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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
Commission file number 33-7841
FiberNet Telecom Group, Inc.
(Name of Small Business Issuer in Its Charter)
Nevada 13-3859938
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
100 Town Centre Drive, Rochester, NY 14623
(Address of Principal Executive Offices) (Zip Code)
(716) 340-2200
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of Class)
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 past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definite proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
Registrant's revenues for its most recent fiscal year: $ 0.00
The aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, was $26,000,000 as of December 31, 1998.
The number of shares outstanding of each of issuer's classes of common
equity, as of December 31, 1998, was 16,000,000 shares of Common Stock, $ .001
par value.
Documents Incorporated by Reference: None
Transitional Small Business Disclosure Format (check one):
Yes [ ] No [X]
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PART I
THIS ANNUAL REPORT ON FORM 10-KSB (THE "ANNUAL REPORT") CONTAINS
CERTAIN FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 21 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, (THE "EXCHANGE ACT"), INCLUDING
STATEMENTS THAT INDICATE WHAT THE COMPANY "BELIEVES", "EXPECTS" AND
"ANTICIPATES" OR SIMILAR EXPRESSIONS. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN
RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE ACTUAL RESULTS,
PERFORMANCE OR ACHIEVEMENTS OF THE COMPANY TO DIFFER MATERIALLY FROM THOSE
EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE OF THIS ANNUAL REPORT. THERE CAN BE NO ASSURANCE THAT THE
FORWARD LOOKING INFORMATION CONTAINED HEREIN WILL IN FACT TRANSPIRE. THE COMPANY
UNDERTAKES NO OBLIGATION TO PUBLICLY UPDATE OR REVISE ANY FORWARD LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS OVERVIEW
Introduction
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. 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.
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The subsidiary structure of the Company is set forth in the chart below:
[SUBSIDIARY STRUCTURE FLOW CHART]
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.
The Company's founders have significant experience in the Competitive
Access Provider industry and intend to draw upon their expertise in the
telecommunications, electronics, and communications industries from their
predecessor companies, FiberNet, Inc. and FiberNet USA, Inc., to expand the
Company's business to be the premier provider of intra-building fiber optic
networks and local telecommunications services in selected urban markets.
FiberNet, Inc. and FiberNet USA, Inc. were owned primarily by Petrocelli
Industries Inc., an investment company controlled by the Company's Chairman,
Santo Petrocelli. FiberNet, Inc. successfully designed, installed and operated
competitive access networks in three upstate New York
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markets (Albany, Buffalo, and Rochester). These networks, covering approximately
500 route miles, were sold to Metropolitan Fiber Systems (a predecessor entity
to MCI WorldCom Inc.) in 1993. FiberNet USA, Inc. built additional networks in
Cincinnati (OH), Raleigh-Durham (NC), Huntsville (AL), and St. Louis (MO) and
merged with Intermedia Communications, Inc. in 1995.
FIBERNET EQUAL ACCESS, LLC
Equal Access' business strategy is to provide high-bandwidth carrier-class
fiber and copper via transport intra-building networks in large Class-A
commercial office buildings and to lease Synchronized Optical Network ("SONET")
digital circuits to carriers. Management believes this strategy is unique in
last mile telecommunications solutions.
Overview. Management believes Equal Access will become the "Premier
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 a DS-0, DS-1, and DS-3 circuit level.
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' PDS provides the
critical links between tenants, the building and carrier networks necessary for
100% fiber optic connectivity and virtual throughput.
Equal Access intends to focus on delivering PDS technology to Class-A
(generally with a minimum of 500,000 square feet) commercial office buildings.
Management believes that Equal Access is currently the only company developing,
implementing and managing intra-building networks consisting of 100%
fully-redundant fiber optics.
Over the next five years, Equal Access expects to construct PDS systems in
10 MSA's in the United States. Management expects that this increased demand for
PDS in the next few years will result from the increasing number of carriers
competing with Regional Bell Operating Companies ("RBOC"), on a national level.
Business Strategy. Equal Access' business strategy will focus on securing
multi-year license agreements from building owners/managers in their buildings.
These license agreements provides Equal Access the exclusive right and ability
to resell and/or lease intra-building transport capacity to third parties. 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.
Network Interface Equipment Room. Equal Access generally will 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.
Within this space, Equal Access will provide secure caged floor space with
direct fiber connectivity to make carrier utilization easy and consistent.
