SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(mark one)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File No. 333-91469
Pathnet Telecommunications, Inc.
(Exact name of registrant as specified in its charter)
Delaware 52-2201331
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
11720 Sunrise Valley Drive
Reston, VA 20191
(Address of principal executive offices) (Zip Code)
(703) 390-1000
(Registrant's telephone number, including area code)
Not Applicable
(Former name,former address and former fiscal year,if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [ X ]
As of May 12, 2000, there were 3,178,477 shares of the Registrant's common
stock, par value $.01 per share, outstanding.
2
PATHNET TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
INDEX
PAGE
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Condensed Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2000 (unaudited) and
December 31, 1999 3
Unaudited Consolidated Statements of Operations for the three months ended
March 31, 2000 and 1999 4
Unaudited Consolidated Statements of Comprehensive Loss for the three
months ended March 31, 2000 and 1999 5
Unaudited Consolidated Statements of Cash Flows for the three months
ended March 31, 2000 and 1999 6
Notes to Unaudited Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 27
Item 4. Submission of Matters to a Vote of Security Holders 27
Item 5. Other Information 27
Item 6. Exhibits and Reports on Form 8-K 28
Signatures 29
Exhibits Index 30
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
PATHNET TELECOMMUNICATIONS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2000 1999
----- ----
(UNAUDITED)
ASSETS
Cash and cash equivalents $ 118,599,060 $ 90,661,837
Accounts receivable 1,610,835 254,894
Interest receivable 408,353 1,048,417
Marketable securities available for sale 11,675,066 42,651,836
Prepaid expenses and other current assets 1,000,342 1,182,570
------------- -------------
Total current assets 133,293,656 135,799,554
Property and equipment, net 158,365,020 131,928,365
Intangible assets - rights of way 187,275,006 -
Deferred financing costs, net 15,956,145 9,649,680
Restricted cash 25,275,159 16,921,559
Marketable securities available for sale 22,092,539 5,088,458
Pledged marketable securities held to maturity - 20,796,563
Other assets 416,394 351,808
------------- -------------
Total assets $ 542,673,919 $ 320,535,987
============= =============
LIABILITIES, MANDATORILY REDEEMABLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 17,756,350 $ 18,543,195
Accrued interest 19,651,044 8,932,293
Accrued expenses and other current liabilities 3,125,698 3,113,181
------------- -------------
Total current liabilities 40,533,092 30,588,669
12 1/4% Senior Notes, net of unamortized bond discount of $3,276,000 and $3,378,375
respectively 346,724,000 346,621,625
Other noncurrent liabilities 7,991,061 3,092,779
------------- -------------
Total liabilities 395,248,153 380,303,073
------------- -------------
Commitments and contingences
Mandatorily redeemable preferred stock:
Series A convertible preferred stock, $0.01 par value, 0 and 1,000,000 shares
authorized, issued and outstanding at March 31, 2000 and December 31, 1999,
respectively (liquidation preference $1,000,000) - 1,000,000
Series B convertible preferred stock, $0.01 par value, 0 and 1,651,046 shares
authorized, issued and outstanding at March 31, 2000 and December 31, 1999,
respectively (liquidation preference $5,033,367) - 5,008,367
Series C convertible preferred stock, $0.01 par value, 0 and 2,819,549 shares
authorized, issued and outstanding at March 31, 2000 and December 31, 1999,
respectively (liquidation preference $30,000,052) - 29,961,272
Series E convertible preferred stock, $0.01 par value, 4,506,145 and 0 shares
authorized, 2,867,546 and 0 issued and outstanding and March 31, 2000
and December 31, 1999, respectively 37,871,966 -
------------- -------------
Total mandatorily redeemable preferred stock 37,871,966 35,969,639
------------- -------------
Stockholders' equity (deficit):
Series A convertible preferred stock, $0.01 par value, 2,899,999 and 0 shares
authorized, issued and outstanding at March 31, 2000 and December 31, 1999,
respectively 29,000 -
Series B convertible preferred stock, $0.01 par value, 4,788,030 and 0 shares
authorized, issued and outstanding at March 31, 2000 and December 31, 1999,
respectively 47,880 -
Series C convertible preferred stock, $0.01 par value, 8,176,686 and 0 shares
authorized, issued and outstanding at March 31, 2000 and December 31, 1999,
respectively 81,767 -
Series D convertible preferred stock, $0.01 par value, 9,250,000 and 0 shares
authorized, 8,511,607 and 0 shares issued and outstanding at March 31,2000 and
December 31, 1999, respectively 85,116 -
Undesignated preferred stock, par value $0.01 per share, 0 and 10,000,000 shares
authorized, 0 shares issued and outstanding - -
Common stock, $0.01 par value, 60,000,000 shares authorized, 3,176,107 and
3,068,218 shares issued and outstanding 31,761 30,682
Deferred compensation (8,977,266) (441,760)
Additional paid-in capital 240,001,666 6,264,362
Accumulated other comprehensive loss (14,869) (90,240)
Accumulated deficit (121,731,255) (101,499,769)
------------- -------------
Total stockholders' equity (deficit) 109,553,800 (95,736,725)
------------- -------------
Total liabilities, mandatorily redeemable preferred stock and
stockholders' equity $ 542,673,919 $ 320,535,987
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
3
PATHNET TELECOMMUNICATIONS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
Revenue $ 1,926,554 $ 826,104
----------- -----------
Operating expenses:
Cost of revenue (including non cash deferred compensation
of $532,657 and $20,582, respectively) 4,268,997 2,651,200
Selling, general and administrative (including non cash deferred
compensation of $899,712 and $113,494, respectively) 6,243,490 2,795,360
Reorganization expenses 1,408,468 -
Depreciation expense 2,557,984 537,639
----------- -----------
Total operating expenses 14,478,939 5,984,199
----------- -----------
Net operating loss (12,552,385) (5,158,095)
Interest expense (9,741,793) (10,270,211)
Interest income 2,235,057 3,814,608
Other income (expense), net (172,365) 88,096
----------- -----------
Net loss $(20,231,486) $(11,525,602)
=========== ===========
Basic and diluted loss per
common share $ (6.59) $ (3.97)
=========== ===========
Weighted average number of
common shares outstanding 3,068,240 2,902,895
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
PATHNET TELECOMMUNICATIONS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
Net loss $ (20,231,486) $ (11,525,602)
Other comprehensive income:
Net unrealized (loss) gain on marketable
securities available for sale 75,371 (133,891)
----------- -----------
Comprehensive loss $ (20,156,115) $ (11,659,493)
=========== ===========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
PATHNET TELECOMMUNICATIONS, INC. AND SUBSIDIARIES AND PREDECESSOR COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
FOR THE THREE MONTHS ENDED
MARCH 31,
2000 1999
---- ----
Cash flows from operating activities:
Net loss $ (20,231,486) $(11,525,602)
Adjustment to reconcile net loss to net cash used in operating activities:
Depreciation expense 2,557,984 537,639
Amortization of deferred financing costs 285,160 284,005
Provision for write down of spare parts 120,000 -
Provision for losses on accounts receivable 21,000 -
