,
Fair Market Value shall be determined by the Board of Directors acting in good
faith and as of the date on which such determination is made.
"INCUMBENT" means any railroad, utility, governmental entity,
pipeline or other licensed owner (which ownership is determined immediately
prior to any transaction with the Company or a Restricted Company Subsidiary) of
Telecommunications Assets to be used in the Company's network pursuant to an
Incumbent Agreement (and any subsidiary or Affiliate of such Person that is a
party to an Incumbent Agreement for the sole purpose of receiving payments from
the Company or a Restricted Company Subsidiary pursuant to such agreement).
"INCUMBENT AGREEMENT" means an agreement between an Incumbent and
the Company or a Restricted Company Subsidiary pursuant to which, among other
things, such Incumbent receives a payment equal to a percentage of the Company's
or such Restricted Company Subsidiary's revenues, if any, attributable, in whole
or in part, to Telecommunications Assets transferred or leased, or with respect
to which a right of use has been granted, by such Incumbent to the Company or
such Restricted Company Subsidiary and upon or with respect to which the Company
or such Restricted Company Subsidiary has constructed or intends to construct a
portion of its network.
"INCUR" OR "INCUR" means, with respect to any Indebtedness, to
incur, create, issue, assume, guarantee or otherwise become directly or
indirectly liable or responsible for the payment of, or otherwise incur, such
Indebtedness, contingently or otherwise; provided that neither the accrual of
interest nor the accretion of original issue discount shall be considered an
incurrence of Indebtedness. With respect to Indebtedness to be borrowed under a
binding commitment previously entered into that provides for the Company to
Incur Indebtedness on a revolving basis, the Company shall be deemed to have
Incurred the greater of (a) the Indebtedness actually Incurred or (b) all or a
portion of the amount of such unborrowed commitment that the Company shall have
so designated to be Incurred in an Officer's Certificate delivered to the
Trustee (in which case the Company 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:
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(a) all liabilities, contingent or otherwise, of such Person: (i)
for borrowed money (including overdrafts), (ii) in connection with any letters
of credit and acceptances issued under letter of credit facilities, acceptance
facilities or other similar facilities (including reimbursement obligations with
respect thereto), (iii) evidenced by bonds, notes, debentures or other similar
instruments, (iv) for the deferred and unpaid purchase price of property or
services or created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person or (v) for
Capitalized Lease Obligations (including any Sale-Leaseback Transaction);
(b) all obligations of such Person under or in respect of Interest
Rate Agreements and Currency Agreements;
(c) all Indebtedness referred to in (but not excluded from) the
preceding clauses of other Persons and all dividends of other Persons, the
payment of which is secured by (or for which the holder of such Indebtedness has
an existing right, contingent or otherwise, to be secured by) any Lien upon or
with respect to any property (including 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 the Company to have been Incurred on
such date pursuant to clause (b) of the last sentence of the definition of
"Incur") of all unconditional obligations as described above and, with respect
to contingent obligations, the maximum liability upon the occurrence of the
contingency giving rise to the obligation; provided (i) that the amount
outstanding at any time of any Indebtedness issued with original issue discount
equals the face amount of such Indebtedness less the remaining unamortized
portion of the original issue discount of such Indebtedness at such time as
determined in conformity with GAAP and (ii) that Indebtedness shall not include
any liability for U.S. federal, state, local or other taxes owed by such Person.
For purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to this 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.
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"INVESTED CAPITAL" means the sum of:
(a) 75% of the aggregate net cash proceeds received by the Company
from the issuance of (or capital contributions with respect to) any Qualified
Capital Stock subsequent to the Issue Date, other than the issuance of Qualified
Capital Stock to a Restricted Company Subsidiary; and
(b) 75% of the aggregate net cash proceeds from sales of Redeemable
Capital Stock of the Company or Indebtedness of the Company convertible into
Qualified Capital Stock of the Company, in each case upon such redemption or
conversion thereof into Qualified Capital Stock.
"INVESTMENT" means, with respect to the Company's relationship with
any Person, any direct or indirect advance, loan or other extension of credit or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of others)
or any purchase, acquisition or ownership by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
or owned by, any other Person and all other items that would be classified as
investments on a balance sheet prepared in accordance with GAAP. In addition,
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the Fair Market Value of the net assets of any Subsidiary at the time that
such Subsidiary is designated an Unrestricted Company Subsidiary shall be deemed
to be an "Investment" made by the Company in such Unrestricted Company
Subsidiary at such time and the portion (proportionate to the Company's equity
interest in such Subsidiary of the Fair Market Value of the net assets of any
Subsidiary at the time that such Subsidiary is designated a Restricted Company
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.
"NET CASH PROCEEDS" means:
(a) with respect to any Asset Sale, the proceeds thereof in the form
of cash or Cash Equivalents, including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when disposed
of for, cash or Cash Equivalents (except to the extent that such obligations are
financed or sold with recourse to the Company or any Restricted Company
Subsidiary), net of (i) brokerage commissions and other fees and expenses
(including fees and expenses of legal counsel and investment banks) related to
such Asset Sale, (ii) provisions for all taxes payable as a result of such Asset
Sale, (iii) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties which are the subject of
such Asset Sale, (iv) amounts required to be paid to any Person (other than the
Company or any Restricted Company Subsidiary) owning a beneficial interest in
the assets subject to the Asset Sale and (v) appropriate amounts to be provided
by the Company or any Restricted Company Subsidiary, as the case may be, as a
reserve required in accordance with GAAP against any liabilities associated with
such Asset Sale and retained by the Company or any Restricted Company
Subsidiary, as the case may be, after such Asset Sale, including 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
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converted into or exchanged for Qualified Capital Stock, as referred to in the
definition of "Restricted Payment" contained in this Section 103, the proceeds
of such issuance or sale in the form of cash or Cash Equivalents, including
payments in respect of deferred payment obligations when received in the form
of, or stock or other assets when disposed of for, cash or Cash Equivalents
(except to the extent that such obligations are financed or sold with recourse
to the Parent or any Subsidiary of the Parent), 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 INDEBTEDNESS" means:
(a) Indebtedness of the Company pursuant to the Notes or of any
Restricted Company Subsidiary pursuant to a Guarantee of the Notes;
(b) Indebtedness of the Company or any Restricted Company Subsidiary
outstanding on the Issue Date;
(c) Indebtedness of the Company owing to any Restricted Company
Subsidiary (but only so long as such Indebtedness is held by such Restricted
Company Subsidiary); provided that any Indebtedness of the Company owing to any
such Restricted Company Subsidiary is subordinated in right of payment from and
after such time as the Notes shall become due and payable (whether at Stated
Maturity, by acceleration or otherwise) to the payment and performance of the
Company's obligations under the Notes; and provided further that any transaction
pursuant to which any Restricted Company Subsidiary to which such Indebtedness
is owed ceases to be a Restricted Company Subsidiary shall be deemed to be an
incurrence of Indebtedness by the Company that is not permitted by this clause
(c);
(d) Indebtedness of any Restricted Company Subsidiary owing to the
Company or of any Restricted Company Subsidiary owing to another Restricted
Company Subsidiary;
(e) Indebtedness of the Company or any Restricted Company Subsidiary
in respect of performance, surety or appeal bonds or under letter of credit
facilities provided in the ordinary course of business and, in the case of
letters of credit, under which recourse to the Company is limited to the cash
securing such letters of credit;
(f) Indebtedness of the Company under Currency Agreements and
Interest Rate Agreements entered into in the ordinary course of business;
provided that such agreements are designed to protect the Company or any
Restricted Company Subsidiary against, or manage exposure to, fluctuations in
currency exchange rates and interest rates, respectively, and that such
agreements do not increase the Indebtedness of the obligor outstanding at any
time other than as a result of fluctuations in foreign currency exchange rates
or interest rates or by reason of fees, indemnities and compensation payable
thereunder;
(g) Telecommunications Indebtedness and any Indebtedness issued in
exchange for, or the net proceeds of which are used to refinance or refund, such
Telecommunications Indebtedness in an amount not to exceed the amount so
refinanced or refunded (plus premiums, accrued interest, and reasonable fees and
expenses);
(h) Indebtedness of the Company or any Restricted Company Subsidiary
consisting of guarantees, indemnities or obligations in connection with (1)
Telecommunications Indebtedness, (2) Indebtedness permitted under clause (j) or
(m) of this "Permitted Indebtedness" definition or (3) in respect of purchase
price adjustments in connection with the acquisition of or disposition of
assets, including shares of Capital Stock;
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(i) Indebtedness of the Company not to exceed, at any time
outstanding, 2.0 times the Net Cash Proceeds from the issuance and sale after
the Issue Date, other than to a Restricted Company Subsidiary, of Qualified
Capital Stock of the Company, to the extent such Net Cash Proceeds have not been
used to make Restricted Payments pursuant to clause (a)(3)(B) or clauses (b)(ii)
and (iii) of the definition of "Restricted Payment" or to make any Permitted
Investments under clause (h) of the definition of Permitted Investments;
provided that such Indebtedness does not mature prior to the Stated Maturity of
the Notes and has an Average Life longer than the Notes;
(j) Indebtedness of the Company or any Restricted Company 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 consolidated accounts
receivable of the Company as of the last fiscal quarter for which financial
statements are prepared or (y) $50,000,000 or the equivalent thereof in one or
more foreign currencies; and any Indebtedness incurred in exchange for, or the
net proceeds of which are used to refinance or refund, Indebtedness issued under
this clause (j) in an amount not to exceed the amount so refinanced or refunded
(plus premiums, accrued interest, and reasonable fees and expenses);
(k) Indebtedness of the Company or a Restricted Company Subsidiary
issued in exchange for, or the net proceeds of which are used to refinance or
refund, then-outstanding Indebtedness of the Company or a Restricted Company
Subsidiary, incurred under the ratio test set forth in clause (i) or (ii) of the
definition of "Allowable Company Indebtedness" 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 definition of "Allowable Company Indebtedness"
will mature prior to the Stated Maturity of the Notes or have an Average Life
shorter than the Notes; provided further that in no event may Indebtedness of
the Company be refinanced by means of any Indebtedness of any Restricted Company
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
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(m) Indebtedness of the Company or any Restricted Company 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 $30,000,000 (or the
equivalent thereof in one or more foreign currencies) at any time outstanding.
"PERMITTED INVESTMENT" means any of the following:
(a) Investments in Cash Equivalents; provided that the term "with a
maturity of 180 days or less" in clauses (a), (b) and (c) of the definition of
"Cash Equivalents" is changed to "with a maturity of one year or less" for the
purposes of this definition of "Permitted Investments" only;
(b) Investments in the Company or any Restricted Company Subsidiary;
(c) Investments by the Company or any Restricted Company Subsidiary
in another Person if, as a result of such Investment, (i) such other Person
becomes a Restricted Company Subsidiary or (ii) such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all of
its assets to, the Company or a Restricted Company 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 $1,000,000 (or the
equivalent thereof in one or more foreign currencies) 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 the
Company, Redeemable Capital Stock of the Company, or Indebtedness of the Company
convertible into Qualified Capital Stock of the Company, in the latter two cases
upon such redemption or conversion thereof into Qualified Capital Stock of the
Company, issued by the Company or any Restricted Company Subsidiary 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 Company Subsidiary to a Restricted Company Subsidiary), 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;
(i) Investments in trade receivables, prepaid expenses, negotiable
instruments held for collection and lease, utility and worker's compensation,
performance and other similar deposits or escrow;
(j) Loans, advances and extensions of credit to employees made in
the ordinary course of business of the Company not in excess of $500,000 (or the
equivalent thereof in one or more foreign currencies) in any fiscal year;
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(k) Bonds, notes, debentures or other securities evidencing
Indebtedness received as a result of Asset Sales permitted under Section 1017);
(l) Endorsements for collection or deposit in the ordinary course of
business by the Company or any Restricted Company Subsidiary of bank drafts and
similar negotiable instruments of any other person received as payment for
ordinary course of business trade receivables;
(m) Investments deemed to have been made as a result of the
acquisition of a Person that at the time of such acquisition held instruments
constituting Investments that were not acquired in contemplation of, or in
connection with, the acquisition of such Person;
(n) Investments in or acquisitions of Capital Stock, indebtedness,
securities or other property of Persons (other than Affiliates of the Company)
received by the Company or any of its Restricted Company Subsidiaries in the
bankruptcy or reorganization of or by such Person or any exchange of such
Investment with the issuer thereof or taken in settlement of or other resolution
of claim or disputes, and, in each case, extensions, modifications and renewals
thereof;
(o) Investments in any Person to which Telecommunications Assets
used in an Initial System have been transferred and which person has provided to
the Company or a Restricted Company Subsidiary the right to use such assets
pursuant to an Incumbent Agreement; provided that, in the good faith
determination of the Board of Directors, the present value of the future
payments expected to be received by the Company in respect of any such
Investment plus the Fair Market Value of any capital stock or other securities
received in connection therewith shall be 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 $20,000,000 (or the equivalent thereof in one
or more foreign currencies).
"PERMITTED LIENS" means:
(a) Liens existing on the Issue Date;
(b) Liens on any property or assets of a Restricted Company
Subsidiary granted in favor of the Company or any Restricted Company Subsidiary;
(c) Liens on any property or assets of the Company or any Restricted
Company 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 this Indenture;
(e) Liens securing Indebtedness incurred under clauses (g), (j) or
(m) of the definition of "Permitted Indebtedness";
(f) statutory Liens of landlords and carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen or other like Liens arising in the
ordinary course of business of the Company or any Restricted Company Subsidiary
and, with respect to amounts not yet delinquent or being contested in good faith
by appropriate proceeding, if a reserve or other
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appropriate provision, if any, as required in conformity with GAAP shall have
been made therefor;
(g) Liens for taxes, assessments, government charges or claims that
are being contested in good faith by appropriate proceedings promptly instituted
and diligently conducted and if a reserve or other appropriate provision, if
any, as shall be required in conformity with GAAP shall have been made therefor;
(h) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory obligations, surety and appeal bonds,
government contracts, performance bonds, escrows and other obligations of a like
nature incurred in the ordinary course of business (other than contracts for the
payment of money);
(i) easements, rights-of-way, restrictions and other similar charges
or encumbrances not interfering in any material respect with the business of the
Company or any Restricted Company Subsidiary incurred in the ordinary course of
business;
(j) Liens arising by reason of any judgment, decree or order of any
court so long as such Lien is adequately bonded and any appropriate legal
proceedings that may have been duly initiated for the review of such judgment,
decree or order shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired;
(k) Liens securing Acquired Indebtedness created prior to (and not
in connection with or in contemplation of) the incurrence of such Indebtedness
by the Company or any Restricted Company Subsidiary; provided that such Lien
does not extend to any property or assets of the Company or any Restricted
Company Subsidiary other than the assets acquired in connection with the
incurrence of such Acquired Indebtedness;
(l) Liens securing obligations of the Company under Interest Rate
Agreements or Currency Agreements permitted to be incurred under clause (f) of
the definition of "Permitted Indebtedness" or any collateral for the
Indebtedness to which such Interest Rate Agreements or Currency Agreements
relate;
(m) Liens incurred or deposits made in the ordinary course of
business in connection with workers' compensation, unemployment insurance and
other types of social security;
(n) Liens securing reimbursement obligations of the Company or any
Restricted Company Subsidiary with respect to letters of credit that encumber
documents and other property relating to such letters of credit and the products
and proceeds thereof;
(o) Liens arising from purchase money mortgages and purchase money
security interests; provided that (i) the related Indebtedness shall not be
secured by any property or assets of the Company or of any Restricted Company
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
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replacement shall be no more restrictive in any material respect than the Lien
so extended, renewed or replaced and shall not extend to any additional property
or assets;
(r) Liens with respect to the equipment and related assets of the
Company installed on its network in favor of Persons that have licensed, leased,
transferred or granted to the Company or any Restricted Company Subsidiary a
right to use Telecommunications Assets or financed the purchase of
Telecommunications Assets or securing the obligations of the Company or such
Restricted Company Subsidiary under an Incumbent Agreement; provided that such
Liens will (1) be created on terms that the Company reasonably believes to be no
less favorable to the Company than Liens granted under clause (e) of this
definition and (2) not secure any Indebtedness in excess of the Fair Market
Value of the equipment and assets so secured;
(s) Liens relating to revenues of the Company or any Restricted
Company Subsidiary arising as a result of obligations under an Incumbent
Agreement; and
(t) Liens on the property or assets or Capital Stock of Accounts
Receivable Subsidiaries and Liens arising out of any sale of Accounts Receivable
in the ordinary course of business (including in connection with a financing
transaction) to or by an Accounts Receivable Subsidiary or to Persons that are
not Affiliates of the Company.
"PERMITTED RESTRICTION" means:
(a) 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 this Indenture for
interest, premium, and Liquidated Damages, if any, and principal less the amount
of cash that is otherwise available to the Company at such time for the payment
of interest, premium and Liquidated Damages, if any, and principal due and
payable in respect of the Notes or this Indenture or (2) if paid, would result
in an event described in the following clause (B) of this sentence, or (B)
during the tendency 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; and
(b) any encumbrance or restriction under the Vendor Credit Facility.
"PERMITTED TELECOMMUNICATIONS ASSET SALE" means any transfer,
conveyance, sale, lease or other disposition of a capital asset that is a
Telecommunications Asset, the proceeds of which are treated as revenues
(including deferred revenues) by the Company in accordance with GAAP.
"PERMITTED TELECOMMUNICATIONS JOINT VENTURE" means a corporation,
partnership or other entity engaged in one or more Telecommunications Business
in which the Company owns, directly or indirectly, an equity interest.
"PERMITTED TRANSACTION" means a transaction or a series of
transactions pursuant to which the Company consolidates with or merges with or
into any other Person or sells, assigns, conveys, transfers, leases or otherwise
disposes of all or substantially all of its properties
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<PAGE> 41
and assets to any other Person or Persons, or pursuant to which any Restricted
Company Subsidiary enters into any such transaction or series of transactions,
provided always that such transaction or series of transactions, shall not be
permitted if it or they in the aggregate would result in the sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of the Company and its Restricted Company Subsidiaries
on a consolidated basis to any other Person or Persons, unless at the time and
immediately after giving effect thereto:
(i) either (A) the Company shall be the continuing corporation
or (B) the Person (if other than the Company) formed by such
consolidation or into which the Company or such Restricted Company
Subsidiary is merged or the Person that acquires by sale,
assignment, conveyance, transfer, lease or disposition all or
substantially all the properties and assets of the Company and its
Restricted Company Subsidiaries on a consolidated basis, as the case
may be (the "Surviving Company Entity"), (1) shall 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)
shall expressly assume, by a supplemental indenture to this
Indenture in form satisfactory to the Trustee, the Company's
obligations pursuant to the Notes for the due and punctual payment
of the principal of, premium, if any, and interest on all the Notes
and the performance and observance of every covenant herein on the
part of the Company to be performed or observed;
(b) immediately before and immediately after giving effect to such
transaction or series of transactions on a pro forma basis (and treating any
obligation of the Company or any Restricted Company 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 shall have occurred and be continuing;
(c) immediately after giving effect to such transaction or series of
transactions on a pro forma basis (on the assumption that the transaction or
series of transactions occurred on the first day of the two fiscal quarter
period ending immediately prior to the consummation of such transaction or
series of transactions, with the appropriate adjustments with respect to the
transaction or series of transactions being included in such pro forma
calculation), the Company (or the Surviving Company Entity if the Company is not
the continuing obligor hereunder) could incur at least $1.00 of additional
Allowable Company Indebtedness (other than Permitted Indebtedness); and
(d) the Company or such Person 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
(c) above) and an Opinion of Counsel, each stating that such consolidation,
merger, sale, assignment, conveyance, transfer or lease or other disposition
and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture, constitute a Permitted Transaction for
the purposes of this definition and that all conditions precedent herein
provided for relating to such transaction have been complied with.
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Provided that:
(i) any merger or consolidation of a Restricted
Company Subsidiary with and into the Company (with the Company
being the surviving entity) or another Restricted Company
Subsidiary need only comply with clauses (c) and (d) above in
order to qualify as a Permitted Transaction. Further, any
reincorporation of the Company or any Restricted Company
Subsidiary under the laws of the United States of America, any
state thereof or the District of Columbia shall be a Permitted
Transaction;
(ii) Upon any consolidation of the Company with or
merger of the Company with or into any other corporation or
any sale, assignment, conveyance, transfer, lease or
disposition of the properties and assets of the Company
substantially as an entirety to any Person that qualifies as a
Permitted Transaction pursuant to clauses (a) through (d) of
this definition in which the Company is not the continuing
obligor hereunder, the Surviving Company Entity shall succeed
to, and be substituted for, and may exercise every right and
power of, the Company hereunder with the same effect as if
such successor Person had been named as the Company herein.
When a successor assumes all of the obligations of its
predecessor under the Indenture, the predecessor shall be
released from such obligations; provided that, in the case of
a transfer by lease, the predecessor shall not be released
from the payment of principal of, premium and Liquidated
Damages, if any, and interest on the Notes.
(iii) If, upon any such consolidation of the Company
with or merger of the Company into any other corporation, or
upon any sale, assignment, conveyance, lease or transfer of
the property of the Company substantially as an entirety to
any other Person, any property or assets of the Company would
thereupon become subject to any Lien, then unless such Lien
qualifies as a Permitted Lien without equally and ratably
securing the Notes, the Company, prior to or simultaneously
with such consolidation, merger, sale, assignment, conveyance,
lease or transfer, shall as to such property or assets, secure
the Notes Outstanding (together with, if the Company shall so
determine any other Indebtedness of the Company now existing
or hereinafter created which is not subordinate in right of
payment to the Notes) equally and ratably with (or prior to)
the Indebtedness which upon such consolidation, merger,
conveyance, lease or transfer is to become secured as to such
property or assets by such Lien, or shall cause such Notes to
be so secured.
"RESTRICTED PAYMENT" means any of the following actions
whether taken directly or indirectly and whether taken by the Company or any
Restricted Company Subsidiary:
(a) (1) the declaration or payment of any dividend on, or
making of any distribution to holders of, any shares of the Capital Stock of the
Company (other than dividends or distributions payable solely in shares of its
Qualified Capital Stock or in options, warrants or other rights to acquire such
shares of Qualified Capital Stock);
(2) purchasing, redeeming or otherwise acquiring or
retiring for value, directly or indirectly, any shares of Capital Stock
of the Company or any Capital Stock of
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any of its Affiliates (other than Capital Stock of the Parent, any
Subsidiaries of the Parent that are not Company Restricted Subsidiaries
and any Wholly Owned Restricted Subsidiary) or any options, warrants or
other rights to acquire such shares of Capital Stock;
(3) making any principal payment on, or repurchasing,
redeeming, defeasing or otherwise acquiring or retiring for value,
prior to the Stated Maturity of any principal payment or any sinking
fund payment, any Indebtedness of the Company that is expressly
subordinated in right of payment to the Notes; or
(4) making any Investment (other than any Permitted
Investment) in any Person;
(such payments or other actions described in (but not excluded from)
clauses (1) through (4) are collectively referred to as "Restricted
Payments"); unless at the time of, and immediately after giving effect
to, the proposed Restricted Payment (the amount of any such Restricted
Payment, if other than cash, as determined by the Board of Directors
the Company, whose determination shall be conclusive and evidenced by a
Board Resolution), (A) no Default or Event of Default shall have
occurred and be continuing, (B) the Company could incur at least $1.00
of additional Allowable Company Indebtedness (other than Permitted
Indebtedness) and (C) the aggregate amount of all Restricted Payments
declared or made after the Issue Date shall not exceed the sum of:
(i) (A) 100% of Consolidated Operating Cash Flow of
the Company less 1.5 times Consolidated Interest Expense of
the Company or (B) if Consolidated Operating Cash Flow of the
Company is a negative, minus 100% of such negative amount, in
each case on a cumulative basis for the period beginning on
the first day of the Company's first fiscal quarter after the
Issue Date and ending on the last day of the Company's last
fiscal quarter ending prior to the date of such proposed
Restricted Payment; plus
(ii) the aggregate Net Cash Proceeds and the Fair
Market Value of Telecommunications Assets or Voting Stock of a
Person that becomes a Restricted Subsidiary, the assets of
which consist primarily of Telecommunications Assets, received
by the Company after the Issue Date as capital contributions
or from the issuance or sale (other than to any Subsidiary) of
shares of Qualified Capital Stock of the Company (including
upon the exercise of options, warrants or rights) or warrants,
options or rights to purchase shares of Qualified Capital
Stock of the Company; plus
(iii) the aggregate Net Cash Proceeds and the Fair
Market Value of Telecommunications Assets or Voting Stock of a
Person that becomes a Restricted Subsidiary, the assets of
which consist primarily of Telecommunications Assets, received
by the Company after the Issue Date from the issuance or sale
(other than to any Subsidiary) of debt securities or
Redeemable Capital Stock that have been converted into or
exchanged for Qualified Capital Stock of the Company, together
with the aggregate Net Cash Proceeds and the Fair Market Value
of Telecommunications Assets or Voting
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Stock of a Person that becomes a Restricted Subsidiary, the
assets of which consist primarily of Telecommunications
Assets, received by the Company at the time of such conversion
or exchange; plus
(iv) to the extent not otherwise included in
Consolidated Operating Cash Flow of the Company, an amount
equal to the sum of (a) the net reduction in Investments
(other than Permitted Investments) in any Person (other than a
Restricted Subsidiary) resulting from the payment in cash of
dividends, repayments of loans or advances or other transfers
of assets, in each case to the Company or any Restricted
Subsidiary after the Issue Date from such Person and (b) the
amount of any net reduction in Investments resulting from the
redesignation of an Unrestricted Company Subsidiary as a
Restricted Company Subsidiary (valued as provided in the
definition of "Investment") at the time of such redesignation;
provided that, in the case of (a) or (b) above, the foregoing
sum shall not exceed the total amount of Investments (other
than Permitted Investments) previously made in such Person or
Unrestricted Company Subsidiary by the Company and its
Restricted Company Subsidiaries.
(b) Notwithstanding the above, the following actions by the
Company or any Restricted Company Subsidiary shall not constitute Restricted
Payments so long as (with respect to clauses (1) through (6) below) no Default
or Event of Default shall have occurred and be continuing:
(1) the payment of any dividend within 60 days after
the date of declaration thereof, if at such date of declaration the
payment of such dividend would have complied with the provisions of
paragraph (a) above and such payment will be deemed to have been paid
on such date of declaration for purposes of the calculation required by
paragraph (a) above;
(2) the purchase, redemption or other acquisition or
retirement for value of any shares of Capital Stock of the Company (x)
in exchange for, or out of the Net Cash Proceeds of a substantially
concurrent issuance and sale (other than to a Subsidiary) of, shares of
Qualified Capital Stock of the Company; (y) that are held by former
officers, employees or directors (or their estates or beneficiaries
under their estates) of the Company or any of its Subsidiaries;
provided that the aggregate amount of such purchase, redemption or
other acquisition or retirement for value under this clause (y) will
not exceed $250,000 (or the equivalent thereof in one or more foreign
currencies) in any given fiscal year; or (z) pursuant to the employment
agreement dated August 4, 1997, between the Company and Richard Jalkut,
as amended and as in effect on the Issue Date (and any extensions or
renewals thereof); provided that the amount of such purchase,
redemption or other acquisition or retirement for value under this
clause (z) will not exceed $1,000,000 (or the equivalent thereof in one
or more foreign currencies) in any given fiscal year;
(3) the purchase, redemption, defeasance or other
acquisition or retirement for value of any Indebtedness of the Company
that is expressly subordinated in right of payment to the Notes in
exchange for, or out of the Net Cash
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<PAGE> 45
Proceeds of a substantially concurrent issuance and sale (other than to
a Subsidiary) of, shares of Qualified Capital Stock of the Company;
(4) the purchase of any Indebtedness of the Company
that is expressly subordinated in right of payment to the Notes at a
purchase price not greater than 101% of the principal amount thereof in
the event of a Change of Control in accordance with provisions similar
to Section 1010; provided that prior to such purchase the Company has
made the Change of Control Offer as provided in such covenant with
respect to the Notes and has purchased all Notes validly tendered for
payment in connection with such Change of Control Offer;
(5) the purchase, redemption, defeasance or other
acquisition or retirement for value of Indebtedness (other than
Redeemable Capital Stock) of the Company that is expressly subordinated
in right of payment to the Notes in exchange for, or out of the Net
Cash Proceeds of a substantially concurrent incurrence (other than to a
Subsidiary) of, new Indebtedness of the Company that is expressly
subordinated in right of payment to the Notes, so long as (A) the
principal amount of such new Indebtedness does not exceed the principal
amount (or, if such Indebtedness being refinanced provides for an
amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration thereof, such lesser amount as of
the date of determination) of the Indebtedness being so purchased,
redeemed, defeased, acquired or retired, plus the lesser of (x) the
amount of any premium required to be paid in connection with such
refinancing pursuant to the terms of the Indebtedness being refinanced
or (y) the amount of any premium reasonably determined by the Company
as necessary to accomplish such refinancing, plus, in either case, the
amount of expenses of the Company incurred in connection with such
refinancing; (B) such new Indebtedness is subordinated to the Notes to
the same extent as such Indebtedness so purchased, redeemed, defeased,
acquired or retired; and (C) such new Indebtedness has an Average Life
longer than the Average Life of the Indebtedness being refinanced and a
final Stated Maturity of principal later than the final Stated Maturity
of the Indebtedness being refinanced; and
(6) the payment of cash in lieu of fractional shares
of Common Stock pursuant to the Warrant Agreement.
The actions described in clauses (1) through (4) and (6) of
this paragraph (b) shall be Restricted Payments that shall be permitted in
accordance with this paragraph (b) but shall reduce the amount that would
otherwise be available for Restricted Payments under clause (C) of paragraph (a)
above. The actions described in clause (5) of this paragraph (b) shall be
Restricted Payments that shall be permitted in accordance with this paragraph
(b) and shall not reduce the amount that would otherwise be available for
Restricted Payments under clause (C) of paragraph (a).
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company
other than an Unrestricted Company Subsidiary.
"SALE-LEASEBACK TRANSACTION" means any direct or indirect
arrangement, or series of related arrangements, with any Person (other than the
Company or a Restricted Company Subsidiary) or to which any Person (other than
the Company or a Restricted Company
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<PAGE> 46
Subsidiary) is a party, providing for the leasing to the Company or to a
Restricted Company Subsidiary of any property for an aggregate term exceeding
three years, whether owned by the Company or by any Subsidiary of the Company at
the Issue Date or later acquired, which has been or is to be sold or transferred
by the Company or such Restricted Company Subsidiary to such Person or to any
other Person from whom funds have been or are to be advanced by such Person on
the security of such property; provided that the transfer by the Company or any
Restricted Company Subsidiary of Telecommunications Assets to, and the leasing
by the Company or any Restricted Company 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 Company Subsidiary that, together with its Subsidiaries, (i) for
the most recent fiscal year of the Company accounted for more than 10% of the
consolidated revenues of the Company and its Restricted Company Subsidiaries,
(ii) as of the end of such fiscal year, was the owner of more than 10% of the
consolidated assets of the Company and its Restricted Company Subsidiaries, or
(iii) owns one or more FCC licenses the aggregate cost or Fair Market Value of
which represents 5% or more of the net asset value of the Company and its
Restricted Company Subsidiaries on a consolidated basis as of the end of such
fiscal year, in the case of (i), (ii) or (iii) as set forth on the most recently
available consolidated financial statements of the Company for such fiscal year.
"TELECOMMUNICATIONS ASSETS" means, with respect to any Person,
assets (including rights of way, trademarks and licenses) other than current
assets that are utilized by such Person, directly or indirectly, for the design,
development, construction, installation, integration or provision of the
Company's network, including any businesses or services in which the Company is
currently engaged and including any computer systems used in a
Telecommunications Business. Telecommunications Assets 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 the Company or a Restricted Company
Subsidiary, such other Person either is, or immediately following the relevant
transaction shall become, a Restricted Subsidiary of the Company pursuant to
this Indenture or a Permitted Telecommunications Joint Venture subject to the
limitations set forth under clause (p) of the definition of "Permitted
Investment" contained in this Section 103. 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 the Company.
"TELECOMMUNICATIONS INDEBTEDNESS" means, Indebtedness of the
Company or any Restricted Company Subsidiary incurred at any time within 315
days of, and for the purpose of financing all or any part of the cost of, the
construction, expansion, installation, acquisition or improvement by the Company
or any Restricted Company Subsidiary of any new
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<PAGE> 47
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
at the date of incurrence thereof, 100% of the lesser of the cost or Fair Market
Value of such Telecommunications Assets; provided further that, to the extent an
Incumbent Agreement is characterized as a Capitalized Lease Obligation, it shall
be considered Telecommunications Indebtedness.
"UNRESTRICTED COMPANY SUBSIDIARY" means:
(a) any Subsidiary of the Company that at the time of
determination shall be an Unrestricted Company Subsidiary (as designated by the
Board of Directors as provided below); and
(b) any Subsidiary of an Unrestricted Company Subsidiary.
The Board of Directors may designate any Subsidiary of the
Company (including any newly acquired or newly formed Subsidiary of the
Company) to be an Unrestricted Company Subsidiary so long as (i)
neither the Company nor any other Subsidiary of the Company is directly
or indirectly liable for any Indebtedness of such Subsidiary, (ii) no
default with respect to any Indebtedness of such Subsidiary would
permit (upon notice, lapse of time or otherwise) any holder of any
other Indebtedness of the Company or any Restricted Company 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 Company Subsidiary will not violate the
provisions of Section 1012, (iv) neither the Company nor any Restricted
Company Subsidiary has a contract, agreement, arrangement,
understanding or obligation of any kind, whether written or oral, with
such Subsidiary other than those that might be obtained at the time
from persons who are not Affiliates of the Company, and (v) neither the
Company nor any other Subsidiary of the Company 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 shall be evidenced to the Trustee by filing a Board
Resolution with the Trustee giving effect to such designation. The
Board of Directors may designate any Unrestricted Company Subsidiary as
a Restricted Company Subsidiary if, immediately after giving effect to
such designation, there would be no Default or Event of Default under
this Indenture and the Company could incur $1.00 of additional
Allowable Company Indebtedness (other than Permitted Indebtedness).
SECTION 104. AMENDMENT TO SECTION 103. Section 103 of the Indenture is hereby
amended by deleting the existing Section 103 in its entirety and replacing it
with the following:
Section 103. Form of Documents Delivered to Trustee.
In any case where several matters are required to be certified
by, or covered by an opinion of, any specified Person, it is not necessary that
all such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only
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<PAGE> 48
one document, but one such Person may certify or give an opinion with respect to
some matters and one or more other such Persons as to other matters, and any
such Person may certify or give an opinion as to such matters in one or several
documents.
Any certificate or opinion of an officer of the Company may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Company, unless such counsel
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to such matters are erroneous.
Any certificate or opinion of an officer of the Parent may be
based, insofar as it relates to legal matters, upon a certificate or opinion of,
or representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to the matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be based, insofar as
it relates to factual matters, upon a certificate or opinion of, or
representations by, an officer or officers of the Parent, unless such counsel
knows, or in the exercise of reasonable care should know, that the certificate
or opinion or representations with respect to such matters are erroneous.
Where any Person is required to make, give or execute two or
more applications, requests, consents, certificates, statements, opinions or
other instruments under this Indenture, they may, but need not, be consolidated
and form one instrument.
AMENDMENTS TO "NOTE FORMS"
SECTION 105. AMENDMENT TO SECTION 202. Section 202 of the Indenture is hereby
amended by deleting the existing Section 202 in its entirety and replacing it
with the following:
Section 202. Form of Face of Note.
PATHNET, INC.
12 1/4% Senior Note due 2008
[CUSIP]_______________
[ISIN]_________________
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<PAGE> 49
No._____________ $________
Pathnet, Inc., a Delaware corporation (herein called the "Company", which
term includes any successor Person under the Indenture, as amended by the
Supplemental Indenture, each hereinafter referred to), for value received,
hereby promises to pay to _____________ or registered assigns, the principal sum
of ________________ Dollars on April 15, 2008, at the office or agency of the
Company and the Parent (as defined below) referred to below, and to pay interest
thereon on October 15, 1998 and semi-annually thereafter, on April 15 and
October 15 in each year, from April 8, 1998, or from the most recent Interest
Payment Date to which interest has been paid or duly provided for, at the rate
of 12 1/4% per annum, until the principal hereof is paid or duly provided for,
and (to the extent lawful) to pay on demand interest on any overdue interest at
the rate borne by the Notes from the date on which such overdue interest becomes
payable to the date payment of such interest has been made or duly provided for.
