<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
/X/ Quarterly report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended: March 31, 1999
/ / Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from_____________to_____________
Commission file number: 333-7841
FIBERNET TELECOM GROUP, INC.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Nevada 13-3859938
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
570 Lexington Avenue, New York, New York 10022
(Address of Principal Executive Offices)
212-421-4900
Issuer's Telephone Number, Including Area Code)
(Former Name, Former Address and Former fiscal Year,
if Changed Since Last Report)
100 Town Centre Drive, Rochester, New York 14623
716-340-2200
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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.
X
Yes___ No___
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares outstanding of each of issuer's classes of common
equity, as of April 30, 1998, was 16,000,000 shares of Common Stock, $.001 par
value.
Transitional Small Business Disclosure Format (check one):
X
Yes___ No___
<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
See attached.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
FiberNet Telecom Group, Inc. ("FiberNet" or the "Company") is a
development stage holding company dedicated to delivering integrated
telecommunications products and services in tier-one major metropolitan service
areas ("MSA's") throughout the United States. The Company intends to initially
focus its operations in the New York City marketplace and pursue a "carrier's
carrier" marketing strategy, selling primarily to telecom carriers and other
communication service providers. FiberNet conducts its business through its
direct and indirect subsidiaries, including FiberNet Telecom, Inc.
FiberNet Telecom, Inc. is a management company organized to develop new
ventures within the telecommunications industry arising from what management
believes is the need for greater broadband capacity due to the growth of the
Internet and data communications and the favorable regulatory environment
created by the Telecommunications Act of 1996. FiberNet Telecom, Inc. manages
two operating subsidiaries, FiberNet Equal Access, LLC and Local Fiber, LLC.
Both subsidiaries are New York limited liability companies.
FiberNet Equal Access, LLC ("Equal Access") specializes in designing,
building, and operating intra-building fiber optic transmission
networks and plans to lease digital bandwidth circuits to
telecommunications providers.
Local Fiber, LLC ("Local Fiber") is a Competitive Local Exchange
Carrier ("CLEC") which plans to provide competitive local
telecommunications service as an alternative to the local exchange
carriers.
FiberNet has 100% ownership of Equal Access (subject to a 10% warrant)
and 90% ownership of Local Fiber, with the remaining 10% ownership held
by MetroMedia Network, Inc. ("MetroMedia").
To date, FiberNet has not generated any revenues. Successful
implementation of its business plan, as described herein, will depend upon many
factors, including the ability to raise adequate financing.
FIBERNET EQUAL ACCESS, LLC
Equal Access' business strategy is to provide high-bandwidth
carrier-class fiber and copper transport via intra-building networks in large
Class-A commercial office buildings and to lease digital circuits to carriers.
Management believes this strategy is unique in last mile telecommunications
solutions.
Overview. Management believes Equal Access will become a leading
building transmission provider by creating in-building high-speed, high-capacity
fiber optic and copper networks, which it links to existing external fiber optic
networks, thus delivering a high-speed, seamless link between users and the data
and voice information they are sending and receiving. These services will be
leased on a flat rate monthly fee basis, in addition to an installation charge,
at DS-1 and DS-3 circuit levels. Equal Access intends to include a Digital
Subscriber Line ("DSL") product for carriers as part of its service offerings.
Management believes Equal Access' fiber intra-building network, called
a Premise Distribution System ("PDS") efficiently supports the increased flow of
information that has outgrown the transmission capabilities of copper-wire only
systems. A PDS will connect various types of voice, data, and video
communication devices, switching equipment and information management systems
together, and to external fiber optic networks. Equal Access intends to focus on
delivering PDS technology to Class-A (generally with a minimum of 500,000 square
feet) commercial office buildings. In order
<PAGE> 3
to provide carrier connectivity in a building, Equal Access generally intends to
build a 1,000 to 1,500 square foot Network Interface Equipment Room in the
basement of each building. This is the collocation facility within a building
that interconnects the carriers' networks to Equal Access' intra-building
network.
Business Strategy. Equal Access' business strategy will focus on
securing multi-year license agreements from building owners/managers in their
buildings. In exchange for these agreements, each building owner receives a
redundant state of the art fiber optic telecommunications network at no cost as
well as a percentage share of the revenues generated by Equal Access in its
building.