Loss on sale of equipment (279) -
Interest expense resulting from amortization of discount on the
bonds payable 102,375 102,375
Amortization of premium on pledged securities 71,563 167,295
Amortization of deferred compensation 1,432,369 134,076
Changes in assets and liabilities:
Accounts receivable (1,376,941) 404,215
Interest receivable 1,108,446 339,068
Prepaid expenses and other current assets 182,228 (4,573,224)
Accounts payable 2,734,227 (1,234,100)
Accrued interest 10,718,752 10,718,751
Accrued expenses and other liabilities 1,876,611 973,861
Other assets (64,586) (108,565)
------------- ------------
Net cash used in operating activities (462,577) (3,780,206)
------------- ------------
Cash flows from investing activities:
Expenditures for network in progress (28,731,555) (16,668,923)
Expenditures for property and equipment (1,144,690) (125,589)
Sale and maturity of marketable securites available for sale 50,942,232 58,493,029
Purchase of marketable securities available for sale (35,894,172) -
Sale and maturity of pledged marketable securities held to maturity (20,725,261) 41,092
Restricted cash (8,822,243) (155,930)
Repayment of note receivable - 3,206,841
------------- ------------
Net cash provided by (used in) investing activities (3,925,167) 44,790,520
------------- ------------
Issuance of series E convertible preferred stock 38,000,000 -
Proceeds from option to purchase series E convertible preferred stock 1,000,000 -
Exercise of employee common stock options 396,718 1,091
Payment of deferred financing costs (7,071,751) -
------------- ------------
Net cash provided by (used in) financing activities 32,324,967 1,091
------------- ------------
Net increase in cash and cash equivalents 27,937,223 41,011,405
Cash and cash equivalents at the beginning of period 90,661,837 57,521,887
------------- ------------
Cash and cash equivalents at the end of period $ 118,599,060 $ 98,533,292
============= ============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
6
PATHNET TELECOMMUNICATIONS, INC. AND SUBSIDIARIES
AND PREDECESSOR COMPANY
CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY
Pathnet, Inc. (Pathnet), 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.
Pathnet Telecommunications, Inc. (Pathnet Telecommunications) was
formed on November 1, 1999 by certain former shareholders of Pathnet in order to
facilitate the reorganization transaction which became effective on March 30,
2000 (see Note 11) and to continue the activity of Pathnet. Upon finalization of
the reorganization transaction, Pathnet became a wholly-owned subsidiary of
Pathnet Telecommunications. Hereafter, Pathnet Telecommunications, together with
Pathnet and its subsidiaries, are referred to as the Company.
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 other
telecommunications providers 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.
As of March 31, 2000, the Company's network consisted of over 6,300
wireless route miles providing wholesale transport services to 44 cities and 700
miles of installed fiber. The Company is constructing an additional 1,000 route
miles of fiber optic network, 500 of which is scheduled for completion by the
end of the second quarter. During 2000, the Company intends to deploy additional
products and services including bundled wholesale transport and local access
services.
The Company's business is funded primarily through equity investments
by the Company's stockholders and by proceeds from Pathnet's $350.0 million
aggregate principal amount of units consisting of 12 1/4% Senior Notes due 2008
(Senior Notes), which have been registered under the Securities Act of 1933, as
amended (Securities Act), and warrants to purchase Common Stock issued by
Pathnet on April 8, 1998 (Debt Offering).
2. BASIS OF PRESENTATION
Pathnet was formed to build 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.
Pathnet Telecommunications was formed to continue the activity of Pathnet with
strategic investments from Colonial Pipeline Company, Burlington Northern and
Santa Fe Corporation and CSX Corporation received in connection with the
reorganization transaction. Since inception, Pathnet and Pathnet
Telecommunications' activities consist principally of constructing and deploying
digital networks utilizing both wireless and fiber-optic technologies. Pathnet
and Pathnet Telecommunications were considered companies under common control.
Consequently, for purposes of the accompanying consolidated financial
statements, Pathnet has been treated as a "predecessor" entity. Therefore, the
consolidated financial statements as of December 31, 1999 and for the three
months ended March 31, 1999 represent the historical financial information of
Pathnet, the predecessor entity. The accompanying consolidated financial
statements incorporate the combined business activities of Pathnet and Pathnet
Telecommunications. Collectively, Pathnet and Pathnet Telecommunications are
referred to as the Company in the accompanying consolidated financial
statements.
The Company recently commenced providing telecommunications 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. As of March 31, 2000 the Company had 25 customers for its
telecommunications services. As a result, the Company exited the development
stage in the three months ended March 31, 2000.
In the opinion of management, the accompanying unaudited consolidated
financial statements of the Company contain all adjustments (consisting only of
normal recurring accruals) necessary to present fairly the Company's
consolidated financial position, and the results of operations and cash flows
for the periods indicated. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. These unaudited
consolidated financial statements should be read in conjunction with the
financial statements and notes thereto for Pathnet, Inc. included in the
Company's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission and made effective on March 14, 2000. The results of
operations for the three months ended March 31, 2000 are not necessarily
indicative of the operating results to be expected for the full year.
3. CONSOLIDATION
These consolidated financial statements include the accounts of Pathnet
Telecommunications and its wholly owned subsidiaries, Pathnet and Pathnet/Idaho
Power License, LLC (a wholly owned subsidiary of Pathnet). All material
intercompany accounts and transactions have been eliminated in consolidation.
4. LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the weighted
average number of shares of common stock outstanding during the applicable
period. Diluted loss per share is computed by dividing net loss by the weighted
average common and potentially dilutive common equivalent shares outstanding
during the applicable period. For each of the periods presented, basic and
diluted loss per share are the same. The exercise of 3,394,473 employee common
stock options, the exercise of warrants to purchase 1,116,500 shares of common
stock, and the conversion of 27,243,868 shares of Series A, B, C, D and E
convertible preferred stock into shares of common stock as of March 31, 2000,
which could potentially dilute basic loss per share in the future, were not
included in the computation of diluted loss per share for the periods presented
because to do so would have been antidilutive in each case.
5. SEGMENT REPORTING
The Company identifies its segments based on management responsibility.