The interest so payable, and punctually paid or duly provided for, on any
Interest Payment Date, as provided in such Indenture, shall be paid to the
Person in whose name this Note (or one or more Predecessor Notes) is registered
at the close of business of the Regular Record Date for such interest, which
shall be the April 1 or October 1 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date. This Note has been issued
with original issue discount for U.S. federal income tax purposes.
This Note is unconditionally guaranteed by Pathnet Telecommunications, Inc.,
a Delaware corporation (herein called the "Parent") as set forth in the
Guarantee endorsed hereon.
The following information is supplied for purposes of Section 1273 and 1275
of the Internal Revenue Code.
<TABLE>
<S> <C>
Issue Date: April 8, 1998
Issue Price: $988.29
Original issue discount under Section 1273 of
the Internal Revenue Code (for each $1,000
principal amount): $11.71
Yield Maturity 12.46%
</TABLE>
Any such interest not so punctually paid or duly provided for
shall forthwith cease to be payable to the Holder on such Regular Record Date,
and such defaulted interest, and (to the extent lawful) interest on such
defaulted interest at the rate borne by the Notes, may be paid to the Person in
whose name this Note (or one or more Predecessor Notes) is registered at the
close of business on a Special Record Date for the payment of such Defaulted
Interest to be fixed by the Trustee, notice whereof shall be given to Holders of
Notes not less than 10 days prior to such Special Record Date, or may be paid at
any time in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Notes may be listed, and upon such notice
as may be required by such exchange, all as more fully provided in said
Indenture. Payment of the principal of (and premium, if any, on) and interest on
this Note will be made to the Depositary or its nominee, as the case may be, as
the registered owner thereof, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts; provided, however, the payment of interest may be made at the
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<PAGE> 50
option of the Company or the Parent, as the case may be (i) by its check mailed
to the address of the Person entitled thereto as such address shall appear on
the Note Register or (ii) by wire transfer to an account maintained by the payee
located in the United States.
The Holder of this Note is entitled to the benefits of the Notes Registration
Rights Agreements, dated as of April 8, 1998 (the "Notes Registration Right
Agreement"), between the Company and the Initial Purchasers named therein.
Reference is hereby made to the further provisions of this Note set forth on
the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.
Unless the certificate of authentication hereon has been duly executed by the
Trustee referred to on the reverse hereof by manual signature, this Note shall
not be entitled to any benefit under the Indenture, as amended by the
Supplemental Indenture, or the Guarantee or be valid or obligatory for any
purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed.
Dated: PATHNET, INC.
By____________________________________
Attest:
_______________________
Authorized Signature
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<PAGE> 51
SECTION 106. AMENDMENT TO SECTION 203. Section 203 of the Indenture is hereby
amended by deleting the existing Section 203 in its entirety and replacing it
with the following:
Section 203. Form of Reverse Note.
This Note is one of a duly authorized issue of securities of
the Company designated as its 12 1/4% Senior Notes due 2008 (herein called the
"Notes"), limited (except as otherwise provided in the Indenture, as amended by
the Supplemental Indenture) in aggregate principal amount to $350,000,000, which
may be issued under an indenture dated as of April 8, 1998 between the Company
and The Bank of New York, as trustee, as amended by the Supplemental Indenture
dated as of [ ], 2000 between the Company, Pathnet Telecommunications,
Inc., and The Bank of New York, as trustee. References in this Note to the
Indenture shall be deemed to be references to the Indenture as amended by the
Supplemental Indenture. The Bank of New York, as trustee is herein called the
"Trustee", which term includes any successor trustee under the Indenture.
Reference is hereby made to the Indenture and all indentures supplemental
thereto for a statement of the respective rights, limitations of rights, duties,
obligations and immunities thereunder of the Company, the Parent, the Trustee
and the Holders of the Notes, and of the terms upon which the Notes are, and are
to be, authenticated and delivered.
The Notes are subject to redemption upon not less than 30 nor
more than 60 days notice, at any time after April 15, 2003 as a whole or in
part, at the election of the Company, at a Redemption Price (expressed as
percentages of the principal amount) set forth below if redeemed during the
12-month period beginning April 15, of the years indicated (subject to the right
of Holders of record on the relevant Regular Record Dates to receive interest
due on an interest payment date):
<TABLE>
<CAPTION>
Year Redemption Price
---- ----------------
<S> <C>
2003 106.125%
2004 104.083%
2005 102.042%
2006 and thereafter 100.00%
</TABLE>
together in the case of any such redemption with accrued
interest, if any, to the Redemption Date, all as provided in the Indenture.
Notwithstanding the foregoing, at any time on or prior to April 15, 2001, the
Company may redeem within 60 days of one or more Public Equity Offerings up to
35% of the aggregate principal amount of the Notes issued on the Issue Date at a
redemption price equal to 112.25% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any thereon to the Redemption
Date (subject to the right of Holders of record on the relevant Regular Record
Date to receive interest due on an Interest Payment Date) with the Net Cash
Proceeds of one or more Public Equity Offerings; provided that at least 65% of
the principal amount of the Notes issued on the Issue Date remain Outstanding.
If less than all the Notes are to be redeemed, the Trustee will select the
particular Notes to be redeemed not more than 60 days prior to the redemption
date by such method as the Trustee
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<PAGE> 52
deems fair and appropriate; provided that no such partial redemption will reduce
the principal amount of a Note not redeemed to less than $1,000. Notice of
redemption will be mailed, first-class postage prepaid, at least 30 but not more
than 60 days before the redemption date to each holder of Notes to be redeemed
at its registered address. On and after the date of redemption, interest will
cease to accrue on Notes portions thereof called for redemption and accepted for
payment.
Upon the occurrence of a Change of Control, the Holder of this Note may
require the Company, subject to certain limitations provided in Section 1010 of
the Indenture and otherwise in this Indenture, to repurchase this Note at a
purchase price in cash in an amount equal to 101% of the principal amount
thereof, plus accrued and unpaid interest thereon to the Change of Control
Purchase Date (as defined in Section 1010 of the Indenture).
In the case of any redemption of Notes, interest installments whose Stated
Maturity is on or prior to the Redemption Date will be payable to the Holders of
record of such Notes, or one or more Predecessor Notes, at the close of business
on the relevant Record Date referred to on the face hereof. Notes (or portions
thereof) for whose redemption and payment provision is made in accordance with
the Indenture shall cease to bear interest from and after the Redemption Date.
In the event of redemption of this Note in part only, a new Note or Notes for
the unredeemed portion hereof shall be issued in the name of the Holder hereof
upon the cancellation hereof.
If an Event of Default shall occur and be continuing, the principal of all
the Notes may be declared due and payable in the manner and with the effect
provided in the Indenture.
The Indenture contains provisions for defeasance at any time of (a) the
entire indebtedness of the Company on this Note and (b) certain restrictive
covenants and the related Defaults and Events of Defaults, upon compliance by
the Company with certain conditions set forth therein, which provisions apply to
this Notice.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modifications of the rights and obligations of the
Company, the Parent and the rights of the Holders under the Indenture at any
time by the Company and the Trustee with the consent of the Holders of a
majority in aggregate principal amount of the Notes at the time Outstanding. The
Indenture also contains provisions permitting the Holders of specified
percentages in aggregate principal amount of the Notes at the time Outstanding,
on behalf of the Holders of all Notes, to waive compliance by the Company and
the Parent with certain provisions of the Indenture and certain past defaults
under the Indenture and their consequences. Any such consent or waiver by or on
behalf of the Holder of this Note shall be conclusive and binding upon such
Holder and upon all future Holders of this Note and of any Note issued upon the
registration of transfer hereof or in exchange hereof or in lieu hereof whether
or not notation of such consent or waiver is made upon this Note.
No reference herein to the Indenture and no provisions of this Note or of the
Indenture shall alter or impair the obligation of the Company, which is absolute
and unconditional, to pay the principal of (and premium and Liquidated Damages,
if any) and interest on this Note at the times, place, and rate, and in the coin
or currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Note is registerable on the Note Register of the
Company, upon surrender of this Note for registration of transfer at the office
or agency of the Company and the Parent maintained for such
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<PAGE> 53
purpose in The City of New York, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company, the Parent and the
Note Registrar duly executed by, the Holder hereof or his attorney duly
authorized in writing, and thereupon one or more new Notes, of authorized
denominations and for the same aggregate principal amount, will be issued to the
designated transferee and transferees.
The Notes are issuable only in registered form without coupons in
denominations of $1,000 and any integral multiple thereof. As provided in the
Indenture and subject to certain limitations therein set forth, the Notes are
exchangeable for alike aggregate principal amount of Notes of a different
authorized denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any registration of transfer or exchange
of Notes, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to the time of due presentment of this Note for registration of
transfer, the Company, the Trustee and any agent of the Company or the Trustee
may treat the Person in whose name this Note is registered as the owner hereof
for all purposes, whether or not this Note be overdue, and neither the Company,
the Trustee nor any agent shall be affected by notice to the contrary.
THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF
THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES
THEREOF.
All terms used in this Note which are defined in the Indenture shall have the
meanings assigned to them in the Indenture.
SECTION 107. ADDITION OF SECTION 203A. The following Section 203A is hereby
added to the Indenture:
SECTION 203A. Guarantee of Note. Each of the Notes shall have the
following Guarantee endorsed upon it:
1. Guarantee of Payment and Performance of Obligations.
(a) For value received, Pathnet Telecommunications, Inc.
(the "Parent") unconditionally guarantees to the
holder of any Outstanding Note or Notes (a "Holder")
the full and punctual payment and performance of the
Obligations (as defined in subsection (b) below).
This Guarantee is an absolute, unconditional and
continuing guarantee of the full and punctual payment
and performance by the Company of each of the
Obligations, and not of collectability only, and is
no way conditioned upon any requirement that any
Holder first attempt to seek payment or performance
from the Company or any other Parent or surety or
resort to any security or other means of obtaining
payment of all or any of the Obligations or upon any
other contingency. Upon any default by the Company in
the full and punctual payment or performance of any
of the Obligations, if such default remains uncured
after the giving of any required notice and after any
applicable period of cure, the liabilities and
obligations of the Parent hereunder shall at the
option of any Holder become forthwith effective,
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<PAGE> 54
matured, due and payable without further demand or
notice of any nature, all such demands and notices
being expressly waived by the Parent.
(b) As used herein, the term "Obligations" means all
obligations, covenants, liabilities, undertakings and
agreements of any kind of the Company to all or any
of the Holders contained in the Indenture, to be
performed after the date hereof, howsoever, incurred,
arising or evidenced, whether now or hereafter
existing, due or to become due or of payment or
performance and including, without limitation: (i)
the prompt payment in full, in United States
currency, when due (whether at stated maturity, by
acceleration, by mandatory or optional prepayment or
otherwise) of the principal of and interest on the
Notes (including interest on any overdue principal,
and, to the extent permitted by applicable law, on
any overdue interest) and all other amounts from time
to time owing by the Company under the Indenture and
under the Notes (including costs, expenses and
taxes); and (ii) the prompt performance and
observance by the Company of all covenants,
agreements and conditions on its part to be performed
and observed under the Indenture, in each case
strictly in accordance with the terms thereof (such
payments and other obligations being herein
collectively referred to as the "Obligations").
2. Guarantee Continuing and Liability Unaffected.
(a) Subject to Section 2 (c), this is a continuing
guarantee and shall be binding upon the Parent
regardless of how long before or after the date
hereof any part of the Obligations was or is incurred
by the Company. Subject to Section 2 (c), this
Guarantee may be enforced by any or all of the
Holders from time to time and as often as occasion
for such enforcement may arise.
(b) If after receipt of any payment from the Parent made
hereunder the Holders, or any of them, are compelled
to surrender or voluntarily surrender such payment or
proceeds to any person because such payment or
application of proceeds is or may be avoided,
invalidated, recaptured, or set aside as a
preference, fraudulent conveyance, impermissible
setoff or for any other reason, whether or not such
surrender is the result of (i) any judgment, decree
or order of any court or administrative body having
jurisdiction over the Holders, or (ii) any settlement
or compromise by the Holders of any claim as to any
of the foregoing with any person (including the
Company), then the Obligations or part thereof
affected shall be reinstated and continue and this
Guarantee shall be reinstated and continue in full
force as to such Obligations or part thereof as if
such payment or proceeds had not been received. The
provisions of this Section 2(b) shall survive the
termination of this Guarantee and any satisfaction
and discharge of the Company by virtue of any
payment, court order or any federal or state law.
(c) The Parent shall be subrogated to all rights of the
Holders in respect of any amounts paid by the Parent
pursuant to the provisions of this Guarantee;
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<PAGE> 55
provided, however, that Parent shall be entitled to
enforce, or to receive any payments arising out of or
based upon, such right of subrogation with respect to
any Obligation only after the payment of all amounts
owed by the Company to the Holders with respect to
all of the Obligations have been paid in full.
(d) This Guarantee shall terminate and be of no further
force and effect as to any Note upon full payment of
the Redemption Price with respect to such Note,
provided, however, that this Guarantee shall continue
to be effective or shall be reinstated, as the case
may be, if at any time the Company must restore
payment of any sums paid under such Note or under
this Guarantee for any reason whatsoever.
3. Unconditional Nature of Parent's Obligations and Liabilities.
The obligations and liabilities of the Parent hereunder shall be
absolute and unconditional, and shall not be subject to any
counterclaim, set-off, deduction or defense based upon any claim the
Parent may have against the Company or any other person or entity. Such
obligations and liabilities shall remain in full force and effect for
the period set forth in Section 2 above without regard to any event,
circumstance or condition (whether or not the Parent shall have
knowledge or notice thereof) which but for the provisions of this
Section might constitute a legal or equitable defense or discharge of a
Parent or surety or which might in any way limit recourse against the
Parent, including:
(a) any amendment or modification or supplement to the
terms of the Indenture, this Guarantee or any of the
Notes, including the renewal or extension of the time
for payment of the Notes or the granting of time in
respect of the payment thereof;
(b) any waiver, consent, extension, granting of time,
forbearance, indulgence or other action or inaction
under or in respect of the Indenture or the Notes, or
any exercise or non-exercise of any right, remedy or
power in respect thereof;
(c) the invalidity or unenforceability, in whole or in
part of the Indenture or this Guarantee resulting
from the Company's or the Parent's lack of authority
to enter into the Indenture and/or to incur any or
all of the Obligations, by any person acting for the
Company or the Parent without or in excess of
authority;
(d) any actual, purported or attempted sale, assignment
or other transfer by any or all of the Holders or by
the Company or the Parent of the Indenture or the
Notes or of any of their rights, interests or
obligations thereunder;
(e) the addition of any party as a Parent or surety of
all or any part of the Obligations or any limitation
of the liability of any additional Parent or surety
of all or any part of the Obligations under any other
agreement;
(f) any merger or consolidation of the Company or of the
Parent into or with any other entity, or any sale,
lease, transfer or other disposition of any or all of
any Company's or the Parent's assets or any sale,
transfer or other
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disposition of any or all of the economic interests
in the Company or the Parent to any other person or
entity;
(g) the recovery of any judgment against the Company or
any action to enforce the same; or
(h) any change in the financial condition of the Company
or the Company's entry into an assignment for the
benefit of creditors, an arrangement or any other
agreement or procedure for the restructuring of its
liabilities, or the Company's insolvency, bankruptcy,
reorganization, dissolution, liquidation or any
similar action by or occurrence with respect to the
Company.
4. Parent's Waiver. The Parent unconditionally waives, to the
fullest extent permitted by law:
(a) notice of any of the matters referred to in Section 3
hereof;
(b) diligence, presentment, demand of payment and filing
of claims with a court in the event of bankruptcy or
insolvency of the Company;
(c) any right to the enforcement, assertion or exercise
by any or all of the Holders of any of their rights,
powers or remedies under, against or with respect to
the Company (i) any other Parent or surety, or (ii)
any security for all or any part of the Obligations;
(d) any requirement that the Parent be joined as a party
in any action or proceeding against the Company to
enforce any of the provisions of the Indenture;
(e) acceptance of this Guarantee by any Holder;
and covenants that this Guarantee will not be discharged except by complete
performance of the obligations contained in this Guarantee.
5. Representations and Warranties. The Parent represents and
warrants that:
(a) the Parent is a corporation duly organized and
validly existing in good standing under the laws of
the State of Delaware and has the full power,
authority and legal right to enter into and perform
its obligations under this Guarantee;
(b) this Guarantee has been duly authorized, executed and
delivered by the Parent and constitutes the legal,
valid and binding obligation of the Parent,
enforceable against the Parent in accordance with its
terms, except for the effect of bankruptcy,
insolvency, reorganization, moratorium, receivership
or similar laws affecting the enforcement of
creditors' rights generally;
(c) the execution, delivery and performance by the Parent
of this Guarantee do not and will not contravene any
applicable law, rule, regulation, judgment or order
and do not and will not contravene the provisions of,
constitute a breach of or default under, or result in
the creation of any security interest, lien or
encumbrance on any of the property of the Parent
pursuant to, the Parent's articles of incorporation
or by-laws of any
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indenture, mortgage, license or other contract,
agreement or instrument to which the Parent is a
party or by which it is bound.
6. Attorney's Costs. The Parent agrees to pay all reasonable
attorney's fees and disbursements and all other reasonable and actual costs and
expenses which may be incurred by the Holders in the enforcement of this
Guarantee.
7. Successors and Assigns. This Guarantee shall be binding upon the
Parent and its respective successors and assigns, and shall inure to the benefit
of and be enforceable by the Holders and their respective successors and
assigns.
8. Governing Law. This Guarantee shall be governed by and construed in
accordance with the laws of the State of New York.
9. Severability. Wherever possible, each provision of this Guarantee
shall be construed in such manner as to be valid and enforceable against the
Parent under applicable law, but if any provision hereof shall be deemed invalid
or unenforceable to any extent against the Parent in any jurisdiction, such
provision shall be ineffective only to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remainder
of such provision or any of the other provisions hereof, and any such invalidity
or unenforceability against the Parent in one jurisdiction shall not render such
provision ineffective in any other jurisdiction.
10. Notices.
Any notice, request or other communication required or permitted to
be given hereunder to the Holders shall be given by the Parent in the same
manner as set forth in Section 106 of the Indenture.
11. Transferability. This Guarantee is solely for the benefit of the
Holders and is not separately transferable from the Notes.
12. Headings. Section headings appearing in this Guarantee are for
convenience of reference only and shall not define, limit, amplify or otherwise
modify any provision hereof. Capitalized terms used herein have the meanings
given to them in the Indenture.
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This Guarantee shall not be valid or obligatory to any purpose
until the certificate of authentication on the Note on which this Guarantee has
been endorsed shall have been executed by the Trustee under the Indenture by the
signature of one of its authorized officers.
IN WITNESS WHEREOF, the Parent has caused this Guarantee to be executed on its
behalf by an officer or other person thereunto duly authorized as of the date
first above written.
PATHNET TELECOMMUNICATIONS, INC.
By:
-------------------------------------------
Name:
Title:
AMENDMENT TO "REMEDIES"
SECTION 108. AMENDMENT TO SECTION 501. Section 501 of the Indenture is hereby
amended by deleting the existing Section 501 in its entirety and replacing it
(i) with the definition of "Event of Default" set forth in Section 103 for the
purposes of interpretation of Section 1017(a) and (ii) with the definition of
"Event of Default" set forth in Section 102 for all other purposes.
AMENDMENTS TO "CONSOLIDATION, MERGER, CONVEYANCE, TRANSFER OR LEASE"
SECTION 109. AMENDMENT TO ARTICLE EIGHT. Article Eight of the Indenture is
hereby amended by deleting the existing Article Eight in its entirety and
replacing it with the following:
SECTION 801. Company and Parent May Consolidate, etc., Only on Certain
Terms.
Neither the Company nor the Parent will, 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 neither will the Company or the Parent permit any Restricted
Subsidiary to enter into any such transaction or series of transactions, if such
transaction or series of transactions, in the aggregate, would result in the
sale, assignment, conveyance, transfer, lease or other disposition of all or
substantially all of the properties and assets of the Restricted Entities on a
consolidated basis to any other Person or Persons, unless at the time and
immediately after giving effect thereto and subject always to the provisions of
Section 1010 and Section 1017:
(1) either (A) the Company or the Parent (as the case
may be) shall be the continuing corporation or (B) the Person (if other
than the Company or the Parent) formed by such consolidation or into
which the Company, the Parent or such Restricted Subsidiary is merged
or the Person that acquires by sale, assignment, conveyance, transfer,
lease or disposition all or substantially all the properties and assets
of the Restricted Entities on a consolidated basis, as the case may be
(the "Surviving Entity"), (i) shall be a corporation organized and
validly existing under the laws of the
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United States of America, any state thereof or the District of Columbia
and (ii) shall expressly assume, by a supplemental indenture to this
Indenture in form satisfactory to the Trustee, the obligations of the
Company or the Parent pursuant to the Notes or the Guarantee, as the
case may be, 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 herein on the part of the Company or the
Parent to be performed or observed;
(2) immediately before and immediately after giving
effect to such transaction or series of transactions on a pro forma
basis (and treating any obligation of any Restricted Entity 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 shall have occurred and be continuing;
(3) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (on the
assumption that the transaction or series of transactions occurred on
the first day of the two fiscal quarter period ending immediately prior
to the consummation of such transaction or series of transactions, with
the appropriate adjustments with respect to the transaction or series
of transactions being included in such pro forma calculation), the
Company or the Parent (as the case may be) (or the Surviving Entity if
the Company or the Parent is not the continuing obligor hereunder)
could incur at least $1.00 of additional Indebtedness (other than
Permitted Indebtedness) under Section 1011; and
(4) the Company, the Parent or such Person 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 (3) above) and an Opinion of
Counsel, each stating that such consolidation, merger, sale,
assignment, conveyance, transfer or lease or other disposition and, if
a supplemental indenture is required in connection with such
transaction, such supplemental indenture, comply with this Article and
that all conditions precedent herein provided for relating to such
transaction have been complied with.
Any merger or consolidation of a Restricted Subsidiary or of
the Company with and into the Company or the Parent (with the Company or the
Parent (as the case may be) being the surviving entity) or another Restricted
Subsidiary need only comply with clauses (3) and (4) above. Further, this
section shall not apply to any reincorporation of any Restricted Entity under
the laws of the United States of America, any state thereof or the District of
Columbia.
SECTION 802. Successor Substituted.
Upon any consolidation of the Company or the Parent with or
merger of the Company or the Parent with or into any other corporation or any
sale, assignment, conveyance, transfer, lease or disposition of the properties
and assets of the Company or the Parent substantially as an entirety to any
Person in accordance with Section 801 in which the Company or the Parent is not
the continuing obligor hereunder, the Surviving Entity shall succeed to, and be
substituted for, and may exercise every right and power of, the Company or the
Parent (as the case may be) hereunder with the same effect as if such successor
Person had been named as the
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Company or the Parent (as the case may be) herein. When a successor assumes all
of the obligations of its predecessor under the Indenture, the predecessor shall
be released from such 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 or, in the case where the predecessor
is the Parent, from the obligations under the Guarantees in respect of the
payment of principal of, premium, if any, and interest on the Notes.
SECTION 803. Notes to Be Secured in Certain Events.
If, upon any such consolidation of the Company or the Parent
with or merger of the Company or the Parent into any other corporation, or upon
any sale, assignment, conveyance, lease or transfer of the property of the
Company or the Parent substantially as an entirety to any other Person, any
property or assets of the Company or the Parent (as the case may be) would
thereupon become subject to any Lien, then unless such Lien could be created
pursuant to Section 1015 without equally and ratably securing the Notes, the
Company or the Parent (as the case may be), prior to or simultaneously with such
consolidation, merger, sale, assignment, conveyance, lease or transfer, shall as
to such property or assets, secure the Notes Outstanding or the Guarantees (as
the case may be) (together with, if the Company or the Parent (as the case may
be) shall so determine, any other Indebtedness of the Company or the Parent (as
the case may be) now existing or hereinafter created which is not subordinate in
right of payment to the Notes or the Guarantees, as the case may be)) equally
and ratably with (or prior to) the Indebtedness which upon such consolidation,
merger, conveyance, lease or transfer is to become secured as to such property
or assets by such Lien, or shall cause such Notes or Guarantees to be so
secured.
AMENDMENTS TO "SUPPLEMENTAL INDENTURES"
SECTION 110. AMENDMENT TO SECTION 901. Section 901 of the Indenture is hereby
amended by deleting the existing Section 901 in its entirety and replacing it
with the following:
SECTION 901. Supplemental Indentures Without Consent of
Holders.
Without the consent of any Holders, the Company and the
Parent, when authorized by a Board Resolution, and the Trustee, at any time and
from time to time, may enter into one or more indentures supplemental hereto, in
form satisfactory to the Trustee, for any of the following purposes:
(1) to evidence the succession of another Person to the
Company, the Parent or any other obligor on the Notes, and the
assumption by any such successor of the covenants of the Company or the
Parent or such obligor contained herein and in the Notes in accordance
with Article Eight of this Indenture;
(2) to add to the covenants of the Company, the Parent or any
other obligor upon the Notes or the Guarantees for the benefit of the
Holders or to surrender any right or power herein conferred upon the
Company, the Parent or any other obligor upon the Notes or the
Guarantees, as applicable, in this Indenture or the Notes;
(3) to cure any ambiguity, to correct or supplement any
provision herein or in the Notes or the Guarantees that may be
defective or inconsistent with any other provision herein or in the
Notes or the Guarantees, or to make any other provisions with respect
to matters or questions arising under this Indenture or the Notes or
the
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Guarantees; provided that, in each case, such action shall not
adversely affect the interest of the Holders;
(4) 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;
(5) to evidence and provide the acceptance of the appointment
of a successor Trustee under this Indenture;
(6) to mortgage, pledge, hypothecate or grant a security
interest in favor of the Trustee for the benefit of the Holders as
additional security for the payment and performance of the Company's or
the Parent's obligations hereunder, in any property or assets,
including any of which are required to be mortgaged, pledged or
hypothecated, or in which a security interest is required to be granted
to the Trustee pursuant to this Indenture or otherwise;
(7) to add a further guarantor of the Notes under the
Indenture;
(8) to secure the Notes pursuant to the requirements of
Section 803 or Section 1015 or otherwise;
(9) to add any additional Events of Default; or
(10) to evidence and provide for the acceptance of appointment
hereunder by a successor Trustee pursuant to the requirements of
Section 609.
SECTION 111. AMENDMENT TO SECTION 902. Section 902 of the Indenture is hereby
amended by deleting the existing Section 902 in its entirety and replacing it
with the following:
SECTION 902. Supplemental Indentures with Consent of Holders.
With the consent of the Holders of not less than a majority in
aggregate principal amount of the Outstanding Notes, by Act of said
Holders delivered to the Company, the Parent and the Trustee, the
Company and the Parent, when authorized by a Board Resolution, and the
Trustee may enter into an indenture or indentures supplemental hereto
for the purpose of adding any provisions to or changing in any manner
or eliminating any of the provisions of this Indenture or of modifying
in any manner the rights of the Holders under this Indenture provided,
however, that no such supplemental indenture shall, without the consent
of the Holder of each Outstanding Note affected thereby:
(1) change the Stated Maturity of the principal of or any
installment of interest on, any Note, or reduce the principal amount
thereof (or premium or Liquidated Damages, if any) or the rate of
interest thereon, alter any redemption provision with respect to any
Note or change the coin or currency in which any Note or any premium or
Liquidate Damages or the interest thereon is payable, or impair the
right to institute suit for the enforcement of any such payment after
the Stated Maturity thereof (or, in the case of redemption, on or after
the Redemption Date);
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(2) amend, change or modify the obligation of the Company to
make and consummate an Excess Proceeds Offer with respect to any Asset
Sale in accordance with Section 1017 or the obligation of the Company
to make and consummate a Change of Control Offer in the event of a
Change of Control in accordance with Section 1010, including, in each
case amending, changing or modifying any definition relating thereto;
(3) reduce the percentage of the principal amount of the
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 this Indenture and their consequences provided for in this
Indenture;
(4) modify any of the provisions of this Section or Sections
513 and Section 1019, except to increase the percentage of the
aggregate principal amount of Outstanding Notes required for such
actions thereunder or to provide that certain other provisions of this
Indenture cannot be modified or waived without the consent of the
Holder of each Outstanding Note affected thereby;
(5) except as otherwise permitted under Article Eight consent
to the assignment or transfer by the Company of any of their rights or
obligations under the Indenture; or
(6) release any Lien created by the Amended and Restated
Pledge Agreement, except in accordance with the terms of the Amended
and Restated Pledge Agreement
(7) modify the provisions of this Indenture relating to the
Guarantee in a manner adverse to the Holders.
It shall not be necessary for any Act of Holders under this Section to
approve the particular form of any proposed supplemental indenture, but it shall
be sufficient if such Act shall approve the substance thereof.
AMENDMENTS TO "COVENANTS"
SECTION 112. AMENDMENT TO SECTION 1002.
Section 1002 of the Indenture is hereby amended by deleting the existing Section
1002 in its entirety and replacing it with the following:
SECTION 1002. Maintenance of Office or Agency:
The Company and the Parent shall maintain in The City of New
York, an office or agency where Notes may be presented or surrendered for
payment, where Notes may be surrendered for registration of transfer or exchange
and where notices and demands to or upon the Company or the Parent in respect of
the Notes, this Indenture or the Guarantees may be served. The Corporate Trust
Office of the Trustee shall be such office or agency of the Company and the
Parent unless the Company or the Parent shall designate and maintain some other
office or agency for one or more of such purposes. The Company and the Parent
will give prompt written notice to the Trustee of any change in the location of
any such office or agency. If at any time the Company or the Parent shall fail
to maintain any such required office or agency or shall
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fail to furnish the Trustee with the address thereof, such presentations,
surrenders, notices and demand may be made or served at the Corporate Trust
Administration office of the Trustee, and the Company and the Parent hereby
appoint the Trustee as their agent to receive all such presentations,
surrenders, notices and demands.
The Company and the Parent may also from time to time
designate one or more other offices or agencies (in or outside of The City of
New York) where the Notes may be presented or surrendered for any or all such
purposes and may from time to time rescind any such designation; provided, that
such designation or rescission shall not in any manner relieve the Company or
the Parent of their obligation to maintain an office or agency in The City of
New York for such purposes. The Company and the Parent will give prompt written
notice to the Trustee of any such designation or rescission and any change in
the location of any such other office or agency.
SECTION 113. AMENDMENT TO SECTION 1003. Section 1003 of the Indenture is hereby
amended by deleting the existing Section 1003 in its entirety and replacing it
with the following:
SECTION 1003. Money for Note Payments to Be Held in Trust
If the Company or the Parent shall at any time act as their
own Paying Agent, they will, on or before each due date of the principal of (or
premium, if any) or interest on any of the Notes, segregate and hold in trust
for the benefit of the Persons entitled thereto a sum sufficient to pay the
principal of (or premium, if any) or interest so becoming due until such sums
shall be paid to such Persons or otherwise disposed of as herein provided and
will promptly notify the Trustee of their action or failure so to act.
Whenever the Company and the Parent shall have one or more
Paying Agents for the Notes, the Company and/or the Parent will, on or before
10:00 a.m. on each due date of the principal of (or premium, if any) or interest
on any Notes, deposit with a Paying Agent a sum sufficient to pay the principal
(and premium, if any) or interest so becoming due, such sum to be held in trust
for the benefit of the Persons entitled to such principal, premium or interest,
and (unless such Paying Agent is the Trustee) the Company and/or the Parent will
promptly notify the Trustee of such action or any failure so to act.
The Company and the Parent shall cause each Paying Agent
(other than the Trustee) to execute and deliver to the Trustee an instrument in
which such Paying Agent shall agree with the Trustee, subject to the provisions
of this Section, that such Paying Agent will:
(1) hold all sums held by it for the payment of the principal
of (and premium, if any) or interest on Notes in trust for the benefit
of the Persons entitled thereto until such sums shall be paid to such
Persons or otherwise disposed of as herein provided;
(2) give the Trustee notice of any default by the Company or
the Parent (or any other obligor upon the Notes) in the making of any
payment of principal (and premium, if any) or interest; and
(3) at any time during the continuance of any such default,
upon the written request of the Trustee, forthwith pay to the Trustee
all sums so held in trust by such Paying Agent.
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The Company or the Parent may at any time, for the purpose of
obtaining the satisfaction and discharge of this Indenture or for any other
purpose, pay, or by Company Order or Parent Order direct any Paying Agent to
pay, to the Trustee all sums held in trust by the Company, the Parent or such
Paying Agent, such sums to be held by the Trustee upon the same trusts as those
upon which such sums where held by the Company, the Parent or such Paying Agent;
and, upon such payment by any Paying Agent to the Trustee, such Paying Agent
shall be released from all further liability with respect to such sums.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company or the Parent, in trust for the payment of the
principal of (or premium, if any) or interest on any Note and remaining
unclaimed for two years after such principal, premium, interest has become due
and payable shall be paid to the Company on Company Request or to the Parent on
Parent Request, or (if then held by the Company or the Parent) shall be
discharged from such trust. The Holder of such Note, as an unsecured general
creditor, shall look thereafter only to the Company and the Parent for the
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company or the Parent as
trustee thereof, shall thereupon cease; provided, however, that the Trustee or
such Paying Agent, before being required to make any such repayment, may at the
expense of the Company and the Parent cause to be published once, in a newspaper
published in the English language, customarily published on each Business Day
and of general circulation in the Borough of Manhattan, The City of New York,
notice that such money remains unclaimed and that, after a date specified
therein, which shall not be less than 30 days from the date of such publication,
any unclaimed balance of such money then remaining will be repaid to the Company
or the Parent, as the case may be.
SECTION 114. AMENDMENT TO SECTION 1004. Section 1004 of the Indenture is hereby
amended by deleting the existing Section 1004 in its entirety and replacing it
with the following:
SECTION 1004. Corporate Existence.
Subject to Article Eight, (a) the Company shall do or cause to
be done all things necessary to preserve and keep in full force and effect the
corporate existence, rights (charter and statutory) and franchises of the
Company and each of its Subsidiaries, and (b) the Parent shall do or cause to be
done all things necessary to preserve and keep in full force and effect the
corporate existence, rights (charter and statutory) and franchises of the Parent
and each of its Subsidiaries; provided, as the case may be, that neither the
Company nor the Parent, as the case may be, shall be required to preserve any
such right or franchise if the Board of Directors of the Company or the Parent,
as the case may be, shall determine that the preservation thereof is no longer
desirable in the conduct of the business of the Company or the Parent and its
respective Subsidiaries as a whole.
SECTION 115. AMENDMENT TO SECTION 1005. Section 1005 of the Indenture is hereby
amended by deleting the existing Section 1005 in its entirety and replacing it
with the following:
SECTION 1005. Payment of Taxes and Other Claims.
(a) The Company shall pay or discharge or cause to be paid or
discharged, before the same shall become delinquent, (i) all material taxes,
assessments and governmental charges levied or imposed upon the Company or any
of its Subsidiaries or upon the income, profits or property of the Company or
any Restricted Company Subsidiary and (ii) all material
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lawful claims for labor, materials and supplies, which, if unpaid, might by law
become a lien upon the property of the Company or any of its Subsidiaries; and
(b) the Parent shall pay or discharge or cause to be paid or discharged, before
the same shall become delinquent, (i) all material taxes, assessments and
governmental charges levied or imposed upon the Parent or any of its
Subsidiaries or upon the income, profits or property of the Parent or any
Restricted Subsidiary and (ii) all material lawful claims for labor, materials
and supplies, which, if unpaid, might by law become a lien upon the property of
the Parent or any of its Subsidiaries provided, that neither the Company nor the
Parent shall be required to pay or discharge or cause to be paid or discharged
any such tax, assessment, charge or claim whose amount, applicability or
validity is being contested in good faith by appropriate proceedings.
SECTION 116. AMENDMENT TO SECTION 1006. Section 1006 of the Indenture is hereby
amended by deleting the existing Section 1006 in its entirety and replacing it
with the following:
SECTION 1006. Maintenance of Properties.
(a) The Company shall, or shall cause its Restricted Company
Subsidiaries to, cause all material properties owned by the Company or any
Restricted Company Subsidiary or used or held for use in the conduct of its
business or the business of any Restricted Company Subsidiary to be maintained
and kept in good condition, repair and working order (reasonable wear and tear
excepted) and supplied with all necessary equipment and will cause to be made
all necessary repairs, renewals, replacements, betterments and improvements
thereof, all as in the judgment of the Company may be necessary so that the
business carried on in connection therewith may be properly and advantageously
conducted at all times, and (b) the Parent shall, or shall cause the Restricted
Subsidiaries to, cause all material properties owned by the Parent or any
Restricted Subsidiary or used or held for use in the conduct of its business or
the business of any Restricted Subsidiary to be maintained and kept in good
condition, repair and working order (reasonable wear and tear excepted) and
supplied with all necessary equipment and will cause to be made all necessary
repairs, renewals, replacements, betterments and improvements thereof, all as in
the judgment of the Parent may be necessary so that the business carried on in
connection therewith may be properly and advantageously conducted at all times;
provided, that nothing in this Section 1006 shall prevent a Restricted Entity
from discontinuing the maintenance of any of such properties or disposing of
them as otherwise permitted herein if such discontinuance or disposition is, in
the judgment of the Parent, desirable in the conduct of its business or the
business of such Restricted Entity and not disadvantageous in any material
respect to the Holders.