Benefits. Equal Access' fiber optic voice and data network will benefit
telecommunications service providers (carriers), building tenants and building
owners.
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Carrier Benefits. The PDS will allow carriers to share telecommunications
equipment and fiber routes inside the building, providing significant economies
of scale. Management expects the PDS to virtually eliminate the need for
carriers to go through extensive provisioning and build-outs for each tenant.
The PDS requires no capital investment and carriers pay on an "as-needed" basis
for the services and network. Further, management anticipates carriers will
realize savings from the cost-based, non-discriminatory pricing. In addition,
carriers will not face building access problems. By dealing directly with Equal
Access, management anticipates the carriers' need to negotiate directly with
building owners to be significantly reduced. Lastly, management believes Equal
Access will dramatically improve the carriers' time-to-market, reducing delays
which can typically run up to 120 days. Management believes intra-building fiber
optic connections are faster, better, and cheaper than current copper or hybrid
systems, and offer virtually unlimited expandability.
Building Owner Benefits. Management expects building owners to benefit
significantly from the PDS. First, the existing telecommunications systems
(consisting of copper wires) in their buildings will be upgraded to a
state-of-the-art redundant fiber system without any capital investment. Second,
since Equal Access offers revenue sharing, it may become an additional profit
center to the building. Third, management believes that buildings with PDS will
represent a powerful incentive for attracting and maintaining tenants. Fourth,
because the management of the system is outsourced, the property owner will not
need to establish an in-house team of technicians. Fifth, since the PDS is
efficient in the space it utilizes, the property owner will not have to
sacrifice square footage. Sixth, the PDS is a complete system rather than
multiple carrier systems which can clog up risers and telecommunications
closets. Finally, rather than spending time and effort each time a tenant
requests approval, the owner will only have to approve the construction plans
once. Carriers needing access can then work directly with Equal Access.
Tenant Benefits. Management believes tenants will benefit from their
connection to multiple carriers via a high capacity fiber optic network. As a
result, tenants will have immediate and competitively priced access to enhanced
high-speed, faultless transmission of voice, data, and fax communications. In
addition, tenants may choose among a variety of different carriers.
Strategic Partners. Equal Access has established strategic alliances and
credibility with major building owners and developers which have been leveraged
to gain long-term building contracts. Equal Access has executed agreements with
four building owners covering seven properties in New York City. These building
owners also control an additional 29 properties in New York, which Equal Access
expects to complete contracts with upon the successful completion of the initial
buildings. Equal Access began construction on the initial buildings in 1998. The
Company is negotiating with other building owners to enter into contracts
relating to the leasing of space in a number of commercial office buildings.
Construction Costs. Management estimates the cost, subject to financing,
of completing its initial targeted buildings and developing selected PDS systems
to be in excess of $20 million. The capital will be used for the construction of
the in-building riser system, the purchase of transmission equipment, fiber and
copper cable, and the construction of a network interface equipment room in each
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 new digital switching and SONET
transmission platform that interconnects with an existing, 384-mile dark fiber
network. Local Fiber operates out of a 13,000 square foot switching facility at
60 Hudson Street, which will house its state-of-the-art 5ESS-2000 switch.
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Local Fiber's advanced network and switching architecture will allow it to
provide a broad array of services and products:
- Carrier Link Services to Business Customers: Dedicated products,
hub collocation, inter-building transport and carrier access
services, including special access, dedicated access, switched
originating access and switched terminating access.
- Local Link Services: Switched products include Local voice line
(POTS), Centrex, ISDN basic and primary, Direct inward and outward
dialing.
- "Feature Group" Options: Voice mail, three-way calling,
call-forwarding, call waiting, distinctive ringing and metered
business calling.
- "Extended and long distance service" Services: IntraLATA toll,
long distance toll, 800 and 888 service and calling card service.
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. Management anticipates generating additional
sales by selling to off-net customers. Local Fiber will expand its capabilities
to include enhanced data and Internet Protocol services. 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 switch. Local Fiber deploys a highly distributed
switching architecture by using digital communication links connected to the
host switch (Lucent 5ESS-2000). This sophisticated switch enables Local Fiber to
provide a full range of services, including all types of calls (local exchange,
long distance, Centrex services and ISDN) to multiple carriers and end-user
customers. Local Fiber's bundling approach and distributive switching
architecture represent a cost-effective alternative to current local exchange
companies.