The Company measures segment loss as operating loss, which is defined as loss
before interest income and expense, and income taxes. The service revenue from
the telecommunications division includes all revenues generated from the sale of
telecommunications products, including high capacity, digital transport and
competitive local access services. The construction division includes the
operating activity and the assets relating to the network build out. The
revenues for the construction division primarily relate to the management of
construction projects and the sale of dark fiber through indefeasible rights of
use agreements ("IRUs"). The corporate division includes certain general and
administrative functions and operating expenses. All of the Company's revenues
are attributable to customers in the United States, and all assets are located
in the United States
The following tables reflect the financial information for the reportable
segments;
THREE MONTHS ENDED MARCH 31, 2000
TELECOMMUNICATIONS CONSTRUCTION CORPORATE CONSOLIDATED
Revenue $ 921,849 $ 1,004,705 $ -- $ 1,926,554
Operating expenses 1,743,086 2,525,911 10,209,942 14,478,939
----------------------- ------------------ --------------- ---------------
Operating loss $ (821,237) $ (1,521,206) $ (10,209,942) $ (12,552,385)
======================== =================== ================ ================
THREE MONTHS ENDED MARCH 31, 1999
TELECOMMUNICATIONS CONSTRUCTION CORPORATE CONSOLIDATED
Revenue $ 576,504 $ 249,600 $ -- $ 826,104
Operating expenses 2,033,900 915,945 3,034,354 5,984,199
----------------------- ------------------ --------------- ---------------
Operating loss $ (1,784,300) $ (339,441) $ (3,034,354) $ (5,158,095)
======================== =================== ================ ================
The majority of revenues for the quarter comprise construction services
(approximately 52.2 per cent) arising mainly from its co-development agreements
with Tri-State Generation and Transmission Association, Inc. (Tri-State). The
remainder of the Company's revenues for the quarter (approximately 47.8 per
cent) has been derived from the sale of bandwidth along the Company's digital
network including approximately $528,000 from one customer. The Company has
experienced significant operating and net losses and negative operating cash
flow to date and expects to continue to experience operating and net losses and
negative operating cash flow until such time as it is able to generate revenue
sufficient to cover its operating expenses.
6. AVAILABLE FOR SALE MARKETABLE SECURITIES
The Company's marketable securities are considered "available for
sale," and, as such, are stated at market value. Marketable securities include
restricted cash of approximately $22.1 million at March 31, 2000. The net
unrealized gains and losses on marketable securities are reported as part of
accumulated other comprehensive income (loss). Realized gains or losses from the
sale of marketable securities are based on the specific identification method.
The following is a summary of the investments in marketable securities
at March 31, 2000:
GROSS UNREALIZED
COST GAINS LOSSES MARKET VALUE
Available for sale marketable securities:
U.S. Treasury securities and debt securities
of U.S. Government agencies $ 23,302,385 $ 44,315 $ 23,118 $ 23,367,896
Corporate debt securities 8,976,442 1,615 32,999 8,944,795
Debt Securities issued by foreign
governments 1,503,649 -- 4,684 1,498,965
------------------ ----------- ---------- -----------------
33,782,475 45,930 60,801 33,811,656
Less: long term restricted cash (22,048,488) (44,315) (263) (22,092,540)
------------------ ----------- ---------- -----------------
$ 11,433,987 $ 1,615 $ 60,538 $ 11,719,116
================== =========== ============= ==================
Net proceeds from the sales and maturity of available for sale
securities were approximately $50.9 million during the three months ended March
31, 2000.
The amortized cost and market value of available for sale marketable
securities by contractual maturity, regardless of their balance sheet
classification, at March 31, 2000 is as follows:
COST MARKET VALUE
Due in one year or less $ 33,782,475 $ 33,811,656
Due after one year through two years -- --
------------------ ------------------
33,782,475 33,811,656
Less: long term restricted cash (22,018,488) (22,092,540)
------------------ ------------------
$ 11,433,987 $ 11,719,116
================== ==================
Expected maturities may differ from contractual maturities because the
issuers of the securities may have the right to prepay obligations without
prepayment penalties.
7. PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, is comprised of the following
at March 31, 2000 and December 31, 1999:
MARCH 31, DECEMBER 31,
2000 1999
----------------- ---------
Network in progress $ 86,655,041 $ 63,123,322
Communications network 75,594,507 71,604,029
Office and computer equipment 4,288,020 2,262,934
Furniture and fixtures 956,536 1,555,771
Leasehold improvements 377,749 337,181
---------------- ------------------
167,871,853 138,883,237
Less: accumulated depreciation (9,506,833) (6,954,872)
----------------- ------------------
Property and equipment, net $158,365,020 $ 131,928,365
================= ==================
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 March 31, 2000 includes approximately $53.8 million for costs incurred to
construct digital fiber optic networks and $2.8 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.
8. DEFERRED FINANCING COSTS
The Company has incurred costs related to Pathnet's Debt Offering and
the amendment to the Senior Notes in connection with the reorganization
transaction. 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.
9. RESTRICTED CASH
Restricted cash comprises amounts held in escrow to collateralize the
Company's obligations under certain of its development agreements together with
cash and cash equivalents of approximately $21.6 million held as collateral for
repayment of interest on the Company's Senior Notes through April 2000. 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 three months ended March 31, 2000, the Company
deposited approximately $9.2 million in escrow and $0.2 million was released
from escrow.
10. COMMITMENTS AND CONTINGENCIES
As of March 31, 2000, the Company had capital commitments of up to
approximately $84.8 million relating to telecommunication and transmission
equipment and its agreement with WFI, Tri-States and CapRock.
On April 19, 2000, Pathnet, Inc. was sued by several plaintiffs
purporting to represent a class of landowners damaged by Pathnet in connection
with the development of Pathnet's fiber optic network. Specifically, the
complaint alleges that Pathnet installed fiber optic facilities on the property
of the landowners in the class without obtaining the necessary legal rights from
the landowners. Based on the information currently available to us, in the vast
majority of the jurisdictions in which Plaintiff alleges violations, we are
unaware of any facts that would support Plaintiff's claims. In the jurisdictions
in which there is uncertainty as to the factual basis for Plaintiff's claims, we
believe that we have valid defenses to Plaintiff's claims. We also believe that
we would be indemnified against Plaintiff's claims by our co-development partner
on that project. Accordingly, based upon our current understanding of the
factual basis for Plaintiff's claims and the likelihood of success, we do not
believe that Plaintiff's claims will have a material adverse effect on the
earnings, cash flow or financial position of the Company.
11. REORGANIZATION
On March 30, 2000, the Company completed a strategic investment
transaction with Colonial Pipeline Company, The Burlington Northern and Santa Fe
Corporation and CSX Corporation. As part of the transaction, the Company
received a contribution of over 12,000 miles of rights of way with an estimated
value of approximately $187.0 million. Generally, the Company does not begin
amortizing rights of way used in its network until the network is completed and
available for use. As of March 31, 2000, none of the rights of way obtained in
the reorganization transaction were available for use.