SECTION 117. AMENDMENT TO SECTION 1007. Section 1007 of the Indenture is hereby
amended by deleting the existing Section 1007 in its entirety and replacing it
with the following:
SECTION 1007. Insurance.
(a) The Company shall at all times keep all of its and its Restricted Company
Subsidiaries' properties which are of an insurable nature insured, and (b) the
Parent shall at all times keep all of its and the Restricted Subsidiaries'
properties, which are of an insurable nature insured, in each case with insurers
believed by the Company or the Parent (as the case may be) to be responsible
against loss or damage to the extent that property of similar character is
usually so insured by corporations similarly situated and owning like
properties.
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SECTION 118. AMENDMENT TO SECTION 1008. Section 1008 of the Indenture is hereby
amended by deleting the existing Section 1008 in its entirety and replacing it
with the following:
SECTION 1008. Statement by Officers As to Default.
(a) The Company and the Parent shall deliver to the Trustee, within 50
days after the end of each fiscal quarter and within 120 days after the end of
each fiscal year, a brief certificate from the principal executive officer,
principal financial officer or principal accounting officer of each of the
Company and the Parent as to his or her knowledge of the compliance of the
Company or the Parent (as the case may be) with all conditions and covenants
under this Indenture since the beginning of such quarter or year, as the case
may be. For purposes of this Section 1008(a), such compliance shall be
determined without regard to any period of grace or requirement of notice under
this Indenture.
(b) When any Default has occurred and is continuing under this
Indenture, or if the trustee for or the holder of any other evidence of
Indebtedness of any Restricted Entity gives any notice or takes any other action
with respect to a claimed default (other than with respect to Indebtedness in
the principal amount of less than $7,500,000 (or the equivalent thereof in one
or more foreign currencies)), the Company or the Parent (as the case may be)
shall deliver to the Trustee by registered or certified mail or by facsimile
transmission an Officers' Certificate specifying such event, notice or other
action within five Business Days of an officer of the Company or the Parent (as
the case may be) becoming aware of its occurrence.
SECTION 119. AMENDMENT TO SECTION 1009. Section 1009 of the Indenture is hereby
amended by deleting the existing Section 1009 in its entirety and replacing it
with the following:
SECTION 1009. Provision of Financial Statements.
(a) Subject to Section 1009(b) below the Company and the Parent shall
file on a timely basis with the Commission, to the extent such filings are
accepted by the Commission and whether or not the Company or the Parent (as the
case may be) has a class of securities registered under the Exchange Act, the
annual reports, quarterly reports and other documents that the Company or the
Parent (as the case may be) would be required to file if it were subject to
Section 13 or 15(d) of the Exchange Act.
(b) Provided always that the Parent complies fully with its filing
obligations pursuant to Section 1009(a) above, the Company shall be entitled in
its sole discretion to rely on any applicable law, rule, regulation or SEC
approval (together "Relevant Saving"), whether in force at the date hereof or
subsequently promulgated, to limit the scope of or cease to comply with its
filing obligations pursuant to Section 1009(a) to the maximum extent permitted
by such Relevant Saving.
(c) The Parent shall also be required (i) to file with the Trustee, and
provide to each Holder of Notes, without cost to such Holder, copies of such
reports and documents within 15 days after the date on which the Parent files
such reports and documents with the Commission or the date on which the Parent
would be required to file such reports and documents if the Parent were so
required, and (ii) if filing such reports and documents with the Commission is
not accepted by the Commission or is prohibited under the Exchange Act, to
supply at the Parent's cost copies of such reports and documents to any
prospective holder promptly upon request. Delivery of such reports, information
and documents to the Trustee is for informational purposes only and the
Trustee's receipt of such shall not constitute constructive notice of any
information
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contained therein or determinable from information contained therein, including
the Parent's compliance with any of its covenants hereunder (as to which the
Trustee is entitled to rely exclusively on Officers' Certificates).
SECTION 120. AMENDMENT TO SECTION 1010. Section 1010 of the Indenture is hereby
amended by deleting the existing Section 1010 in its entirety and replacing it
with the following:
SECTION 1010. Purchase of Notes upon Change of Control.
(a) Upon the occurrence of a Change of Control at any time and subject
to the compliance by the Company or the Parent (as the case may be) with the
requirements of paragraph (b) of this Section 1010, each Holder shall have the
right to require that the Company repurchase all of such Holder's Notes, in
whole or in part in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash in an amount equal to 101% of the
principal amount thereof, plus accrued and unpaid interest thereon to the date
of purchase, in accordance with the procedures set forth in paragraphs (b) and
(c) of this Section 1010 (the "Change of Control Offer").
(b) Within 15 days following any Change of Control, the Company (if the
Change of Control relates to the Company) or the Parent (if the Change of
Control relates to the Parent) shall notify the Trustee thereof and give to each
Holder of the Notes in the manner provided in Section 105 a notice stating:
(1) that a Change of Control has occurred and that such Holder has
the right to require the Company to repurchase such Holder's Notes at
the Change of Control Purchase Price;
(2) the circumstances and relevant facts regarding such Change of
Control (including information with respect to pro forma historical
income, cash flow and capitalization after giving effect to such Change
of Control);
(3) the Change of Control Purchase Price and a purchase date (the
"Change of Control 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;
(4) that any Note not tendered will continue to accrue interest;
(5) that, unless the Company defaults in the payment of the Change
of Control Purchase Price, any Notes accepted for payment pursuant to
the Change of Control Offer will cease to accrue interest on and after
the Change of Control Purchase Date; and
(6) the instructions a Holder must follow in order to have its
Notes repurchased in accordance with paragraph (c) of this Section.
(c) Holders electing to have Notes purchased shall be required to
surrender such Notes to the Company at the address specified in the notice at
least five Business Days prior to the Change of Control Purchase Date. Holders
shall be entitled to withdraw their election if the Company receives, not later
than three Business Days prior to the Change of Control Purchase Date, a
facsimile transmission or letter setting forth the name of the Holder, the
principal amount of the Notes delivered for purchase by the Holder as to which
his election is to be withdrawn and
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a statement that such Holder is withdrawing his election to have such Notes
purchased. Holders whose Notes are purchased only in part shall be issued new
Notes and Guarantees equal in principal amount to the unpurchased portion of the
Notes surrendered, which unpurchased portion shall be equal to $1,000 in
principal amount or integral multiples thereof.
SECTION 121. AMENDMENT TO SECTION 1011. Section 1011 of the Indenture is hereby
amended by deleting the existing Section 1011 in its entirety and replacing it
with the following:
SECTION 1011. Limitation on Indebtedness.
Neither the Company nor the Parent shall , and neither shall they
permit any Restricted Subsidiary to, incur any Indebtedness (including any
Acquired Indebtedness) other than Permitted Indebtedness; provided that the
Company or the Parent (as the case may be) may Incur Indebtedness if, at the
time of such incurrence, the Consolidated Indebtedness to Consolidated Operating
Cash Flow Ratio of the Company or the Parent, as the case may be, would have
been less than or equal to (i) 6.0 to 1.0 but greater than zero, for
Indebtedness incurred on or prior to December 31, 2001, or (ii) 5.0 to 1.0 but
greater than zero, for Indebtedness incurred thereafter. For the purposes of
determining compliance with this Section 1011, in the event that an item of
Indebtedness or any portion thereof meets the criteria of more than one of the
type of Indebtedness that any Restricted Entity is permitted to Incur, the
Parent will have the right, in its sole discretion, to classify such item of
Indebtedness or portion thereof at the time of its incurrence and the Company or
the Parent, as the case may be, will only be required to include the amount and
type of such Indebtedness or portion thereof under the clause permitting the
Indebtedness as so classified.
SECTION 122. AMENDMENT TO SECTION 1012. Section 1012 of the Indenture is hereby
amended by deleting the existing Section 1012 in its entirety and replacing it
with the following:
SECTION 1012. Limitation on Restricted Payments.
The Parent shall not, and shall not permit any Restricted Subsidiary
or, in the case of paragraphs (3) and (4) below, the Company to take, directly
or indirectly, any of the following actions:
(a) (1) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Capital Stock of the Parent (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);
(2) purchase, redeem or otherwise acquire or retire for value,
directly or indirectly, any shares of Capital Stock of the Parent or any
Capital Stock of any of its Affiliates (other than Capital Stock of the
Company or any Wholly Owned Restricted Subsidiary) or any options,
warrants or other rights to acquire such shares of Capital Stock;
(3) make any principal payment on, or repurchase, redeem, defease
or otherwise acquire or retire for value, prior to the Stated Maturity
of any principal payment or any sinking fund payment, any Indebtedness
of the Parent or of the Company that is expressly subordinated in right
of payment to the Notes or to the Guarantees, as the case may be; or
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(4) make any Investment (other than any Permitted Investment) in
any Person;
(such payments or other actions described in (but not excluded from) clauses (1)
through (4) are collectively referred to as "Restricted Payments"); unless at
the time of, and immediately after giving effect to, the proposed Restricted
Payment (the amount of any such Restricted Payment, if other than cash, as
determined by the Board of Directors of the Parent, whose determination shall be
conclusive and evidenced by a Board Resolution), (A) no Default or Event of
Default shall have occurred and be continuing, (B) the Parent could incur at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to Section 1011 and (C) the aggregate amount of all Restricted Payments
declared or made after the Issue Date shall not exceed the sum of:
(i) 100% of Consolidated Operating Cash Flow of the Parent less 1.5
times Consolidated Interest Expense of the Parent or (ii) if
Consolidated Operating Cash Flow of the Parent is a negative, minus 100%
of such negative amount, in each case on a cumulative basis for the
period beginning on the first day of the Parent's first fiscal quarter
after the Issue Date and ending on the last day of the Parent's last
fiscal quarter ending prior to the date of such proposed Restricted
Payment; plus
(ii) the aggregate Net Cash Proceeds and the Fair Market Value of
Telecommunications Assets or Voting Stock of a Person that becomes a
Restricted Subsidiary, the assets of which consist primarily of
Telecommunications Assets, received by the Parent after the Issue Date
as capital contributions or from the issuance or sale (other than to any
Subsidiary) of shares of Qualified Capital Stock of the Parent
(including upon the exercise of options, warrants or rights) or
warrants, options or rights to purchase shares of Qualified Capital
Stock of the Parent; plus
(iii) the aggregate Net Cash Proceeds and the Fair Market Value of
Telecommunications Assets or Voting Stock of a Person that becomes a
Restricted Subsidiary, the assets of which consist primarily of
Telecommunications Assets, received by the Parent after the Issue Date
from the issuance or sale (other than to any Subsidiary) of debt
securities or Redeemable Capital Stock that have been converted into or
exchanged for Qualified Capital Stock of the Parent, together with the
aggregate Net Cash Proceeds and the Fair Market Value of
Telecommunications Assets or Voting Stock of a Person that becomes a
Restricted Subsidiary, the assets of which consist primarily of
Telecommunications Assets, received by the Parent at the time of such
conversion or exchange; plus
(iv) to the extent not otherwise included in Consolidated Operating
Cash Flow of the Parent, an amount equal to the sum of (a) the net
reduction in Investments (other than Permitted Investments) in any
Person (other than a Restricted Subsidiary) resulting from the payment
in cash of dividends, repayments of loans or advances or other transfers
of assets, in each case to the Parent or any Restricted Subsidiary after
the Issue Date from such Person and (b)
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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 (a) or (b) above, the
foregoing sum shall not exceed the total amount of Investments (other
than Permitted Investments) previously made in such Person or
Unrestricted Subsidiary by the Parent and its Restricted Subsidiaries.
(b) Notwithstanding paragraph (a) above, the Parent and any Restricted
Subsidiary may take the following actions so long as (with respect to clauses
(2) through (6) below) no Default or Event of Default shall have occurred and be
continuing:
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration the payment of such
dividend would have complied with the provisions of paragraph (a) above
and such payment will be deemed to have been paid on such date of
declaration for purposes of the calculation required by paragraph (a)
above;
(2) the purchase, redemption or other acquisition or retirement for
value of any shares of Capital Stock of the Parent (x) in exchange for,
or out of the Net Cash Proceeds of a substantially concurrent issuance
and sale (other than to a Subsidiary) of, shares of Qualified Capital
Stock of the Parent; or (y) that are held by former officers, employees
or directors (or their estates or beneficiaries under their estates) of
the Parent 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 (or the
equivalent thereof in one or more foreign currencies) in any given
fiscal year;
(3) the purchase, redemption, defeasance or other acquisition or
retirement for value of any Indebtedness of the Parent 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
the Parent;
(4) the purchase of any Indebtedness of the Company that is
expressly subordinated in right of payment to the Notes or the purchase
of any Indebtedness of the Parent that is expressly subordinated in
right of payment to the Guarantees, in each case 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 Section 1010;
provided that prior to such purchase the Company has made the Change of
Control Offer as provided in such covenant with respect to the Notes and
has purchased all Notes validly tendered for payment in connection with
such Change of Control Offer;
(5) the purchase, redemption, defeasance or other acquisition or
retirement for value of Indebtedness (other than Redeemable Capital
Stock) of the Parent that is expressly subordinated in right of payment
to the Notes in exchange for, or out of the Net Cash Proceeds of a
substantially concurrent incurrence (other than to a Subsidiary) of, new
Indebtedness of the Parent that is expressly subordinated in right of
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payment to the Notes, so long as (A) the principal amount of such new
Indebtedness does not exceed the principal amount (or, if such
Indebtedness being refinanced provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of
determination) of the Indebtedness being so purchased, redeemed,
defeased, acquired or retired, plus the lesser of (x) the amount of any
premium required to be paid in connection with such refinancing pursuant
to the terms of the Indebtedness being refinanced or (y) the amount of
any premium reasonably determined by the Parent as necessary to
accomplish such refinancing, plus, in either case, the amount of
expenses of the Parent 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
(6) the payment of cash in lieu of fractional shares of Common
Stock pursuant to the Warrant Agreement.
The actions described in clauses (1) through (4) and (6) of this paragraph (b)
shall be Restricted Payments that shall be permitted in accordance with this
paragraph (b) but shall reduce the amount that would otherwise be available for
Restricted Payments under clause (C) of paragraph (a) above. The actions
described in clause (5) of this paragraph (b) shall be Restricted Payments that
shall be permitted in accordance with this paragraph (b) and shall not reduce
the amount that would otherwise be available for Restricted Payments under
clause (C) of paragraph (a).
SECTION 123. AMENDMENT TO SECTION 1013. Section 1013 of the Indenture is hereby
amended by deleting the existing Section 1013 in its entirety and replacing it
with the following:
SECTION 1013. Limitation on Issuance and Sale of Capital Stock of
the Company and Restricted Subsidiaries.
Neither the Company nor the Parent shall , and neither shall they
permit any Restricted Subsidiary to, issue or sell any Capital Stock of the
Company or of a Restricted Subsidiary (other than to a Restricted Entity );
provided, that this covenant shall not prohibit (i) issuances or sales of
Capital Stock of the Company or a Restricted Subsidiary if, immediately after
giving effect to such issuance or sale, the Company would no longer be Wholly
Owned by the Parent or 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
Section 1012 if made on the date of such issuance and sale, (ii) the ownership
by directors of directors' qualifying shares or the ownership by foreign
nationals of Capital Stock of the Company or of any Restricted Subsidiary, to
the extent mandated by applicable law, (iii) the issuance and sale of Capital
Stock of the Company or any Restricted Subsidiary owned by any Restricted Entity
in compliance with Section 1017; provided that such Restricted Subsidiary would
remain a Restricted Subsidiary after such transaction or (iv) the issuance and
sale of Capital Stock of the Company or any Restricted Subsidiary to any Person
that transfers, leases, licenses or grants a right to use Telecommunications
Assets to the Parent or the Company (as the case may be) pursuant to an
Incumbent Agreement; provided that, after such issuance and sale, such
subsidiary remains a Restricted Subsidiary and, in the good faith
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determination of the Board of Directors of the Parent, the Fair Market Value of
any such transfer, lease, license or grant is not less than the Fair Market
Value of the Capital Stock of such Restricted Subsidiary issued and sold in
respect thereof.
SECTION 124. AMENDMENT TO SECTION 1014. Section 1014 of the Indenture is hereby
amended by deleting the existing Section 1014 in its entirety and replacing it
with the following:
SECTION 1014. Limitation on Transactions with Affiliates.
Neither the Company nor the Parent shall, and neither shall they
permit any Restricted Subsidiary to, enter into or suffer to exist, directly or
indirectly, any transaction or series of related transactions (including, the
sale, purchase, exchange or lease of assets, property or services) with, or for
the benefit of, any Affiliate of the Parent, the Company or any Restricted
Subsidiary (other than a Restricted Entity so long as no Affiliate of the Parent
(other than a Restricted Entity) shall beneficially own Capital Stock in such
Restricted Entity) unless (i) such transaction or series of related transactions
are on terms, taken as a whole, that are no less favorable to the Company, the
Parent, or such Restricted Subsidiary, as the case may be, than those that could
have been obtained in an arm's length transaction with unrelated third parties
that are not Affiliates; (ii) with respect to any transaction or series of
related transactions involving aggregate consideration equal to or greater than
$5,000,000 (or the equivalent thereof in one or more foreign currencies), the
Parent 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 $10,000,000 (or the equivalent
thereof in one or more foreign currencies), the Parent will deliver the
Officers' Certificates described in clause (ii) above, which will also certify
that such transaction or series of related transaction has been approved by a
majority of the Disinterested Directors of the Board of Directors of the Parent,
or that the Parent has obtained a written opinion from an independent financial
expert certifying that the financial terms of such transaction or series of
related transactions, taken as a whole, are fair to the Company, the Parent, or
the Restricted Subsidiary, as the case may be, from a financial point of view:
provided, that this covenant shall not restrict (1) any transaction or series of
related transactions between the Company and the Parent, (2) any transaction or
series of related transactions between either the Company or the Parent (as the
case may be) and one or more of the Restricted Subsidiaries or between the
Restricted Subsidiaries, (3) the Company or the Parent from paying reasonable
and customary regular compensation and fees to directors of any Restricted
Entity who are not employees of any Restricted Entity, (4) the performance of
the Parent's obligations under the Stockholders' Agreement, dated as of [ ],
among the Parent and the Investors named therein, as amended and supplemented
from time to time or (5) the performance of the Company's obligations under the
Investment and Stockholders' Agreement, dated as of October 31, 1997, among the
Company, David Schaeffer and the Investors named therein, as amended; the
Investment and Stockholders' Agreement, dated as of August 28, 1995, by and
among the Company and the Investors named therein; the Non-Qualified Stock
Option Agreement, dated August 4, 1997, between the Company and Richard Jalkut;
and the Employment Agreement, dated August 4, 1997, between the Company and
Richard Jalkut, in each case as amended through the Issue Date; provided that
any amendments or modifications to the terms of transactions described in this
clause (5) will be (x) no less favorable to the Parent or the Company, as the
case may be, 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
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Directors of the Parent or the Company, as the case may be, (including a
majority of the Disinterested Directors of the relevant Board of Directors) (6)
the making of any Restricted Payment not prohibited by Section 1012 and (7)
loans or advances made to directors, officers or employees of any Restricted
Entity, 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 (or the equivalent thereof in one or
more foreign currencies in any calendar year.)
SECTION 125. AMENDMENT TO SECTION 1015. Section 1015 of the Indenture is hereby
amended by deleting the existing Section 1015 in its entirety and replacing it
with the following:
SECTION 1015. Limitation on Liens.
Neither the Company nor the Parent shall, and neither shall they
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 any shares of Capital Stock
or Indebtedness of the Company or any Restricted Subsidiary) whether owned at
the Issue Date (in the case of the Company) or the Amendment Date (in the case
of the Parent) or thereafter acquired, or any income, profits or proceeds
therefrom, or assign or otherwise convey any right to receive income thereon,
unless (x) in the case of any Lien securing Indebtedness of the Company or the
Parent (as the case may be) 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 126. AMENDMENT TO SECTION 1016. Section 1016 of the Indenture is hereby
amended by deleting the existing Section 1016 in its entirety and replacing it
with the following:
SECTION 1016. Limitations on Issuance of Certain Guarantees and
Debt Securities.
Neither the Company nor the Parent shall permit any Restricted
Subsidiary to (i) directly or indirectly guarantee, assume or in any other
manner become liable with respect to any Debt Securities ("Guaranteed
Indebtedness") or (ii) issue any Debt Securities, unless, in either such case,
such Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture providing for the guarantee (a "Subsidiary Guarantee") of payment of
the Notes. If the Guaranteed Indebtedness (A) ranks equally in right of payment
with the Notes, then the guarantee of such Guaranteed Indebtedness will rank
equally in right of payment with, or be subordinated in right of payment to, the
Subsidiary Guarantee or (B) is subordinated in right of payment to the Notes,
then the guarantee of such Guaranteed Indebtedness will be subordinated in right
of payment to the Subsidiary Guarantee at least to the extent that the
Guaranteed Indebtedness is subordinated in right of payment to the Notes. The
obligations of each Restricted Subsidiary under a Subsidiary Guarantee will be
limited to the maximum amount as will, after giving effect to all other
contingent and fixed liabilities of such Restricted Subsidiary, result in the
obligations of such Restricted Subsidiary under the Subsidiary Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under applicable
law.
Notwithstanding the foregoing, any Subsidiary Guarantee by a
Restricted Subsidiary of the Notes shall provide by its terms that it shall be
automatically and
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unconditionally released and discharged upon (i) the sale or other disposition,
by way of merger or otherwise, to any Person not an Affiliate of the Parent, of
all of the Restricted Entities' Capital Stock in such Restricted Subsidiary,
(ii) the merger or consolidation of the applicable Restricted Subsidiary with
and into another Restricted Entity that has guaranteed the Notes and that is the
surviving Person in such merger or consolidation and (iii) the release by all of
the holders of Debt Securities of the Company or of the Parent (as the case may
be) 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 127. AMENDMENT TO SECTION 1017. Section 1017 of the Indenture is hereby
amended by deleting the existing Section 1017 in its entirety and replacing it
with the following:
SECTION 1017. Limitation on Sale of Assets.
(a) Limitation on Asset Sales by the Company and Restricted Company
Subsidiaries.
(i) The Company shall not, and shall not permit any Restricted
Company Subsidiary to, directly or indirectly, engage in any Asset Sale
unless (A) the consideration received by the Company or such Restricted
Company Subsidiary for such Asset Sale is not less than the Fair Market
Value of the shares or other assets sold (as determined by the Board of
Directors of the Company, whose determination shall be conclusive and
evidenced by a resolution thereof) and (B) the consideration received
by the Company or the relevant Restricted Company Subsidiary in respect
of such Asset Sale consists of at least 75% cash or Cash Equivalents;
provided, that for purposes of this Section 1017(a) "Cash Equivalents"
shall include (X) the amount of any liabilities (other than liabilities
that are by their terms subordinated to the Notes) of the Company or
such Restricted Company Subsidiary (as shown on the Company's or such
Restricted Company Subsidiary's most recent balance sheet or in the
notes thereto) that are assumed by the transferee of any such assets or
other property in such Asset Sale or are no longer a liability of the
Company or any Restricted Company Subsidiary (and excluding any
liabilities that are incurred in connection with or in anticipation of
such Asset Sale), but only to the extent that such assumption is
effected on a basis under which there is no further recourse to the
Company or any of its Restricted Company Subsidiaries with respect to
such liabilities and (Y) any securities, notes or other obligations
received by the Company or any such Restricted Company Subsidiary in
connection with such Asset Sale that are converted by the Company or
such Restricted Company Subsidiary into cash within 60 days of receipt.
(ii) If the Company or any Restricted Company Subsidiary engages in
an Asset Sale, the Company may use the Net Cash Proceeds thereof,
within 12 months after such Asset Sale, to (A) permanently repay or
prepay the Notes or any then outstanding Indebtedness of the Company
that ranks equally with the Notes or Indebtedness of any Restricted
Company Subsidiary or permanently reduce (without making any
prepayment) any Indebtedness of the Company ranking equally with the
Notes or any Indebtedness of a Restricted Company Subsidiary or (B)
invest (or enter into a legally binding agreement to invest) in
properties and assets to replace the properties and assets that were
the subject of the Asset Sale or in properties and assets that are or
will be used in the Telecommunications Business of the Company or a
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Restricted Company Subsidiary, as the case may be. If any such legally
binding agreement to invest such Net Cash Proceeds is terminated, then
the Company may, within 60 days of such termination or within 12 months
of such Asset Sale, whichever is later, apply or invest such Net Cash
Proceeds as provided in clause (A) or (B) (without regard to the
parenthetical contained in such clause (B) above. The amount of such
Net Cash Proceeds not so used as set forth above in this paragraph (ii)
constitutes "Company Excess Proceeds."
(iii) When the aggregate amount of Company Excess Proceeds exceeds
$10,000,000 (or the equivalent thereof in one or more foreign
currencies after deducting fees that would be incurred in converting
such funds to US dollars), the Company shall, within 15 Business Days,
make an offer to purchase (a "Company 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
Company Excess Proceeds. Any Company Excess Proceeds Offer shall
include a pro rata offer under similar circumstances to purchase all
other Indebtedness of the Company ranking equally with the Notes which
Indebtedness contains similar provisions requiring the Company to
purchase such Indebtedness. The offer price as to each Note (the
"Company 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 a Company Excess
Proceeds Offer is less than the Company Excess Proceeds, the Company
may use such deficiency for general corporate purposes. If the
aggregate principal amount of Notes validly tendered and not withdrawn
by holders thereof pursuant to a Company Excess Proceeds Offer exceeds
the Excess Proceeds, Notes to be purchased will be selected on a
proportional basis. Upon completion of such Company Exceeds Proceeds
Offer, the amount of Company Excess Proceeds shall be reset to zero.
(b) Limitation on Asset Sales by Parent and Restricted Parent
Subsidiaries. (i)The Parent shall not, and shall not permit any Restricted
Parent Subsidiary to, directly or indirectly, engage in any Asset Sale unless
(A) the consideration received by the Parent or such Restricted Parent
Subsidiary for such Asset Sale is not less than the Fair Market Value of the
shares or other assets sold (as determined by the Board of Directors of the
Parent, whose determination shall be conclusive and evidenced by a resolution
thereof) and (B) the consideration received by the Parent or the relevant
Restricted Parent Subsidiary in respect of such Asset Sale consists of at least
75% cash or Cash Equivalents; provided, that for purposes of this Section
1017(b), "Cash Equivalents" shall include (X) the amount of any liabilities
(other than liabilities that are by their terms subordinated to the Notes) of
the Parent or such Restricted Parent Subsidiary (as shown on the Parent's or
such Restricted Parent Subsidiary's most recent balance sheet or in the notes
thereto) that are assumed by the transferee of any such assets or other property
in such Asset Sale or are no longer a liability of the Parent or any Restricted
Parent Subsidiary (and excluding any liabilities that are incurred in connection
with or in anticipation of such Asset Sale), but only to the extent that such
assumption is effected on a basis under which there is no further recourse to
the Parent or any of the Restricted Parent Subsidiaries with respect to such
liabilities and (Y) and securities, notes or other obligations received by the
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Parent or any of its Restricted Parent Subsidiaries in connection with such
Asset Sale that are converted by the Parent or such Restricted Parent Subsidiary
into cash within 60 days of receipt.
(ii) If the Parent or any Restricted Parent Subsidiary engages in an
Asset Sale, the Parent may use the Net Cash Proceeds thereof, within 12
months after such Asset Sale, to (A) commence an offer to purchase the
Notes or any then outstanding Indebtedness of the Parent that ranks
equally with the Notes or Indebtedness of any Restricted Parent
Subsidiary or permanently reduce (without making any prepayment) any
Indebtedness of the Parent ranking equally with the Guarantee or any
Indebtedness of a Restricted Parent Subsidiary, (B) cause the Company
to repay or prepay the Notes or any then outstanding Indebtedness of
the Company that ranks equally with the Notes or Indebtedness of any
Restricted Company Subsidiary or permanently reduce (without making any
prepayment) any Indebtedness of the Company ranking equally with the
Notes or Indebtedness of any Restricted Company Subsidiary, or (C)
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. If any such legally
binding agreement to invest such Net Cash Proceeds is terminated, then
the Parent 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 (A), or (B) or (C) (without regard to
the parenthetical contained in such clause (C)) above. The amount of
such Net Cash Proceeds not so used as set forth above in this paragraph
(c) constitutes "Parent Excess Proceeds."
(iii) When the aggregate amount of Parent Excess Proceeds exceeds
$10,000,000, the Parent shall, within 15 business days, make an offer
to purchase (a "Parent 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 Parent Excess Proceeds. Any
Parent Excess Proceeds Offer made by the Parent shall include a pro
rata offer under similar circumstances to purchase all other
Indebtedness of the Parent ranking equally with the Notes which
Indebtedness contains similar provisions requiring the Parent to
purchase such Indebtedness. The offer price as to each Note (the
"Parent 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 Parent Excess
Proceeds Offer is less than the Parent Excess Proceeds, the Parent 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 a Parent Excess Proceeds Offer exceeds the Parent
Excess Proceeds, Notes to be purchased will be selected on a
proportional basis. Upon completion of such Parent Excess Proceeds
Offer, the amount of Excess Proceeds shall be reset to zero.
SECTION 128. AMENDMENT TO SECTION 1018. Section 1018 of the Indenture is hereby
amended by deleting the existing Section 1018 in its entirety and replacing it
with the following:
SECTION 1018. Limitations on Dividend Restrictions.
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Neither the Company nor the Parent shall, and neither shall they
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 the Company or 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 the Company or such Restricted Subsidiary owned
by any Restricted Entity, (b) pay any Indebtedness owed to any Restricted
Entity, (c) make Investments in any Restricted Entity, (d) transfer any of its
property or assets to any Restricted Entity or (e) guarantee any indebtedness of
any Restricted Entity, 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 any Restricted
Entity, (iv) any agreement or other instrument of a Person acquired by the any
Restricted Entity 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 a Restricted Entity otherwise
permitted hereunder, (vi) any encumbrance or restriction with respect to a
Restricted Subsidiary entered into for the sale or disposition of all or
substantially all of the Capital Stock or assets of such Restricted Subsidiary
permitted under Section 1017), (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 this
Indenture for interest, premium and principal less the amount of cash that is
otherwise available to the Company or the Parent (as the case may be) at such
time for the payment of interest, premium and principal due and payable in
respect of the Notes or this Indenture or (2) if paid, would result in an event
described in the following clause (B) of this sentence, or (B) during the
pendency of any event that causes, permits or, after notice or lapse of time,
would cause or permit the holder or holders of such Indebtedness to declare such
Indebtedness to be immediately due and payable or to require cash
collateralization or cash cover for such Indebtedness for so long as such cash
collateralization or cash cover has not been provided; (viii) any encumbrance or
restriction under the Vendor Credit Facility; (ix) any encumbrance or
restriction relating to transfer of property or assets comprising an Initial
System pursuant to an Incumbent Agreement, and (x) any encumbrance or
restriction under any agreement that extends, renews, refinances or replaces
agreements containing the encumbrances or restrictions in the foregoing clauses
(i) through (vi) and (viii), so long as the Board of Directors of the Parent
determines in good faith that the terms and conditions of any such encumbrances
or restrictions, taken as a whole, are no less favorable to any Restricted
Entity and the holders of the Notes than those so extended, renewed, refinanced
or replaced."
AMENDMENTS TO "SECURITY"
SECTION 129. AMENDMENTS TO ARTICLE 12. Article 12 of the Indenture is hereby
amended by deleting the existing Article 12 in its entirety and replacing it
with the following:
SECTION 1201. Security
(a) On the date hereof, the Company shall purchase the New Pledged
Securities, and at all times, subject to the Amended and Restated Pledge
Agreement, pledge to the Trustee the Pledged Securities as security for the
benefit of the Holders. The Pledged Securities must be in such amount as will
be sufficient upon receipt of scheduled interest on and principal payments of
such Pledged Securities, in the opinion of a nationally recognized firm of
independent public accountants selected by the Company, to provide for payment
in full of the fourth and fifth scheduled interest payments due on the
Outstanding Notes. The Pledged Securities shall be pledged by the Company to
the Trustee for the benefit of the Holders pursuant to the Amended and Restated
Pledge Agreement and shall be held by the Trustee in the Escrow Account pending
disposition pursuant to the Amended and Restated Pledge Agreement.
(b) Each Holder, by its continued acceptance of a Note, consents and
agrees to the terms of the Pledge Agreement (including, without limitation, the
provisions providing for foreclosure and release of the Pledged Securities) as
the same may be in effect or may be amended from time to time in accordance
with its terms, and authorizes and directs the Trustee to enter into the
Amended and Restated Pledge Agreement and to perform its respective obligations
and exercise its respective rights thereunder in accordance therewith. The
Company shall do or cause to be done all such acts and things as may be
reasonably necessary or proper, or as may be required by the provisions of the
Amended and Restated Pledge Agreement, to assure and confirm to the Trustee the
security interest in the Pledged Securities contemplated hereby, by the Amended
and Restated Pledge Agreement or any part thereof, as from time to time
constituted, so as to render the same available for the security and benefit of
this Indenture and of the Notes secured hereby, according to the intent and
purposes herein expressed. The Company shall take, or shall cause to be taken,
any and all actions reasonably required (and any action reasonably requested by
the Trustee) to cause the Amended and Restated Pledge Agreement to create and
maintain, as security for the obligations of the Company under this Indenture
and the Notes, valid and enforceable first priority liens in and on all the
Pledged Securities, in favor of the Trustee, superior to and prior to the
rights of the third Persons and subject to no other Liens.
(c) The release of any Pledged Securities pursuant to the Amended and
Restated Pledge Agreement will not be deemed to impair the security under this
Indenture in contravention of the provisions hereof if and to the extent the
Pledged Securities are released pursuant to this Indenture and the Amended and
Restated Pledge Agreement. To the extent applicable, the Company shall cause
TIA Section 314(d), relating to the release of property or securities from the
Lien and security interest of the Amended and Restated Pledge Agreement and
relating to the substitution therefor of any property or securities to be
subjected to the Lien and security interest of the Amended and Restated Pledge
Agreement, to be complied with. Any certificate or opinion required by TIA
Section 314(d) may be made by an officer of the Company, except in cases where
TIA Section 314(d) requires that such certificate or opinion be made by an
independent Person, which Person shall be an independent appraiser or other
expert selected or approved by the Company in the exercise of reasonable care.
(d) The Company shall cause TIA Section 314(b), relating to opinions of
counsel regarding the Lien under the Amended and Restated Pledge Agreement, to
be complied with. The Trustee may, to the extent permitted by Section 602
hereof, accept as conclusive evidence of compliance with the foregoing
provisions the appropriate statements contained in such instruments.
(e) The Trustee, in its sole discretion and without the consent of the
Holders, may, and at the request of the Holders of at least 25% in aggregate
principal amount of Notes then Outstanding shall, on behalf of the Holders,
take all actions it deems necessary or appropriate in order to (i) enforce any
of the terms of the Amended and Restated Pledge Agreement and (ii) collect and
receive any and all amounts payable in respect of the obligations of the
Company thereunder. The Trustee shall have power to institute and to maintain
such suits and proceedings as the Trustee may deem expedient to preserve or
protect its interests and the interests of the Holders in the Pledged
Securities (including power to institute and maintain suits or proceedings to
restrain the enforcement of or compliance with any legislative or other
governmental enactment, rule or order that may be unconstitutional or otherwise
invalid if the enforcement of, or compliance with, such enactment, rule or
order would impair the security interest hereunder or be prejudicial to the
interest of the Holders of the Trustee).
AMENDMENTS TO "DEFEASANCE AND COVENANT DEFEASANCE"
SECTION 130. AMENDMENTS TO ARTICLE 13. Article 13 of the Indenture is hereby
amended by deleting the existing Article 13 in its entirety and replacing it
with the following:
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SECTION 1301. Company's Option to Effect Defeasance or Covenant Defeasance.
The Company may, at its option by Board Resolution, at any time,
with respect to the Notes, elect to have either Section 1302 or Section 1303 be
applied to all Outstanding Notes upon compliance with the conditions set forth
below in this Article Thirteen.