LOCAL FIBER, LLC
Overview. Management believes Local Fiber will be the first
facilities-based carrier to offer an end-to-end, 100% fiber carrier-class
network solution. This will be achieved through the interconnection of the Local
Fiber network with its sister subsidiary, Equal Access' in-building network. In
Manhattan, the Company plans to install a Network Operations Center ("NOC") at
60 Hudson Street and a SONET transmission platform connecting the 384-mile dark
fiber network in New York City to buildings served by Equal Access.
Business Strategy. Local Fiber will initially focus on wholesale
transport services in the New York City metropolitan area. The Company provides
switched local telecommunications and long distance services, focusing on
buildings already "on-net" with Equal Access. Expansion markets for Local Fiber
will include Los Angeles, Chicago, San Francisco, Philadelphia, Boston, Detroit,
Dallas, Washington and Houston.
Benefits. Local Fiber's unique market niche, broad industry experience
and expertise allow it to offer significant benefits to potential customers:
Capacity and Reliability. Management believes Local Fiber's 100% fiber
optic SONET network delivers greater capacity, quality and reliability. The
self-healing fiber architecture consists of diversely routed cables so that a
cut or break will not affect service.
State-of-the-Art Network. Through a contractual arrangement with
Metromedia, a 10% owner of Local Fiber, Local Fiber has the exclusive right to
use up to eight strands (four of which are presently usable) of Metromedia's
48-mile dark fiber New York City network for an initial term of 12 years with a
15 year renewal option at Local Fiber's request, at no cost. Management expects
that this significant cost advantage over competitors will allow Local Fiber to
provide lower costs for its customers. Combined with Equal Access'
intra-building networks, FiberNet is able to provide 100% end-to-end fiber to
customers.
Interconnection Arrangements. Local Fiber has executed its first
interconnection and co-carrier agreement with Bell Atlantic, and is currently in
negotiations with other CLECs and long distance carriers in New York City. This
arrangement will provide seamless interconnection between Local Fiber's network
and other carriers. Local Fiber will negotiate similar agreements in other
markets with the incumbent Regional Bell Operating Company and Local Exchange
Carrier.
NETWORK OPERATIONS CENTER
Both Equal Access and Local Fiber will utilize the NOC located at 60
Hudson street for remote provisioning and fault management. The NOC will be a
24-hour, 365 days-per-year, technology center. The NOC will be responsible for
real-time network surveillance, remote rearrangement of circuits and database
maintenance for all wiring address and assignment records. In addition, all
billing, provisioning and fault management routines will be performed here. The
Company expects the NOC to be equipped and operational in 1999.
LIQUIDITY AND CAPITAL RESOURCES
<PAGE> 4
The Company has to date financed its development efforts through direct
equity investments from its shareholders. The Company has sustained losses for
the period for the three months ended March 31, 1999 of $686,996 and from August
10, 1994 (date of inception) to March 31, 1999 of $3,503,483. These operating
losses are due to the development of its telecommunications services businesses
and the Company anticipates that such losses to continue as it executes its
business plan. Cash used to fund negative EBITDA during the three months ended
March 31, 1999 was approximately $279,017, and purchases of property and
equipment during the three months ended March 31, 1999 was $108,876.
The Company's planned operations will require significant capital to
fund equipment purchases, engineering and design costs and installation
expenses. The Company intends to spend over $100 million through the year 2000
to build-out its initial intra-building construction and network programs which
includes the purchase of electronics equipment, DACS equipment, a network
control center and monitoring equipment, fiber and copper cable, construction,
engineering and design services, and the installation of in-building PDS
systems.
The Company has secured a commitment for an equipment lease line of
credit totaling $5.4 million. This line is expected to fund the Company's NOC at
60 Hudson Street, DACS equipment and SONET electronics for both the dark fiber
ring, and the PDS systems within the Equal Access buildings. The Company is in
the process of negotiating with lenders regarding debt and equity financing, but
to date no final commitments have been obtained.
The Company expects to significant growth in employees over the next twelve
months as its business plan begins to develop into fully operating businesses.