In return for the rights of way, the Company issued 8,511,607 shares of
the Company's Series D convertible preferred stock. In addition to providing a
portion of the rights of way access, Colonial Pipeline paid $43.0 million in
cash to the Company, comprised of $38.0 million at the initial closing for
1,729,631 shares of the Company's Series E redeemable preferred stock, $1.0
million for the issuance of an option to purchase 1,593,082 shares of the
Company's Series E redeemable preferred stock for $21.97 per share in connection
with an initial public offering and $4.0 million for rights in 2,200 conduit
miles of our future network. Colonial Pipeline will pay an additional $25.0
million for 1,137,915 shares of the Company's Series E redeemable preferred
stock upon the completion of a fiber-optic network segment that the Company
expects to complete during the second calendar quarter of 2000. The new
investors collectively received an approximate one-third equity stake in the
Company, as well as representation on the Company's Board of Directors.
Upon the closing of the transaction, all of the Pathnet's common stock
was exchanged for common stock of the Company resulting in Pathnet becoming a
wholly-owned subsidiary of the Company and all of the Pathnet's 5,470,595 shares
of mandatorily redeemable preferred stock being converted into 15,864,715 of the
Company's convertible preferred stock.
The Company obtained consents to the waiver and the amendment of
certain provisions of the indenture from the holders of a majority of Pathnet's
Senior Notes. In return for such consents, (i) Pathnet made consent fee payments
to consenting noteholders of approximately $7.3 million in the aggregate and
purchased and pledged to the trustee under the indenture for the benefit of the
noteholders, additional U.S. Treasury Securities as security covering the
October 16, 2000 interest payment on the Senior Notes and (ii) Pathnet
Telecommunications issued its senior guarantees of the Senior Notes. The $7.3
million consent payment to the bondholders increased deferred financing costs
and is being amortized over the remaining term of the Senior Notes. In addition,
for the quarter ended March 31, 2000, the Company had expensed approximately
$1.4 million of fees for printing, legal, solicitation and other transaction
fees.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CERTAIN STATEMENTS CONTAINED IN THIS ITEM CONSTITUTE FORWARD-LOOKING
STATEMENTS. SEE. "FORWARD-LOOKING STATEMENTS" BELOW. IN THIS REPORT, WE REFER TO
PATHNET TELECOMMUNICATIONS, INC., AS THE "COMPANY," "WE," "US," AND "OUR." WHERE
APPLICABLE, SUCH REFERENCES REFER TO PATHNET, INC.,OR "PATHNET", THE PREDECESSOR
REPORTING COMPANY PRIOR TO THE REORGANIZATION TRANSACTION COMPLETED ON MARCH 30,
2000.
OVERVIEW
We were formed on November 1, 1999 in order to facilitate a
reorganization transaction with Pathnet, Inc. which is now our wholly owned
subsidiary. Our reorganization was completed on March 30, 2000. Together with
Pathnet, we are a wholesale telecommunications provider building a nationwide
network designed to provide other wholesale and retail telecommunications
service providers with access to underserved and second and third tier markets
throughout the United States.
Our network will enable our customers, including existing local
telephone companies, long distance companies, internet service providers,
competitive telecommunications companies, cellular operators and other
telecommunications providers, 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.
Since Pathnet's inception in November 1995, our business has focused on:
o Entering into strategic relationships with owners of
telecommunications assets and co-development partners;
o Developing and constructing our digital backbone network;
o Negotiating collocation and interconnection agreements and installing
collocations and interconnections off our backbone network;
o Designing and developing our network architecture and operations
support systems, including the buildout and launch of our 24-hour
network operations center;
o Raising capital and hiring management and other key personnel;
o Developing "leading edge" products and services; and
o Procuring governmental authorizations.
On March 30, 2000, we completed a strategic investment transaction with
Colonial Pipeline Company, The Burlington Northern and Santa Fe Corporation and
CSX Transportation, Inc. We received the right to develop over 12,000 miles of
these investors' rights of way holdings, 8,000 of which have some form of
exclusivity. In addition to providing a portion of the rights of way access,
Colonial also made a contribution of $43.0 million in cash (consisting of $38.0
million as a first tranche cash investment, $1.0 million for options to purchase
additional shares of our stock and $4.0 million for rights in a single fiber
optic conduit) and agreed to make a second cash investment of $25.0 million in
our business upon the completion of our Chicago to Aurora (a suburb of Denver)
fiber optic network build. Our new investors hold approximately one-third of our
equity and have representation on our Board of Directors.
As of March 31, 2000, our network consisted of over 6,300 wireless
route miles, providing wholesale transport services to 44 cities, and 700 miles
of installed fiber. We are constructing an additional 1,000 route miles of fiber
optic network, 500 of which is scheduled for completion by the end of the second
quarter of this year. During 2000, we intend to deploy additional products and
services including bundled wholesale transport and local access services.
We have experienced operating losses since our 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 we will achieve
positive earnings before interest, taxes, depreciation and amortization, if at
all, will depend on the:
o Size of our target markets;
o Timely completion of backbone routes, collocations and interconnections;
o Cost of the necessary infrastructure;
o Timing of and barriers to market entry; and
o Commercial acceptance of our services.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THE THREE MONTHS ENDED
MARCH 31, 1999
During the three months ended March 31, 2000, we completed our
reorganization, which included our acquisition of rights of way and cash from
our investors. We also continued to focus on:
o expanding the number of cities and collocations in our network,
o building out our fiber network,
o 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 existing
local telephone companies, and
o developing our infrastructure including the hiring of key management
personnel.
REVENUE
For the three months ended March 31, 2000 and 1999, we generated
revenue of approximately $1.9 million and $826,000, respectively, comprised of
revenue from telecommunications services of approximately $922,000 and $526,000,
respectively, together with revenue from construction services of approximately
$1.0 million and $250,000, respectively. The increase in revenue from
construction services arises mainly from our co-development agreement with
Tri-State Generation and Transmission Association, Inc. entered into during the
third quarter of 1999. We expect that a substantial portion of our future
revenue will be generated from our sale of construction services, local access
services and backbone infrastructure services.
OPERATING EXPENSES
For the three months ended March 31, 2000 and 1999, we incurred
operating expenses of approximately $13.1 million and $6.0 million,
respectively. This increase is primarily a result of additional staff costs
incurred as we continued to develop our infrastructure, depreciation expenses as
more of our network came on line, administrative costs related to obtaining
regulatory status, deferred expense for compensatory stock options and costs
associated with our reorganization transaction. Cost of revenue reflects direct
costs we incurred in performing construction and management services and
providing telecommunications services. We expect selling, general and
administrative expenses to continue to increase in the remainder of 2000 as we
continue to develop or infrastructure and increase our staff level.