SECTION 1302. Defeasance and Discharge.
Upon the Company's exercise under Section 1301 of the option
applicable to this Section 1302, each of the Company and the Parent shall be
deemed to have been discharged from its obligations with respect to all
Outstanding Notes on the date the conditions set forth in Section 1304 are
satisfied (hereinafter, "defeasance"). For this purpose, such defeasance means
that the Company shall be deemed to have paid and discharged the entire
indebtedness represented by the Outstanding Notes, which shall thereafter be
deemed to be "Outstanding" only for the purposes of Section 1305 and the other
Sections of this Indenture referred to in (A) and (B) below, and to have
satisfied all its other obligations under such Notes and this Indenture insofar
as such Notes are concerned (and the Trustee, at the expense of the Company,
shall execute proper instruments acknowledging the same), except for the
following which shall survive until otherwise terminated or discharged
hereunder: (A) the rights of Holders of Outstanding Notes to receive, solely
from the trust fund described in Section 1304 and as more fully set forth in
such Section, payments in respect of the principal of (and premium, if any, on)
and interest and Liquidated Damages, if any, on such Notes when such payments
are due, (B) the Company's and the Parent's obligations with respect to such
Notes under Sections 304, 305, 306, 1002 and 1003, (C) the rights, powers,
trusts, duties and immunities of the Trustee hereunder and (D) this Article
Thirteen. Subject to compliance with this Article Thirteen, the Company may
exercise its option under this Section 1302 notwithstanding the prior exercise
of its option under Section 1303 with respect to the Notes. Forthwith upon
exercise by the Company of its option under this Section 1302 the Guarantees
shall cease to be of further force and effect.
SECTION 1303. Covenant Defeasance.
Upon the Company's exercise under Section 1301 of the option
applicable to this Section 1303, the Company and the Parent shall be released
from their respective obligations under any covenant contained in Section 801(2)
and (3) and Section 803 and in Sections 1007 through 1018 with respect to the
Outstanding Notes on and after the date the conditions set forth below are
satisfied (hereinafter, "covenant defeasance"), and the Notes shall thereafter
be deemed not to be "Outstanding" for the purposes of any direction, waiver,
consent or declaration or Act of Holders (and the consequences of any thereof)
in connection with such covenants, but shall continue to be deemed "Outstanding"
for all other purposes hereunder. For this purpose, such covenant defeasance
means that, with respect to the Outstanding Notes, the Company and the Parent
may omit to comply with and shall have no liability in respect of any term,
condition or limitation set forth in any such covenant, whether directly or
indirectly, by reason of any reference elsewhere herein to any such covenant or
by reason of any reference in any such covenant to any other provision herein or
in any other document and such omission to comply shall not constitute a Default
or an Event of Default under Section 501(4), but, except as specified above, the
remainder of this Indenture and such Notes shall be unaffected thereby.
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SECTION 1304. Conditions to Defeasance or Covenant Defeasance.
The following shall be the conditions to application of either
Section 1302 or Section 1303 to the Outstanding Notes:
(1) The Company or the Parent shall have deposited or caused to be
deposited irrevocably with the Trustee (or another trustee satisfying the
requirements of Section 607 who shall agree to comply with the provisions of
this Article Thirteen applicable to it) as trust funds in trust for the purpose
of making the following payments, specifically pledged as security for, and
dedicated solely to, the benefit of the Holders of such Notes, (A) cash in
United States dollars, (B) U.S. Government Obligations which through the
scheduled payment of principal and interest in respect thereof in accordance
with their terms will provide, not later than one day before the due date of any
payment, money in an amount, or (C) a combination thereof, sufficient, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, to pay
and discharge, and which shall be applied by the Trustee (or other qualifying
trustee) to pay and discharge, (i) the principal of (and premium, if any) and
interest and Liquidated Damages, if any, on, Outstanding Notes on the Stated
Maturity (or Redemption Date, if applicable) of such principal (and premium, if
any) or installment of interest and Liquidated Damages, if any, and (ii) any
payments applicable to the Outstanding Notes on the day on which such payments
are due and payable in accordance with the terms of this Indenture and of such
Notes; provided that the Trustee shall have been irrevocably instructed to apply
such money or the proceeds of such U.S. Government Obligations to said payments
with respect to the Notes. Before such a deposit, the Company may give to the
Trustee, in accordance with Section 1103 hereof, a notice of its election to
redeem all of the Outstanding Notes at a future date in accordance with Article
Eleven hereof, which notice shall be irrevocable. Such irrevocable redemption
notice, if given, shall be given effect in applying the foregoing. For this
purpose, "U.S. Government Obligations" means securities that are (x) direct
obligations of the United States of America for the timely payment of which its
full faith and credit is pledged or (y) obligations of a Person controlled or
supervised by and acting as an agency or instrumentality of the United States of
America the timely payment of which is unconditionally guaranteed as a full
faith and credit obligation by the United States of America, which, in either
case, are not callable or redeemable at the option of the issuer thereof, and
shall also include a depository receipt issued by a bank (as defined in Section
3(a)(2) of the Securities Act of 1933, as amended), as custodian with respect to
any such U.S. Government Obligation or a specific payment of principal of or
interest on any such U.S. Government Obligation held by such custodian for the
account of the holder of such depository receipt, provided that (except as
required by law) such custodian is not authorized to make any deduction from the
amount payable to the holder of such depository receipt from any amount received
by the custodian in respect of the U.S. Government Obligation or the specific
payment of principal of or interest on the U.S. Government Obligation evidenced
by such depository receipt.
(2) No Default or Event of Default with respect to the Notes shall
have occurred and be continuing on the date of such deposit or, insofar as
paragraphs (6) and (7) of Section 501 hereof are concerned, at any time during
the period ending on the 123rd day after the date of
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such deposit (it being understood that this condition shall not be deemed
satisfied until the expiration of such period).
(3) Such defeasance or covenant defeasance shall not result in a
breach or violation of, or constitute a default under any material agreement or
instrument (other than the Indenture) to which the Company or the Parent is a
party or by which it is bound.
(4) In the case of an election under Section 1302, the Company shall
have delivered to the Trustee an Opinion of Counsel stating that (x) the Company
has received from, or there has been published by, the Internal Revenue Service
a ruling, or (y) since April 1, 1998, there has been a change in the 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 federal income tax purposes as a result of
such defeasance and will be subject to federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
defeasance had not occurred.
(5) In the case of an election under Section 1303, the Company shall
have delivered to the Trustee an Opinion of Counsel to the effect that the
Holders of the Outstanding Notes will not recognize income, gain or loss for
U.S. federal income tax purposes as a result of such covenant defeasance and
will be subject to U.S. federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such covenant
defeasance had not occurred.
(6) The Company shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the defeasance under Section 1302 or
the covenant defeasance under Section 1303 (as the case may be) have been
complied with.
SECTION 1305. Deposited Money and U.S. Government Obligations to Be Held in
Trust; Other Miscellaneous Provisions.
Subject to the provisions of the last paragraph of Section 1003, all
money and U.S. Government Obligations (including the proceeds thereof) deposited
with the Trustee (or other qualifying trustee, collectively for purposes of this
Section 1305, the "Trustee") pursuant to Section 1304 in respect of the
Outstanding Notes shall be held in trust and applied by the Trustee, in
accordance with the provisions of such Notes and this Indenture, to the payment,
either directly or through any Paying Agent (including the Company acting as its
own Paying Agent) as the Trustee may determine, to the Holders of such Notes of
all sums due and to become due thereon in respect of principal (and premium, if
any) and interest, but such money need not be segregated from other funds except
to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the U.S. Governmental Obligations
deposited pursuant to Section 1304 or the principal and interest received in
respect thereof other than any such tax, fee or other charge which by law is for
the account of the Holders of the Outstanding Notes.
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Anything in this Article Thirteen to the contrary notwithstanding,
the Trustee shall deliver or pay to the or the Parent, as the case may be, from
time to time upon Company Request or Parent Request, as applicable any money or
U.S. Government Obligations held by it as provided in Section 1304 which, in the
opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee, are in
excess of the amount thereof which would then be required to be deposited to
effect an equivalent defeasance or covenant defeasance, as applicable, in
accordance with this Article.
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SECTION 1306. Reinstatement.
If the Trustee or any Paying Agent is unable to apply any money in
accordance with Section 1305 by reason of any order or judgment of any court or
governmental authority enjoining, restraining or otherwise prohibiting such
application, then the Company's and the Parent's obligations under this
Indenture and the Notes shall be revived and reinstated as though no deposit had
occurred pursuant to Section 1302 or 1303, as the case may be, until such time
as the Trustee or Paying Agent is permitted to apply all such money in
accordance with Section 1305; provided, however, that if the Company or the
Parent makes any payment of principal of (or premium, if any) or interest on any
Note following the reinstatement of its obligations, the Company or the Parent,
as applicable, shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money held by the Trustee or Paying Agent.
PARENT GUARANTEE
SECTION 131. GUARANTEE. Parent agrees that forthwith upon execution of this
Supplemental Indenture it will enter into a guarantee of the Company's
obligations under the Notes in the form attached hereto as Exhibit 1.
MISCELLANEOUS
SECTION 132. WAIVER. Without limitation to Section 1019 of the Indenture, the
Parent may omit in any particular instance to comply with any term provision or
condition set forth in Section 803 or Sections 1005 through 1018, inclusive, if
before or after the time for such compliance the Holders of at least a majority
in aggregate principal amount of the Outstanding Notes, by Act of such Holders,
waive such compliance in such instance with such term, provision or condition
except to the extent so expressly waived, and, until such waivers shall become
effective, the obligations of the Parent and the duties of the Trustee in
respect of any such term, provision or condition shall remain in full force and
effect.
SECTION 133. ACTS OF HOLDERS.
(a) Any request, demand, authorization, direction, notice, consent,
waiver or other action provided by this Supplemental Indenture to be given or
taken by Holders may be embodied in and evidenced by one or more instruments of
substantially similar tenor signed by such Holders in person or by agents duly
appointed in writing; and, except as herein otherwise expressly provided, such
action shall become effective when such instrument or instruments are delivered
to the Trustee and, where it is hereby expressly required, to the Parent and/or
Company. Such instrument or instruments (and the action embodied therein and
evidenced thereby) are herein sometimes referred to as the "Act" of the Holders
signing such instrument or instruments. Proof of execution of any such
instrument or of a writing appointing any such agent shall be sufficient for any
purpose of this Supplemental Indenture and conclusive in favor of the Trustee,
the Parent and the Company, if made in the manner provided in this Section.
(b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by a certificate of a notary public or other officer authorized by
law to take acknowledgements of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution
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thereof. Where such execution is by a signer acting in a capacity other than his
individual capacity, such certificate or affidavit shall also constitute
sufficient proof of authority. The fact and date of the execution of any such
instrument or writing, or the authority of the Person executing the same, may
also be proved in any other manner that the Trustee deems sufficient.
(c) The principal amount and serial numbers of Notes held by any
Person, and the date of holding the same, shall be proved by the Note Register.
(d) If the Parent and/or the Company shall solicit from the Holders of
Notes any request, demand, authorization, direction, notice, consent, waiver or
other Act, the Company or the Parent (as the case may be) may, at its option, by
or pursuant to a Board Resolution, fix in advance a record date for the
determination of Holders entitled to give such request, demand, authorization,
direction, notice, consent, waiver or other Act, but neither the Company nor the
Parent shall have no obligation to do so. Notwithstanding TIA Section 316(c),
such record date shall be the record date specified in or pursuant to such Board
Resolution, which shall be a date not earlier than the date 30 days prior to the
first solicitation of Holders generally in connection therewith and not later
than the date such solicitation is completed. If such a record date is fixed,
such request, demand, authorization, direction, notice, consent, waiver or other
Act may be given before or after such record date, but only the Holders of
record at the close of business on such record date shall be deemed to be
Holders for the purposes of determining whether Holders of the requisite
proportion of Outstanding Notes have authorized or agreed or consented to such
request, demand, authorization, direction, notice, consent, waiver or other Act,
and for that purpose the Outstanding Notes shall be computed as of such record
date; provided that no such authorization, agreement or consent by the Holders
on such record date shall be deemed effective unless it shall become effective
pursuant to the provisions of this Indenture not later than eleven months after
the record date.
(e) Any request, demand, authorization, direction, notice, consent,
waiver or other Act of the Holder of any Note shall bind every future Holder of
the same Note and the Holder of every Note issued upon the registration of
transfer thereof or in exchange therefor or in lieu thereof in respect of
anything done, omitted or suffered to be done by the Trustee, the Parent or the
Company in reliance thereon, whether or not notation of such action is made upon
such Note.
SECTION 134. NOTICE OF HOLDERS; WAIVER.
Where this Supplemental Indenture provides for notice of any event
to Holders by the Parent or the Trustee, such notice shall be sufficiently given
(unless otherwise herein expressly provided) if in writing and mailed,
first-class postage prepaid, to each Holder affected by such event, at its
address as it appears in the Note Register, not later than the latest date, and
not earlier than the earliest date, prescribed for the giving of such notice. In
any case where notice to Holders is given by mail, neither the failure to mail
such notice, nor any defect in any notice so mailed, to any particular Holder
shall affect the sufficiency of such notice with respect to other Holders. Any
notice mailed to a Holder in the manner herein prescribed shall be conclusively
deemed to have been received by such Holder, whether or not such Holder actually
receives such notice. Where this Indenture provides for notice in any manner,
such notice may be waived in writing by the Person entitled to receive such
notice, either before or after the event, and such waiver shall be the
equivalent of such notice. Waivers of notice by Holders shall be filed with the
Trustee, but such filing shall not be a condition precedent to the validity of
any action taken in reliance upon such waiver.
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In case, by reason of the suspension of or irregularities in regular
mail service or by reason of any other cause, it shall be impracticable to mail
notice of any event to Holders when such notice is required to be given pursuant
to any provision of this Indenture, then any manner of giving such notice as
shall be satisfactory to the Trustee shall be deemed to be a sufficient giving
of such notice for every purpose hereunder.
SECTION 135. COUNTERPARTS. This Supplemental Indenture may be signed in any
number of counterparts each of which so executed shall be deemed to be an
original, but all such counterparts together constitute but one and the same
Supplemental Indenture.
SECTION 136. GOVERNING LAW. THIS SUPPLEMENTAL INDENTURE SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
GIVING EFFECT TO THE CONFLICTS OF LAW PRINCIPLES THEREOF.
SECTION 137. SEPARABILITY CLAUSE. In case any provision in this
Supplemental Indenture shall be invalid, illegal or unenforceable, the validity,
legality and enforceability of the remaining provisions shall not in any way be
affected or impaired thereby.
SECTION 138. HEADINGS. The various headings of this Supplemental Indenture
are inserted for convenience only and shall not affect the meaning or
interpretation of this Supplemental Indenture or any provisions hereof or
thereof.
SECTION 139. EFFECT OF SUPPLEMENTAL INDENTURE. Pursuant to Section 902 of
the Indenture, upon the execution of this Supplemental Indenture, the Indenture
shall be and be deemed to be modified and amended in accordance therewith with
respect to the Notes affected thereby, and the respective rights, limitations of
rights, obligations, duties and liabilities and immunities under the Indenture
of the Trustee shall thereafter be determined, exercised and enforced hereunder
subject in all respects to such modifications and amendments, and all the terms
and conditions of this Supplemental Indenture shall be and be deemed to be part
of the terms and conditions of the Indenture for any and all purposes.
SECTION 140. INDENTURE IN FULL FORCE AND EFFECT AS SUPPLEMENTED. Except as
specifically stated herein, all of the terms and conditions of the Indenture
shall remain in full force and effect. All references to the Indenture in any
other document or instrument shall be deemed to mean the Indenture, as
supplemented by this Supplemental Indenture. This Supplemental Indenture shall
not constitute a novation of the Indenture, but shall constitute an amendment
thereto. The parties hereby agree to be bound by the terms and obligations of
the Indenture, as supplemented by this Supplemental Indenture, as though the
terms and obligations of the Indenture were set forth herein.
-79-
<PAGE> 85
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed as of the day and year first above written.
PATHNET, INC.
By:_________________________________
Name:
Title:
PATHNET TELECOMMUNICATIONS, INC.
By:_________________________________
Name:
Title:
THE BANK OF NEW YORK, TRUSTEE
By:_________________________________
Name:
Title:
-80-
<PAGE> 1
Exhibit 4.6
FORM OF AMENDED AND RESTATED PLEDGE AGREEMENT
This AMENDED AND RESTATED PLEDGE AGREEMENT (this "Pledge
Agreement") is made and entered into as of _________, 2000 by PATHNET, INC., a
Delaware corporation (the "Pledgor"), THE BANK OF NEW YORK, a New York banking
corporation, having an office at 101 Barclay Street, Floor 21 West, New York,
New York 10286, as trustee (the "Trustee") for the holders from time to time
(the "Holders") of the Notes (as defined herein) issued by the Pledgor under the
Indenture referred to below and THE BANK OF NEW YORK, as securities intermediary
(the "Pathnet Securities Intermediary").
W I T N E S S E T H
WHEREAS, the Pledgor and the Trustee have entered into that
certain indenture dated as of April 8, 1998 (the " Original Indenture"),
pursuant to which the Pledgor issued on April 8, 1998 $350,000,000 in aggregate
principal amount of 12-1/4 % Senior Notes due 2008 (and along with such notes
that may from time to time be issued in substitution therefor, the "Notes"); and
WHEREAS, the Pledgor agreed, pursuant to the Original
Indenture, to (i) purchase or cause the purchase of Pledged Securities (as
defined in the Original Indenture) in an amount that would be sufficient upon
receipt of scheduled interest and principal payments in respect thereof to
provide for the payment of the first four scheduled interest payments due on the
Notes and (ii) place such Pledged Securities (or cause them to be placed) in an
account maintained by the Trustee with the Pathnet Securities Intermediary for
the benefit of Holders of the Notes; and
WHEREAS, the Pledgor agreed to purchase United States Treasury
securities in an amount sufficient, in the opinion of a nationally recognized
firm of independent public accountants selected by the Pledgor and delivered to
the Trustee, upon receipt of scheduled interest and principal payments of such
securities, to provide for payment in full of each of the first four scheduled
interest payment due on the Notes and interest on the Notes in the event that
the Notes become due and payable prior to such time as the first four scheduled
interest payments thereon shall have been paid in full (the "Original
Obligations"); and
WHEREAS, the Pledgor agreed to (i) pledge to the Trustee for
its benefit and the ratable benefit of the Holders of the Notes a security
interest in the Pledged Securities and related collateral and (ii) execute and
deliver the Pledge Agreement dated as of April 8, 1998 by and between the
Pledgor and the Trustee in order to secure the payment and performance by the
Pledgor of all the Original Obligations (the "Original Pledge Agreement"); and
<PAGE> 2
2
WHEREAS, pursuant to the Original Pledge Agreement the Trustee
opened an account (the "Escrow Account") with the Pathnet Securities
Intermediary, at its office at 101 Barclay Street, New York, New York 10286,
Account No. 281251, in the name of The Bank of New York, as Trustee, for the
benefit of the Holders of the 12-1/4% Senior Notes due 2008 of Pathnet, Inc.
(along with such notes that may from time to time be issued in substitution
therefor), with respect to which the Trustee is the sole entitlement holder and
which is under the sole dominion and control of the Trustee but subject to the
terms of the Original Pledge Agreement.
WHEREAS, the first three scheduled interest payments on the
Notes have been paid in accordance with the terms of the Original Indenture; and
WHEREAS, Pathnet has entered into a Contribution and
Reorganization transaction (the "Transaction") as at the date hereof, as more
particularly described in the Registration Statement of Pathnet
Telecommunications, Inc., and filed with the SEC with Registration No.
333-91469; and
WHEREAS, in connection with the Transaction, the Original
Indenture has been supplemented by that Supplemental Indenture of even date
herewith by and among the Pledgor, Pathnet Telecommunications Inc., and the
Trustee (the "Supplemental Indenture"); and
WHEREAS, pursuant to the Supplemental Indenture Pathnet has
agreed to (i) purchase and pledge to the Trustee additional United States
Treasury securities as security for the benefit of the holders of the Notes with
respect to the fifth scheduled interest payment on the Notes on the same terms
as the Original Pledge Agreement; and (ii) execute and deliver this Amended and
Restated Pledge Agreement in order to secure the payment in full of the fourth
and fifth scheduled interest payments due on the Notes and interest on the Notes
in the event that the Notes become due and payable prior to such time as the
fourth and fifth scheduled interest payments thereon shall have been paid in
full (the "Outstanding Obligations").
Capitalized terms used herein and not otherwise defined herein
shall have the meanings given to them in the Indenture. References herein to the
"Indenture" shall be deemed to be references to the Original Indenture as
amended by the Supplemental Indenture unless expressly stated to the contrary.
NOW THEREFORE, in consideration of the mutual promises herein
contained and in order to induce the Holders of the Notes to consent to the
amendments to the Original Indenture contained in the Supplemental Indenture,
the Pledgor hereby agrees with the Trustee, for the benefit of the Trustee and
for the ratable benefit of the Holders of the Notes, as follows:
SECTION 1. Pledge and Grant of Security Interest. As security
for the prompt and complete payment and performance when due of the Outstanding
Obligations (whether at the stated maturity or otherwise), the Pledgor hereby
pledges to the Trustee for its benefit and for the ratable benefit of the
Holders of the Notes, and grants to the Trustee for its benefit and for the
ratable benefit of the Holders of the Notes, a continuing
<PAGE> 3
3
first priority security interest in and to all of the Pledgor's right, title and
interest in, to and under the following (wherever located), whether investment
property, general intangibles, other rights, interests, claims and remedies or
proceeds or otherwise (collectively, the "Pledged Collateral"): (a) the United
States Treasury securities identified by CUSIP Number in Exhibit A to this
Pledge Agreement (the "Pledged Securities"), (b) any and all applicable Security
Entitlements to the Pledged Securities, (c) the Escrow Account and all funds,
certificates, instruments, assets and properties, if any, from time to time
carried therein or representing or evidencing the Escrow Account (d) any and all
related accounts in which Security Entitlements to the Pledged Securities are
carried and (e) all proceeds of any and all of the Pledged Collateral
(including, without limitation, proceeds that constitute property of the types
described in clauses (a) - (d) of this Section 1).
SECTION 2. Security for Outstanding Obligation. This Pledge
Agreement secures the prompt and complete payment and performance when due
(whether at stated maturity, by acceleration or otherwise) of all the
Outstanding Obligations.
SECTION 3. Delivery of New Pledged Securities; Escrow Account;
Interest. (a) The Pledged Securities shall, if and to the extent that
they have not previously been pledged and transferred to the Trustee
pursuant to the Original Pledge Agreement (such unpledged and
untransferred securities being hereinafter referred to as the "New
Pledged Securities" and the Pledged Collateral, in so far as it relates
to the New Pledged Securities being referred to as the New Pledged
Collateral) be pledged and transferred to the Trustee and the Trustee
shall become the holder of a Security Entitlement to the New Pledged
Securities through action by the Pathnet Securities Intermediary, as
confirmed (in writing or electronically or otherwise in accordance with
standard industry practice) to the Trustee by the Pathnet Securities
Intermediary (i) indicating by book-entry that the New Pledged
Securities and all Security Entitlements thereto have been credited to
the Escrow Account, or (ii) acquiring the New Pledged Securities or a
Security Entitlement thereto for the Trustee and accepting the same for
credit to the Escrow Account.
(b) The Trustee has pursuant to the Original Pledge Agreement,
established with the Pathnet Securities Intermediary the Escrow Account
on the books of the Pathnet Securities Intermediary as a Securities
Account segregated from all other custodial or collateral accounts,
such Escrow Account to be maintained at the offices of the Pathnet
Securities Intermediary at 101 Barclay Street, Floor 21 West, New York,
New York 10286, and the Pathnet Securities Intermediary has established
and maintained a Securities Account at the Federal Reserve Bank of New
York ("FRBNY"). Upon transfer of the New Pledged Securities to the
Pathnet Securities Intermediary (or the Pathnet Securities
Intermediary's acquisition of the Security Entitlements thereto), as
confirmed to the Pathnet Securities Intermediary by FRBNY or another
securities intermediary, the Pathnet Securities Intermediary shall make
appropriate book entries indicating that the New Pledged Securities
and/or such Security Entitlement have been credited to the Trustee and
the Escrow Account and that all of the Pledged
<PAGE> 4
4
Securities are therefore credited to the Trustee and the Escrow
Account. Subject to the other terms and conditions of this Pledge
Agreement, all funds or other property held by the Trustee pursuant to
this Pledge Agreement and the Original Pledge Agreement shall be held
in the Escrow Account subject (except as expressly provided in Section
4(a), (b) and (c) hereof) to the exclusive dominion and control
(including "control" as defined in Section 9-115(l)(e) of the UCC) of
the Trustee and exclusively for the benefit of the Trustee and for the
ratable benefit of the Holders of the Notes and segregated from all
other funds or other property otherwise held by the Trustee.
(c) The Trustee shall, in accordance with all applicable laws,
have sole dominion and control (including "control" as defined in UCC
Section 9-115(l)(e)) over the Escrow Account, and it shall be a term
and condition of the Escrow Account and the Pledgor irrevocably
instructs the Trustee, notwithstanding any other term or condition to
the contrary in any other agreement, that no Pledged Collateral shall
be released to or for the account of, or withdrawn by or for the
account of, the Pledgor or any other Person except as expressly
provided in this Pledge Agreement.
(d) The Trustee shall, in accordance with and subject to all
applicable laws, be the sole entitlement holder of, and have the sole
power to originate "Entitlement Orders" (as defined in UCC Section
8-102(a)(8)) with respect to, the Escrow Account and all United States
Treasury securities held therein, and it shall be a term and condition
of the Escrow Account that the Trustee shall have the right to issue
such Entitlement Orders with respect to the Escrow Account and all
assets and properties from time to time carried in the Escrow Account,
including such securities, Security Entitlements and other "Financial
Assets" (as defined in UCC Section 8-102(a)(9)) without further consent
of the Pledgor or any other Person (except, to the extent required
under the Indenture, of the Holders), and that no Pledged Collateral
shall be released to or for the account of, or withdrawn by or for the
account of, the Pledgor or any other Person except as expressly
provided in this Pledge Agreement.
(e) All Pledged Collateral shall be retained in the Escrow
Account pending disbursement pursuant to the terms hereof.
(f) Concurrently with the execution and delivery of this
Pledge Agreement the Trustee and the Pathnet Securities Intermediary
are delivering to the Pledgor a duly executed certificate, in the form
of Exhibit A hereto, of an officer of the Trustee, confirming the
Trustee's receipt and holding of the Pledged Securities or a Security
Entitlement thereto and the crediting of the Pledged Securities or such
Security Entitlement to the Escrow Account, all in accordance with this
Pledge Agreement.
(g) Concurrently with the execution and delivery of this
Pledge Agreement, the Pledgor shall deliver to the Trustee
acknowledgement copies or stamped receipt copies of proper financing
statements, duly filed under the UCC
<PAGE> 5
5
of the State of New York, covering the New Pledged Collateral described
in this Pledge Agreement.
(h) Concurrently with the execution and delivery of this
Pledge Agreement, the Pledgor shall deliver to the Trustee an opinion
of a nationally recognized firm of independent public accountants,
selected by the Pledgor, substantially in the form of Exhibit B
hereto.]
SECTION 4. Disbursements.
(a) At least three Business Days prior to the due date of each
of the fourth or the fifth scheduled interest payments on the Notes,
the Pledgor may, pursuant to written instructions given by the Pledgor
to the Trustee (a "Company Order"), direct the Trustee to release from
the Escrow Account and pay to the Holders of the Notes on behalf of the
Issuer proceeds sufficient to provide for payment in full of such
interest then due on the Notes. Upon receipt of a Company Order, the
Trustee will take any action necessary to provide for the payment of
the interest on the Notes in accordance with the Company Order and the
payment provisions of the Indenture to the Holders of the Notes from
(and to the extent of) proceeds of the Pledged Securities in the Escrow
Account. Nothing in this Section 4 shall affect the Trustee's rights to
apply the Pledged Collateral to the payments of amounts due on the
Notes upon acceleration thereof.
(b) If the Pledgor makes any interest payment or portion of an
interest payment for which the Pledged Collateral is security from a
source of funds other than the Escrow Account ("Other Funds"), the
Pledgor may, after payment in full of such interest payment, direct the
Trustee pursuant to a Company Order to release to the Pledgor or to
another party at the direction of the Pledgor (the "Pledgor's
Designee") proceeds from the Escrow Account in an amount less than or
equal to the amount of Other Funds applied to such interest payment.
Upon receipt by the Trustee of such Company Order and provided the
Trustee has received such interest payment, if no Default or Event of
Default (as defined in the Indenture) shall have occurred and be
continuing, the Trustee shall pay over to the Pledgor or the Pledgor's
Designee, as the case may be, the requested amount from proceeds in the
Escrow Account as soon as practicable. Concurrently with any release of
funds to the Pledgor pursuant to this Section 4(b), the Pledgor shall
deliver to the Trustee a certificate signed by an officer of the
Pledgor stating that the Pledgor has made the interest payment from a
source of funds other than the Escrow Account, and that such release
has been duly authorized by the Pledgor and will not contravene any
provision of applicable law or the Certificate of Incorporation or the
By-laws of the Pledgor or any material agreement or other material
instrument binding upon the Pledgor or any of its subsidiaries or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Pledgor or any of its subsidiaries or
result in the creation or imposition of any Lien on any assets of the
Pledgor, except for the security interest granted under the Pledge
Agreement.
<PAGE> 6
6
(c) If at any time the principal of and interest on the
Pledged Securities exceeds 100% of the amount sufficient, in the
written opinion of a nationally recognized firm of independent
accountants selected by the Pledgor and delivered to the Trustee, to
provide for payment in full of the remaining fourth and fifth scheduled
interest payments due on all of the outstanding Notes, the Pledgor may
direct the Trustee to release any such excess amount to the Pledgor or
to any Pledgor's Designee. Upon receipt of a Company Order (which shall
include a certificate from such nationally recognized firm of
independent accountants stating the amount by which the Pledged
Securities exceed the amount required to be held in the Escrow
Account), if no Default or Event of Default (as defined in the
Indenture) shall have occurred and be continuing, the Trustee shall pay
over to the Pledgor or the Pledgor's Designee, as the case may be, any
such excess amount.
(d) Upon payment in full of the Outstanding Obligations, or if
the Company shall become obligated under the Indenture to redeem all of
the outstanding Notes and such Notes shall have been redeemed, then, if
no Default or Event of Default (as defined in the Indenture) shall have
occurred and be continuing, the security interest in the Pledged
Collateral evidenced by this Pledge Agreement will automatically
terminate and be of no further force and effect and the Pledged
Collateral shall promptly be paid over and transferred to the Pledgor.
Furthermore, upon the release of any Pledged Collateral from the Escrow
Account in accordance with the terms of this Pledge Agreement, whether
upon release of Pledged Collateral to Holders as payment of interest or
otherwise, the security interest evidenced by this Pledge Agreement in
such released Pledged Collateral will automatically terminate and be of
no further force and effect.
(e) At least three Business Days prior to the due date of each
of the fourth and fifth scheduled interest payments on the Notes, the
Pledgor shall give the Trustee notice (by Company Order) as to whether
such interest payment will be made pursuant to Section 4(a) or 4(b) and
the respective amounts of interest that will be paid from the Escrow
Account and from Other Funds. Any Other Funds to be used to make any
interest payment shall be delivered to the Trustee, in immediately
available funds, prior to 10:00 a.m. (New York City time) on such
interest payment date. If no such notice is given or such Other Funds
have not been so delivered, the Trustee will act pursuant to Section
4(a) as if it had received a Company Order pursuant thereto for the
payment in full of the interest then due from the Escrow Account.
(f) The Trustee shall liquidate Pledged Collateral in the
Escrow Account (pursuant to written instructions from Pledgor) in order
to make any scheduled payment of interest unless there are sufficient
funds in the Escrow Account on such interest payment date.
(g) Nothing contained in Section 1, Section 3, this Section 4,
Section 11 or any other provision of this Pledge Agreement shall (i)
afford the Pledgor any right to issue Entitlement Orders with respect
to any Security Entitlement to
<PAGE> 7
7
the Pledged Securities or any Securities Account in which any such
Security Entitlement may be carried, or otherwise afford the Pledgor
rights to of any such Security Entitlement or (ii) except as otherwise
specified under this Agreement (or required by applicable law) give
rise to any other rights of the Pledgor with respect to the Pledged
Securities, any Security Entitlement thereto or any Securities Account
in which any such Security Entitlement may be carried (except as
expressly provided in Sections 4(a), (b) and (c) hereof) of the Trustee
in its capacity as such (and not as a securities intermediary).
SECTION 5. Representations and Warranties. The Pledgor hereby
represents and warrants that, as of the date hereof.
(a) The execution and delivery by the Pledgor of, and the
performance by the Pledgor of its obligations under, this Pledge
Agreement will not contravene any provision of applicable law or
statute or the organization documents of the Pledgor or any material
agreement or other material instrument binding upon the Pledgor or any
of its subsidiaries or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over the Pledgor
or any of its subsidiaries, or result in the creation or imposition of
any Lien on any assets of the Pledgor, except for the security
interests granted under this Pledge Agreement; no consent, approval,
authorization or order of, or qualification with, or other action by,
any governmental or regulatory body or agency or any third party is
required (i) for the execution, delivery or performance by the Pledgor
of this Pledge Agreement, (ii) for the grant by the Pledgor of the
security interest granted hereby, for the pledge by the Pledgor of the
Pledged Collateral pursuant to this Pledge Agreement, (iii) for the
perfection and maintenance of the pledge and security interest created
hereby (including the first-priority nature of such pledge and security
interest, assuming compliance by the Pathnet Securities Intermediary
with all obligations contained in this Pledge Agreement or (iv) except
for any such consents, approvals, authorizations or orders required to
be obtained by the Trustee (or the Holders) for reasons other than the
consummation of this transaction, for the exercise by the Trustee of
the rights provided for in this Pledge Agreement or the remedies in
respect of the Pledged Collateral pursuant to this Pledge Agreement.
(b) Immediately before the depositing the New Pledged
Securities into the Escrow Account, the Pledgor is the legal and
beneficial owner of the New Pledged Collateral free and clear of any
Lien or claims of any person or entity (except for the security
interests granted under this Pledge Agreement). No financing statement
or other instrument similar in effect covering the Pledgor's interest
in the Pledged Securities is on file in any public office, other than
any financing statements filed pursuant to this Pledge Agreement.
(c) This Pledge Agreement has been duly authorized, validly
executed and delivered by the Pledgor and assuming the due
authorization, execution and delivery thereof by the Trustee,
constitutes a valid and binding agreement of the Pledgor, enforceable
against the Pledgor in accordance with its terms, except as
<PAGE> 8
8
(i) the enforceability hereof may be limited by bankruptcy, insolvency,
fraudulent conveyance, preference, reorganization, moratorium or
similar laws now or hereafter in effect relating to or affecting
creditors' rights or remedies generally, (ii) the availability of
equitable remedies may be limited by equitable principles of general
applicability, (iii) the exculpation provisions and rights to
indemnification hereunder may be limited by U.S. federal and state
securities laws and public policy considerations and (iv) the waiver of
rights and defenses contained in Section 11(b), Section 15.11 and
Section 15.15 hereof may be limited by applicable law.
(d) Upon the transfer to the Trustee of the New Pledged
Securities and the acquisition by the Trustee of a Security Entitlement
thereto in accordance with Section 3, and the compliance by the Pathnet
Securities Intermediary with the provisions of this Pledge Agreement,
the pledge of and grant of a security interest in the Pledged
Collateral securing the payment of the Outstanding Obligations for the
benefit of the Trustee and the Holders of the Notes will constitute a
valid first priority perfected security interest in such Pledged
Collateral, enforceable as such against all creditors of the Pledgor
(and any persons purporting to purchase any of the Pledged Collateral
from the Pledgor) and all filings and actions (other than the transfer
to the Trustee of the Pledged Securities) necessary or desirable to
perfect and protect such security interest have been duly taken.
(e) There are no legal or governmental proceedings pending or,
to the best of the Pledgor's knowledge, threatened to which the Pledgor
or any of its subsidiaries is a party or to which any of the properties
of the Pledgor or any such subsidiary is subject that would materially
adversely affect the power or ability of the Pledgor to perform its
obligations under this Pledge Agreement or to consummate the
transactions contemplated hereby.
(f) The pledge of the Pledged Collateral pursuant to this
Pledge Agreement is not prohibited by law or governmental regulation
(including, without limitation, Regulations G, T, U and X of the Board
of Governors of the Federal Reserve System) applicable to the Pledgor.