Comprehensive service offerings. Local Fiber will provide advanced fiber
optic technology directly to each floor of the buildings it serves through its
vertical marketing integration strategy with its subsidiary Equal Access, with
comprehensive services such as on-site repairs and maintenance, and customized
solutions.
Bundled local and long distance services: Customers will be provided with
"One Simple Bill" that contains feature rich transport and switch-based
products, as well as long distance services.
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
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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.
Seamless Interconnection. 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 Network Operations Center for remote provisioning and fault management.
The Network Operations Center ("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 NOC will
be strategically located in a 15,000 square foot facility in Rochester, New York
which will enable Equal Access and Local Fiber to take advantage of Rochester's
large technical labor force. In addition, the round the clock remote monitoring
will ensure that all network components in up to 10 markets are working at top
efficiency and security, at all times. The Company expects the NOC to be
equipped and operational in 1999.
The NOC will be equipped with the following state-of-the-art technology:
* Lucent NOC1
- Allows for real-time network surveillance and alarming
* Lucent SNC Interface & Provisioning
- Provides provisioning of all SONET network elements
- Graphical user interface for alarm reporting and status
display
* Metasolv
- electronic order processing
- trouble ticketing
- circuit inventory
* Macrologic Billing Control
- Financial reporting
- Payment/account information
- Billing parameters (rates/tax)
Market Opportunities. Management believes significant factors such as
industry growth, regulatory changes and the obsolescence of current copper
networks have combined to create excellent opportunity for FiberNet and its
subsidiaries. Management expects the industry to growth substantially over the
next decade.
Competition. Equal Access has a limited number of competitors, including
RBOCs (which own most of the in-building copper networks), but have cables with
limited broadband capabilities. Currently, however, the Company's customer base
can choose from a selection of indirect competitive alternatives. Management
believes Equal Access' redundant fiber optic network will be more
technologically advanced compared to existing systems offered by competitors.
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Local Fiber is in competition with incumbent LECs, CLECs and IXCs.
However, Local Fiber believes it offers the following competitive advantages:
- FiberNet's end-to-end technology provides customers with fiber
technology that originates at the Local Fiber fiber loop, and
connects directly to the customer premise in buildings equipped with
Equal Access' PDS infrastructure. The result is the unparalleled
capacity, quality and reliability of a 100% fiber network.
- Local Fiber can reach customers at a lower cost than its
competitors. This advantage is predicated on FiberNet's exclusive
right of use agreement with Metromedia, which provides a dark fiber
backbone to Local Fiber throughout Manhattan at no cost.
Expansion Costs. Local Fiber will require significant purchases of
equipment essential for the growth and operation of its business. Management
estimates Local Fiber will require significant additional capital over the next
three years to purchase local switching equipment, electronics equipment, DACS
equipment, a network control center and monitoring equipment, fiber and copper
cable, construction, engineering and installation.
Federal Regulation. FiberNet intends to capitalize on the sweeping changes
that have dramatically altered the the telecommunications industry. The new
regulatory changes have opened new markets and created new opportunities for
telecommunication companies.
The 1996 Telecommunications Act, which was enacted in February, 1996 (the
"Telcom Act') effected plenary changes in regulation at both the federal and
state levels that affect virtually every segment of the telecommunications
industry. The stated purpose of the Telcom Act is to promote competition in all
areas of telecommunications and to reduce unnecessary regulation in order to
secure lower prices and higher quality services for telecommunication consumers.
The Telcom Act enables FiberNet to: a) connect directly to RBOCs; b) take
advantage of lower, cost-based pricing; c) purchase individual network elements
on an "as-needed" basis; and d) resell network capacity and services on a
wholesale basis to carriers.
The Telcom Act also makes competitive entry into other services or
geographic markets more attractive to RBOCs, other ILECs and other companies,
and likely will increase the level of competition FiberNet faces. More and
diverse kinds of telecom providers will be pursuing customers and selling their
products and offerings to all market segments. However, telecommunications
users, residential and business customers can expect increased choices and
benefit from companies such as FiberNet.
Local Regulation. The Company is also subject to numerous local
regulations, such as building code requirements. These regulations may vary
greatly from state to state and city to city.