INTEREST EXPENSE
Interest expense for the three months ended March 31, 2000 and 1999 was
approximately $9.7 million and $10.3 million, respectively. Interest expense
primarily represents interest on Pathnet's 12 1/4% Senior Notes due 2008 issued
in April 1998 together with the amortization expense related to bond issuance
costs in respect to those notes and the amortization expense related to deferred
financing costs.
INTEREST INCOME
Interest income for the three months ended March 31, 2000 and 1999 was
approximately $2.2 million and $3.8 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 the senior notes.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2000, we had approximately $130.3 million of cash, cash
equivalents and marketable securities to fund future operations. In addition, we
had $25.8 million in restricted cash to be used to build our network. We expect
to receive an additional $25 million equity investment 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 Technologies, Inc.
a proposed credit facility in which Lucent will, subject to certain conditions
(including the closing of our reorganization), provide us with financing for
fiber optic cable that we purchase from them.
We estimate that our current available resources, together with those
received in our reorganization, will be sufficient to fund the implementation of
our long term business plan, as currently contemplated, including the capital
commitments described above, operating losses in new markets and working capital
needs through the fourth quarter of 2000. After such time, we expect we will
require additional financing, which may include commercial bank borrowings,
additional vendor financing or the sale or issuance of equity or debt
securities.
Our expectations of our future capital requirements and cash flows from
operations are based on current estimates. If our plans or assumptions change or
prove to be inaccurate, we may require additional sources of capital or
additional capital sooner than anticipated.
FORWARD-LOOKING STATEMENTS
The matters discussed in this quarterly report may include
forward-looking statements, including statements which can be identified by the
use of forward-looking terminology such as "believes," "anticipates," "expects,"
"may," "will," or "should" or the negative of such terminology or other
variations on such terminology or comparable terminology, or by discussions of
strategies that involve risks and uncertainties. Although we believe that the
expectations reflected in such forward-looking statements are reasonable, we
cannot assure you that such expectations will prove to be correct. Important
factors that could cause actual results to differ materially from expectations
include, without limitation, those described in conjunction with the
forward-looking statements in this quarterly report, as well as the amount of
capital needed to deploy our network; our substantial leverage and need to
service our indebtedness; the restrictions imposed by our current and possible
future financing arrangements; our ability to successfully manage the
cost-effective and timely completion of our network and our ability to attract
and retain customers for our products and services; our ability to implement our
newly expanded business plan; our ability to retain and attract relationships
with the incumbent owners of the telecommunications assets with which we expect
to build our network; our ability to obtain and maintain rights of way for the
deployment of our network; our ability to retain and attract key management and
other personnel as well as our ability to manage the rapid expansion of our
business and operations; our ability to compete in the highly competitive
telecommunications industry in terms of price, service, reliability and
technology; our dependence on the reliability of our network equipment, our
reliance on key suppliers of network equipment and the risk that our technology
will become obsolete or otherwise not economically viable; and our ability to
conduct our business in a regulated environment. We do not intend to update
these forward-looking statements. These and other risks and uncertainties
affecting us are contained from time to time in our filings with the Securities
and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to minimal market risks. We manage sensitivity of our results
of operations to market 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. As of March 31, 2000, the
fair value of our debt was approximately $237.6 million.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
OUR REGISTERED OFFERING
On March 14, 2000, the Securities and Exchange Commission declared our
Registration Statement on Form S-1 (No. 333-91469) effective. Our Registration
Statement relates to our offer of our absolute, unconditional and continuing
guarantees of the obligations of Pathnet under the indenture governing Pathnet's
12 1/4 % Senior Notes due 2008, including Pathnet's obligations to make interest
and principal payments on those notes. We commenced the offer of our guarantees
on March 14, 2000 and terminated the offer on March 27, 2000.
On March 30, 2000, after receipt of noteholder consent to the waivers
under and amendments of the our original Pathnet indenture relating to Pathnet's
notes, we entered into a supplemental indenture with Pathnet and the indenture
trustee and issued our guarantees of all of Pathnet's notes under the indenture.
Pursuant to the terms of our guarantees, we are guaranteeing to the holder of
any outstanding note(s) all obligations, covenants, liabilities, undertakings
and agreements of any kind of Pathnet contained in the indenture (as amended),
including:
o 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
o 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 are 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. 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. A copy of our guarantee is attached as
an exhibit hereto.
We had conditioned the issuance of our guarantees upon, among other
things, the waiver and amendment of certain provisions of the indenture. In
particular, we sought consent from holders of the notes to the (1) waiver of
Pathnet's compliance, for purposes of the reorganization 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 (2) adoption of amendments to the terms of the indenture
that are intended to subject us to indenture covenants parallel to those that
were applicable solely to Pathnet (and, in some cases, its subsidiaries) and
extend the scope of indenture tests and covenants to us and any of our future
subsidiaries. A summary of the indenture amendments is provided below.
SUMMARY OF THE INDENTURE AMENDMENTS
The indenture amendments were designed to impose upon us and our
Restricted Subsidiaries restrictions parallel to those that the original
indenture imposed 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 original indenture permitted such transactions between
Pathnet and its Restricted Subsidiaries. The necessary amendments to the
indenture are contained in the supplemental indenture, which binds both Pathnet
and us.
The following table summarizes the material changes to the original
indenture as implemented by the supplemental indenture. The table does not
restate the supplemental indenture in its entirety and it may omit detailed
information important to some investors in understanding the operation of
relevant covenants of the indenture and the supplemental indenture in specific
circumstances. 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. As used in the table, "Pathnet" refers to Pathnet, Inc. and
"Pathnet Telecom" refers to us. For more detailed information regarding the
provisions summarized here, you should refer to the supplemental indenture filed
as an exhibit hereto. In addition to the supplemental indenture, the original
indenture is incorporated by reference as set forth in our exhibit list.
CHANGES AS INCORPORATED IN THE
PROVISION ORIGINAL INDENTURE SUPPLEMENTAL INDENTURE
- - ---------------------- -------------------------------------- ----------------------------
EVENTS OF DEFAULT Payment defaults on the notes. No change for notes; adds failure
of guarantees to be in effect.
Covenant defaults on the indenture. Covenant defaults on the
indenture, including obligations
imposed directly on Pathnet
Telecom.
Cross defaults to other indebtedness or Cross defaults to other
adverse judgments over $7.5 million indebtedness or adverse judgments
against Pathnet or any Significant over $7.5 million against any of
Subsidiary of Pathnet. Pathnet, Pathnet Telecom, or any
Significant Subsidiary of either
Pathnet or Pathnet Telecom.