(g) No Event of Default (as defined herein) exists.
SECTION 6. Further Assurances. The Pledgor will, promptly upon
request by the Trustee, execute and deliver or cause to be executed and
delivered, or use its reasonable best efforts to procure, all assignments,
instruments and other documents, all in form and substance reasonably
satisfactory to the Trustee, execute and deliver any instruments to the Trustee
and take any other actions that are necessary or desirable, to perfect, continue
the perfection of, or protect the first priority of the Trustee's security
interest in and to the Pledged Collateral, to protect the Pledged Collateral
against the rights, claims, or interests of third persons (other than any such
rights, claims or interests created by or arising through the Trustee), to
enable the Trustee to enforce its rights and remedies hereunder, or to effect
the purposes of this Pledge Agreement. A photocopy or other reproduction of this
Agreement or any financing statement covering the Pledged
<PAGE> 9
9
Collateral or any part thereof shall be sufficient as a financing statement
where permitted by law. The Pledgor will promptly pay all reasonable costs
incurred in connection with any of the foregoing. The Pledgor also agrees to
take all actions that are necessary to perfect or continue the perfection of, or
to protect the first priority of, the Trustee's security interest in and to the
Pledged Collateral, including the filing of all necessary financing and
continuation statements, and to protect the Pledged Collateral against the
rights, claims or interests of third persons (other than any such rights, claims
or interests created by or arising through the Trustee).
SECTION 7. Covenants. The Pledgor covenants and agrees with
the Trustee and the Holders of the Notes that from and after the date of this
Pledge Agreement until the payment in full in cash of the Outstanding
Obligations:
(a) that (i) it will not (and will not purport to) sell or
otherwise dispose of, or grant any option or warrant with respect to,
any of the Pledged Collateral or its beneficial interest therein, and
(ii) it will not create or permit to exist any Lien or other adverse
interest in or with respect to its beneficial interest in any of the
Pledged Collateral (except for the security interests granted under
this Pledge Agreement) and at all times will be the sole beneficial
owner of the Pledged Collateral; and
(b) that it will not (i) enter into any agreement or
understanding that restricts or inhibits or purports to restrict or
inhibit the Trustee's rights or remedies hereunder, including, without
limitation, the Trustee's right to sell or otherwise dispose of the
Pledged Collateral or (ii) fail to pay or discharge any tax, assessment
or levy of any nature with respect to its beneficial interest in the
Pledged Collateral not later than five days prior to the date of any
proposed sale under any judgment, writ or warrant of attachment with
respect to such beneficial interest.
SECTION 8. Power of Attorney. Upon the occurrence of an Event
of Default, in addition to all of the powers granted to the Trustee pursuant to
the Indenture, the Pledgor hereby appoints and constitutes the Trustee as the
Pledgor's attorney-in-fact, with full authority in the place and stead of the
Pledgor and in the name of the Pledgor or otherwise, from time to time in the
Trustee's discretion, to take any action and to execute any instrument that the
Trustee may deem necessary or advisable to accomplish the purposes of this
Pledge Agreement, including, without limitation, the following powers: (a)
collection of proceeds of any Pledged Collateral; (b) conveyance of any item of
Pledged Collateral to any purchaser thereof; (c) giving of any notices or
recording of any Liens under Section 6 hereof; and (d) paying or discharging
taxes or Liens levied or placed upon the Pledged Collateral, the legality or
validity thereof and the amounts necessary to discharge the same to be
determined by the Trustee in its sole reasonable discretion, and such payments
made by the Trustee to become part of the Outstanding Obligations of the Pledgor
to the Trustee, due and payable immediately upon demand. The Trustee's authority
under this Section 8 shall include, without limitation, the authority to endorse
and negotiate any checks or instruments representing proceeds of Pledged
Collateral in the name of the Pledgor, execute and give receipt for any
certificate
<PAGE> 10
10
of ownership or any document constituting Pledged Collateral, transfer title to
any item of Pledged Collateral, sign the Pledgor's name on all financing
statements (to the extent permitted by applicable law) or any other documents
deemed necessary or appropriate by the Trustee to preserve, protect or perfect
the security interest in the Pledged Collateral and to file the same, prepare,
file and sign the Pledgor's name on any notice of Lien, and to take any other
actions arising from or incident to the powers granted to the Trustee in this
Pledge Agreement. This power of attorney is coupled with an interest and is
irrevocable by the Pledgor. Notwithstanding anything to the contrary stated
herein, the Trustee has no duty or obligation to exercise any of the powers
stated in this Section 8.
SECTION 9. No Assumption of Duties: Reasonable Care. The
rights and powers granted to the Trustee hereunder are being granted in order to
preserve and protect the security interest of the Trustee and the Holders of the
Notes in and to the Pledged Collateral granted hereby and shall not be
interpreted to, and shall not impose any duties on the Trustee in connection
therewith other than those expressly provided herein or imposed under applicable
law. Except as provided by applicable law or by the Indenture, the Trustee shall
be deemed to have exercised reasonable care in the custody and preservation of
the Pledged Collateral in its possession if the Pledged Collateral is accorded
treatment substantially equal to that which the Trustee accords similar property
held by the Trustee for similar accounts, it being understood that the Trustee
in its capacity as such shall not have any responsibility for (a) ascertaining
or taking action with respect to calls, conversions, exchanges, maturities or
other matters relative to any Pledged Collateral, whether or not the Trustee has
or is deemed to have knowledge of such matters or (b) investing or reinvesting
any of the Pledged Collateral or any loss on any investment; provided, however,
that nothing contained in this Pledge Agreement shall relieve the Trustee of any
responsibilities as a securities intermediary under applicable law.
SECTION 10. Indemnity. The Pledgor shall indemnify, hold
harmless and defend the Trustee and its directors, officers, agents and
employees from and against any and all claims, actions, obligations, liabilities
and expenses, including reasonable defense costs, reasonable investigative fees
and costs and reasonable legal fees and expenses and damages arising from the
Trustee's performance as Trustee under this Pledge Agreement, except to the
extent that such claim, action, obligation, liability or expense is directly
attributable to the gross negligence or wilful misconduct of such indemnified
person.
SECTION 11. Remedies Upon Event of Default. If any Event of
Default under the Indenture (any such Event of Default being referred to in this
Pledge Agreement as an "Event of Default") shall have occurred and be
continuing:
(a) The Trustee and the Holders of the Notes shall have, in
addition to all other rights given by law or by this Pledge Agreement
or the Indenture, all of the rights and remedies with respect to the
Pledged Collateral of a secured party under the UCC. In addition, with
respect to any Pledged Collateral that shall then be in or shall
thereafter come into the possession or custody of the Trustee, the
Trustee may sell or cause the same to be sold at any broker's board or
at public or
<PAGE> 11
11
private sale, in one or more sales or lots, at such price or prices as
the Trustee may deem best, for cash or on credit or for future
delivery, without assumption of any credit risk. The purchaser of any
or all Pledged Collateral so sold shall thereafter hold the same
absolutely, free from any claim, encumbrance or right of any kind
whatsoever created by or through the Pledgor. Unless any of the Pledged
Collateral threatens, in the reasonable judgment of the Trustee, to
decline speedily in value or is or becomes of a type sold on a
recognized market, the Trustee will give the Pledgor reasonable notice
of the time and place of any public sale thereof, or of the time after
which any private sale or other intended disposition is to be made. To
the extent permitted by applicable law, any sale of the Pledged
Collateral conducted in conformity with reasonable commercial practices
of banks, insurance companies, commercial finance companies, or other
financial institutions disposing of property similar to the Pledged
Collateral shall be deemed to be commercially reasonable. Any
requirements of reasonable notice shall be met if such notice is mailed
to the Pledgor as provided in Section 15.1 hereof at least 10 days
before the time of the sale or disposition. The Trustee or any Holder
of Notes may, in its own name or in the name of a designee or nominee,
buy any of the Pledged Collateral at any public sale and, if permitted
by applicable law, at any private sale. All expenses (including court
costs and reasonable attorneys' fees, expenses and disbursements) of,
or incident to, the enforcement of any of the provisions hereof shall
be recoverable from the proceeds of the sale or other disposition of
the Pledged Collateral.
(b) The Pledgor further agrees to use its reasonable best
efforts to do or cause to be done all such other acts as may be
necessary to make such sale or sales of all or any portion of the
Pledged Collateral pursuant to this Section 11 valid and binding and in
compliance with any and all other applicable requirements of law. The
Pledgor further agrees that a breach of any of the covenants contained
in this Section 11 will cause irreparable injury to the Trustee and the
Holders of the Notes, that the Trustee and the Holders of the Notes
have no adequate remedy at law in respect of such breach and, as a
consequence, that each and every covenant contained in this Section 11
shall be specifically enforceable against the Pledgor, and the Pledgor
hereby waives and agrees not to assert any defenses against an action
for specific performance of such covenants except for a defense that no
Event of Default has occurred.
(c) The Trustee may, without notice to the Pledgor except as
required by law and at any time or from time to time, charge, set-off
and otherwise apply all or any part of the Outstanding Obligations
against the Escrow Account or any part thereof.
SECTION 12. Expenses. The Pledgor will upon demand pay to the
Trustee the amount of any and all reasonable expenses, including, without
limitation, the reasonable fees, expenses and disbursements of its counsel,
experts and agents retained by the Trustee that the Trustee may incur in
connection with (a) the review, negotiation and administration of this Pledge
Agreement, (b) the custody or preservation of, or the sale of, collection from,
or other realization upon, any of the Pledged Collateral, (c) the
<PAGE> 12
12
exercise or enforcement of any of the rights of the Trustee and the Holders of
the Notes hereunder or (d) the failure by the Pledgor to perform or observe any
of the provisions hereof.
SECTION 13. Security Interest Absolute. All rights of the
Trustee and the Holders of the Notes and security interests hereunder, and all
obligations of the Pledgor hereunder, shall be absolute and unconditional
irrespective of:
(a) any lack of validity or enforceability of the Indenture or
any other agreement or instrument relating thereto;
(b) any change in the time, manner or place of payment of, or
in any other term of, all or any of the Outstanding Obligations, or any
other amendment or waiver of or any consent to any departure from the
Indenture;
(c) any taking, exchange, surrender, release or non-perfection
of any other collateral or any taking, release or amendment or waiver
from any guaranty for all or any of the Outstanding Obligations;
(d) any change, restructuring or termination of the corporate
structure or the existence of the Pledgor or any of its subsidiaries;
or
(e) to the extent permitted by applicable law, any other
circumstance which might otherwise constitute a defense available to,
or a discharge of, the Pledgor in respect of the Outstanding
Obligations or of this Pledge Agreement.
SECTION 14. Pathnet Securities Intermediary's Representations,
Warranties and Covenants. The Pathnet Securities Intermediary represents and
warrants that it is as of the date hereof, and it agrees that for so long as it
maintains the Escrow Account and acts as securities intermediary pursuant to
this Pledge Agreement it shall be a "Securities Intermediary" (as defined in the
UCC and in 31 C.F.R. Section 357.2) and shall be eligible to maintain, and does
maintain, a Participant's Securities Account (as defined in 31 C.F.R. Section
357.2) in the name of the Pathnet Securities Intermediary with the FRBNY (a
"FRBNY Member Securities Account"). In furtherance of the foregoing, the Pathnet
Securities Intermediary hereby:
(a) represents and warrants that it is a corporation that in
the ordinary course of its business maintains Securities Accounts for
others and is acting in that capacity hereunder and with respect to the
Escrow Account;
(b) represents and warrants that it maintains the FRBNY Member
Securities Account with the FRBNY and that the United Stated Treasury
securities constituting the Pledged Securities transferred to the
Pathnet Securities Intermediary pursuant to Section 3(b) have been
credited to the FRBNY Member Securities Account;
(c) agrees that the Escrow Account shall be an account to
which Financial Assets may be credited, and the Pathnet Securities
Intermediary
<PAGE> 13
13
undertakes to treat the Trustee as the sole person entitled to exercise
rights that comprise (and entitled to the benefits of) such Financial
Assets, and entitled to exercise the rights of an entitlement holder
and control in the manner contemplated by the UCC, and further agrees
to identify the Trustee in the records of the Pathnet Securities
Intermediary as the sole person having a Securities Entitlement against
the Pathnet Securities Intermediary with respect to the Escrow Account
and all Financial Assets credited thereto;
(d) hereby represents that it has not granted, and covenants
that so long as it acts as Pathnet Securities Intermediary hereunder it
shall not grant, control (including without limitation, "control" as
defined in UCC Section 9-115(l)(e)) over or with respect to any Pledged
Collateral credited to the Escrow Account from time to time to any
other Person other than the Trustee;
(e) covenants that in its capacity as Pathnet Securities
Intermediary hereunder and with respect to the Escrow Account, it shall
not take any action inconsistent with, and represents and covenants
that it is not and so long as this Pledge Agreement remains in effect
will not become party to any agreement, the terms of which are
inconsistent with the provisions of this Pledge Agreement;
(f) agrees, with the other parties to this Pledge Agreement,
that any item of property credited to the Escrow Account shall be
treated as a Financial Asset;
(g) agrees, with the other parties to this Pledge Agreement,
so long as it serves as Pathnet Securities Intermediary pursuant to
this Pledge Agreement, to maintain the Escrow Account as a Securities
Account and maintain appropriate books and records in respect thereof
in accordance with its usual procedures and subject to the terms of
this Pledge Agreement;
(h) agrees, with the other parties to this Pledge Agreement,
that the Pathnet Securities Intermediary's jurisdiction, for purposes
of UCC Section 8-110(e) and 31 C.F.R. 357.11(b) as it pertains to this
Pledge Agreement, the Escrow Account and Security Entitlements relating
thereto, shall be the State of New York.
SECTION 15. Miscellaneous Provisions.
Section 15.1. Notices. Any notice or communication given
hereunder shall be sufficiently given if in writing and delivered in person or
mailed by first class mail, commercial courier service or telecopier
communication, addressed as follows:
if to the Pledgor:
PathNet, Inc.
1015 31st Street, N.W.
Washington, D.C. 20007
Telecopier: (202) 625-7369
<PAGE> 14
14
Attention: General Counsel
with a copy to:
Bruce Wilson, Esq.
Covington & Burling
1201 Pennsylvania Avenue, N.W.
Washington D.C. 20004
if to the Trustee:
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286
Telecopier: (212) 815-5915
Attention: Corporate Trust Administration
Section 15.2. No Adverse Interpretation of Other Agreements.
This Pledge Agreement may not be used to interpret another pledge, security or
debt agreement of the Pledgor or any subsidiary thereof. No such pledge,
security or debt agreement (other than the Indenture) may be used to interpret
this Pledge Agreement.
Section 15.3. Severability. The provisions of this Pledge
Agreement are severable, and if any clause or provision shall be held invalid,
illegal or unenforceable in whole or in part in any jurisdiction, then such
invalidity or unenforceability shall affect in that jurisdiction only such
clause or provision, or part thereof, and shall not in any manner affect such
clause or provision in any other jurisdiction or any other clause or provision
of this Pledge Agreement in any jurisdiction.
Section 15.4. Headings. The headings in this Pledge Agreement
have been inserted for convenience of reference only, are not to be considered a
part hereof and shall in no way modify or restrict any of the terms or
provisions hereof.
Section 15.5. Counterpart Originals. This Pledge Agreement may
be signed in two or more counterparts, each of which shall be deemed an
original, but all of which shall together constitute one and the same agreement.
Section 15.6. Benefits of Pledge Agreement. Nothing in this
Pledge Agreement, express or implied, shall give to any person, other than the
parties hereto and their successors hereunder, and the Holders of the Notes, any
benefit or any legal or equitable right, remedy or claim under this Pledge
Agreement.
Section 15.7. Amendments, Waivers and Consents. Any amendment
or waiver of any provision of this Pledge Agreement and any consent to any
departure by the Pledgor from any provision of this Pledge Agreement shall be
effective only if made or duly given in compliance with all of the terms and
provisions of the Indenture, and
<PAGE> 15
15
neither the Trustee nor any Holder of Notes shall be deemed, by any act, delay,
indulgence, omission or otherwise, to have waived any right or remedy hereunder
or to have acquiesced in any Default or Event of Default (as defined herein) or
in any breach of any of the terms and conditions hereof. Consistent with the
foregoing, this Pledge Agreement may be amended, its provisions may be waived
and departures from its provisions may be consented to by action of the Pledgor
and the Trustee, and (if applicable) the Holders of the Notes, as provided in
the Indenture, and no such amendment, waiver or consent shall require any action
or approval by the Initial Purchasers. Failure of the Trustee or any Holder of
Notes to exercise, or delay in exercising, any right, power or privilege
hereunder shall not preclude any other or further exercise thereof or the
exercise of any other right, power or privilege. A waiver by the Trustee or any
Holder of Notes of any right or remedy hereunder on any one occasion shall not
be construed as a bar to any right or remedy that the Trustee or such Holder of
Notes would otherwise have on any future occasion. The rights and remedies
herein provided are cumulative, may be exercised singly or concurrently and are
not exclusive of any rights or remedies provided by law.
Section 15.8. Interpretation of Agreement. All terms not
defined herein or in the Indenture shall have the meaning set forth in the UCC,
except where the context otherwise requires. Acceptance of or acquiescence in a
course of performance rendered under this Pledge Agreement shall not be relevant
to determine the meaning of this Pledge Agreement even though the accepting or
acquiescing party had knowledge of the nature of the performance and opportunity
for objection.
Section 15.9. Continuing Security Interest, Termination. (a) This
Pledge Agreement shall create a continuing security interest in and to
the Pledged Collateral and shall, unless otherwise provided in this
Pledge Agreement, remain in full force and effect until the payment in
full in cash of the Outstanding Obligations. This Pledge Agreement
shall be binding upon the Pledgor, its transferees, successors and
assigns, and shall inure, together with the rights and remedies of the
Trustee hereunder, to the benefit of the Trustee, the Holders of the
Notes and their respective successors, transferees and assigns.
(b) This Pledge Agreement (other than the Pledgor's
obligations under Sections 10 and 12) shall terminate upon the payment
in full in cash of the Outstanding Obligations or if the Company shall
become obligated under the Indenture to redeem all of the outstanding
Notes and such Notes shall have been redeemed, and if no Default or
Event of Default (as defined in the Indenture shall have occurred and
be continuing. At such time, the Trustee shall, pursuant to a Company
Order, reassign and redeliver to the Pledgor all of the Pledged
Collateral hereunder that has not been sold, disposed of, retained or
applied by the Trustee in accordance with the terms of this Pledge
Agreement and the Indenture and take all actions that are necessary to
release the security interest created by this Pledge Agreement in and
to the Pledged Collateral, including the execution and delivery of all
termination statements necessary to terminate any financing or
continuation statements filed with respect to the Pledged Collateral.
Such reassignment and redelivery shall be without warranty by or
recourse to the
<PAGE> 16
16
Trustee in its capacity as such, except as to the absence of any Liens
on the Pledged Collateral created by or arising through the Trustee,
and shall be at the reasonable expense of the Pledgor.
Section 15.10. Survival of Representations and Covenants. All
representations, warranties and covenants of the Pledgor contained herein shall
survive the execution and delivery of this Pledge Agreement, and shall terminate
only upon the termination of this Pledge Agreement.
Section 15.11. Waivers. The Pledgor waives presentment and
demand for payment of any of the Outstanding Obligations, protest and notice of
dishonor or default with respect to any of the Outstanding Obligations, and all
other notices to which the Pledgor might otherwise be entitled, except as
otherwise expressly provided herein or in the Indenture.
Section 15.12. Authority of the Trustee. (a) The Trustee shall
have the right to exercise all powers hereunder that are specifically granted to
the Trustee by the terms hereof, together with such powers as are reasonably
incident hereto. The Trustee may perform any of its duties hereunder or in
connection with the Pledged Collateral by or through agents or employees and
shall be entitled to retain counsel and to act in reliance upon the advice of
counsel concerning all such matters. Except as otherwise expressly provided in
this Pledge Agreement or the Indenture, neither the Trustee nor any director,
officer, employee, attorney or agent of the Trustee shall be liable to the
Pledgor for any action taken or omitted to be taken by the Trustee, in its
capacity as Trustee, hereunder, except for its own gross negligence or willful
misconduct, and the Trustee shall not be responsible for the validity,
effectiveness or sufficiency hereof or of any document or security furnished
pursuant hereto. The Trustee and its directors, officers, employees, attorneys
and agents may conclusively rely on any communication, instrument or document
believed by it or them to be genuine and correct and to have been signed or sent
by the proper person or persons.
(b) The Pledgor acknowledges that the rights and
responsibilities of the Trustee under this Pledge Agreement with
respect to any action taken by the Trustee or the exercise or
non-exercise by the Trustee of any option, right, request, judgment or
other right or remedy provided for herein or resulting or arising out
of this Pledge Agreement shall, as between the Trustee and the Holders
of the Notes, be governed by the Indenture and by such other agreements
with respect thereto as may exist from time to time among them, but, as
between the Trustee and the Pledgor, the Trustee shall be conclusively
presumed to be acting as agent for the Holders of the Notes with full
and valid authority so to act or refrain from acting, and the Pledgor
shall not be obligated or entitled to make any inquiry respecting such
authority.
(c) The Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Pledge Agreement, and
no implied covenants or obligations shall be read into this Pledge
Agreement against the Trustee or the Pathnet Securities Intermediary.
<PAGE> 17
17
(d) No provision of this Pledge Agreement shall require the
Trustee or the Pathnet Securities Intermediary to expend or risk its
own funds or otherwise incur any financial liability in the performance
of any of its duties hereunder, or in the exercise of any of its rights
and powers.
(e) The Trustee and the Pathnet Securities Intermediary may
consult with counsel of its selection and the advice of such counsel or
any Opinion of Counsel shall be full and complete authorization and
protection in respect of any action taken, suffered or omitted by it
hereunder in good faith and in reliance thereon.
(f) The Trustee and the Pathnet Securities Intermediary may
execute any of the trusts or powers hereunder or perform any duties
hereunder either directly or by or through agents or attorneys and the
Trustee and the Pathnet Securities Intermediary shall not be
responsible for any misconduct or negligence on the part of any agent
or attorney appointed with due care by it hereunder.
Section 15.13. Final Expression. This Pledge Agreement,
together with the Indenture and any other agreement executed in connection
herewith, is intended by the parties as a final expression of this Pledge
Agreement and is intended as a complete and exclusive statement of the terms and
conditions thereof.
Section 15.14. Rights of Holders of the Notes. No Holder of
Notes shall have any independent rights hereunder other than those rights
granted to individual Holders of the Notes pursuant to Section 508 of the
Indenture; provided that nothing in this subsection shall limit any rights
granted to the Trustee under the Notes or the Indenture.
Section 15.15. GOVERNING LAW; SUBMISSION TO JURISDICTION;
WAIVER OF JURY TRIAL; WAIVER OF DAMAGES. (a) THIS PLEDGE AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
ANY DISPUTE ARISING OUT OF, CONNECTED WITH, RELATED TO, OR INCIDENTAL TO, THE
RELATIONSHIP ESTABLISHED BETWEEN THE PLEDGOR, THE TRUSTEE AND THE HOLDERS OF THE
NOTES IN CONNECTION WITH THIS PLEDGE AGREEMENT AND WHETHER ARISING IN CONTRACT,
TORT, EQUITY OR OTHERWISE, SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK. NOTWITHSTANDING THE FOREGOING, THE MATTERS
IDENTIFIED IN 31 C.F.R. PART 357, 61 FED. REG. 43626 (AUG. 23, 1996) SHALL BE
GOVERNED SOLELY BY THE LAWS SPECIFIED THEREIN.
(b) THE PLEDGOR AGREES THAT THE TRUSTEE SHALL, IN ITS CAPACITY
AS TRUSTEE OR IN THE NAME AND ON BEHALF OF ANY HOLDER OF NOTES, HAVE
THE RIGHT, TO THE EXTENT PERMITTED BY APPLICABLE LAW, TO PROCEED
AGAINST THE PLEDGOR OR THE PLEDGED COLLATERAL IN A COURT IN ANY
<PAGE> 18
18
LOCATION REASONABLY SELECTED IN GOOD FAITH (AND HAVING PERSONAL OR IN
REM JURISDICTION OVER THE PLEDGOR OR THE PLEDGED COLLATERAL, AS THE
CASE MAY BE) TO ENABLE THE TRUSTEE TO REALIZE ON SUCH PLEDGED
COLLATERAL, OR TO ENFORCE A JUDGMENT OR OTHER COURT ORDER ENTERED IN
FAVOR OF THE TRUSTEE. THE PLEDGOR AGREES THAT IT WILL NOT ASSERT ANY
COUNTERCLAIMS, SET OFFS OR CROSSCLAIMS IN ANY PROCEEDING BROUGHT BY THE
TRUSTEE TO REALIZE ON SUCH PROPERTY OR TO ENFORCE A JUDGMENT OR OTHER
COURT ORDER IN FAVOR OF THE TRUSTEE, EXCEPT FOR SUCH COUNTERCLAIMS, SET
OFFS OR CROSSCLAIMS WHICH, IF NOT ASSERTED IN ANY SUCH PROCEEDING,
COULD NOT OTHERWISE BE BROUGHT OR ASSERTED. THE PLEDGOR WAIVES ANY
OBJECTION THAT IT MAY HAVE TO THE LOCATION OF THE COURT IN THE CITY OF
NEW YORK ONCE THE TRUSTEE HAS COMMENCED A PROCEEDING DESCRIBED IN THIS
PARAGRAPH INCLUDING, WITHOUT LIMITATION, ANY OBJECTION TO THE LAYING OF
VENUE OR BASED ON THE GROUNDS OF FORUM NON CONVENIENS.
(c) THE PLEDGOR AGREES THAT NEITHER ANY HOLDER OF NOTES NOR
(EXCEPT AS OTHERWISE PROVIDED IN THIS PLEDGE AGREEMENT OR THE
INDENTURE) THE TRUSTEE IN ITS CAPACITY AS TRUSTEE SHALL HAVE ANY
LIABILITY TO THE PLEDGOR (WHETHER ARISING IN TORT, CONTRACT OR
OTHERWISE) FOR LOSSES SUFFERED BY THE PLEDGOR IN CONNECTION WITH,
ARISING OUT OF, OR IN ANY WAY RELATED TO, THE TRANSACTIONS CONTEMPLATED
AND THE RELATIONSHIP ESTABLISHED BY THIS PLEDGE AGREEMENT, OR ANY ACT,
OMISSION OR EVENT OCCURRING IN CONNECTION THEREWITH, UNLESS IT IS
DETERMINED BY A FINAL AND NONAPPEALABLE JUDGMENT OF A COURT THAT IS
BINDING ON THE TRUSTEE OR SUCH HOLDER OF NOTES, AS THE CASE MAY BE,
THAT SUCH LOSSES WERE THE RESULT OF ACTS OR OMISSIONS ON THE PART OF
THE TRUSTEE OR SUCH HOLDERS OF NOTES, AS THE CASE MAY BE, CONSTITUTING
BAD FAITH, GROSS NEGLIGENCE OR WILLFUL MISCONDUCT.
(d) TO THE EXTENT PERMITTED BY APPLICABLE LAW, THE PLEDGOR
WAIVES THE POSTING OF ANY BOND OTHERWISE REQUIRED OF THE TRUSTEE OR ANY
HOLDER OF NOTES IN CONNECTION WITH ANY JUDICIAL PROCESS OR PROCEEDING
TO ENFORCE ANY JUDGMENT OR OTHER COURT ORDER PERTAINING TO THIS PLEDGE
AGREEMENT OR ANY RELATED AGREEMENT OR DOCUMENT ENTERED IN FAVOR OF THE
TRUSTEE OR ANY HOLDER OF NOTES, OR TO ENFORCE BY SPECIFIC PERFORMANCE,
TEMPORARY RESTRAINING ORDER OR PRELIMINARY OR PERMANENT INJUNCTION,
THIS PLEDGE AGREEMENT OR ANY RELATED AGREEMENT OR DOCUMENT BETWEEN THE
PLEDGOR ON
<PAGE> 19
19
THE ONE HAND AND THE TRUSTEE AND/OR THE HOLDERS OF THE NOTES ON THE
OTHER HAND.
IN WITNESS WHEREOF, the Pledgor and the Trustee have each
caused this Amended and Restated Pledge Agreement to be duly executed and
delivered as of the date first above written.
Pledgor:
PATHNET, INC.
By:____________________________
Name:
Title:
Trustee:
THE BANK OF NEW YORK, Trustee
By:______________________________
Name:
Title:
THE BANK OF NEW YORK,
as Pathnet Securities Intermediary
By:______________________________
Name:
Title:
<PAGE> 20
CERTIFICATE
Pursuant to Section 3(f) of the Pledge Agreement (the "Pledge
Agreement") dated as of ___________, 2000 between Pathnet, Inc. (the "Pledgor")
and The Bank of New York, trustee (the "Trustee") for the holders of the 12 1/4%
Senior Notes due 2008 (the "Notes") of the Pledgor, and The Bank of New York, as
securities intermediary (the "Pathnet Securities Intermediary"), the undersigned
officer of the Trustee, on behalf of the Trustee, and the undersigned officer of
the Pathnet Securities Intermediary, on behalf of the Pathnet Securities
Intermediary, make the following certifications to the Pledgor and the Holders
of the Outstanding Notes. Capitalized terms used and not defined in this
Certificate have the meanings set forth or referred to in the Pledge Agreement.
1. The Trustee has previously established with the Pathnet
Securities Intermediary, as Securities Intermediary, the Escrow Account. The
Pathnet Securities Intermediary has acquired a Security Entitlement to the
United States Treasury securities identified in Annex 1 to this Certificate (the
"Pledged Securities") from the FRBNY and holds a Security Entitlement thereto in
the FRBNY's Security Account. The Pathnet Securities Intermediary has made
appropriate book entries in its records establishing that the Pledged Securities
and the Trustee's Securities Entitlement thereto have been credited to and are
held in the Escrow Account.
2. The Trustee has established and maintained and will
maintain the Escrow Account and all Securities Entitlements and other positions
carried in the Escrow Account solely in its capacity as Trustee and has not
asserted and will not assert any claim to or interest in the Escrow Account or
any such Securities Entitlements or other positions except in such capacity.
3. The Trustee and the Pathnet Securities Intermediary have
acquired their Security Entitlements to the Pledged Securities for value and
without notice of any adverse claim thereto. Without limiting the generality of
the foregoing, the Pledged Securities are not and the Pathnet Securities
Intermediary's and the Trustee's Security Entitlements to the Pledged Securities
are not, to their knowledge, subject to any Lien granted by either of them in
favor of any Securities Intermediary (including, without limitation, NFSC or the
FRBNY) through which the Trustee derives its Security Entitlement to the Pledged
Securities.
4. Neither the Pathnet Securities Intermediary nor the Trustee
has caused or permitted the Pledged Securities or any Security Entitlement
thereto to become subject to any Lien created by or arising through either of
the Trustee or the Pathnet Securities Intermediary.
<PAGE> 21
2
IN WITNESS WHEREOF, the undersigned officers have executed
this Certificate on behalf of The Bank of New York, Trustee, and on behalf of
the Pathnet Securities Intermediary, respectively, this _________ day of
_________, 2000.
THE BANK OF NEW YORK,
Trustee
-----------------------------------
Name:
Title:
THE BANK OF NEW YORK,
As Pathnet Securities
Intermediary
------------------------------------
Name:
Title:
<PAGE> 22
PLEDGED SECURITIES
<TABLE>
<CAPTION>
Original Principal
------------------
Description of Debt Cusip No(s) Final Maturity Amount Cost of Closing
- ------------------- ----------- -------------- ------ ---------------
<S> <C> <C> <C> <C>
- ------------------- ----------- -------------- ------------------ ---------------
- ------------------- ----------- -------------- ------------------ ---------------
- ------------------- ----------- -------------- ------------------ ---------------
- ------------------- ----------- -------------- ------------------ ---------------
</TABLE>
<PAGE> 23
INDEPENDENT ACCOUNTANTS' REPORT ON APPLYING
AGREED-UPON PROCEDURES
To the Board of Directors
Pathnet, Inc.
Washington, D.C,
We understand that $350,000,000 12-1/4% Senior Notes due 2008 ("Notes") of
Pathnet, Inc. (the "Issuer"), were issued on April 8, 1998. We also understand
that in connection with the payment of the fourth and fifth scheduled interest
payments on the Notes The Bank of New York (the "Trustee") will hold the
Securities listed on the attached schedule (Schedule 11) (the "Securities")
pursuant to Section 3(h) of the Pledge Agreement, between the Issuer and the
Trustee, dated as of ___________, 2000 (the "Pledge Agreement").
We have been requested by the Issuer and the Trustee (collectively the "Intended
Users") to prove the arithmetic accuracy of the computations shown on the
attached schedules, prepared by the Issuer.
We have performed the procedures enumerated below, which were agreed to by the
Intended Users, solely to assist you and the Trustee with respect to proving the
arithmetic accuracy of the computations shown on the attached schedules. This
agreed upon procedures engagement was performed in accordance with standards
established by the American Institute of Certified Public Accountants. The
sufficiency of the procedures is solely the responsibility of the specified
users of the report. Consequently, we make no representation regarding the
sufficiency of the procedures described below either for the purpose for which
this report was requested or for any other purpose. The procedures that we
performed and our findings are, as follows:
1. We have proved the arithmetic accuracy of the computations of the
fourth and fifth scheduled interest payments, as shown on the attached
Schedule (Schedule I), which was prepared by the Issuer.
2. We have proved the arithmetic accuracy of the computation of the
scheduled receipts of maturing principal and interest to be received
from the Securities and cash on deposit as shown on Schedule II, which
was prepared by the Issuer. Other than proving such arithmetic
accuracy, we have not confirmed or otherwise verified the information
on that schedule.
3. We recomputed each amount in the net cash flow column on Schedule II by
deducting each amount in the interest payment column from each amount
in the total available column, individually and in total.
In performing the above calculations, we have relied solely on the data set
forth in the attached schedules prepared and provided to us by the Issuer. The
scope of our engagement did not include the verification of any underlying data,
assumptions or definitions necessary to derive the calculations. Such underlying
data, assumptions and definitions include, but are not limited to, the
following:
<PAGE> 24
(i) The principal amounts, coupon rates, and related maturities for
the Securities and Notes; and
(ii) Interest start dates, maturity dates, and interest payment dates
for the Securities and the Notes.
We were not engaged to, and did not, perform an examination, the objective of
which would be the expression of an opinion on the specified elements, accounts,
or items included in the attached schedules. Accordingly, we do not express such
an opinion. Had we performed additional procedures, other matters might have
come to our attention that would have been reported to you.
This report is intended solely for the use of the Intended Users listed above
and should not be used by those who have not agreed to the procedures and taken
responsibility for the sufficiency of the procedures for their purposes.
McLean, Virginia
April 8, 1998
<PAGE> 25
SCHEDULE I
<TABLE>
<CAPTION>
Interest Payment
Date on the Notes Principal Annual Interest Rate Interest Payment (1)
----------------- --------- -------------------- --------------------
<S> <C> <C> <C>
</TABLE>
(1) Interest payments for each period are calculated assuming a 180-day
semi-annual period and 360-day year.
<PAGE> 26
<TABLE>
<CAPTION>
Coupon Total Interest Net Cash
Security Coupon Rate Maturity Date Par Amount Interest(1) Cash Flow Available(2) Payment(3) Flow(4)
- -------- ----------- ------------- ---------- ----------- --------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
</TABLE>
- --------------------------------------------------------------------------------
(1) Coupon interest is calculated assuming a 180-day semi-annual period and a
360-day year.
(2) Total Available for each period is equal to the Cash Flow for the period
plus Net Cash Flow from the previous period.
(3) See SCHEDULE I attached hereto.
(4) Net Cash Flow for each period is equal to Total Available for the period
less the Interest Payment for each period.
- --------------------------------------------------------------------------------
<PAGE> 1
February 22, 2000
Pathnet Telecommunications, Inc.
Pathnet, Inc.
1015 31st Street, N.W.
Washington, D.C. 20007
Re: Pathnet Telecommunications, Inc. Registration Statement on Form
S-1 Registration No. 333-91469
Ladies and Gentlemen:
We have acted as counsel to Pathnet Telecommunications, Inc., a
Delaware corporation (the "Company") and Pathnet, Inc., a Delaware corporation
("Pathnet"), in connection with the preparation and filing by the Company of a
registration statement on Form S-1, filed on November 22, 1999 (Registration No.