Projected employees are expected to increase from the current total of four to
approximately fifty with the majority of the increase in sales, customer
service, engineering and operations.
The Company recently closed a $14.1 million financing described in Item 5
herein.
FORWARD-LOOKING STATEMENTS
This Report contains certain forward-looking statements and information
relating to the Company that are based on the beliefs of the Company's
management, as well as assumptions made by and information currently available
to the Company's management. When used herein, words such as "anticipate,"
"believe," "estimate," "expect," "intend," and similar expressions, as they
relate to the Company or the Company's management, identify forward-looking
statements. Such statements reflect the current views of the Company with
respect to future events and are subject to certain risks, uncertainties and
assumptions, relating to the operations and results of operations of the
Company, the Company's business strategy, competition and changes in economic
cycles, as well as other factors described herein. Should one or more of these
risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results or outcomes may vary materially from those described
herein as anticipated, estimated, expected or intended.
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGE IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
<PAGE> 5
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
On May 7, 1999 (the "Closing Date"), the Company entered into a
Securities Purchase Agreement (the "Securities Purchase Agreement") with certain
purchasers named therein ("Purchasers") for the sale of $13.9 million aggregate
amount of 4% to 8% Senior Secured Convertible Notes ("Notes") of the Company and
133,333 shares of Series C Preferred Stock ("Series C Preferred Stock"), each of
which is convertible into shares of Common Stock at an exercise price of $1.50
per common share. As part of the sale of the Notes, FiberNet issued
approximately 7.9 million five-year warrants ("Warrants") to purchase shares of
common stock at $0.67 to $1.50 per share, which are also convertible into shares
of Common Stock. The Company may also sell an additional $1.5 million of
securities on substantially the same terms as those described above (the above
events and the other transactions and events contemplated by the Securities
Purchase Agreement are referred to as the transaction ("Transaction")).
As part of the Transaction, Signal Capital Partners, L.P., Trident
Telecom Paratners LLC and one of the Investors, Concordia Telecom Management,
L.L.C. will have voting rights for shares of Common Stock beneficially owned
by LPS Consultants, Inc. ("LPS"), LTJ Group, Inc. ("LTJ") and SMFS, Inc.
("SMFS"), pursuant to an irrevocable proxy ("Proxy") for the earlier of three
years from the Closing Date or the occurrence of other events, including the
sale of the Company's Common Stock in a public offering, subject to certain
conditions. Including the shares subject to the Proxy, the Purchasers will
beneficially own approximately 86% of the Common Stock of the Company assuming
conversion of the Warrants, Notes and Series C Preferred Stock and other
warrants and options beneficially owned by the Purchasers. In addition, 80,000
shares of the Company's Series B Voting Preferred Stock ("Series B Preferred
Stock") beneficially owned by LPS, LTJ and SMFS were redeemed by the Company
for $.001 per share and as of the Closing Date, there were no issued and
outstanding shares of Series B Preferred Stock.
As part of the Transaction, the size of the Board of Directors of the
Issuer (the "Board") increased from three to six directors, with the addition of
Michael S. Liss, Timothy P. Bradley and Richard Sayers on the Closing Date,
although Mr. Liss did not commence service as a Director on the Board until May
11, 1999. The Transaction also contemplates that on May 22, 1999, (i) Santo
Petrocelli, Sr. Frank Chiaino and Lawrence S. Polan will resign from the Board,
and (ii) Roy (Trey) D. Farmer III, Charles J. Mahoney and Joseph Tortoretti will
commence their terms as directors. Those persons elected to the Board on the
Record Date and commencing their terms as directors on May 22, 1999 will
constitute a majority of the directors of the Board of the Issuer.
The Issuer pledged the shares of stock of its wholly-owned subsidiary,
FiberNet Telecom, Inc. ("FTI"), and and FTI pledged limited liability company
interests owned by FTI in Fibernet Equal Access, L.L.C. and Local Fiber, L.L.C.
as part of the Transaction.