Bankruptcy proceedings by or in respect Bankruptcy proceedings by or in
of Pathnet or any Significant respect of Pathnet, Pathnet
Subsidiary of Pathnet. Telecom, or any Significant
Subsidiary of Pathnet or Pathnet
Telecom.
Pledge Agreement ceases to be in full No change.
force and effect.
CONSOLIDATION, Restricts the ability of Pathnet and Expands the covenant so that it
MERGER, CONVEYANCE, its Restricted Subsidiaries to enter applies to Pathnet Telecom and its
TRANSFER OR LEASE into transactions involving a merger or consolidated group, rather than
disposition of all or substantially all solely to Pathnet and its
of Pathnet's and its Restricted consolidated group. Provisions
Subsidiaries' assets on a consolidated relating to the required
basis. substitution of successors and the
requirement to secure the notes in
certain circumstances apply to
Pathnet obligations under the
notes and as appropriate to
Pathnet Telecom obligations under
the guarantees.
AMENDMENTS Certain types of amendments (and Provides that Pathnet Telecom and
TO THE INDENTURE supplemental indentures) may be adopted Pathnet can amend the indenture in
without consent of noteholders. the same circumstances, and with
the same levels of approvals, as
Pathnet is permitted to make such
amendments under the original 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
noteholders. require such a majority
in the original indenture.
Certain types of amendments (and Subjects Pathnet Telecom to the
supplemental indentures) may not be unanimous consent threshold for the
adopted without the consent of all amendments requiring unanimous
noteholders. 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 noteholders.
MAINTENANCE OF Pathnet must maintain an office or Both Pathnet and Pathnet Telecom
OFFICE 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
applies to Pathnet.
MONEY FOR NOTE Regulates Pathnet's dealings with Regulates Pathnet Telecom's
PAYMENTS 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 Pathnet and its subsidiaries must Expands the covenant so that it
EXISTENCE maintain corporate existence. also applies to Pathnet Telecom and
its other subsidiaries.
PAYMENT OF TAXES Pathnet and its subsidiaries must pay Expands the covenant so that it
AND OTHER CLAIMS taxes and other claims. also applies to Pathnet Telecom and
its other subsidiaries.
MAINTENANCE OF Pathnet and Restricted Subsidiaries Expands the covenant so that it
PROPERTIES must maintain material properties in also applies to Pathnet Telecom and
good condition and repair. its Restricted Subsidiaries.
INSURANCE Pathnet and Restricted Subsidiaries Expands the covenant so that it
must maintain customary insurance. also applies to Pathnet Telecom and
its Restricted Subsidiaries.
OFFICERS COMPLIANCE Required from Pathnet. Required from Pathnet and from
CERTIFICATE Pathnet Telecom.
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 the notes at a premium upon occurrence Expands the provision so that
OBLIGATION of a Change of Control. Pathnet's repurchase obligation is
also triggered by a Change of
Control of Pathnet Telecom;
guarantees apply to this
obligation.
LIMITATION ON Subject to a ratio test for Expands the existing covenant so
INDEBTEDNESS Consolidated Indebtedness to that both Pathnet and Pathnet
Consolidated Operating Cash Flow Test Telecom are subject to the same
for Pathnet and its Restricted limitations (including the
Subsidiaries, neither Pathnet nor its limitations on their respective
Restricted Subsidiaries can incur Restricted Subsidiaries), except
Indebtedness other than Permitted that:
Indebtedness. Permitted Indebtedness
includes Telecommunications (1) the definition of Permitted
Indebtedness of either Pathnet or any Indebtedness continues to
Restricted Subsidiary; subordinated include Telecommunications
indebtedness of Pathnet to its Indebtedness, but applies 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 allows
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. Imposes parallel restrictions
(other than Permitted Investments), on Pathnet Telecom's ability to make
unless Pathnet could, after such other Restricted Payments.
payment, incur additional Indebtedness
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.
SALE OF CAPITAL STOCK Restricts the sale or issuance of Expands the covenant to apply to
OF RESTRICTED Capital Stock of Restricted capital stock of Pathnet and
SUBSIDIARIES 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 original
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 Pathnet from issuing or guaranteeing to Pathnet Telecom's Restricted
OTHER DEBT Debt Securities unless they Subsidiaries; exception for vendor
concurrently guarantee the notes; financings and other borrowings
specific exception excludes from the continues to apply.
definition of Debt Securities any
vendor equipment financing facilities
or similar financings and other
borrowings incurred in a manner not
customarily viewed as a securities
offering.
LIMITATION ON ASSET Pathnet and its Restricted Subsidiaries Retains unmodified Pathnet's
SALES may not engage in an Asset Sale unless obligations in respect of Asset
the transaction is for fair market Sales. Imposes corresponding
value and meets other requirements as obligations on Pathnet Telecom and
to the nature of the consideration; if its Restricted Subsidiaries.
the amount of proceeds exceeds a
specified threshold, Pathnet is
required to commence an offer to
purchase notes up to such amount within
15 business days of the closing of the
Asset Sale.
PROHIBITION AGAINST Subject to exceptions, including, among Expands the existing covenant to
DIVIDEND RESTRICTIONS others, those for Secured Indebtedness apply to Pathnet and to Restricted
and Telecommunications Indebtedness, Subsidiaries of both Pathnet and
Pathnet cannot permit any Restricted Pathnet Telecom.
Subsidiary to accept a restriction on
its ability to pay dividends or make
other payments to Pathnet or any
Restricted Subsidiary of Pathnet to the
extent necessary to permit Pathnet to
make payment on the notes.
SECURITY Pathnet acquired Government Securities Pathnet acquired additional
and pledged them to the Trustee as Government Securities and pledged
security for the benefit of the noteholders them to the trustee as security for
with respect to the payment of the first the benefit of the noteholders
four scheduled interest payments on with respect to the October 16, 2000
the notes (through the April 15, 2000 interest payment on the notes.
interest payment date).
SALES OF UNREGISTERED SECURITIES DURING THE FIRST QUARTER
OVERVIEW. On March 30, 2000, we completed a transaction involving a single
plan of contribution and reorganization in
which, among other things:
o existing stockholders of Pathnet exchanged 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;
o warrants to purchase shares of Pathnet common stock were exchanged for
warrants to purchase similar shares of our common stock;
o we adopted the employee stock option plans formerly held by Pathnet
(and the option grants made under those plans);
o Pathnet became our wholly owned subsidiary;
o three new investors - The Burlington Northern and Santa Fe Railway
Company, CSX Transportation, Inc. and Colonial Pipeline Company -
contributed to us rights of way, with a value of $187 million, to
permit us to build our telecommunications network along their existing
railroad and pipeline corridors, in return for shares of our Series D
Convertible Preferred Stock; and
o Colonial also contributed $38 million in cash to purchase shares of
our Series E Convertible Preferred Stock and an additional $1 million
for options to purchase additional shares of our stock.