333-91469) and Amendment No. 1 thereto, filed on December 16, 1999, and
Amendment No. 2 thereto, filed on February 22, 2000 (as so amended, the
"Registration Statement"), under the Securities Act of 1933, as amended (the
"Act"), with respect to the Company's senior guarantees of Pathnet's 12-1/4%
Senior Notes Due 20008 (the "Guarantees").
This opinion is being furnished in accordance with the requirements
of Item 601(b)(5) of Regulation S-K under the Act.
In connection with this opinion, we have examined originals, or
copies certified or otherwise identified to our satisfaction, of such documents,
corporate records and other instruments as we have deemed necessary or
appropriate for purposes of this opinion, including (i) the Registration
Statement and (ii) the form of Supplemental Indenture, of which the Guarantees
are a part, filed with the Securities and Exchange Commission (the "Commission")
as an exhibit to the Registration Statement.
We have also relied, with respect to certain factual matters, on
oral and written statements and representations of the Company and Pathnet. In
addition, officers of the Company and Pathnet have furnished us certificates
with respect to certain factual matters necessary to our opinions and we have
relied upon such certificates as to such factual matters. In respect of such
matters of fact relevant to our opinions, we have relied exclusively, without
independent investigation or verification, upon the statements, records,
documents and other instruments referred to above and on the aforesaid
certificates and assurances of the Company and Pathnet.
In rendering our opinions we have assumed:
<PAGE> 2
Pathnet Telecommunications, Inc.
Pathnet, Inc.
February 22, 2000
Page 2 of 3
(a) the genuineness of all signatures on all documents and the legal
capacity of all natural persons;
(b) the authenticity of all documents examined by us and the
conformity to original documents of all documents submitted to us as
certified, conformed or photostatic copies and the authenticity of the
originals of such latter documents;
(c) the due and valid authorization (pursuant to and upon the
exercise of all requisite corporate and/or other power and authority),
execution and delivery of all of the executed documents by all parties
thereto other than the Company and Pathnet;
(d) that all of the documents constitutes the valid and binding
obligation of the party or parties thereto other than the Company and
Pathnet, enforceable against each such party in accordance with their
respective terms, except to the extent that the legality or
enforceability thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in
effect relating to or affecting creditors' rights generally, general
principles of equity (regardless of whether such legality or
enforceability is considered in a proceeding in equity or at law), and
the discretion of the court before which any proceeding for enforcement
of any such document may be brought; and
(e) that the execution, delivery and performance by all parties
other than the Company and Pathnet of all such parties' respective
obligations under the documents do not violate or conflict with or
constitute a default under any term of each such party's articles of
incorporation, bylaws, certificate of partnership, partnership or
operating agreement or other organic document.
Based on the foregoing and subject to the qualifications hereinafter
set forth, we are of the opinion that:
When (i) the Supplemental Indenture has been validly executed
and delivered by the Company and The Bank of New York, as Trustee, and
(ii) the Guarantees have been validly executed and delivered in accordance
with the terms of the Supplemental Indenture, the Guarantees will
constitute valid and legally binding obligations of the Company,
enforceable against the Company in accordance with their terms.
Our opinions set forth in the preceding paragraph above are
qualified to the extent that the characterization of, and the enforceability of
any rights or remedies in, any agreement or instrument may be limited by (i)
applicable bankruptcy, insolvency, fraudulent conveyance or transfer,
reorganization, receivership, readjustment of debt, moratorium, equitable
subordination, and other similar laws and doctrines now or hereafter in effect
relating to or affecting creditors'
<PAGE> 3
Pathnet Telecommunications, Inc.
Pathnet, Inc.
February 22, 2000
Page 3 of 3
rights generally or (ii) general equitable principles (regardless of whether
enforceability is being considered in a proceeding in equity or at law).
We have investigated such questions of law for the purposes of
rendering our opinions set forth herein as we have deemed necessary. The
opinions rendered herein are limited to the laws of the State of New York and
the Federal law of the United States of America which are normally applicable to
transactions of the type contemplated by the Supplemental Indenture, and we
express no opinion as to any other laws.
We hereby consent to the filing of this opinion with the Commission
as an exhibit to the Registration Statement. We also consent to the reference to
our firm under the caption "Legal Matters" in the Registration Statement. This
opinion is expressed as of the date hereof, and we disclaim any undertaking to
advise you of any subsequent changes in the facts stated or assumed herein or of
any subsequent changes in applicable law.
Very truly yours,
/s/ Covington & Burling
Covington & Burling
<PAGE> 1
February 22, 2000
Pathnet, Inc.
1015 31st Street, N.W.
Washington, D.C. 20007
Re: Registration Statement on Form S-1
(Registration No. 333-91469)
Ladies and Gentlemen:
We have acted as United States federal income tax counsel for Pathnet,
Inc., a Delaware corporation (the "Company"), in connection with the guarantee
by Pathnet Telecommunications, Inc. ("Pathnet Telecom") of $350,000,000
aggregate principal amount of the Company's 12-1/4% Senior Notes due 2008 (the
"Notes"), and the waiver and amendment of certain provisions of
the Indenture governing the Notes.
We are giving this opinion in connection with a registration statement on
Form S-1, filed on November 22, 1999 (Registration No. 333-91469) and Amendment
No. 1 thereto, filed on December 16, 1999, and Amendment No. 2 thereto, filed on
February 22, 2000 (as so amended, the "Registration Statement"), relating to the
offering of the Guarantees of Pathnet Telecom and the proposed waivers and
amendments to the Indenture. Capitalized terms used but not defined in this
letter have the respective meanings ascribed to them in the Registration
Statement.
In rendering our opinion, we have examined originals or copies, certified
or otherwise identified to our satisfaction, of the Registration Statement and
such agreements and other documents as we have deemed relevant and necessary and
we have made such investigations of law as we have deemed appropriate as a basis
for the opinion expressed below. In our examination, we have assumed the
authenticity of original documents, the accuracy of copies and the genuineness
of signatures. We understand and assume that (i) each such agreement represents
the valid and binding obligation of the respective parties to such agreement,
enforceable in accordance with its respective terms and the entire agreement
between the parties with respect to the subject matter of such agreement, (ii)
the parties to each agreement have complied, and will comply, with all of their
respective covenants, agreements and undertakings contained in such agreement,
and (iii) the transactions provided for by each agreement were and will be
carried out in accordance with their terms. We also understand and assume that
the Guarantees and waivers of and amendments to the Indenture will be
effectuated in the manner and in accordance with the terms set forth in the
Registration Statement.
<PAGE> 2
Pathnet, Inc.
February 22, 2000
Page 2
We also have relied upon representations by the Company regarding certain
factual matters. If any of such representations are incorrect in whole or in
part, such inaccuracies may have a material adverse affect upon our opinion set
forth in this letter.
The opinion set forth in this letter is limited to the Internal Revenue
Code of 1986, as amended (the "Code"), administrative rulings, judicial
decisions, Treasury regulations and other applicable authorities, all as in
effect on the date of this letter. The statutory provisions, regulations and
interpretations upon which our opinion is based are subject to change, and such
change could apply retroactively. Any such change could affect the continuing
validity of the opinion set forth in this letter. We assume no responsibility to
advise you of any subsequent changes in existing law or facts, nor do we assume
any responsibility to update this opinion with respect to any matters expressly
set forth in this letter, and no opinions are to be implied or may be inferred
beyond the matters expressly so stated.
The opinion set forth in this letter has no binding effect on the United
States Internal Revenue Service or the courts of the United States. No assurance
can be given that, if the matter were contested, a court would agree with the
opinion set forth in this letter.
Based upon and subject to the foregoing, the discussion set forth in the
Registration Statement under the heading "Federal Income Tax Consequences"
constitutes our opinion with respect to such matters, except as to matters upon
which we have expressly declined to express an opinion, as stated therein. While
such discussion addresses the material anticipated United States federal income
tax consequences applicable to certain holders, it does not purport to address
all United States federal income tax consequences and our opinion is limited to
those United States federal income tax consequences specifically addressed
therein.
In giving the foregoing opinion, we express no opinion other than as to
the federal income tax laws of the United States of America.
We are furnishing this letter to you in connection with the Registration
Statement, and the opinion set forth herein is solely for your benefit, and for
the benefit of the holders of the Notes, in connection therewith and may not be
used or relied upon for any other purpose and may not be circulated, quoted or
otherwise referred to for any other purpose without our express written consent.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement with the Commission.
Very truly yours,
/s/ Covington & Burling
Covington & Burling
<PAGE> 1
Exhibit 10.21.1
FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT
THIS ASSIGNMENT AND ACCEPTANCE AGREEMENT (this "Agreement"), dated as
of _______________________, 2000, is by and between Pathnet, Inc., a Delaware
corporation (the "Seller") and Pathnet Telecommunications, Inc., a Delaware
corporation (the "Purchaser").
WITNESSETH:
WHEREAS, Seller currently holds certain assets relating to the fiber
portion of its digital network;
WHEREAS, Purchaser desires to purchase, and Seller desires to sell,
such assets, and, as part of such purchase and sale, Seller desires to assign,
and the Purchaser desires to assume, all of the obligations and liabilities
relating to such assets, subject, in each case, to the exemptions, terms and
conditions set forth herein;
NOW THEREFORE, in consideration of the premises and the mutual
representations, warranties and covenants and agreements hereinafter set forth,
and upon the terms and subject to the conditions hereinafter set forth, Seller
and Purchaser hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the respective meanings set forth below (such meanings to be equally
applicable to both the singular and the plural forms of the terms defined).
(a) Affiliate: As defined in Section 8.1.
(b) Agreement: As defined in the preamble.
(c) Closing: As defined in Article VII.
(d) Colonial Contribution Agreement: Shall mean that certain
Contribution Agreement, dated as of November 2, 1999, by and among the
Purchaser, the Seller and Colonial Pipeline Company, a Delaware and Virginia
corporation.
(e) Contribution Agreements: Shall mean (i) that certain
Contribution Agreement, dated as of November 2, 1999, by and among the
Purchaser, the Seller and The Burlington Northern Santa Fe Railway Company, a
Delaware corporation, (ii) that certain Contribution Agreement, dated as of
November 2, 1999, by and among the Purchaser, the Seller and CSX Transportation,
Inc., a Virginia corporation, (iii) that certain Contribution Agreement, dated
as of November 2, 1999, by and among the Purchaser, the Seller and the preferred
stockholders of the Purchaser, (iv) that certain
-1-
<PAGE> 2
Contribution Agreement, dated as of November 2, 1999, by and among the
Purchaser, the Seller and certain common stockholders of the Purchaser, and (v)
that certain Contribution Agreement, dated November 4, 1999, by and among the
Purchaser, the Seller and David Schaeffer.
(f) Contribution Agreement Closing: As defined in Section 6.1(e).
(e) Fiber Assets: As defined in Section 2.1.
(f) Indemnified Persons: As defined in Section 8.1
(g) Indemnifying Persons: As defined in Section 8.1.
(h) Purchaser: As defined in the preamble.
(i) Purchased Assets: As defined in Section 2.1.
(j) Purchase Price: As defined in Section 4.1.
(k) Seller: As defined in the preamble.
(l) Survival Date: As defined in Section 8.4.
ARTICLE II
ASSETS TO BE ACQUIRED
2.1 Acquisition and Transfer of Assets. At the Closing (as hereinafter
defined), upon the terms and subject to the conditions hereinafter set forth,
Seller shall sell, assign, transfer, convey and deliver to Purchaser, and
Purchaser shall purchase, acquire and accept from Seller all right, title and
interest of Seller in and to the certain assets relating to the fiber portion of
Seller's digital network, including, without limitation, in and to all of the
assets, properties, rights, contracts and claims employed in connection with
such assets, wherever located, whether tangible or intangible, as the same shall
exist as of the Closing. The assets, properties, contracts and claims to be
purchased pursuant to this Agreement are hereinafter collectively referred to as
the "Fiber Assets." The Fiber Assets shall include, without limitation, all
right, title and interest of Seller and its Subsidiaries in and to the assets,
properties, rights, contracts and claims described in the following paragraphs
(a) through (g) but in each case, only to the extent exclusively used in, held
for exclusive use in or exclusively related to the Fiber Assets:
(a) all rights in, to and under all contracts, commitments and other
agreements of Seller set forth below:
(i) Agreement between Pacific Fiber Link, LLC (A/K/A Worldwide
Fiber, Inc.) and Pathnet, Inc., dated March 31, 1999 as
amended by Letter, dated
-2-
<PAGE> 3
June 28, 1999 and the Marketing Agreement between Pacific
Fiber Link, LLC (A/K/A Worldwide Fiber, Inc.) and Pathnet,
dated March 31, 1999.
(ii) Dark Fiber Network Agreement by and between Pathnet, Inc.,
Tri-State Generation and Transmission Association, Inc. and
other Participating Members Systems named therein, dated
August 5, 1999, Letter Agreement between Pathnet, Inc. and
Tri-State Generation and Transmission Association, Inc. dated
December 31, 1999 and Letter Agreement between Pathnet, Inc.
and Tri-State Generation and Transmission Association, Inc.
dated January 17, 2000, including the associated right of way
pursuant to Fiber Optic Cable Construction and Use Agreement
between Public Service Company of New Mexico and Pathnet, Inc.
dated June 9, 1999 and Fiber Optic Cable License Agreement
between Public Service Company of New Mexico and Pathnet, Inc.
dated December 23, 1999.
(iii) Agreement between CapRock Telecommunications Corp and Pathnet,
Inc. dated November 18, 1999 and Joint Marketing Agreement
between Pathnet, Inc. and CapRock Telecommunications, Corp,
dated November 18, 2999 and Letter Agreement between Pathnet,
Inc. and CapRock Telecommunications, Inc., dated January 17,
2000.
(b) all inventories of work-in-progress, raw materials, finished
products, supplies, spare parts and other materials relating to the fiber route
under construction between Chicago, Illinois and Aurora, Colorado;
(c) all rights in and to insurance and indemnity claims relating
to the Fiber Assets;
(d) all prepaid expenses, advances and deposits relating to the
Fiber Assets;
(e) all rights, choses in action and claims, (known or unknown,
matured or unmatured, accrued or contingent) against third parties relating to
the Fiber Assets;
(f) all goodwill and going concern rights associated with the
items listed above; and
(h) a license to the intellectual property of Seller as set forth
in the License of Marks attached hereto as Exhibit A.
For convenience of reference, the assets, properties, interests in properties
and rights that are to be sold, transferred, conveyed and assigned to Purchaser
pursuant to this Section 2.1 are collectively referred to herein as the
"Purchased Assets."
2.2 Instrument of Conveyance and Transfer, Etc. At the Closing, Seller
shall deliver (or cause to be delivered) to Purchaser such deeds, bills of sale,
endorsements, assignments and other instruments of transfer, conveyance and
assignment as shall be
-3-
<PAGE> 4
necessary to transfer, convey and assign the Purchased Assets to the Purchaser.
Simultaneously therewith, Seller shall take all steps as may be required to put
the Purchaser in possession of the Purchased Assets.
2.3 Right of Endorsement, Etc. Effective upon the Closing, Seller
hereby constitutes and appoints Purchaser, its successors and assigns, the true
and lawful attorney of the Seller with full power of substitution, in the name
of Purchaser, or the name of Seller, on behalf of and for the benefit of
Purchaser, to collect all accounts and notes receivable and other items being
transferred, conveyed and assigned to Purchaser as provided herein, to endorse,
without recourse, checks, notes and other instruments in the name of Seller, to
institute and prosecute, in the name of Seller or otherwise, all proceedings
which Purchaser may deem proper in order to collect, assert or enforce any
claim, right or title of any kind in or to the Purchased Assets, to defend and
compromise any and all actions, suits or proceedings in respect of any of the
Purchased Assets, and to do all such acts and things in relation thereto as
Purchaser may deem advisable. Seller agrees that the foregoing powers are
coupled with an interest and shall be irrevocable by Seller, directly or
indirectly, whether by the dissolution of Seller or in any manner or for any
reason.
2.4 Further Assurances; Etc. Seller shall pay to Purchaser promptly any
amounts which shall be received by Seller after the Closing which are, or are
received in connection with, Purchased Assets. Seller at any time and from time
to time after the Closing, upon the request of Purchaser and at the expense of
Seller, shall do, execute, acknowledge, deliver and file, or shall cause to be
done, executed, acknowledged, delivered or filed, all such further acts, deeds,
transfers, conveyances, assignments or assurance as may be required for the
better transferring, conveying, assigning and assuring to Purchaser, or for
aiding and assisting in the collection of or reducing to possession by
Purchaser, any of the assets, properties or rights being purchased hereunder.
2.5 Assignment of Contracts, Rights, Etc. Anything contained in this
Agreement to the contrary notwithstanding, this Agreement shall not constitute
an agreement or attempted agreement to transfer, sublease or assign any
contract, license, lease, sales order, purchase order or other agreement or any
claim or right of any benefit arising thereunder or resulting therefrom or any
permit or operating authority if an attempted transfer, sublease or assignment
thereof, without the consent of any other party thereto, would constitute a
breach thereof or in any way affect the rights of Purchaser thereunder. Seller
and Purchaser shall use their respective best efforts, and shall cooperate with
each other, to obtain the consent of such third party to any of the foregoing to
the assignment or transfer thereof to Purchaser in all cases in which such
consent is required for assignment or transfer. If such consent is not obtained,
Seller shall cooperate with Purchaser in any arrangements necessary or desirable
to provide for Purchaser the benefits thereunder, including, without limitation,
enforcement for the benefit of Purchaser of any and all rights of Seller thereof
against the other party thereto arising out of the cancellation by such other
party or otherwise.
-4-
<PAGE> 5
ARTICLE III
ASSUMPTION OF LIABILITIES
On the terms and subject to the conditions of this Agreement,
simultaneously with the transfer, conveyance and assignment to Purchaser of the
Purchased Assets, Purchaser shall assume all of the liabilities and obligations
relating to the Purchased Assets as such liabilities and obligations shall exist
immediately prior to the Closing.
ARTICLE IV
PURCHASE PRICE OF PURCHASED
ASSETS; ALLOCATION
4.1 Purchase Price. The aggregate purchase price to be paid for the
Purchased Assets shall be $70,000,000 (the "Purchase Price"). At the Closing,
against delivery to the Purchaser of appropriate instruments of transfer,
conveyance and assignment with respect to the Purchased Assets, the Purchaser
shall deliver to the Seller, a Promissory Note in the form attached hereto as
Exhibit B in the principal amount of $70,000,000.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of the Seller. The Seller hereby
represents and warrants to the Purchaser as follows:
(a) Organization, Standing and Power. The Seller is a corporation
duly organized, validly existing and in good standing under the laws of
the State of Delaware and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its
business as now being conducted; and the Seller has all requisite
corporate power and authority and to enter into this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. Seller is duly qualified and in good standing to
do business in every jurisdiction in which such qualification is
necessary.
(b) Authority. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
validly authorized by all necessary corporate action and on the part of
the Seller and this Agreement constitutes a valid and binding
obligation of the Seller enforceable in accordance with its terms.
Neither the execution, delivery and performance of this Agreement nor
the consummation by the Seller of the transactions contemplated hereby
nor compliance by the Seller with any of the provisions hereof will (i)
conflict with or result in a breach of any provision of the Certificate
of Incorporation or Bylaws of the Seller, (ii) cause a default (or give
rise to any right of termination, cancellation or acceleration) under
any of the terms, conditions or provisions of any note, bond, lease,
mortgage, indenture, license or other instrument or agreement to which
the Seller, or by which the Seller, or any of its properties or assets
is or may be bound or (iii) violate any law,
-5-
<PAGE> 6
statute, rule or regulation or order, writ, judgment, injunction or
decree applicable to the Seller, or any of its properties or assets.
5.2 Representations and Warranties of the Purchaser. The Purchaser
hereby represents and warrants to the Seller as follows:
(a) Organization, Standing and Power. The Purchaser is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware and has all requisite corporate power
and authority to own, lease and operate its properties, to carry on its
business as now being conducted, to enter into this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby.
(b) Authority. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the
part of the Purchaser and this Agreement constitutes a valid and
binding obligation of the Purchaser, enforceable in accordance with its
terms. Neither the execution, delivery and performance of this
Agreement nor the consummation of the transactions contemplated hereby
nor compliance by the Purchaser with any of the provisions hereof will
(i) conflict with or result in a breach of any provision of its
Certificate of Incorporation or Bylaws, (ii) cause a default (or give
rise to any right of termination, cancellation or acceleration) under
any of the terms, conditions or provisions of any note, bond, lease,
mortgage, indenture, license or other instrument or agreement to which
the Purchaser is a party, or by which it or its properties or assets
may be bound, or (iii) violate any law, statute, rule or regulation or
order, writ, injunction or decree applicable to the Purchaser or any of
its properties or assets.
ARTICLE VI
CONDITIONS OF CLOSING
6.1 Conditions of Obligations of the Purchaser. The obligations of the
Purchaser to perform this Agreement are subject to the satisfaction of the
following conditions unless waived by the Purchaser:
(a) Representations and Warranties. The representations and
warranties of the Seller set forth in Section 5.1 hereof shall be true
and correct in all material respects as of the date of this Agreement
and as of the Closing Date (as hereinafter defined) as though made on
and as of the Closing Date.
(b) Authorization. All action necessary to authorized the
execution, delivery and performance of this Agreement by the Seller and
the consummation of the transactions contemplated hereby shall have
been duly and validly taken.
-6-
<PAGE> 7
(c) Instruments of Transfer, Conveyance and Assignment. The
Purchaser shall have received duly executed instruments of transfer,
conveyance and assignment as contemplated by Section 2.2 hereof.
(d) Consents and Approvals. The Purchaser shall have received
duly executed copies of all consents and approvals required for or in
connection with the execution and delivery by the Seller of this
Agreement and the consummation of the transactions contemplated hereby
including the consent of the holders of the Seller's 12 -1/4% Senior
Notes in accordance with the Indenture by and between Pathnet, Inc. and
The Bank of New York, dated April 8, 1998.
(e) Closing under Contribution Agreements. The Closing (as
defined in the Contribution Agreements) and the Initial Closing (as
defined in the Colonial Contribution Agreement) shall have occurred
(together, such occurrences, the "Contribution Agreement Closing").
6.2 Conditions of Obligations of the Seller. The obligations of the
Seller to perform this Agreement are subject to the satisfaction of the
following conditions unless waived by the Seller:
(a) Representations and Warranties. The representations and
warranties of the Purchaser set forth in Section 5.2 hereof shall be
true and correct in all material respects as of the date of this
Agreement and as of the Closing Date as though made on and as of the
Closing Date.
(b) Authorization. All action necessary to authorize the
execution, delivery and performance of this Agreement by the Purchaser
and the consummation of the transactions contemplated hereby shall have
been duly and validly taken by the Board of Directors of the Purchaser.
(c) Closing under Contribution Agreements. The Contribution
Agreement Closing shall have occurred.
ARTICLE VII
CLOSING
The closing (the "Closing") for the consummation of the transactions
contemplated by this Agreement shall take place immediately after the
Contribution Agreement Closing shall have occurred.
ARTICLE VIII
INDEMNIFICATION
8.1 Definitions. As used in this Article VIII, the following terms
shall have the following respective meanings:
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<PAGE> 8
(a) "Affiliate" shall mean a person or entity that directly,
or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with, any other person or
entity.
(b) "Indemnified Persons" shall mean and include the
Purchaser, all Affiliates of the Purchaser, and the successors and
assigns of the foregoing; and
(c) "Indemnifying Persons" shall mean the Seller and its
successors and assigns.
8.2 Indemnification. The Indemnifying Persons shall, jointly and
severally, indemnify and save the Indemnified Persons, and each of them,
harmless from, against, for and in respect of the following:
(a) any and all liabilities and obligations of the Seller not
assumed by the Purchaser pursuant to this Agreement;
(b) any liabilities and obligations of the Indemnifying
Persons for fees, costs and expenses relating to or arising out of the
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby, including,
without limitation, legal and accounting fees and expenses and taxes
incurred by the Indemnifying Persons;
(c) any damages, losses, obligations, liabilities, claims,
actions or causes of action sustained or suffered by the Indemnified
Persons, or any of them, and arising from a breach of any
representation, warranty, covenant or agreement of the Indemnifying
Persons contained in or made pursuant to this Agreement or in any
certificate, instrument or agreement delivered by any of such parties
pursuant hereto or in connection with the transactions contemplated
hereby, or any facts or circumstances constituting such breach;
(d) all damages, losses, obligations, liabilities, claims,
actions or causes of action sustained or suffered by the Indemnified
Persons, or any of them, as a result of non-compliance by the Seller
with the provisions of the "bulk sales laws" of any state which may be
applicable to the transactions contemplated hereby;
(e) all damages, losses, obligations, liabilities, claims,
actions or causes of action sustained or suffered by the Indemnified
Persons, or any of them, as a result of the failure to obtain any
consent or provide any benefit under any contract, license, lease,
sales order, purchase order or other agreement, claim, right, permit or
operating authority; and
(f) all reasonable costs and expenses (including, without
limitation reasonable attorney's, accountants' and other professional
fees and expenses)
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incurred by the Indemnified Persons, or any of them, in connection with
any action, suit, proceeding, demand, assessment or judgment incident
to any of the matters indemnified against under Section 8.2(a), Section
8.2(b), Section 8.2 (c), Section 8.2 (d) and Section 8.2 (e) hereof.
No claim, demand, suit or cause of action shall be brought against the
Indemnifying Persons under or pursuant to this Section 8.2 unless the
Indemnified Persons, or any of them, at any time prior to the Survival Date (as
defined in Section 8.4 hereof), give the Indemnifying Persons written notice,
with reasonable specificity, of the existence of any such claim, demand, suit or
cause of action under this Agreement. Upon the giving of such written notice as
aforesaid, the Indemnified Persons, or any of them, shall have the right to
commence legal proceedings within one year subsequent to the Survival Date for
the enforcement of its or their rights under this Agreement.
8.3 Third Party Claims. The obligations and liabilities of the
Indemnifying Persons hereunder with respect to claims resulting from the
assertion of liability by third parties shall be subject to the following terms
and conditions:
(a) The Indemnified Persons shall give prompt written notice
to the Indemnifying Persons of any assertion of liability by a third
party which might give rise to a claim by the Indemnified Persons
against the Indemnified Persons based on the indemnity agreements
contained in Section 8.2 hereof, stating the nature and basis of said
assertion and the amount thereof, to the extent known.
(b) In the event any action, suit or proceeding is brought
against the Indemnified Persons, with respect to which the Indemnifying
Persons may have liability under the indemnity agreement contained in
Section 8.2 hereof, the action, suit or proceeding shall, upon the
written agreement of the Indemnifying Persons that they are obligated
to indemnify under the indemnity agreement contained in Section 8.2
hereof, be defended (including all proceedings on appeal or for review
which counsel for the defendant shall deem appropriate) by the
Indemnifying Persons. The Indemnified Persons shall have the right to
employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such Indemnified
Persons unless (i) the employment of such counsel shall have been
authorized by the Indemnifying Persons in connection with the defense
of such action, suit or proceeding, (ii) the Indemnifying Persons shall
not have agreed, promptly after the notice to them provided in
subsection (a) above, that they are obligated to indemnify under the
indemnity agreement contained in Section 8.2 hereof or (iii) such
Indemnified Person shall have reasonably concluded that such action,
suit or proceeding involves to a significant extent matters beyond the
scope of the indemnity agreement contained in Section 8.2 hereof, or
that there may be defenses available to it (or them) which are
different from or additional to those available to the Indemnifying
Persons, in any of which events the Indemnifying Persons shall not have
the right to direct the defense of such action, suit or proceeding on
behalf of the Indemnified Persons and that portion of such fees and
expenses reasonably
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related to matters covered by the indemnity agreement contained in
Section 8.2 hereof shall be borne by the Indemnifying Persons. The
Indemnified Persons shall be kept fully informed of such action, suit
or proceeding at all stages thereof whether or not they are so
represented. The Indemnifying Persons shall make available to the
Indemnified Persons and their attorneys and accountants all books and
records of the Indemnifying Persons relating to such proceedings or
litigation and the parties hereto agree to render to each other such
assistance as they may reasonably require of each other in order to
ensure the proper and adequate defense of any such action, suit or
proceeding.
(c) The Indemnifying Persons shall not make any settlement of
any claims without the written consent of the Indemnified Persons.
8.4 Survival. All representations and warranties contained in this
Agreement shall survive the Closing hereunder until the second anniversary (the
"Survival Date") of the date hereof, at which time such representations and
warranties shall expire and be terminated and extinguished.
8.5 Remedies Cumulative. The remedies provided for in this Article VIII
shall be cumulative and shall not preclude assertion by the Indemnified Persons
of any other rights or the seeking of any other remedies against the
Indemnifying Persons.
ARTICLE IX
AMENDMENT, MODIFICATION AND WAIVER
This Agreement shall not be altered or otherwise amended except
pursuant to an instrument in writing signed by each of the parties hereto,
except that any party to this Agreement may waive any obligation owed to it by
another party under this Agreement. The waiver by any party hereto of a breach
of any provisions of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.
ARTICLE X
MISCELLANEOUS
10.1 Bulk Sales Compliance. Subject to Section 8.2(d), the Purchaser
hereby waives compliance by the Seller with the provisions of the "bulk sales
laws" (i.e., Article 6 of the Uniform Commercial Code) of any state which may be
applicable to the transactions contemplated hereby.
10.2 Entire Agreement. This Agreement and the Exhibits and Schedules
attached hereto contain the entire agreement among the Purchaser and the Seller
with respect to the transactions contemplated hereby and supersede all prior
agreements or understandings among the parties with respect thereto.
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10.3 Descriptive Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning or construction of any
provision of this Agreement.
10.4 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
10.5 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Delaware.
10.6 Benefits of Agreements. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns. Anything contained herein to the
contrary notwithstanding, this Agreement shall not be assignable by any party
hereto without the consent of the other party hereto.
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf as of the day and year first above written.
PATHNET, INC.
By: ___________________________________
Name:
Title:
PATHNET TELECOMMUNICATIONS, INC.
By: ___________________________________
Name:
Title:
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EXHIBIT A
LICENSE OF MARKS
WHEREAS, Pathnet, Inc., a Delaware corporation having offices
at 1015 31st Street, N.W., Washington, D.C., 20007 ("Licensor"), has adopted,
used and is using trademarks, service marks, logos and designs including without
limitation the "A NETWORK OF OPPORTUNITIES" and "PATHNET" service marks and the
Pathnet logo (all such trademarks, service marks, logos and designs shall be
collectively referred to herein as the "Marks"); and
WHEREAS, Pathnet Telecommunications, Inc., a Delaware
corporation having offices at 1015 31st Street, N.W., Washington, D.C., 20007
("Licensee"), is desirous of a license to use the Marks;
NOW, THEREFORE, for good and valuable consideration, receipt
of which is hereby acknowledged, the parties hereto agree as follows:
1. License. Licensor does hereby grant to Licensee the perpetual,
non-exclusive right and license to use the Marks on a royalty-free basis in
connection with Licensee's telecommunications business; provided, however, that
Licensee shall retain the right to use the Marks.
2. Ownership of Marks. Licensee acknowledges and agrees that (a)
Licensor is the owner of the entire right, title and interest in and to the
Marks and the Marks, or any form or embodiment thereof (as well as the goodwill
now or hereafter attached to the same) are the property of and all use thereof
shall inure to the benefit of Licensor, and (b) Licensee shall have no rights to
the Marks other than those set forth in this License of Marks.
3. Approvals/Quality Control. Licensee shall, upon request of Licensor,
submit representative samples of Licensee's use of the Marks to Licensor,
without charge to Licensor, and Licensor shall have a period of ten (10) days to
notify Licensee of their acceptance or rejection.
4. Representations, Warranties and Covenants of Licensor. Licensor
represents and warrants that it is the owner of the Marks and the registrant
therefor, that Licensor has the full power and authority to license the right to
use the Marks, that Licensor has not entered into any agreements in conflict
with this License of Marks, and that there are no actions, suits or proceedings
pending or, to Licensor's knowledge, threatened against Licensor with respect to
the Marks. Licensor agrees to take all such further actions, and to execute any
and all such further documents and instruments, as may be necessary or desirable
to confirm the license executed hereby.
5. Assignment. Neither party may assign any or all of its rights or
delegate any of its duties under this Agreement without the consent of the other
party, provided,
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that either party hereto may assign its rights, but not its obligations, to any
Affiliate without the consent of the other party. For the purposes of this
Section 5, an "Affiliate" of a party shall mean a subsidiary of such party or
other entity under common ownership or control.
IN WITNESS WHEREOF, this LICENSE OF MARKS is made and
effective as of the ___ of ________________, 2000.
PATHNET, INC.
By: ___________________________________
Name:
Title:
PATHNET TELECOMMUNICATIONS, INC.
By: ___________________________________
Name:
Title:
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Exhibit B
FORM OF
PROMISSORY NOTE
$70,000,000.00 ____________, 2000
FOR VALUE RECEIVED, PATHNET TELECOMMUNICATIONS, INC., a corporation
duly organized under the laws of the State of Delaware (the "Purchaser"),
promises to pay to Pathnet, Inc., a Delaware corporation, at 1015 31st Street,
Washington, DC 20007 ("Seller"), or at such other place as the holder of this
Note may from time to time designate in writing, the principal amount of SEVENTY
MILLION AND NO/100 DOLLARS ($70,000,000.00), together with interest on the
unpaid principal amount of this Note computed from the date of Closing as
defined in the Assignment and Acceptance Agreement (the "Assignment and
Acceptance") by and between Purchaser and Seller, dated the date hereof, as
amended from time to time, until the entire indebtedness is paid, at the rate of
twelve and one quarter percent (12-1/4%) per annum. The principal amount of this
Note shall be due and payable on March 31, 2010. Accrued interest calculated on
the outstanding principal amount as described above shall be payable yearly on
the last day of each year commencing with the year ended December 31, 2000. All
payments hereunder shall be made in lawful money of the United States of
America.
The unpaid principal amount of this Note may be prepaid in whole or in
part at any time.
The entire unpaid principal amount of this Note or any extension or
renewal hereof, together with accrued interest and all charges owing under this
Note or the Assignment and Acceptance, shall immediately become due and payable
at the option of the holder of this Note, without demand or notice, upon the
occurrence of any of the following Events of Default:
(a) Purchaser fails to pay the principal amount of this Note when the
same becomes due and payable (whether on the date on which such principal
becomes due or upon acceleration or otherwise); or
(b) Purchaser fails to pay any interest when the same becomes due and
payable hereunder and such failure to pay continues for ten (10) business days
after the date on which such payment of interest was due.
If this Note, after maturity, whether by acceleration or otherwise, is
placed in the hands of an attorney for collection, whether suit is brought on
the same or not, Purchaser shall pay to the holder of this Note all attorneys'
fees as are incurred for the purposes of collection hereof.
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Each Obligor under this Note (which term shall include all makers,
guarantors, endorsers and other persons assuming obligations pursuant to this
Note) hereby waives presentment, protest, demand, notice of dishonor, and all
other notices, and all defenses and pleas on the grounds of any extensions of
the time of payments or the due dates of this Note, in whole or in part, before
or after maturity, with or without notice. No renewal or extension of this Note,
no release or surrender of any collateral given as security for this Note, no
release of any Obligor, and no delay in enforcement of this Note or in
exercising any right or power hereunder, shall affect the liability of any
Obligor.
This Note may not be changed orally, but only by an agreement in
writing which is signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
IN WITNESS WHEREOF, Purchaser has caused this Note to be duly executed
on its behalf as of the date set forth at the beginning of this Note, as the act
and deed of Purchaser.
PATHNET TELECOMMUNICATIONS, INC.
By: ____________________________________
Name:
Title:
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Exhibit 10.24.2
FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT
THIS ASSIGNMENT AND ACCEPTANCE AGREEMENT (this "Agreement"), dated as
of _______________________, 2000, is by and between Pathnet Fiber Optics, LLC, a
Delaware limited liability corporation (the "Seller") and Pathnet, Inc., a
Delaware corporation (the "Purchaser").
WITNESSETH:
WHEREAS, Seller currently holds certain fiber optic cable assets
purchased pursuant to the Amended and Restated Fiber Optic Cable Purchase
Agreement between Seller and Lucent Technologies, Inc., dated October 14, 1999
(the "Lucent Agreement");
WHEREAS, Purchaser desires to purchase, and Seller desires to sell,
such assets, and, as part of such purchase and sale, Seller desires to assign,
and the Purchaser desires to assume, all of the obligations and liabilities
relating to such assets, subject, in each case, to the exemptions, terms and
conditions set forth herein;
NOW THEREFORE, in consideration of the premises and the mutual
representations, warranties and covenants and agreements hereinafter set forth,
and upon the terms and subject to the conditions hereinafter set forth, Seller
and Purchaser hereby agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. As used in this Agreement, the following terms
shall have the respective meanings set forth below (such meanings to be equally
applicable to both the singular and the plural forms of the terms defined).