ITEM 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of, or incorporated by reference
into, this Form 10-QSB:
<TABLE>
Exhibit No. Description
- - ----------- -----------
<S> <C>
2.0 Securities Purchase Agreement, dated as of May 07, 1999
(incorporated by reference to Exhibit A to the Issuer's
</TABLE>
<PAGE> 6
<TABLE>
<S> <C>
Schedule 13D filed on May 17, 1999)
4.0 Certificate of Designation of Series C Preferred Stock of
the Issuer (incorporated by reference to Exhibit G to the
Issuer's Schedule 13D filed on May 17, 1999)
27.1 Financial Data Schedule
</TABLE>
(b) The Issuer did not file and reports on Form 8-K during the period covered by
this Form 10Q-SB.
<PAGE> 7
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIBERNET TELECOM GROUP, INC.
Date: March 17, 1999 By: /s/ Kenneth G. Saperstein
------------------------
Name: Kenneth G. Saperstein
Title: Controller
<PAGE> 8
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
AS OF MARCH 31, 1999 AND DECEMBER 31, 1998
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 39,824 $ 257,384
Accounts Receivable 236,049 309,365
Other current assets 3,144 -
------------ ------------
Total current Assets 279,017 566,749
Property, plant and equipment, net 5,490,549 5,397,109
Deferred charges 2,015 363,839
Deposits 362,413 -
------------ ------------
Total other assets 364,428 363,839
------------ ------------
TOTAL ASSETS $ 6,133,994 $ 6,327,697
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 2,020,966 $ 2,587,085
Accounts payable-related party 1,905,550 1,387,265
Accrued Expenses 320,556 337,384
Other accrued expenses 548,806 -
------------ ------------
Total Current Liabilities 4,795,878 4,311,734
Minority Interest 81,217 104,429
Stockholders' Equity
Common Stock, $.001 par value, 50,000,000
shares authorized, 15,000,000 and 16,000,000
shares issued and outstanding at December 31,
1998 and March 31, 1999 respectively 16,000 16,000
Series B voting Preferred Stock $.001 par value,
80,000 shares issued and outstanding
(Preference in involuntary liquidation value,
$1.00 per share) 80 80
Additional Paid in Capital 5,406,585 5,465,564
Deficit accumulated during the development
stage (3,478,770) (3,570,110)
Current Income/(Loss) (686,996) -
------------ ------------
Total stockholders' equity 1,338,116 2,015,963
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,133,994 $ 6,327,697
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 9
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE ENDED MARCH 31, 1999 AND 1998
AND FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1994) TO MARCH 31, 1999
<TABLE>
<CAPTION>
UNAUDITED
PERIOD FROM
FOR THE THREE MONTHS ENDED INCEPTION TO
March 31, March 31, MARCH 31,
1999 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Sales $ - $ - $ -
Cost of Sales - - -
----------- ----------- ------------
Gross Profit - - -
Operating expenses:
General and administrative 624,496 522,967 3,491,604
Other expense-related party 62,500 20,834 334,500
----------- ----------- ------------
Total operating expenses 686,996 543,801 3,826,104
----------- ----------- ------------
Loss from operations (686,996) (543,801) (3,826,104)
Interest Income - 49,279 156,392
----------- ----------- ------------
Loss before minority interest (686,996) (494,522) (3,669,712)
Minority Interest - 34,982 166,229
----------- ----------- ------------
Net Income (Loss) $ (686,996) $ (459,540) $(3,503,483)
=========== =========== ============
Earnings per share
Basic and diluted ($0.04) ($0.03) ($0.02)
----------- ----------- ------------
Weighted average shares outstanding 16,000,000 15,400,000 15,923,611
----------- ----------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 10
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
AND FOR THE PERIOD FROM INCEPTION (AUGUST 10, 1994) TO MARCH 31, 1999
UNAUDITED
<TABLE>
<CAPTION>
PERIOD FROM
FOR THE THREE MONTHS ENDED INCEPTION TO
March 31, March 31, MARCH 31,
1999 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Loss $ (686,996) $ (459,540) $(4,257,106)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 4,342 2,500 35,105
Shareholder stock option - 31,875 127,500
Amortization & write-off of deferred charges - - 283,524
Minority Interest (23,212) (28,847) (195,887)
Change in assets and liabilities:
(Increase) decrease accounts receivable 73,316 - (236,049)
(Increase) decrease prepaid rent - - 3,954