SHARES OF STOCK. In connection with the closing of the reorganization
transaction, we issued the following shares of our capital stock (each
issued on March 30, 2000):
AMOUNT (IN THE
TITLE OF OUR SHARES AGGREGATE) HOLDER(S)
- - ------------------- ---------- ---------
Series A Convertible Preferred Stock 2,899,999 Former holders of Pathnet's Series A Convertible
Preferred Stock
Series B Convertible Preferred Stock 4,725,457 Former holders of Pathnet's Series B Convertible
Preferred Stock
Series C Convertible Preferred Stock 7,126,576 Former holders of Pathnet's Series C Convertible
Preferred Stock
Series D Convertible Preferred Stock 8,511,607 The Burlington Northern and Santa Fe Railway Company,
CSX Transportation, Inc. and Colonial Pipeline Company
Series E Convertible Preferred Stock 1,729,631 Colonial Pipeline Company
Common stock 2,977,593 Former holders of Pathnet's common stock
OUR WARRANTS. On March 30, 2000, in connection with the reorganization,
we issued warrants to purchase a total of 1,116,500 shares of our common stock
at $0.01 per share to holders of, and in exchange for, similar warrants issued
by Pathnet in 1998 to purchase shares of Pathnet's common stock. Our warrants
are exercisable upon the earliest to occur of:
o the time immediately prior to the occurrence of a Change of Control
(as defined in the indenture);
o the 180th day (or an earlier date determined by us) following the
closing of an "Initial Public Equity Offering" (as defined in the
Warrant Agreement);
o upon the closing of an Initial Public Equity Offering but only for
those warrants required to be exercised to permit their holders to
sell Warrant Shares (as defined in the Warrant Agreement) pursuant to
their respective registration rights;
o the time when a class of our equity securities is listed on a national
securities exchange, authorized for quotation on the Nasdaq National
Market or its otherwise subject to registration under the Exchange
Act; or
o April 30, 2001.
We entered into a Supplemental Warrant Agreement, containing substantially
identical terms as Pathnet's original Warrant Agreement, with modifications
reflecting the substitution of us in place of Pathnet as the contracting party
and related conforming changes. The terms governing our warrants are set forth
in the Warrant Agreement, Supplemental Warrant Agreement, Warrant Agreement
Amendment and Waiver, Warrant Registration Rights Agreement, Warrant
Registration Rights Agreement Waiver, Amended and Restated Warrant Registration
Rights Agreement and the form of warrant certificate, all of which are attached
as exhibits hereto.
COLONIAL OPTIONS. On March 30, 2000, in connection with the
reorganization, Colonial received two options pursuant to the terms of the
Colonial Option Agreement, which is attached as an exhibit hereto, for which
Colonial paid us $1 million:
o The first option may be exercised by Colonial and/or a number of Colonial's
affiliated companies, and permits the purchase of up to 1,593,082
additional shares of our series E convertible preferred stock at an
exercise price of $21.97 per share and, under certain circumstances, the
contribution of additional rights of way in exchange for shares of our
series D convertible preferred stock at $21.97 per share pursuant to a new
contribution agreement between Colonial and us.
o 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.
EMPLOYEE STOCK OPTIONS. As of March 31, 2000, pursuant to the exercise
of stock options, we issued 198,514 shares of common stock to certain former
employees at exercise prices ranging from $1.13 to $5.20 per share. All of these
stock options were granted under Pathnet's 1997 Stock Incentive Plan, which we
assumed at the closing of the reorganization transaction.
There were no underwriters involved in the sale of any of these
securities. Our equity securities were issued in private placement transactions
exempt from registration in accordance with Section 4(2) of the Securities Act
of 1933, as amended, and where applicable, Rule 506 under Regulation D, and were
issued without general solicitation or advertising.
USE OF PROCEEDS
We did not receive any proceeds from the issue of our guarantees.
The aggregate amount of expenses incurred for our account in connection
with the issuance and distribution of the guarantees is estimated at $9,504,517,
consisting of the following:
Securities and Exchange Commission registration fee........... $ 60,326
Blue Sky fees and expenses.................................... 1,300
Accounting fees and expenses.................................. 50,000
Legal fees and expenses....................................... 1,550,603
Printing and engraving fees................................... 345,000
Solicitation Agent fees and expenses.......................... 768,163
Information Agent fees and expenses........................... 6,591,625
Miscellaneous................................................. 25,000
Trustee/Depositary/Warrant Agent fees and expenses............ 112,500
---------------
Total.................................................... $ 9,504,517
===============
*Also attributable to the overall reorganization transaction.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 30, 2000, we solicited written consents from the holders of
our Series D Convertible Preferred Stock and Series E Convertible Preferred
Stock to (i) approve the election of Messrs A. R. "Pete" Carpenter, Thomas Hund
and David Lemmon as the Series D/E Stockholder Directors (as defined in the
Company's Stockholders Agreement dated as of March 30, 2000); and (ii) approve
and ratify the election of Richard A. Jalkut, Chief Executive Officer, as a
Director. Effective March 30, 2000, we received written consents approving such
proposals from our Series D and E Preferred Stockholders representing 10,241,238
votes with no abstentions. The terms of office as directors of Messrs. Kevin
Maroni, Peter Barris, Patrick Kerins and Stephen Reinstadtler continued after
March 30, 2000.
On March 30, 2000, we solicited written consents from the holders of
our Series A Convertible Preferred Stock, Series B Convertible Preferred Stock,
Series C Convertible Preferred Stock, Series D Convertible Preferred Stock and
Series E Convertible Preferred Stock to approve our issuance of (i) a promissory
note to Pathnet due March 30, 2010 in the principal amount of $70 million in
exchange for certain fiber assets under assignment and acceptance agreements;
and (ii) a promissory note to Pathnet due March 30, 2010 in the principal amount
of $50 million in exchange for cash. Effective March 30, 2000, we received
unanimous written consent approving such proposals from our preferred
stockholders representing 26,105,953 votes.