(a) Affiliate: As defined in Section 8.1.
(b) Agreement: As defined in the preamble.
(c) Closing: As defined in Article VII.
(d) Colonial Contribution Agreement: Shall mean that certain
Contribution Agreement, dated as of November 2, 1999, by and among PTI, the
Purchaser and Colonial Pipeline Company, a Delaware and Virginia corporation.
(e) Contribution Agreements: Shall mean (i) that certain Contribution
Agreement, dated as of November 2, 1999, by and among PTI, the Purchaser and The
Burlington Northern Santa Fe Railway Company, a Delaware corporation, (ii) that
certain Contribution Agreement, dated as of November 2, 1999, by and among PTI,
the Purchaser and CSX Transportation, Inc., a Virginia corporation, (iii) that
certain Contribution Agreement, dated as of November 2, 1999, by and among PTI,
the
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Purchaser and the preferred stockholders of the Purchaser, (iv) that certain
Contribution Agreement, dated as of November 2, 1999, by and among PTI, the
Purchaser and certain common stockholders of the Purchaser, and (v) that certain
Contribution Agreement, dated November 4, 1999, by and among PTI, the Purchaser
and David Schaeffer.
(f) Contribution Agreement Closing: As defined in Section 6.1(d).
(g) Fiber Assets: As defined in Section 2.1.
(h) Indemnified Persons: As defined in Section 8.1
(i) Indemnifying Persons: As defined in Section 8.1.
(j) Lucent Agreement: As defined in the preamble.
(k) PTI: Shall mean Pathnet Telecommunications, Inc., a Delaware
corporation.
(l) Purchaser: As defined in the preamble.
(m) Purchase Price: As defined in Section 4.1.
(n) Seller: As defined in the preamble.
(o) Survival Date: As defined in Section 8.4.
ARTICLE II
ASSETS TO BE ACQUIRED
2.1 Acquisition and Transfer of Assets. At the Closing (as
hereinafter defined), upon the terms and subject to the conditions hereinafter
set forth, Seller shall sell, assign, transfer, convey and deliver to Purchaser,
and Purchaser shall purchase, acquire and accept from Seller all right, title
and interest of Seller in and to all the fiber optic cable purchased under the
Lucent Agreement (collectively referred to herein as the "Fiber Assets").
2.2 Instrument of Conveyance and Transfer, Etc. At the Closing,
Seller shall deliver (or cause to be delivered) to Purchaser such deeds, bills
of sale, endorsements, assignments and other instruments of transfer, conveyance
and assignment as shall be necessary to transfer, convey and assign the Fiber
Assets to the Purchaser. Simultaneously therewith, Seller shall take all steps
as may be required to put the Purchaser in possession of the Fiber Assets.
2.3 Right of Endorsement, Etc. Effective upon the Closing, Seller
hereby constitutes and appoints Purchaser, its successors and assigns, the true
and lawful attorney of the Seller with full power of substitution, in the name
of Purchaser, or the
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name of Seller, on behalf of and for the benefit of Purchaser, to collect all
accounts and notes receivable and other items being transferred, conveyed and
assigned to Purchaser as provided herein, to endorse, without recourse, checks,
notes and other instruments in the name of Seller, to institute and prosecute,
in the name of Seller or otherwise, all proceedings which Purchaser may deem
proper in order to collect, assert or enforce any claim, right or title of any
kind in or to the Fiber Assets, to defend and compromise any and all actions,
suits or proceedings in respect of any of the Fiber Assets, and to do all such
acts and things in relation thereto as Purchaser may deem advisable. Seller
agrees that the foregoing powers are coupled with an interest and shall be
irrevocable by Seller, directly or indirectly, whether by the dissolution of
Seller or in any manner or for any reason.
2.4 Further Assurances; Etc. Seller shall pay to Purchaser
promptly any amounts which shall be received by Seller after the Closing which
are, or are received in connection with, Fiber Assets. Seller at any time and
from time to time after the Closing, upon the request of Purchaser and at the
expense of Seller, shall do, execute, acknowledge, deliver and file, or shall
cause to be done, executed, acknowledged, delivered or filed, all such further
acts, deeds, transfers, conveyances, assignments or assurance as may be required
for the better transferring, conveying, assigning and assuring to Purchaser, or
for aiding and assisting in the collection of or reducing to possession by
Purchaser, any of the assets, properties or rights being purchased hereunder.
2.5 Assignment of Contracts, Rights, Etc. Anything contained in
this Agreement to the contrary notwithstanding, this Agreement shall not
constitute an agreement or attempted agreement to transfer, sublease or assign
any contract, license, lease, sales order, purchase order or other agreement or
any claim or right of any benefit arising thereunder or resulting therefrom or
any permit or operating authority if an attempted transfer, sublease or
assignment thereof, without the consent of any other party thereto, would
constitute a breach thereof or in any way affect the rights of Purchaser
thereunder. Seller and Purchaser shall use their respective best efforts, and
shall cooperate with each other, to obtain the consent of such third party to
any of the foregoing to the assignment or transfer thereof to Purchaser in all
cases in which such consent is required for assignment or transfer. If such
consent is not obtained, Seller shall cooperate with Purchaser in any
arrangements necessary or desirable to provide for Purchaser the benefits
thereunder, including without, limitation, enforcement for the benefit of
Purchaser of any and all rights of Seller thereof against the other party
thereto arising out of the cancellation by such other party or otherwise.
ARTICLE III
ASSUMPTION OF LIABILITIES
On the terms and subject to the conditions of this Agreement,
simultaneously with the transfer, conveyance and assignment to Purchaser of the
Fiber Assets, Purchaser shall assume all of the liabilities and obligations
relating to the Fiber Assets as such liabilities and obligations shall exist
immediately prior to the Closing.
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ARTICLE IV
PURCHASE PRICE OF PURCHASED
ASSETS; ALLOCATION
4.1 Purchase Price. The aggregate purchase price to be paid for
the Fiber Assets shall be equal to the aggregate of the purchase prices set
forth on all purchase orders submitted to Lucent Technologies, Inc. under the
Lucent Agreement (_____________________ dollars ($________))(the "Purchase
Price"). At the Closing, against delivery to the Purchaser of appropriate
instruments of transfer, conveyance and assignment with respect to the Fiber
Assets, the Purchaser shall deliver to the Seller, a Promissory Note in the form
attached hereto as Exhibit A in the principal amount of $__________.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 Representations and Warranties of the Seller. The Seller
hereby represents and warrants to the Purchaser as follows:
(a) Organization, Standing and Power. The Seller is a
limited liability company duly organized, validly existing and in good
standing under the laws of the State of Delaware and has all requisite
corporate power and authority to own, lease and operate its properties
and to carry on its business as now being conducted; and the Seller has
all requisite corporate power and authority and to enter into this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. Seller is duly qualified and in good
standing to do business in every jurisdiction in which such
qualification is necessary.
(b) Authority. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action
and on the part of the Seller and this Agreement constitutes a valid
and binding obligation of the Seller enforceable in accordance with its
terms. Neither the execution, delivery and performance of this
Agreement nor the consummation by the Seller of the transactions
contemplated hereby nor compliance by the Seller with any of the
provisions hereof will (i) conflict with or result in a breach of any
provision of the organizational documents of the Seller, (ii) cause a
default (or give rise to any right of termination, cancellation or
acceleration) under any of the terms, conditions or provisions of any
note, bond, lease, mortgage, indenture, license or other instrument or
agreement to which the Seller, or by which the Seller, or any of its
properties or assets is or may be bound or (iii) violate any law,
statute, rule or regulation or order, writ, judgment, injunction or
decree applicable to the Seller, or any of its properties or assets.
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5.2 Representations and Warranties of the Purchaser. The Purchaser
hereby represents and warrants to the Seller as follows:
(a) Organization, Standing and Power. The Purchaser is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware and has all requisite corporate power
and authority to own, lease and operate its properties, to carry on its
business as now being conducted, to enter into this Agreement, to
perform its obligations hereunder and to consummate the transactions
contemplated hereby.
(b) Authority. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
have been duly and validly authorized by all necessary corporate action
on the part of the Purchaser and this Agreement constitutes a valid and
binding obligation of the Purchaser, enforceable in accordance with its
terms. Neither the execution, delivery and performance of this
Agreement nor the consummation of the transactions contemplated hereby
nor compliance by the Purchaser with any of the provisions hereof will
(i) conflict with or result in a breach of any provision of its
Certificate of Incorporation or Bylaws, (ii) cause a default (or give
rise to any right of termination, cancellation or acceleration) under
any of the terms, conditions or provisions of any note, bond, lease,
mortgage, indenture, license or other instrument or agreement to which
the Purchaser is a party, or by which it or its properties or assets
may be bound, or (iii) violate any law, statute, rule or regulation or
order, writ, injunction or decree applicable to the Purchaser or any of
its properties or assets.
ARTICLE VI
CONDITIONS OF CLOSING
6.1 Conditions of Obligations of the Purchaser. The obligations of
the Purchaser to perform this Agreement are subject to the satisfaction of the
following conditions unless waived by the Purchaser:
(a) Representations and Warranties. The representations
and warranties of the Seller set forth in Section 5.1 hereof shall be
true and correct in all material respects as of the date of this
Agreement and as of the Closing Date (as hereinafter defined) as though
made on and as of the Closing Date.
(b) Authorization. All action necessary to authorized the
execution, delivery and performance of this Agreement by the Seller and
the consummation of the transactions contemplated hereby shall have
been duly and validly taken.
(c) Instruments of Transfer, Conveyance and Assignment.
The Purchaser shall have received duly executed instruments of
transfer, conveyance and assignment as contemplated by Section 2.2
hereof.
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(d) Closing under Contribution Agreements. The Closing
(as defined in the Contribution Agreements) and the Initial Closing (as
defined in the Colonial Contribution Agreement) shall have occurred
(together, such occurrences, the "Contribution Agreement Closing").
6.2 Conditions of Obligations of the Seller. The obligations of
the Seller to perform this Agreement are subject to the satisfaction of the
following conditions unless waived by the Seller:
(a) Representations and Warranties. The representations
and warranties of the Purchaser set forth in Section 5.2 hereof shall
be true and correct in all material respects as of the date of this
Agreement and as of the Closing Date as though made on and as of the
Closing Date.
(b) Authorization. All action necessary to authorize the
execution, delivery and performance of this Agreement by the Purchaser
and the consummation of the transactions contemplated hereby shall have
been duly and validly taken by the Board of Directors of the Purchaser.
(c) Closing under Contribution Agreements. The
Contribution Agreement Closing shall have occurred.
ARTICLE VII
CLOSING
The closing (the "Closing") for the consummation of the transactions
contemplated by this Agreement shall take place immediately after the
Contribution Agreement Closing shall have occurred.
ARTICLE VIII
INDEMNIFICATION
8.1 Definitions. As used in this Article VIII, the following terms
shall have the following respective meanings:
(a) "Affiliate" shall mean a person or entity that
directly, or indirectly through one or more intermediaries, controls,
or is controlled by, or is under common control with, any other person
or entity.
(b) "Indemnified Persons" shall mean and include the
Purchaser, all Affiliates of the Purchaser, and the successors and
assigns of the foregoing; and
(c) "Indemnifying Persons" shall mean the Seller and its
successors and assigns.
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8.2 Indemnification. The Indemnifying Persons shall, jointly and
severally, indemnify and save the Indemnified Persons, and each of them,
harmless from, against, for and in respect of the following:
(a) any and all liabilities and obligations of the Seller
not assumed by the Purchaser pursuant to this Agreement;
(b) any liabilities and obligations of the Indemnifying
Persons for fees, costs and expenses relating to or arising out of the
execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby, including,
without limitation, legal and accounting fees and expenses and taxes
incurred by the Indemnifying Persons;
(c) any damages, losses, obligations, liabilities,
claims, actions or causes of action sustained or suffered by the
Indemnified Persons, or any of them, and arising from a breach of any
representation, warranty, covenant or agreement of the Indemnifying
Persons contained in or made pursuant to this Agreement or in any
certificate, instrument or agreement delivered by any of such parties
pursuant hereto or in connection with the transactions contemplated
hereby, or any facts or circumstances constituting such breach;
(d) all damages, losses, obligations, liabilities,
claims, actions or causes of action sustained or suffered by the
Indemnified Persons, or any of them, as a result of non-compliance by
the Seller with the provisions of the "bulk sales laws" of any state
which may be applicable to the transactions contemplated hereby;
(e) all damages, losses, obligations, liabilities,
claims, actions or causes of action sustained or suffered by the
Indemnified Persons, or any of them, as a result of the failure to
obtain any consent or provide any benefit under any contract, license,
lease, sales order, purchase order or other agreement, claim, right,
permit or operating authority; and
(f) all reasonable costs and expenses (including, without
limitation reasonable attorney's, accountants' and other professional
fees and expenses) incurred by the Indemnified Persons, or any of them,
in connection with any action, suit, proceeding, demand, assessment or
judgment incident to any of the matters indemnified against under
Section 8.2(a), Section 8.2(b), Section 8.2 (c), Section 8.2 (d) and
Section 8.2 (e) hereof.
No claim, demand, suit or cause of action shall be brought against the
Indemnifying Persons under or pursuant to this Section 8.2 unless the
Indemnified Persons, or any of them, at any time prior to the Survival Date (as
defined in Section 8.4 hereof), give the Indemnifying Persons written notice,
with reasonable specificity, of the existence of any such claim, demand, suit or
cause of action under this Agreement. Upon the giving of such written notice as
aforesaid, the Indemnified Persons, or any of them, shall have the
-7-
<PAGE> 8
right to commence legal proceedings within one year subsequent to the Survival
Date for the enforcement of its or their rights under this Agreement.
8.3 Third Party Claims. The obligations and liabilities of the
Indemnifying Persons hereunder with respect to claims resulting from the
assertion of liability by third parties shall be subject to the following terms
and conditions:
(a) The Indemnified Persons shall give prompt written
notice to the Indemnifying Persons of any assertion of liability by a
third party which might give rise to a claim by the Indemnified Persons
against the Indemnified Persons based on the indemnity agreements
contained in Section 8.2 hereof, stating the nature and basis of said
assertion and the amount thereof, to the extent known.
(b) In the event any action, suit or proceeding is
brought against the Indemnified Persons, with respect to which the
Indemnifying Persons may have liability under the indemnity agreement
contained in Section 8.2 hereof, the action, suit or proceeding shall,
upon the written agreement of the Indemnifying Persons that they are
obligated to indemnify under the indemnity agreement contained in
Section 8.2 hereof, be defended (including all proceedings on appeal or
for review which counsel for the defendant shall deem appropriate) by
the Indemnifying Persons. The Indemnified Persons shall have the right
to employ its or their own counsel in any such case, but the fees and
expenses of such counsel shall be at the expense of such Indemnified
Persons unless (i) the employment of such counsel shall have been
authorized by the Indemnifying Persons in connection with the defense
of such action, suit or proceeding, (ii) the Indemnifying Persons shall
not have agreed, promptly after the notice to them provided in
subsection (a) above, that they are obligated to indemnify under the
indemnity agreement contained in Section 8.2 hereof or (iii) such
Indemnified Person shall have reasonably concluded that such action,
suit or proceeding involves to a significant extent matters beyond the
scope of the indemnity agreement contained in Section 8.2 hereof, or
that there may be defenses available to it (or them) which are
different from or additional to those available to the Indemnifying
Persons, in any of which events the Indemnifying Persons shall not have
the right to direct the defense of such action, suit or proceeding on
behalf of the Indemnified Persons and that portion of such fees and
expenses reasonably related to matters covered by the indemnity
agreement contained in Section 8.2 hereof shall be borne by the
Indemnifying Persons. The Indemnified Persons shall be kept fully
informed of such action, suit or proceeding at all stages thereof
whether or not they are so represented. The Indemnifying Persons shall
make available to the Indemnified Persons and their attorneys and
accountants all books and records of the Indemnifying Persons relating
to such proceedings or litigation and the parties hereto agree to
render to each other such assistance as they may reasonably require of
each other in order to ensure the proper and adequate defense of any
such action, suit or proceeding.
-8-
<PAGE> 9
(c) The Indemnifying Persons shall not make any
settlement of any claims without the written consent of the Indemnified
Persons.
8.4 Survival. All representations and warranties contained in this
Agreement shall survive the Closing hereunder until the second anniversary (the
"Survival Date") of the date hereof, at which time such representations and
warranties shall expire and be terminated and extinguished.
8.5 Remedies Cumulative. The remedies provided for in this Article
VIII shall be cumulative and shall not preclude assertion by the Indemnified
Persons of any other rights or the seeking of any other remedies against the
Indemnifying Persons.
ARTICLE IX
AMENDMENT, MODIFICATION AND WAIVER
This Agreement shall not be altered or otherwise amended except
pursuant to an instrument in writing signed by each of the parties hereto,
except that any party to this Agreement may waive any obligation owed to it by
another party under this Agreement. The waiver by any party hereto of a breach
of any provisions of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.
ARTICLE X
MISCELLANEOUS
10.1 Bulk Sales Compliance. Subject to Section 8.2(d), the
Purchaser hereby waives compliance by the Seller with the provisions of the
"bulk sales laws" (i.e., Article 6 of the Uniform Commercial Code) of any state
which may be applicable to the transactions contemplated hereby.
10.2 Entire Agreement. This Agreement and the Exhibits and
Schedules attached hereto contain the entire agreement among the Purchaser and
the Seller with respect to the transactions contemplated hereby and supersede
all prior agreements or understandings among the parties with respect thereto.
10.3 Descriptive Headings. Descriptive headings are for convenience
only and shall not control or affect the meaning or construction of any
provision of this Agreement.
10.4 Counterparts. This Agreement may be executed in any number of
counterparts, and each such counterpart hereof shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
10.5 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware.
-9-
<PAGE> 10
10.6 Benefits of Agreements. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and assigns. Anything contained herein to the
contrary notwithstanding, this Agreement shall not be assignable by any party
hereto without the consent of the other party hereto.
-10-
<PAGE> 11
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be
executed on its behalf as of the day and year first above written.
PATHNET, INC.
By: ___________________________________
Name:
Title:
PATHNET FIBER OPTICS, LLC
By: ___________________________________
Name:
Title:
-11-
<PAGE> 12
Exhibit A
FORM OF
PROMISSORY NOTE
$__________________ ____________, 2000
FOR VALUE RECEIVED, PATHNET, INC., a corporation duly organized under
the laws of the State of Delaware (the "Purchaser"), promises to pay to Pathnet
Fiber Optics, LLC, a Delaware limited liability company, at 1015 31st Street,
Washington, DC 20007 ("Seller"), or at such other place as the holder of this
Note may from time to time designate in writing, the principal amount
of_____________ DOLLARS ($_______________), together with interest on the unpaid
principal amount of this Note computed from the date of Closing as defined in
the Assignment and Acceptance Agreement (the "Assignment and Acceptance"), by
and between Purchaser and Seller, dated the date hereof, as amended from time to
time, until the entire indebtedness is paid, at the rate of twelve and one
quarter percent (12-1/4%) per annum. The principal amount of this Note shall be
due and payable on March 31, 2010. Accrued interest calculated on the
outstanding principal amount as described above shall be payable yearly on the
last day of each year commencing with the year ended December 31, 2000. All
payments hereunder shall be made in lawful money of the United States of
America.
The unpaid principal amount of this Note may be prepaid in whole or in
part at any time.
The entire unpaid principal amount of this Note or any extension or
renewal hereof, together with accrued interest and all charges owing under this
Note or the Assignment and Acceptance, shall immediately become due and payable
at the option of the holder of this Note, without demand or notice, upon the
occurrence of any of the following Events of Default:
(a) Purchaser fails to pay the principal amount of this Note when
the same becomes due and payable (whether on the date on which such principal
becomes due or upon acceleration or otherwise); or
(b) Purchaser fails to pay any interest when the same becomes due
and payable hereunder and such failure to pay continues for ten (10) business
days after the date on which such payment of interest was due.
If this Note, after maturity, whether by acceleration or otherwise, is
placed in the hands of an attorney for collection, whether suit is brought on
the same or not, Purchaser shall pay to the holder of this Note all attorneys'
fees as are incurred for the purposes of collection hereof.
Each Obligor under this Note (which term shall include all makers,
guarantors, endorsers and other persons assuming obligations pursuant to this
Note) hereby waives
-12-
<PAGE> 13
presentment, protest, demand, notice of dishonor, and all other notices, and all
defenses and pleas on the grounds of any extensions of the time of payments or
the due dates of this Note, in whole or in part, before or after maturity, with
or without notice. No renewal or extension of this Note, no release or surrender
of any collateral given as security for this Note, no release of any Obligor,
and no delay in enforcement of this Note or in exercising any right or power
hereunder, shall affect the liability of any Obligor.
This Note may not be changed orally, but only by an agreement in
writing which is signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought.
IN WITNESS WHEREOF, Purchaser has caused this Note to be duly executed
on its behalf as of the date set forth at the beginning of this Note, as the act
and deed of Purchaser.
PATHNET, INC.
By: ______________________________________
Name:
Title:
-13-
<PAGE> 1
EXHIBIT 10.27
FORM OF PROMISSORY NOTE
$50,000,000.00 ____________, 2000
FOR VALUE RECEIVED, PATHNET TELECOMMUNICATIONS, INC., a corporation
duly organized under the laws of the State of Delaware (the "Borrower"),
promises to pay to Pathnet, Inc., a Delaware corporation, at 1015 31st Street,
N.W., Washington, DC 20007 (the "Lender"), or at such other place as the holder
of this Note may from time to time designate in writing, the principal amount of
FIFTY MILLION AND NO/100 DOLLARS ($50,000,000.00), together with interest on the
unpaid principal amount of this Note computed from the date of Closing as
defined in that certain Assignment and Acceptance Agreement by and between
Borrower and Lender, dated the date hereof, as amended from time to time, until
the entire indebtedness is paid, at the rate of twelve and one quarter percent
(12-1/4%) per annum. The principal amount of this Note shall be due and payable
on March 31, 2010. Accrued interest calculated on the outstanding principal
amount as described above shall be payable yearly on the last day of each year
commencing with the year ended December 31, 2000. All payments hereunder shall
be made in lawful money of the United States of America.
This Note may be prepaid at any time and from time to time, in whole or
in part, without premium or penalty. Any prepayment shall be applied first to
any accrued and unpaid interest and then to principal. In the event of
prepayment of this Note in part only, a new Note for the unpaid portion hereof
shall be issued in the name of the person or entity in whose name this Note is
registered upon the cancellation hereof.
The entire unpaid principal amount of this Note or any extension or
renewal hereof, together with accrued interest and all charges owing under this
Note, shall immediately become due and payable at the option of the holder of
this Note, without demand or notice, upon the occurrence of any of the following
Events of Default:
(a) Borrower fails to pay the principal amount of this Note when the
same becomes due and payable (whether on the date on which such principal
becomes due or upon acceleration or otherwise); or
(b) Borrower fails to pay any interest when the same becomes due and
payable hereunder and such failure to pay continues for ten (10) business days
after the date on which such payment of interest was due.
If this Note, after maturity, whether by acceleration or otherwise, is
placed in the hands of an attorney for collection, whether suit is brought on
the same or not, Borrower shall pay to the holder of this Note all attorneys'
fees as are incurred for the purposes of collection hereof.
Each Obligor under this Note (which term shall include all makers,
guarantors, endorsers and other persons assuming obligations pursuant to this
Note) hereby waives presentment, protest, demand, notice of dishonor, and all
other notices, and all defenses
<PAGE> 2
and pleas on the grounds of any extensions of the time of payments or the due
dates of this Note, in whole or in part, before or after maturity, with or
without notice. No renewal or extension of this Note, no release or surrender of
any collateral given as security for this Note, no release of any Obligor, and
no delay in enforcement of this Note or in exercising any right or power
hereunder, shall affect the liability of any Obligor.
This Note may not be changed orally, but only by an agreement in
writing which is signed by the party against whom enforcement of any waiver,
change, modification or discharge is sought. This Note is made under, and shall
be governed by and construed in accordance with, the laws of the State of New
York applicable to contracts made and to be performed entirely within such State
and without giving effect to choice of law principles of such State.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed
on its behalf as of the date set forth at the beginning of this Note, as the act
and deed of Borrower.
PATHNET TELECOMMUNICATIONS, INC.
By: ______________________________________
Name:
Title:
2
<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. 333-91469) of our report dated February 22, 2000, 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
February 22, 2000
<PAGE> 1
EXHIBIT 23.2
CONSENT OF COVINGTON & BURLING
We hereby consent to the use of our name in the Registration Statement and in
the prospectus in the Registration Statement as the same appears in the caption
"Legal Matters," to the use of our opinions referenced as Exhibits 5.1 and 8.1
to the Registration Statement and to the use of this letter as an exhibit to the
Registration Statement.
Very truly yours,
Covington & Burling
/s/ Covington & Burling
-----------------------
Covington & Burling
Washington, D.C.
February 22, 2000
<PAGE> 1
EXHIBIT 25.2
===============================================================================
FORM T-1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) |__|
-----------
THE BANK OF NEW YORK
(Exact name of trustee as specified in its charter)
<TABLE>
<CAPTION>
New York 13-5160382
<S> <C>
(State of incorporation (I.R.S. employer
if not a U.S. national bank) identification no.)
</TABLE>
<TABLE>
<S> <C>
One Wall Street, New York, N.Y. 10286
(Address of principal executive offices) (Zip code)
</TABLE>
-----------
Pathnet Telecommunications, Inc.
(Exact name of obligor as specified in its charter)
<TABLE>
<CAPTION>
Delaware 52-2201331
<S> <C>
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
</TABLE>
<TABLE>
<S> <C>
1015 31st Street, N.W.
Washington, D.C. 20007
(Address of principal executive offices) (Zip code)
</TABLE>
-------------
Guarantees of 12-1/4% Senior Notes due 2008
(Title of the indenture securities)
===============================================================================
<PAGE> 2
1. GENERAL INFORMATION. FURNISH THE FOLLOWING INFORMATION
AS TO THE TRUSTEE:
(a) NAME AND ADDRESS OF EACH EXAMINING OR SUPERVISING AUTHORITY TO
WHICH IT IS SUBJECT.
- --------------------------------------------------------------------
Name Address
- --------------------------------------------------------------------
<TABLE>
<S> <C>
Superintendent of Banks of the State of 2 Rector Street, New York,
New York N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York 33 Liberty Plaza, New York,
N.Y. 10045
Federal Deposit Insurance Corporation Washington, D.C. 20429
New York Clearing House Association New York, New York 10005
</TABLE>
(b) WHETHER IT IS AUTHORIZED TO EXERCISE CORPORATE TRUST POWERS.
Yes.
2. AFFILIATIONS WITH OBLIGOR.
IF THE OBLIGOR IS AN AFFILIATE OF THE TRUSTEE, DESCRIBE EACH SUCH
AFFILIATION.
None.
16. LIST OF EXHIBITS.
EXHIBITS IDENTIFIED IN PARENTHESES BELOW, ON FILE WITH THE COMMISSION,
ARE INCORPORATED HEREIN BY REFERENCE AS AN EXHIBIT HERETO, PURSUANT TO
RULE 7a-29 UNDER THE TRUST INDENTURE ACT OF 1939 (THE "ACT") AND 17
C.F.R. 229.10(d).
1. A copy of the Organization Certificate of The Bank of New York
(formerly Irving Trust Company) as now in effect, which contains
the authority to commence business and a grant of powers to
exercise corporate trust powers. (Exhibit 1 to Amendment No. 1
to Form T-1 filed with Registration Statement No. 33-6215,
Exhibits 1a and 1b to Form T-1 filed with Registration Statement
No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration
Statement No. 33-29637.)
4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to
Form T-1 filed with Registration Statement No. 33-31019.)
6. The consent of the Trustee required by Section 321(b) of the
Act. (Exhibit 6 to Form T-1 filed with Registration Statement
No. 33-44051.)
7. A copy of the latest report of condition of the Trustee
published pursuant to law or to the requirements of its
supervising or examining authority.
-2-
<PAGE> 3
SIGNATURE
Pursuant to the requirements of the Act, the Trustee, The Bank of New
York, a corporation organized and existing under the laws of the State of New
York, has duly caused this statement of eligibility to be signed on its behalf
by the undersigned, thereunto duly authorized, all in The City of New York, and
State of New York, on the 14th day of December, 1999.
THE BANK OF NEW YORK
By: /s/ MICHAEL CULHANE
------------------------------------
Name: MICHAEL CULHANE
Title: VICE PRESIDENT
<PAGE> 4
- -------------------------------------------------------------------------------
Consolidated Report of Condition of
THE BANK OF NEW YORK
of One Wall Street, New York, N.Y. 10286
And Foreign and Domestic Subsidiaries,
a member of the Federal Reserve System, at the close of business September 30,
1999, published in accordance with a call made by the Federal Reserve Bank of
this District pursuant to the provisions of the Federal Reserve Act.
<TABLE>
<CAPTION>
Dollar Amounts
In Thousands
ASSETS
<S> <C>
Cash and balances due from depository
institutions:
Noninterest-bearing balances and currency
and coin......................................... $6,394,412
Interest-bearing balances.......................... 3,966,749
Securities:
Held-to-maturity securities........................ 805,227
Available-for-sale securities...................... 4,152,260
Federal funds sold and Securities purchased under
agreements to resell............................... 1,449,439
Loans and lease financing receivables:
Loans and leases, net of unearned
income...............37,900,739
LESS: Allowance for loan and
lease losses............572,761
LESS: Allocated transfer risk
reserve........................11,754
Loans and leases, net of unearned income,
allowance, and reserve........................... 37,316,224
Trading Assets........................................ 1,646,634
Premises and fixed assets (including capitalized
leases)............................................ 678,439
Other real estate owned............................... 11,571
Investments in unconsolidated subsidiaries and
associated companies............................... 183,038
Customers' liability to this bank on acceptances
outstanding........................................ 349,282
Intangible assets..................................... 790,558
Other assets.......................................... 2,498,658
-------------
Total assets.......................................... $60,242,491
=============
</TABLE>
<PAGE> 5
<TABLE>
<CAPTION>
LIABILITIES
<S> <C>
Deposits:
In domestic offices................................ $26,030,231
Noninterest-bearing......................11,348,986
Interest-bearing.........................14,681,245
In foreign offices, Edge and Agreement
subsidiaries, and IBFs........................... 18,530,950
Noninterest-bearing.........................156,624
Interest-bearing.........................18,374,326
Federal funds purchased and Securities sold under
agreements to repurchase........................... 2,094,678
Demand notes issued to the U.S.Treasury............... 232,459
Trading liabilities................................... 2,081,462
Other borrowed money:
With remaining maturity of one year or less........ 863,201
With remaining maturity of more than one year
through three years.............................. 449
With remaining maturity of more than three years... 31,080
Bank's liability on acceptances executed and
outstanding........................................ 351,286
Subordinated notes and debentures..................... 1,308,000
Other liabilities..................................... 3,055,031
--------------
Total liabilities..................................... 54,578,827
==============
EQUITY CAPITAL
Common stock.......................................... 1,135,284
Surplus............................................... 815,314
Undivided profits and capital reserves................ 3,759,164
Net unrealized holding gains (losses) on
available-for-sale securities...................... ( 15,440)
Cumulative foreign currency translation
adjustments........................................ ( 30,658)
--------------
Total equity capital.................................. 5,663,664
--------------
Total liabilities and equity capital.................. $60,242,491
==============
</TABLE>
<PAGE> 6
I, Thomas J. Mastro, Senior Vice President and Comptroller of the
above-named bank do hereby declare that this Report of Condition has been
prepared in conformance with the instructions issued by the Board of Governors
of the Federal Reserve System and is true to the best of my knowledge and
belief.
Thomas J. Mastro
We, the undersigned directors, attest to the correctness of this
Report of Condition and declare that it has been examined by us and to the best
of our knowledge and belief has been prepared in conformance with the
instructions issued by the Board of Governors of the Federal Reserve System and
is true and correct.
----
Thomas A. Reyni |
Alan R. Griffith |
Gerald L. Hassell | Directors
|
----
- -------------------------------------------------------------------------------
<PAGE> 1
PATHNET, INC.
SOLICITATION OF CONSENTS FOR $25.00 IN CASH
PER $1,000 PRINCIPAL AMOUNT OF
12 1/4% SENIOR NOTES DUE 2008
To Our Clients:
Enclosed for your consideration is a Prospectus issued by Pathnet
Telecommunications, Inc. ("Pathnet Telecom") dated November 22, 1999 (as the
same may be amended from time to time, the "Preliminary Prospectus"), and a
form of Consent and Letter of Transmittal and instructions thereto (the
"Consent and Letter of Transmittal") relating to the solicitation (the
"Solicitation") by Pathnet, Inc. ("Pathnet") and Pathnet Telecom of consents
(the "Consents") from holders of the 12 1/4% Senior Notes due 2008 of Pathnet
(the "Notes") to the following:
(1) the waiver of Pathnet's obligations under certain provisions of
the Indenture, dated as of April 8, 1998 (the "Indenture"), among Pathnet
and The Bank of New York, as Trustee ("Trustee"), namely the Change of
Control Offer obligation under Section 1010 of the Indenture and the Excess
Proceeds Offer obligation under Section 017 of the Indenture, and
(2) the adoption of a Supplemental Indenture among Pathnet, Pathnet
Telecom and the Trustee, pursuant to which (a) Pathnet Telecom will become
bound by substantially the same covenants and other obligations as are
currently imposed on Pathnet under the Indenture, and (b) transactions
between Pathnet and Pathnet Telecom or Pathnet and certain other
subsidiaries of Pathnet Telecom will be permitted to the same extent that
such transactions are currently permitted between Pathnet and its
Restricted Subsidiaries under the Indenture;
in each case as more fully described under the caption "The Pathnet Senior
Noteholder Waivers and Other Proposed Indenture Amendments" in the Preliminary
Prospectus.
As described in, and subject to the terms and conditions of, the
Preliminary Prospectus, Pathnet Telecom is offering a guarantee of Pathnet's
obligations under the Notes in exchange for the Consents. In addition, upon the
terms and subject to the conditions set forth in the Preliminary Prospectus and
the Consent and Letter of Transmittal, Pathnet will make a Consent Payment at
the rate of $25.00 in cash for each $1,000 principal amount of Notes for which
validly delivered and unrevoked Consents have been received by the Depository
on or prior to the Initial Expiration Date (as defined below), unless extended
(the "Expiration Date").
Pathnet and Pathnet Telecom intend to cause the execution of a supplemental
indenture to accommodate the issuance by Pathnet Telecom of the Guarantees and
the addition of Pathnet Telecom to the Indenture on substantially the same terms
as Pathnet (the "Proposed Amendments") to occur on the Initial Expiration Date
if, as of such date, Requisite Consents have been obtained or, if later,
promptly upon obtaining the Requisite Consents. The Initial Expiration Date will
be the date that is 10 business days after the effective date of the
Registration Statement and Pathnet Telecom will issue a press release confirming
the effective date of the Registration Statement and the Initial Expiration Date
promptly after the Registration Statement is declared effective by the
Securities and Exchange Commission. Pathnet and Pathnet Telecom will deliver to
all Holders a copy of the final Prospectus not less than five business days
prior to the Initial Expiration Date.
The term "Record Holder" as used herein shall mean the registered holders
of Notes outstanding at the close of business in New York on the date of
effectiveness of the Registration Statement (the "Record Date"). The
Preliminary Prospectus describes the requested waivers, the Guarantee, the
Proposed Amendments and the consent solicitation process.
The material is being forwarded to you as the beneficial owner of Notes
carried by us or our affiliates for your account or benefit but not registered
in your name. A delivery of Consents
<PAGE> 2
with respect thereto may only be made by us as the registered holder and
pursuant to your instructions. Therefore, Pathnet and Pathnet Telecom urge
beneficial owners of Notes registered in the name of a broker, dealer,
commercial bank, trust company or other nominee to contact such registered
holder promptly if they wish to deliver Consents in the Solicitation.
Accordingly, we request instructions as to whether you wish us or our
affiliates to deliver Consents with respect to your Notes, pursuant to the
terms and conditions set forth in the Preliminary Prospectus and the Consent
and Letter of Transmittal. We urge you to read carefully the Preliminary
Prospectus and the Consent before instructing us or our affiliates to deliver
Consents with respect to your Notes.
Your instructions to us should be forwarded as promptly as possible in
order to permit us or our affiliates to deliver Consents with respect to your
Notes on your behalf in accordance with the provisions of the Solicitation. The
Solicitation will expire at 5:00 P.M., New York City time, on the Initial
Expiration Date, unless extended. Consents delivered pursuant to the
Solicitation may be revoked, subject to the procedures described in the
Preliminary Prospectus, at any time prior to the Expiration Date.