Employees. As of December 31, 1998, the Company employed 6 people, which
were primarily engaged in administration and marketing. Management projects the
number of employees to increase to 35 over the next twelve months. The Company's
employees are not represented by any labor union. The Company considers its
employee relations to be good.
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ITEM 2. DESCRIPTION OF PROPERTIES
The principal offices of FiberNet are located in its NOC facility in
Rochester, New York, consisting of approximately 15,000 square feet of space.
FiberNet leases this space under an agreement which expires in 2005, at a
current annual base rental of approximately $90,750. FiberNet recently entered
into a lease for 5,000 square feet at 570 Lexington Avenue in New York City for
additional office space for an annual base rental of approximately $276,000.
Local Fiber has entered into an agreement to lease approximately 13,222
square feet of space to serve as the switch control site at 60 Hudson Street in
New York City for a term of ten years and eight months, expiring in July 2008
for an annual base rental of approximately $330,000.
ITEM 3. LEGAL PROCEEDINGS
To the knowledge of management, there is no material litigation pending or
threatened against the Company or FiberNet which would have a material adverse
effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted during the fourth quarter of the period covered
in this report to a vote of shareholders.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCK HOLDER
MATTERS
The Company's common stock is currently eligible for quotation on the NASD
Electronic Bulletin Board under the symbol "FTGX". As of May 27, 1998, the
Company currently had a minimum of 328 shareholders of record.
The following table sets forth the high and low sales prices for each
quarter for the Company's Common Stock as reported on the NASD Electronic
Bulletin Board during the fiscal year 1998:
PERIOD - 1998 Fiscal Year, quarter ended:
<TABLE>
<CAPTION>
----------------------------------------------------
High Low
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<S> <C> <C>
March 31, 1998 $ 8.375 $ 4.500
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June 30, 1998 $ 6.000 $ 4.000
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September 30, 1998 $ 4.688 $ 1.875
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December 31, 1998 $ 2.375 $ 1.000
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</TABLE>
All of the above quotations were obtained from Bloomberg.
The Company has not paid any dividends with respect to its Common Stock
and does not expect to pay dividends on the Common Stock in the foreseeable
future. Any future dividends will be declared at the discretion of the Board of
Directors and will depend, among other things, upon the financial condition,
capital requirements, earnings and liquidity of the Company.
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The Company has had no commercial operations to date. Since it inception,
the Company has engaged principally in organizational activities, including
developing strategic commitments to fund its plan. Accordingly, the Company has
no relevant operating history upon which an evaluation of its performance and
prospects can be made. The Company is subject to unforeseen capital
requirements, failure of market acceptance, failure to establish business
relationships, and competitive disadvantages against larger and more established
companies.
The Company has generated no revenues to date, and will not generate any
meaningful revenues until after the Company successfully completes the
development and installation of Equal Access' PDS product as well as the
installation of Local Fiber's local and long distance switch. Equal Access began
construction on 3 buildings in 1998, which the Company expects to be operational
in 1999. Local Fiber expects to have its switch and network operational by the
third quarter, 1999.
LIQUIDITY AND CAPITAL RESOURCES
The Company has to date financed its development effort through direct
equity investments from its shareholders. The Company has sustained losses in
the amount of $3.57 million for the period from inception (August 10, 1994) to
December 31, 1998. The Company had no revenues during this period, and
substantially all of such losses are attributable to initial start-up costs.
The Company's planned operations will require significant capital to fund
equipment purchases, engineering costs, and installation. During 1998, the
Company spent approximately $5.4 million in capital expenditures, which was
primarily used in the construction of PDS products for Equal Access.
Additionally, Local Fiber has purchased a local and long distance switch,
electronics equipment, DACS equipment, network control center and monitoring
equipment, fiber and copper cable, construction, engineering, and installation
which has been financed pursuant to a $5.1 million line of credit from Comdisco,
a major leasing company. This line of credit replaced a former credit
commitment which expired in December, 1998.
Equal Access projects that the completion of its initial plan including 36
buildings will require approximately $25 million in capital expenditures and
associated working capital. The completion of these 36 buildings is subject to
the execution of additional contracts with building owner/managers as well as
securing additional financing commitments from a third party lender. The capital
will be used for the construction of in-building risers, the purchase and
installation of transmission equipment, fiber and copper cable, and the
construction of network interface equipment rooms in the basements of each
building and network engineering.