On March 30, 2000, we solicited written consents from the holders of
our Common Stock, Series A Convertible Preferred Stock, Series B Convertible
Preferred Stock, Series C Convertible Preferred Stock, Series D Convertible
Preferred Stock and Series E Convertible Preferred Stock to approve (i) the
assumption Pathnet's of stock option plans and all stock options outstanding
under those stock option plans; and (ii) the reservation of shares of our common
stock for issuance under our stock option plans. Effective March 30, 2000, we
received written consents approving such proposals from our stockholders
representing 21,149,709 votes, with stockholders representing 6,821,154 votes
abstaining.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit Index
(B) REPORTS ON FORM 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
PATHNET TELECOMMUNICATIONS, INC.,
a Delaware corporation
(Registrant)
Date: May 15, 2000 By: /S/ RICHARD A. JALKUT
----------------------
Richard A. Jalkut
President and Chief Executive
Officer
Date: May 15, 2000 By: /S/ JAMES M. CRAIG
-------------------
James M. Craig
Executive Vice-President, Chief
Financial Officer and Treasurer
(Principal Financial Officer and
Controller)
EXHIBIT INDEX
Pursuant to Item 601 of Regulation S-K
EXHIBIT NO. DESCRIPTION OF EXHIBIT
3.1 (i) Certificate of Incorporation of Pathnet Telecommunications,
Inc.
3.2 (i) By-laws of Pathnet Telecommunications, Inc.
4.1 (iii) Stockholders Agreement, by and among the Pathnet Telecommunications, Inc. and
certain stockholders of the Pathnet Telecommunications, Inc.
4.2 (ii) Indenture, dated as of April 8, 1998, between Pathnet, Inc. and The Bank of
New York, Inc. as Trustee
4.3 (iii) Supplemental Indenture, dated as of March 30, 2000, by and among Pathnet, Inc., Pathnet
Telecommunications, Inc. and the Bank of New York
4.4 (ii) Form of Note
4.5 (ii) Pledge Agreement, dated as of April 8, 1998, by and among Pathnet, Inc., The
Bank of New York as Trustee and as the Securities Intermediary
4.6 (iii) Amended and Restated Pledge Agreement dated as of March 30, 2000, by and among
Pathnet, Inc, and the Bank of New York
4.7 (iii) Form of Guarantee dated as of March 30, 2000 by Pathnet Telecommunications, Inc.
4.8 (ii) Warrant Agreement, dated as of April 8, 1998, between Pathnet, Inc. and
The Bank of New York, as Warrant Agent
4.9 (ii) Warrant Registration Rights Agreement, dated as of April 8, 1998, by and 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
4.10 (iii) Warrant Agreement Amendment and Waiver, dated as of March 30, 2000, between Pathnet, Inc. and the
Bank of New York
4.11 (iii) Warrant Registration Rights Agreement Waiver, dated as of March 30, 2000, by Pathnet, Inc. with
the consent of Spectrum Equity Investors, L.P., New Enterprise Associates VI, Limited Partnership,
Onset Enterprise Associates II, L.P., FBR Technology Venture Partners, L.P., Grotech Partners IV,
L.P. and Richard A. Jalkut
4.12 (iii) Supplemental Warrant Agreement, dated as of March 30, 2000, between Pathnet Telecommunications,
Inc. and the Bank of New York
4.13 (iii) Form of Pathnet Telecommunications, Inc. Warrant Certificates issued March 30, 2000
4.14 (iii) Amended and Restated Warrant Registration Rights Agreement, dated as of March 30, 2000, among
Pathnet Telecommunications, 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., and Richard A. Jalkut
10.1 (i) + Pathnet Telecommunications, Inc. 1995 Stock Option Plan, as amended ( adopted as of March 30, 2000
by Pathnet Telecommunications, Inc.)
10.2 (i) + Pathnet Telecommunications, Inc. 1997 Stock Incentive Plan, as amended by Amendment No. 1 to the
Pathnet, Inc. 1997 Plan dated March 24, 1998 (adopted as of March 30, 2000 by Pathnet
Telecommunications, Inc.)
10.3 (iii) ++ Fiber Optic Access Agreement, dated as of March 30, 2000 by and between Pathnet
Telecommunications, Inc. and The Burlington Northern and Santa Fe Railway Company
10.4 Intentionally omitted
10.5 (iii) Master Right-of-Way Lease Agreement, dated as of March 30, 2000 by and between Pathnet
Telecommunications, Inc. and Colonial Pipeline Company
10.6 (iii) ++ Fiber Optic Access and Purchase Agreement, dated as of March 30, 2000 by and between Pathnet
Telecommunications, Inc. and Colonial Pipeline Company
10.7 (iii) Option Agreement, dated as of March 30, 2000 by and between Pathnet Telecommunications, Inc. and
Colonial Pipeline Company
10.8 (iii) ++ Fiber Optic Access and License Agreement, dated as of March 30, 2000 by and between Pathnet
Telecommunications, Inc. and CSX Transportation, Inc.
10.9 (iii) ++ Right of Way Operating Agreement, dated as of March 30, 2000, by and between Pathnet
Telecommunications, Inc. and CSX Transportation, Inc.
10.10 (iii) Assignment and Acceptance Agreement, dated as of March 30, 2000, by and between Pathnet, Inc. and
Pathnet Telecommunications, Inc..
10.11 (iii) Assignment and Acceptance Agreement, dated as of March 30, 2000, by and between Pathnet, Inc. and
Pathnet Fiber Optics, LLC
10.12 (iii) License of Marks, dated as of March 30, 2000, by and between Pathnet Telecommunications, Inc. and
Pathnet, Inc.
10.13 (iii) $70 million Promissory Note by Pathnet Telecommunications, Inc. in favor of Pathnet, Inc.
10.14 (iii) $50 million Promissory Note by Pathnet Telecommunications, Inc. in favor of Pathnet, Inc. dated as
of March 30, 2000.
27.1 Financial Data Schedule for the three months ended March 31, 2000.
99.1 Press release dated May 9, 2000 announcing the Company's results for the first quarter of 2000.
(i) Filed as exhibit to Pathnet Telecommunications, Inc.'s Registration
Statement on Form S-1 (Registration No. 333-91469), filed with the SEC
on November 22, 1999, as amended by Amendment No. 1 to such
Registration Statement filed with the SEC on December 16, 1999, and as
further amended by Amendment No. 2 to such Registration Statement
filed with the SEC on February 22, 2000, and as further amended by
Amendment No. 3 to such Registration Statement filed with the SEC on
March 10, 2000 and as further amended by Amendment No.4 dated March
13, 2000, and incorporated herein by reference.
(ii) 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 SEC on May 8, 1998, as amended by
Amendment No. 1 to such Registration Statement filed with the SEC on
July 16, 1998, and as further amended by Amendment No. 2 to such
Registration Statement filed with the SEC on July 27, 1998, and as
further amended by Amendment No. 3 to such Registration Statement
filed with the SEC on August 10, 1998.
(iii) Filed herewith.
+ Constitutes management contract or compensatory arrangement.
++ Certain portions of this exhibit have been omitted based on a request
for confidential treatment filed separately with the SEC.