Increase (decrease) in other assets (3,733) (252,469) (459,763)
Increase (decrease) in accounts payable and accrued expenses 136,505 115,091 2,270,207
----------- ----------- ------------
Net cash used by investing activities (499,778) (591,390) (2,429,485)
Cash flows from investing activities:
Other Assets - - (800)
Capital Expenditures (93,440) (273,782) (3,264,997)
----------- ----------- ------------
Cash used in investing activities (93,440) (273,782) (3,265,797)
Cash flows from financing activities:
Loan from related party 380,000 - 380,000
Payment of preferred dividend - (75,000) (75,000)
Capital Contributed - - 5,814,448
----------- ----------- ------------
Cash provided from financing activities 380,000 (75,000) 5,739,448
Net increase (decrease) in cash (217,560) (940,173) 39,824
Cash at beginning of period 257,384 5,146,327 257,384
----------- ----------- ------------
Cash at end of period $ 39,824 $4,206,154 $ 297,208
=========== =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
<PAGE> 11
FIBERNET TELECOM GROUP, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(A DEVELOPMENT STAGE COMPANY)
UNAUDITED
1. GENERAL
The condensed interim financial statements included herein have been
prepared by FiberNet Telecom Group, Inc. (the Company), without audit,
pursuant to the rules and regulations of the Securities and Exchange
Commission (SEC) and reflect all adjustments which are of a normal
recurring nature and which, in the opinion of management, are necessary
for a fair statement of the results for interim periods. Certain
information and footnote disclosures have been condensed or omitted
pursuant to such rules and regulations. Although FiberNet Telecom Group,
Inc. believes that the disclosures are adequate to make the information
presented not misleading, it is suggested that these condensed financial
statements be read in conjunction with the financial statements and the
notes thereto included in the Company's latest annual report to
stockholders.
2. LEASE CONTRACTS
The Company has entered into lease agreements for office space in
Rochester, a switching center in New York City, and for collocation space
in seven buildings. Lease expense for the three months ended March 31,
1998 was $251,826. Estimated future minimum lease payments are:
<TABLE>
<S> <C>
1999 $ 812,292
2000 $ 812,292
2001 $ 812,292
2002 $ 812,292
2003 and thereafter $ 812,292
-----------
Total...... $ 4,061,460
===========
</TABLE>
3. EARNINGS PER SHARE
Basic earnings per share were computed by dividing net income by the
weighted average number of common shares outstanding during the quarter
as required by FASB Statement No. 128, "Earnings per Share" ("SFAS 128").
As shown in the statement of operations, basic earnings per share as of
December 31, 1998 and March 31, 1999 is calculated using the weighted
average shares outstanding as of December 31, 1998 and March 31, 1999
respectively. Since the loss per share decreases when outstanding options
are included in the computation, those options are antidilutive and are
ignored in the computation of diluted earning per share.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. Since the Company does not use
derivative instruments nor hedging activities in its operations, adopting
Statement 133 on our financial statements will not have material impact.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE THREE
MONTH FINANCIAL STATEMENT AS OF MARCH 31, 1999 AND THREE MONTH FINANCIAL
STATEMENT AS OF MARCH 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> JAN-01-1998 JAN-01-1999
<PERIOD-END> MAR-31-1998 MAR-31-1999
<CASH> 4,206,154 39,824
<SECURITIES> 0 0
<RECEIVABLES> 31,227 239,193
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 4,237,381 279,017
<PP&E> 367,849 5,525,654
<DEPRECIATION> 4,342 35,105
<TOTAL-ASSETS> 4,967,921 6,133,994
<CURRENT-LIABILITIES> 815,053 4,795,878
<BONDS> 0 0
0 0
80 80
<COMMON> 16,000 16,000
<OTHER-SE> 4,142,868 5,279,085
<TOTAL-LIABILITY-AND-EQUITY> 4,957,921 6,133,994
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 543,801 686,996
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (49,279) 0
<INCOME-PRETAX> (494,522) 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (494,522) 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 34,982 0
<CHANGES> 0 0
<NET-INCOME> (459,540) (686,996)
<EPS-PRIMARY> (0.03) (0.04)
<EPS-DILUTED> (0.03) (0.04)
</TABLE>