On November 24, 1997, the Company raised $5.075 million as a part of a one
million share Preferred Stock Private Placement to satisfy financing
requirements and to support working capital shortfalls. The Company has secured
a commitment for an equipment lease line of credit totaling $5.1 million. This
line will fund the Company's central office switch, SONET electronics for both
the switch location and within the Equal Access buildings and DACS equipment.
The Company is in the process of negotiating with other lenders regarding
additional debt and equity financing, but as of to date a final commitment has
not been secured.
The Company expects to accelerate its growth and expand to 10 tier-one
MSA's over the next five years which includes the deployment of switching and
transmission equipment as a CLEC through Local
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Fiber and the construction of Premise Distribution Systems under Equal Access.
The Company may require additional capital if the Company's expansion occurs
more rapidly than currently anticipated or if operating results are below
expectations. The Company intends to raise additional capital before such time.
The Company may secure additional funding through the sale of public or private
debt and/or equity securities. There can be no assurance, however, that the
Company will be successful in raising sufficient additional capital.
YEAR 2000 ISSUES
The Year 2000 issue is the result of computer programs written using two
digits rather than four to define the applicable year. Without corrective
action, programs with time-sensitive software could potentially recognize a date
ending in "00" as the year 1900 rather than the year 2000, causing many computer
applications to fail or create erroneous results.
As a result of modifications or upgrades planned, the Company believes
that the Year 2000 issue will not pose significant problems for the Company's
business, operations, or operating systems. The Company expects that any
additional modifications or upgrades of software or hardware required under the
Year 2000 compatibility will be accomplished using existing resources and will
not have a material impact on the Company's financial position or results of
operations in future periods.
ITEM 7. FINANCIAL STATEMENTS
Audited balance sheets as of December 31, 1998 and the related statements
of operations, cash flows and stockholders' equity for the period from inception
(August 10, 1994) to December 31, 1998, together with related notes and the
reports of Arthur Andersen LLP, independent auditor, appear on pages F-1 through
F-15 of this report.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9. MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following tables set forth the directors and executive officers
of the Company as of December 31, 1998. Directors are elected for a period of
one year and thereafter serve until the next annual meeting at which their
successors are duly elected by the stockholders. Officers and other employees
serve at the will of the board of directors.
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<TABLE>
<CAPTION>
NAME AGE POSITIONS
- - - ---- --- ---------
<S> <C> <C>
Santo Petrocelli, Sr. 63 Chairman and Director
Frank Chiaino 55 President, Chief Executive Officer and
Director
Lawrence S. Polan 68 Director
John J. Marchaesi 39 Vice President-Administration and Director
Kenneth Elias 51 Vice President - Sales and Marketing
Mark F. Lipford 38 Vice President - Engineering and Operations
</TABLE>
SANTO PETROCELLI, SR. served as Chairman and a Director of Fibernet
Telecom Group, Inc., and its wholly-owned subsidiaries, FiberNet Equal Access,
LLC and Local Fiber LLC., since their inception. Mr. Petrocelli is the
President, Chief Executive Officer and a Director of Petrocelli Electric
Company, and Petrocelli Communications Company. In addition, he controls
Petrocelli Industries, Inc., and SMFS, Inc., investment companies which have
held controlling interests in several communications ventures including FiberNet
Telecom, Inc., FiberNet, Inc. and FiberNet USA, Inc. Mr. Petrocelli was the
former Chairman and Chief Executive Officer of FiberNet Inc. and FiberNet USA,
Inc. prior to their acquisition by MFS, now World Comm and InterMedia
Communications Inc. He has over 40 years experience in the communications,
electrical and telecommunications industry.
FRANK CHIAINO is President and Chief Executive Officer of FiberNet Telecom
Group, Inc. and its subsidiaries. Mr. Chiaino joined the Company's management
team after a 30 year career with Time Warner Communications, where he was most
recently President and Chief Executive Officer and concurrently served as Vice
President of Time Warner Cable. Mr. Chiaino also served as Vice President and
Chief Operating Officer at Time Inc.'s Manhattan Cable subsidiary where he built
and managed the nations first urban cable system. Mr. Chiaino has a Bachelor of
Science degree from Queens College and received his Masters of Business
Administration from Columbia University.