Your attention is directed to the following:
1. A consenting holder whose Consent is delivered and not revoked on or prior
to the Expiration Date will receive, upon the terms and subject to the
conditions in the Prospectus, $25.00 in cash for each $1,000 principal
amount of Notes for which a Consent is validly delivered and not revoked.
2. Pathnet's obligation to make Consent Payments is conditioned upon, among
other things, (1) receipt by Pathnet, Pathnet Telecom and the Trustee of
validly delivered and unrevoked Consents from the Record Holders of at
least a majority of the aggregate outstanding principal amount of the Notes
outstanding on the Record Date, and (2) execution by the Trustee of a
Supplemental Indenture providing for the Proposed Amendments, all of which
conditions Pathnet and Pathnet Telecom reserve the right to waive.
If you wish to have us deliver your Consent to (1) the waiver of Pathnet's
Change of Control Offer obligation and the Excess Proceeds Offer obligation in
connection with the Contribution and Reorganization Transaction; and (2) the
adoption of the Supplemental Indenture and the Proposed Amendments contained
therein, please so instruct us by completing, executing and returning to us the
instruction form that appears below. The accompanying Consent and Letter of
Transmittal is furnished to you for informational purposes only and may not be
used by you to deliver Consents with respect to Notes held by us and registered
in our name for your account or benefit.
2
<PAGE> 3
INSTRUCTIONS
THE UNDERSIGNED ACKNOWLEDGE(S) RECEIPT OF YOUR LETTER AND THE
ENCLOSED MATERIAL REFERRED TO THEREIN RELATING TO THE SOLICITATION OF
PATHNET, INC. AND PATHNET TELECOMMUNICATIONS, INC.
This will instruct you to deliver my Consent to (1) the waiver
of Pathnet's Change of Control Offer obligation and the Excess
Proceeds Offer obligation in connection with the Contribution and
Reorganization Transaction; and (2) the adoption of the Supplemental
Indenture and the Proposed Amendments contained therein, with respect
to my Notes, pursuant to the terms of and conditions set forth in the
Prospectus and the Consent and Letter of Transmittal.
Box 1 / / Please deliver my Consent to (1) the waiver of Pathnet's Change of
Control Offer obligation and the Excess Proceeds Offer obligation
with respect to the Contribution and Reorganization Transaction; and
(2) the adoption of a Supplemental Indenture and the Proposed
Amendments contained therein, in each case with respect to my Notes.
I have identified on a signed schedule attached hereto the principal
amount for which Consents regarding such Notes are to be delivered,
if I wish to consent with regard to less than all of such Notes.
Box 2 / / Please do not deliver my Consent to (1) the waiver of Pathnet's
Change of Control Offer obligation and the Excess Proceeds Offer
obligation; and (2) the adoption of the Supplemental Indenture and
the Proposed Amendments contained therein.
Date: ______
----------------------------------------
----------------------------------------
Signatures
----------------------------------------
----------------------------------------
Please print name(s) here
UNLESS A SPECIFIC CONTRARY INSTRUCTION IS GIVEN IN A SIGNED SCHEDULE
ATTACHED HERETO, YOUR SIGNATURE(S) HEREON SHALL CONSTITUTE AN
INSTRUCTION TO US TO CONSENT TO (1) THE WAIVER OF PATHNET'S CHANGE OF
CONTROL OFFER OBLIGATION AND THE EXCESS PROCEEDS OFFER OBLIGATION IN
CONNECTION WITH THIS CONTRIBUTION AND REORGANIZATION TRANSACTION; AND
(2) THE ADOPTION OF THE SUPPLEMENTAL INDENTURE AND THE PROPOSED
AMENDMENTS CONTAINED THEREIN, IN EACH CASE, WITH RESPECT TO ALL OF
YOUR NOTES.
3
<PAGE> 4
PATHNET, INC.
SOLICITATION OF CONSENTS
FOR $25.00 IN CASH PER $1,000 PRINCIPAL AMOUNT
OF 12-1/4% SENIOR NOTES DUE 2008
To Securities Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Enclosed for your consideration is a Prospectus issued by Pathnet
Telecommunications, Inc. ("Pathnet Telecom") dated November 22, 1999 (as the
same may be amended from time to time, the "Preliminary Prospectus"), and a form
of Consent and Letter of Transmittal and instructions thereto (the "Consent and
Letter of Transmittal") relating to the solicitation (the "Solicitation") by
Pathnet, Inc. ("Pathnet") and Pathnet Telecom of consents (the "Consents") from
holders of the 12-1/4% Senior Notes due 2008 of Pathnet (the "Notes") to the
following:
(1) The waiver of Pathnet's obligations under certain provisions of
the Indenture, dated as of April 8, 1998 (the "Indenture"), among Pathnet
and The Bank of New York, as Trustee ("Trustee"), namely the Change of
Control Offer obligation under Section 1010 of the Indenture and the
Excess Proceeds Offer obligation under Section 1017 of the Indenture, and
(2) The adoption of a Supplemental Indenture among Pathnet, Pathnet
Telecom and the Trustee, pursuant to which (a) Pathnet Telecom will become
bound by substantially the same covenants and other obligations as are
currently imposed on Pathnet under the Indenture, and (b) transactions
between Pathnet and Pathnet Telecom or Pathnet and certain other
subsidiaries of Pathnet Telecom will be permitted to the same extent that
such transactions are currently permitted between Pathnet and its
Restricted Subsidiaries under the Indenture;
in each case as more fully described under the caption "The Pathnet Senior
Noteholder Waivers and Other Proposed Indenture Amendments" in the Preliminary
Prospectus.
As described in, and subject to the terms and conditions of, the
Preliminary Prospectus, Pathnet Telecom is offering a guarantee of Pathnet's
obligations under the Notes in exchange for the Consents. In addition, upon the
terms and subject to the conditions set forth in the Preliminary Prospectus and
the Consent and Letter of Transmittal, Pathnet will make a Consent Payment at
the rate of $25.00 in cash for each $1,000 principal amount of Notes for which
validly delivered and unrevoked Consents have been received by the Depository on
or prior to the Initial Expiration Date (as defined below), unless extended (the
"Expiration Date").
Pathnet and Pathnet Telecom intend to cause the execution of a
supplemental indenture to accommodate the issuance by Pathnet Telecom of the
Guarantees and the addition of Pathnet Telecom to the Indenture on substantially
the same terms as Pathnet (the "Proposed Amendments") to occur on the Initial
Expiration Date if, as of such date Requisite Consents have been obtained or, if
later, promptly upon obtaining the Requisite Consents. The Initial Expiration
Date will be the date that is 10 business days after the effective date of the
Registration Statement and Pathnet Telecom will issue a press release confirming
the effective date of the Registration Statement and the Initial Expiration Date
promptly after the Registration Statement is declared effective by the
Securities and Exchange Commission. Pathnet and Pathnet Telecom will deliver to
all Holders a copy of the final Prospectus not less than five business days
prior to the Initial Expiration Date.
The term "Record Holder" as used herein shall mean the registered holders
of Notes outstanding at the close of business in New York on the date of
effectiveness of the Registration Statement (the "Record Date"). The Preliminary
Prospectus describes the requested waivers, the Guarantee, the Proposed
Amendments and the consent solicitation process.
<PAGE> 5
We are asking you to contact your clients for whom you hold Notes
registered in your name or in the name of your nominee. In addition, we ask you
to contact your clients who, to your knowledge, hold Notes registered in their
own name. You will be reimbursed by Pathnet and Pathnet Telecom for customary
mailing and handling expenses incurred by you in forwarding any of the enclosed
materials to your clients.
Enclosed is a copy of each of the following documents:
1. The Preliminary Prospectus.
2. A Consent and Letter of Transmittal for your use in connection with
the Solicitation relating to the Notes and for the information of
your clients.
3. A form of letter that may be sent to your clients for whose accounts
you hold Notes registered in your name or the name of your nominee
with space provided for obtaining the clients' instructions with
regard to the Solicitation.
4. A letter from Richard A. Jalkut to the holders of Notes.
5. Guidelines for Certification of Taxpayer Identification Number on
Substitute Form W-9.
6. A return envelope addressed to the Depositary.
Your prompt action is requested. The Solicitation will expire at 5:00 P.M.,
New York City time, on the Initial Expiration Date, unless extended. Consents
delivered pursuant to the Solicitation may be revoked, subject to the procedures
described in the Consent and Letter of Transmittal, at any time prior to the
Expiration Date.
To deliver Consents in the Solicitation, a duly executed and properly
completed Consent and Letter of Transmittal or a facsimile thereof, together
with a copy of any other required documents, must be received by the Depositary
as indicated in the Consent and Letter of Transmittal.
Additional copies of the enclosed material may be obtained from the
Information Agent, by calling MacKenzie Partners, Inc. on (212) 929-5500.
NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY PERSON
AS AN AGENT OF PATHNET, PATHNET TELECOM, THE TRUSTEE, THE SOLICITATION AGENT,
THE INFORMATION AGENT OR THE DEPOSITARY, OR AUTHORIZE YOU OR ANY OTHER PERSON TO
MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM WITH RESPECT TO THE SOLICITATION,
EXCEPT FOR STATEMENTS EXPRESSLY MADE IN THE PRELIMINARY PROSPECTUS OR THE
CONSENT AND LETTER OF TRANSMITTAL.
_________________________________
Pathnet, Inc.
Pathnet Telecommunications, Inc.
2
<PAGE> 6
CONSENT AND LETTER OF TRANSMITTAL
FOR
12-1/4% SENIOR NOTES DUE 2008
OF
PATHNET, INC.
SOLICITATION OF CONSENTS
FOR $25.00 IN CASH PER $1,000 PRINCIPAL AMOUNT
PURSUANT TO THE PRELIMINARY PROSPECTUS OF
PATHNET TELECOMMUNICATIONS, INC., DATED
NOVEMBER 22, 1999.
THE SOLICITATION WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON THE DATE THAT
IS TEN BUSINESS DAYS AFTER THE EFFECTIVE DATE OF THE REGISTRATION STATEMENT
REFERRED TO BELOW (THE "INITIAL EXPIRATION DATE"), UNLESS EXTENDED (THE
"EXPIRATION DATE"). PATHNET, INC. AND PATHNET TELECOMMUNICATIONS, INC. INTEND TO
PUBLICLY ANNOUNCE THE PRECISE INITIAL EXPIRATION DATE AFTER THE REGISTRATION
STATEMENT IS DECLARED EFFECTIVE BY THE SECURITIES AND EXCHANGE COMMISSION.
CONSENTS MAY BE REVOKED AT ANY TIME UNTIL THE EXPIRATION DATE .
The Depositary:
The Bank of New York
101 Barclay Street, 7th Floor
New York, New York 10286
<TABLE>
<S> <C> <C>
By Hand/Overnight Courier: By Facsimile: By Mail:
(212) 815-6339
The Bank of New York The Bank of New York
101 Barclay Street, 7th Floor 101 Barclay Street, 7th Floor
New York, New York 10286 Confirm by Telephone: New York, New York 10286
ATTENTION: Reorganization (212) 815-6331 ATTENTION: Reorganization
Section, Santino Ginocchitti Section, Santino Ginocchitti
</TABLE>
DELIVERY OF THIS CONSENT AND LETTER OF TRANSMITTAL TO AN ADDRESS, OR
TRANSMISSION VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY.
HOLDERS (PARTICIPANTS IN THE DEPOSITARY TRUST COMPANY) WHO WISH TO BE
ELIGIBLE TO RECEIVE THE CONSENT PAYMENT PURSUANT TO THE SOLICITATION MUST
VALIDLY DELIVER (AND NOT REVOKE) THEIR CONSENTS TO THE DEPOSITARY PRIOR TO THE
EXPIRATION DATE.
THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS
CONSENT AND LETTER OF TRANSMITTAL IS COMPLETED.
The undersigned is a Record Holder (as defined below) of 12-1/4% Senior
Notes (the "Notes") of Pathnet, Inc., a Delaware corporation ("Pathnet"). By
execution hereof, the undersigned acknowledges receipt of the Preliminary
Prospectus of Pathnet Telecommunications, Inc. ("Pathnet Telecom") dated
November 22, 1999 (as may be amended from time to time, the "Preliminary
Prospectus"), and of this Consent and Letter of Transmittal and the instructions
hereto (the "Consent and Letter of Transmittal"), which together constitute the
solicitation by Pathnet and Pathnet Telecom (the "Solicitation"), in connection
with the Contribution and Reorganization Transaction described in the
Preliminary Prospectus, of consents (the "Consents") from Record Holders of the
Notes to:
(1) the waiver of Pathnet's obligations under certain provisions of the
Indenture, dated as of April 8, 1998 (the "Indenture"), among Pathnet and The
Bank of New York, as Trustee ("Trustee"), namely the Change of Control Offer
<PAGE> 7
obligation under Section 1010 of the Indenture and the Excess Proceeds Offer
obligation under Section 1017 of the Indenture, and
(2) the adoption of a Supplemental Indenture among Pathnet, Pathnet
Telecom and the Trustee, pursuant to which (a) Pathnet Telecom will become bound
by substantially the same covenants and other obligations as are currently
imposed on Pathnet under the Indenture, and (b) transactions between Pathnet and
Pathnet Telecom or Pathnet and certain other subsidiaries of Pathnet Telecom
will be permitted to the same extent that such transactions are currently
permitted between Pathnet and its Restricted Subsidiaries under the Indenture;
in each case as more fully described under the caption "The Pathnet Senior
Noteholder Waivers and Other Proposed Indenture Amendments" in the Preliminary
Prospectus.
As described in, and subject to the terms and conditions of, the
Preliminary Prospectus, Pathnet Telecom is offering a guarantee of Pathnet's
obligations under the Notes in exchange for the Consents. In addition, subject
to the terms and conditions of this Consent and Letter of Transmittal and the
Preliminary Prospectus, Holders of Notes who validly deliver (and do not revoke)
their Consents to the Depositary prior to the Expiration Date will receive a
consent payment of $25 per $1,000 in principal amount of the Notes (the "Consent
Payments").
Pathnet's obligation to make Consent Payments to Record Holders of Notes
pursuant to the solicitation is conditioned upon, among other things, (i)
receipt by Pathnet and the Trustee of validly delivered and unrevoked Consents
from Record Holders of a majority in aggregate principal amount of the Notes
outstanding on the Record Date (the "Requisite Consents"); and (ii) execution
and delivery by the Trustee of a supplemental indenture providing for the
amendments to the Indenture necessary to accommodate the issuance by Pathnet
Telecom of the Guarantees and the addition of Pathnet Telecom to the Indenture
on substantially the same terms as Pathnet (the "Proposed Amendments"). The
Preliminary Prospectus describes the requested waivers, the Proposed Amendments,
the form of the guarantees offered by Pathnet Telecom (the "Guarantees") and the
solicitation of consents to the adoption of the Supplemental Indenture and the
Proposed Amendments contained therein.
Forms of the Guarantees, the Indenture and the Supplemental Indenture are
filed or incorporated by reference as exhibits to the Registration Statement of
which the Preliminary Prospectus is a part (Registration No. 333-91469) (the
"Registration Statement"). Copies of these documents may be obtained as
described in the Preliminary Prospectus under the caption "Where you can find
more information" and also from the Depositary at its address set forth above.
Pathnet and Pathnet Telecom undertake to deliver to all Holders a copy of the
final Prospectus not less than five business days prior to the Initial
Expiration Date.
The Solicitation is made only to Record Holders of Notes. The term "Record
Holder" as used herein shall mean the registered holders of Notes outstanding at
the close of business in New York on the effective date of the Registration
Statement (the "Record Date").
The undersigned has completed, executed and delivered this Consent to
indicate the action the undersigned desires to take with respect to the
Solicitation.
All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Preliminary Prospectus.
Your bank or broker can assist you in completing this form. The
instructions included with this Consent and Letter of Transmittal must be
followed. Questions and requests for assistance or for additional copies of the
Preliminary Prospectus or this Consent and Letter of Transmittal may be directed
to the Information Agent. See Instruction 11 herein.
2
<PAGE> 8
TABLE FOR USE IF CONSENT RELATES TO LESS THAN THE TOTAL
PRINCIPAL AMOUNT OF ALL NOTES HELD BY RECORD HOLDER
- --------------------------------------------------------------------------------
DESCRIPTION OF NOTES
- --------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF RECORD HOLDER(S) CERTIFICATE(S) AS TO WHICH CONSENT
(PLEASE FILL IN, IF BLANK) IS GIVEN (ATTACH ADDITIONAL LIST,
IF NECESSARY)
- --------------------------------------------------------------------------------
PRINCIPAL
AMOUNT AS TO
WHICH
CONSENTS
ARE GIVEN
AGGREGATE (MUST BE AN
PRINCIPAL INTEGRAL
CERTIFICATE AMOUNT MULTIPLE OF
NUMBER(S)* REPRESENTED $1,000)*
-------------------------------------------
-------------------------------------------
-------------------------------------------
-------------------------------------------
- --------------------------------------------------------------------------------
TOTAL PRINCIPAL AMOUNT OF NOTES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
* If this Consent relates to less than (i) the total principal amount of Notes
registered in the name of the Record Holder(s) on the Record Date or (ii) if
this Consent is being executed by proxy, the total principal amount of Notes
to which such proxy relates, then the Record Holder(s) or proxy, as the case
may be, must list the certificate numbers and principal amounts of the Notes
as to which this Consent relates. Otherwise, this Consent will be deemed to
relate to the total principal amount of Notes registered in the name(s) of
such Record Holder(s) on the Record Date or to which such proxy relates, as
the case may be.
- --------------------------------------------------------------------------------
3
<PAGE> 9
NOTE - SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
By signing and returning this Consent and Letter of Transmittal in
accordance with the instructions hereto, the undersigned hereby (1) waives
Pathnet's compliance with the Change of Control Offer obligation and the Excess
Proceeds Offer obligation (as those terms are described in the Preliminary
Prospectus) for the purpose of effecting the Contribution and Reorganization
Transaction; and (2) consents to the adoption of the Supplemental Indenture and
the Proposed Amendments contained therein. Unless otherwise specified by the
undersigned, this Consent relates to the total principal amount of Notes
registered in the undersigned's name on the Record Date or, if this consent form
is being executed by proxy, the total principal amount of Notes to which such
proxy relates. If this Consent relates to less than the total principal amount
of Notes registered in the undersigned's name on the Record Date or to which
such proxy relates, as the case may be, the undersigned has listed on the table
herein the certificate numbers and principal amounts for which this Consent is
given.
The undersigned hereby irrevocably constitutes and appoints the Depositary
the true and lawful agent and attorney-in-fact of the undersigned (with full
knowledge that the Depositary also acts as the agent of the Trustee, Pathnet and
Pathnet Telecom) with respect to this Consent, with full power of substitution
(such power-of-attorney being deemed to be an irrevocable power coupled with an
interest) to deliver to the Trustee this Consent and Letter of Transmittal as
evidence of the undersigned's Consent to (1) waiver of Pathnet's compliance with
the Change of Control Offer obligation and the Excess Proceeds Offer obligation
in connection with the Contribution and Reorganization Transaction; and (2) the
adoption of the Supplemental Indenture and the Proposed Amendments contained
therein and as certification that Requisite Consents, duly executed by Record
Holders, have been received, in accordance with the terms of and conditions to
the Solicitation. The undersigned acknowledges that Pathnet and Pathnet Telecom
have nominated the Trustee to receive the Consent on its behalf and that
delivery to the Trustee of this Consent will be deemed for the purposes of this
consent solicitation to be delivery to the Trustee and to Pathnet and Pathnet
Telecom.
Pathnet and Pathnet Telecom intend to cause the execution of the
Supplemental Indenture providing for the Proposed Amendments to occur on the
Initial Expiration Date if, as of such date, Requisite Consents have been
obtained or, if later, promptly upon obtaining the Requisite Consents. The time
and date on which such supplemental indenture is executed is hereinafter
referred to as the "Consent Date". Pathnet and Pathnet Telecom undertake to
deliver to all Holders a copy of the final Prospectus not less than ten business
days prior to the Initial Expiration Date.
The undersigned agrees and acknowledges that, by the execution and
delivery hereof, the undersigned makes and provides (1) the written waiver of
Pathnet's compliance with the Change of Control Offer obligation and the Excess
Proceeds Offer obligation as permitted by Section 1019 of the Indenture; and (2)
the written consent to the adoption of the Supplemental Indenture and the
Proposed Amendments as permitted by Section 902(2) of the Indenture. The
undersigned understands that any Consent provided hereby shall remain in full
force and effect unless and until such Consent is revoked in accordance with the
procedures set forth in the Preliminary Prospectus and this Consent and Letter
of Transmittal. The undersigned understands that a revocation of such Consent
will not be effective following the time and date on which the supplemental
indenture providing for the Proposed Amendments is executed. The undersigned
hereby represents and warrants that the undersigned has full power and authority
to deliver this Consent. The undersigned will, upon request, execute and deliver
any additional documents deemed by the Depositary, Pathnet, Pathnet Telecom, or
the Trustee to be necessary or desirable to perfect the undersigned's Consent
and to complete the execution of the supplemental indenture to the Indenture
reflecting the Proposed Amendments.
The undersigned understands that delivery of Consents pursuant to any of
the procedures described in the Preliminary Prospectus under the caption
"Description of the Consent Solicitation Process" and in the instructions hereto
and acceptance thereof by Pathnet and Pathnet Telecom will constitute a binding
agreement among the undersigned, Pathnet and Pathnet Telecom upon the terms and
subject to the conditions of the Solicitation.
The undersigned understands that deliveries of Consents may be revoked by
written notice of revocation received by the Depositary at any time prior to the
Expiration Date. Any Record Holder who revokes a Consent prior to the Expiration
Date shall not be entitled to receive the Consent Payment, unless such Record
Holder subsequently redelivers a valid Consent prior to the Expiration Date.
4
<PAGE> 10
The undersigned understands that notice of revocation of a Consent, to be
effective, must (i) 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 thereby,
(ii) be signed by the Registered Holder thereof in the same manner as the
original signature on this Consent and Letter of Transmittal or be accompanied
by evidence, satisfactory to Pathnet, Pathnet Telecom, the Trustee and the
Depositary, that the Record Holder of Notes revoking the Consent has succeeded
to ownership of the Notes, and (iii), be received by the Depositary at its
address set forth herein prior to the Expiration Date. 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.
All authority conferred or agreed to be conferred by this Consent and
Letter of Transmittal shall survive the death or incapacity of the undersigned
and every obligation of the undersigned under this Consent shall be binding upon
the undersigned's heirs, personal representatives, executors, administrators,
successors, assigns, trustees in bankruptcy and other legal representatives.
The undersigned acknowledges and agrees that receipt of Consents from the
Record Holders (and their proxies) of at least a majority in principal amount of
the outstanding Notes, among other things, is required to waive Pathnet's
compliance with the Change of Control Offer obligation and the Excess Proceeds
Offer obligation and to approve the Proposed Amendments. The waiver of Pathnet's
compliance with the Change of Control Offer obligation, the waiver of Pathnet's
compliance with the Excess Proceeds Offer obligation, and the Proposed
Amendments will become effective on the Consent Date, as described in the
Preliminary Prospectus.
The undersigned further acknowledges and agrees that by executing and
delivering this Consent and Letter of Transmittal, the undersigned (1) waives
Pathnet's compliance with the Change of Control Offer Obligation and the Excess
Proceeds Offer obligation for the purpose of effecting the Contribution and
Reorganization Transaction; and (2) consents to the adoption of the Supplemental
Indenture and the Proposed Amendments contained therein and that it is not
possible for the undersigned to grant such waivers and consents with respect to
some but not all of such items.
5
<PAGE> 11
- --------------------------------------------------------------------------------
PLEASE SIGN HERE
(TO BE COMPLETED BY ALL CONSENTING RECORD HOLDERS (OR PROXY
HOLDERS) OF NOTES)
This Consent and Letter of Transmittal must be signed by the Record
Holder(s) of Notes in exactly the same manner as the name(s) appear(s) on the
certificate(s) for Notes to which this Consent relates. If signature is by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person must set forth his or her full title below under "Capacity" and
submit proper evidence satisfactory to Pathnet, Pathnet Telecom and to the
Trustee of such person's authority so to act. See Instruction 4 herein.
If this Consent and Letter of Transmittal is signed by a person other than
the Record Holder(s) of the Notes, the Consent and Letter of Transmittal must
be accompanied by the proxy substantially in the form attached hereto duly
executed by such Record Holders.
X...........................................................
X...........................................................
SIGNATURE(S) OF RECORD HOLDER(S) OR AUTHORIZED SIGNATORY
Date:........
Name(s): ..................................................
..................................................
(PLEASE PRINT)
Capacity: ..................................................
Address: ..................................................
..................................................
(INCLUDING ZIP CODE)
Area Code and Telephone No.: ...............................
PLEASE COMPLETE SUBSTITUTE FORM W-9 HEREIN
- --------------------------------------------------------------------------------
6
<PAGE> 12
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE SOLICITATION
1. DELIVERY OF THIS CONSENT AND LETTER OF TRANSMITTAL. To deliver Consents
in the Solicitation, a properly completed and duly executed copy or facsimile of
this Consent and Letter of Transmittal and a copy of any other documents
required by this Consent and Letter of Transmittal must be received by the
Depositary at its address set forth herein prior to the Expiration Date. The
method of delivery of this Consent and Letter of Transmittal and all other
required documents to the Depositary is at the election and risk of Record
Holders. If such delivery is by mail, it is suggested that Record Holders use
properly insured registered mail with return receipt requested, and that the
mailing be made sufficiently in advance of the Expiration Date to permit
delivery to the Depositary prior to such date. Except as otherwise provided
below, the delivery will be deemed made only when actually received by the
Depositary at the address listed on the cover. This Consent and Letter of
Transmittal should be sent only to the Depositary, not to Pathnet, Pathnet
Telecom, the Trustee, the Information Agent or the Solicitation Agent.
PATHNET AND PATHNET TELECOM INTEND TO CAUSE THE EXECUTION OF A
SUPPLEMENTAL INDENTURE PROVIDING FOR THE PROPOSED AMENDMENTS ON THE INITIAL
EXPIRATION DATE IF, AS OF SUCH DATE, THE REQUISITE CONSENTS HAVE BEEN OBTAINED
OR, IF LATER, PROMPTLY UPON OBTAINING THE REQUISITE CONSENTS. SUCH SUPPLEMENTAL
INDENTURE WILL BE BINDING UPON EACH RECORD HOLDER WHETHER OR NOT SUCH RECORD
HOLDER GIVES A CONSENT WITH RESPECT THERETO.
2. CONSENT TO WAIVERS AND PROPOSED AMENDMENTS; REVOCATION OF CONSENT. In
accordance with the Preliminary Prospectus, all properly completed and executed
Consents and Letters of Transmittal (1) waiving Pathnet's compliance with the
Change of Control Offer obligation and the Excess Proceeds Offer obligation and
(2) consenting to the adoption of the Supplemental Indenture and the Proposed
Amendments contained therein 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 adoption
of the Supplemental Indenture and the Proposed Amendments contained therein
unless the Depositary receives, prior to the Expiration Date, a written notice
of revocation of such Consent as described in the Preliminary Prospectus.
Consents may be revoked by delivery of a written notice of revocation in
accordance with the following procedures. To be effective, a notice of
revocation of Consent must (i) 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, (ii) be signed by the Record Holder thereof in the same manner as
the original signature on this Consent and Letter of Transmittal 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 (iii) be received prior
to the Expiration Date by the Depositary at one of the addresses set forth
herein. 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.
3. PARTIAL CONSENTS. Consents will be accepted only in principal amounts
equal to $1,000 or integral multiples thereof. If Consents with respect to less
than the entire principal amount of Notes registered in the name of the Record
Holder are delivered, the Holder must complete the table relating to partial
Consents contained herein. The entire principal amount of Notes registered in
the name of the Record Holder will be deemed to have consented unless otherwise
accurately indicated.
4. RECORD HOLDERS ENTITLED TO CONSENT. Only a Record Holder (or his or her
duly authorized proxy) may deliver a Consent. Any beneficial owner whose Notes
are registered in the name of a broker, dealer, commercial bank, trust company
or other nominee and who wishes to deliver a Consent should contact such Record
Holder promptly and instruct such Record Holder to execute and deliver this
Consent on such beneficial owner's behalf.
5. SIGNATURES ON THIS CONSENT AND LETTER OF TRANSMITTAL. If this Consent
and Letter of Transmittal is signed by the Record Holder(s) of the Notes with
respect to which Consents are given, the signature(s) must correspond with the
name(s) as written on the face of the certificate(s) representing the Notes for
which Consents are given without alteration, enlargement or any change
whatsoever.
8
<PAGE> 13
IF THIS CONSENT AND LETTER OF TRANSMITTAL IS EXECUTED BY A HOLDER OF NOTES
OTHER THAN THE RECORD HOLDER(S), A VALID PROXY (SUBSTANTIALLY IN THE FORM
ATTACHED HERETO) MUST BE OBTAINED FROM SUCH RECORD HOLDER(S).
If any of the Notes with respect to which this Consent is given are owned
by two or more joint Record Holders, all such Record Holders must sign this
Consent and Letter of Transmittal. If any Notes with respect to which this
Consent is given are held in different names on several certificates, it will be
necessary to complete, sign and submit as many separate copies of this Consent
and Letter of Transmittal and any necessary accompanying documents as there are
different names in which certificates are held.
If this Consent and Letter of Transmittal is signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and proper evidence satisfactory to
Pathnet, Pathnet Telecom and the Trustee of their authority so to act must be
submitted with this Consent and Letter of Transmittal.
6. TAXPAYER IDENTIFICATION NUMBER. Each consenting Record Holder is
required to provide the Depositary with the Record Holder's correct taxpayer
identification number ("TIN"), generally the Record Holder's social security or
federal employer identification number, on Substitute Form W-9, which is
provided under "Important Tax Information" below, and to certify that the Record
Holder (or other payee) is not subject to backup withholding. A Record Holder
must cross out item (2) in the Certification box on Substitute Form W-9 if such
Record Holder is subject to backup withholding. Failure to provide the
information on the form may subject the consenting Record Holder to a $50
penalty imposed by the Internal Revenue Service and 31% federal income tax
backup withholding on any Consent Payments made to the Record Holder or other
payee pursuant to the Solicitation. The box in Part 3 of the form should be
checked if the consenting Record Holder has not been issued a TIN and has
applied for a TIN or intends to apply for a TIN in the near future. If the box
in Part 3 is checked and the Depositary is not provided with a TIN by the time
of payment, thereafter the Depositary will withhold 31% on all Consent Payments
to such Record Holder (or other payee) until a TIN is provided to the
Depositary.
7. TRANSFER TAXES. Pathnet will pay all transfer taxes, if any, applicable
to the Solicitation of Consents of holders of Notes pursuant to the
Solicitation.
8. 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 and Pathnet Telecom, in their sole discretion,
which determination shall be final and binding. Alternative, conditional or
contingent Consents will not be considered valid. Pathnet and Pathnet Telecom
reserve the absolute right to reject any or all Consents that are not in proper
form or the acceptance of which would, in Pathnet's and Pathnet Telecom's
opinion, be unlawful. Pathnet and Pathnet Telecom also reserve the right to
waive any defects, irregularities or conditions of delivery as to particular
Consents. Pathnet's and Pathnet Telecom's interpretations of the terms and
conditions of the Solicitation (including the instructions in this Consent and
Letter of Transmittal) will be final and binding. Any defect or irregularity in
connection with deliveries of Consents must be cured within such time as Pathnet
and Pathnet Telecom determine, unless waived by Pathnet and Pathnet Telecom.
Deliveries of Consents shall not be deemed to have been made until all defects
and irregularities have been waived by Pathnet and Pathnet Telecom or cured.
None of Pathnet, Pathnet Telecom, 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.
RECORD HOLDERS SHOULD USE THIS CONSENT AND LETTER OF TRANSMITTAL TO
DELIVER CONSENTS IN THE SOLICITATION.
9. WAIVER OF CONDITIONS. Pathnet and Pathnet Telecom expressly reserve
the absolute right, in their 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.
9
<PAGE> 14
11. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to
the procedure for consenting to the waivers described above and to the Proposed
Amendments and requests for assistance or additional copies of the Preliminary
Prospectus and this Consent and Letter of Transmittal and any other documents
related to the Solicitation may be directed to the Information Agent, whose
address and telephone number appear below. Additional information about the
Solicitation may be obtained from the Depositary, whose address and telephone
number appear below.
10
<PAGE> 15
IMPORTANT TAX INFORMATION
Under federal tax law, a holder who receives a Consent Payment from
Pathnet is required to provide the Depositary (as payer) with such holder's
correct TIN on Substitute Form W-9 below or otherwise establish a basis for
exemption from backup withholding. If such holder is an individual, the TIN is
his or her social security number. If the Depositary is not provided with the
correct TIN, a $50 penalty may be imposed by the Internal Revenue Service, and
any Consent Payments, made with respect to validly delivered and unrevoked
Consents may be subject to backup withholding.
Certain holders (including, among others, all corporations and certain
foreign persons) are not subject to these backup withholding and reporting
requirements. Exempt holders should indicate their exempt status on Substitute
Form W-9. A foreign person may qualify as an exempt recipient by submitting to
the Depositary a properly completed Internal Revenue Service Form W-8, signed
under penalties of perjury, attesting to that holder's exempt status. A Form W-8
can be obtained from the Depositary. See the enclosed "Guidelines for
Certification Taxpayer of Identification Number on Substitute Form W-9" for
additional instructions.
If backup withholding applies, the Depositary is required to withhold 31%
of any Consent Payments made to the holder or other payee. Backup withholding is
not an additional federal income tax. Rather, the federal income tax liability
of persons subject to backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained from the Internal Revenue Service.
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on any Consent Payments paid to a Record
Holder or other payee in connection with the Consent, the holder is required to
provide the Depositary with the holder's correct TIN by completing the form
below, certifying that the TIN provided on Substitute Form W-9 is correct (or
that such holder is awaiting a TIN) and that (i) the holder has not been
notified by the Internal Revenue Service that the holder is subject to backup
withholding as a result of failure to report all interest or dividends or (ii)
the Internal Revenue Service has notified the holder that the holder is no
longer subject to backup withholding.
WHAT NUMBER TO GIVE THE DEPOSITARY
The holder is required to give the Depositary the TIN (e.g., social
security number or employer identification number) of the Record Holder(s) of
the Notes. If the Notes are held in more than one name or are not in the name of
the actual owner, consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
number to report.
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<PAGE> 16
PAYER'S NAME: [ ]
<TABLE>
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------
SUBSTITUTE PART 1 - PLEASE PROVIDE YOUR TIN ______________________
Form W-9 IN THE BOX AT RIGHT AND CERTIFY Social Security Number
BY SIGNING AND DATING BELOW OR
_______________________
Employer Identification
Number
---------------------------------------------------------------------------
----------------------------------------------------------------------------
PART 2 - Certification - Under Penalties of PART 3 -
Department of the Perjury, I certify that:
Treasury Internal Awaiting TIN [ ]
Revenue Service (1) The number shown on this form is my
correct Taxpayer Identification Number (or I
Payer's Request for am waiting for a number to be issued to me)
Taxpayer and
Identification Number
(TIN) (2) I am not subject to backup withholding
because (a) I am exempt from backup
withholding; (b) I have not been notified by
the Internal Revenue Service ("IRS") that I
am subject to backup withholding as a result
of failure to report all interest or
dividends, or (c) the IRS has notified me
that I am no longer subject to backup
withholding.
Certificate instructions - You must cross out item
(2)in Part 2 above if you have been notified by the
IRS that you are subject to backup withholding
because of underreporting interest or dividends on
your tax return.
SIGNATURE DATE
------------------------------------- -------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP
WITHHOLDING OF 31% OF THE CONSENT PAYMENTS MADE TO YOU PURSUANT TO
THE SOLICITATION. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM
W-9 FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX
IN PART 3 OF SUBSTITUTE FORM W-9.
- --------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (a) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or (b)
I intend to mail or deliver an application in the near future. I understand that
if I do not provide a taxpayer identification number by the time of payment, 31
percent of all reportable payments made to me thereafter will be withheld until
I provide a taxpayer identification number.
- --------------------------------- ------------------------
Signature Date
- --------------------------------------------------------------------------------
12
<PAGE> 17
The Information Agent for the Offer and the Solicitation is:
Mackenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
Telephone: 212 929 5500
The Solicitation Agent for the Solicitation is:
Lazard Freres & Co. LLC
30 Rockerfeller Plaza
New York, New York 10020
Telephone: 212 632 6000