LAWRENCE S. POLAN is a Director of FiberNet Telecom Group, Inc. and its
subsidiaries. Mr. Polan was a former director of FiberNet, Inc. and FiberNet
USA, Inc. In addition, Mr. Polan is the Chief Financial Officer of Petrocelli
Electric Company and Petrocelli Communications Company. Prior to joining
Petrocelli Communications, he was the Chief Financial Officer and Controller of
Visa Resources, Inc. a New York Stock Exchange Company with over $250 Million in
annual revenue. Mr. Polan holds a bachelors degree from St. John's University.
JOHN J. MARCHAESI, CPA, is Vice President of Administration and a Director
of FiberNet Telecom Group, Inc. and its subsidiaries. Mr. Marchaesi was the
Controller of FiberNet USA, Inc. Prior to joining the Company, he was a Senior
Manager-Internal Audit and Consulting with Associated Communications Corporation
and also the controller of Cellular One/Albany Telephone Company. He has over
ten years experience in financial management within the telecommunications
industry. He holds a Masters of Business Administration from Rochester Institute
of Technology and a Bachelor of Science in business administration from SUNY,
Oswego.
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<PAGE> 13
KENNETH ELIAS is Vice President of Sales and Marketing. Mr. Elias has over
29 years in the telecommunications industry. Mr. Elias began his career at NYNEX
in 1969 and during his tenure he has held a variety of executive level positions
where he was responsible for product development, market growth and sales
operations. Mr. Elias has a Bachelor of Science from the Citadel.
MARK F. LIPFORD is Vice President of Engineering and Operations of
FiberNet Telecom Group, Inc. Prior to joining the Company, Mr. Lipford served as
Regional Vice President of Time Warner Communications. Mr. Lipford has over 18
years of experience in the telecommunications industry which includes his direct
participation in the development of the nation's first CLEC. Mr. Lipford holds a
Masters of Arts from the University of Akron.
There are currently no arrangements or understandings regarding the length
of time each director is to serve in such capacity except as otherwise described
herein.
ITEM 10. EXECUTIVE COMPENSATION
The following table sets forth the compensation of the executive officers
of the Company for the fiscal year 1998:
<TABLE>
<CAPTION>
- - - ----------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
------------------------------
OTHER LONG ALL
ANNUAL TERM OTHER
SALARY BONUS COMPENSATION COMPENSATION COMPENSATION
NAME POSITION YEAR $ $ $ $ $
- - - ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Santo Petrocelli, Sr. (1) Chairman and Director 1998 $150,000 -- -- 0 0
- - - ----------------------------------------------------------------------------------------------------------------------
Frank Chiaino (2) President, CEO & 1998 $125,000 -- -- 0 0
Director
- - - ----------------------------------------------------------------------------------------------------------------------
Lawrence S. Polan Director 1998 $ 0 -- $ 75,000(3)
- - - ----------------------------------------------------------------------------------------------------------------------
John J. Marchaesi (4) VP Administration
and Finance and 1998 $ 85,000 -- -- 0 0
Director
- - - ----------------------------------------------------------------------------------------------------------------------
Mark Lipford (5) VP Engineering & 1998 $110,000 -- -- 0 0
Operations
- - - ----------------------------------------------------------------------------------------------------------------------
Kenneth Elias VP Sales and 1998 $108,000 -- -- 0 0
Marketing
- - - ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As of January 1, 1998, the Company entered into an employment agreement with
Santo Petrocelli, Sr., the Company's Chairman. The Agreement has a term of three
years and provides for an annual base salary of $150,000. In 1997, the
disinterested members of the Board of Directors approved the issuance to Mr.
Petrocelli of options to purchase 190,000 shares of the Company's Common Stock.
In the event of a Change of Control, the Company shall pay to Mr. Petrocelli
severance pay equal to 2.75 times the amount of Mr. Petrocelli's annual base
salary and 2.75 times Mr. Petrocelli's bonus in respect of the calendar year
preceding the date of termination. The Company deferred payment to Mr.
Petrocelli in the amount of $50,000 until such time as the completion of the
Company's financing.
(2) As of January 1, 1998, the Company entered into an employment agreement with
Frank Chiaino, the Company's President and Chief Executive Officer. The
agreement has a three year term and provides for an annual base salary of
$125,000. Additionally, Mr. Chiaino may receive an annual bonus to be determined
by the board of directors of the Company. Pursuant to the employment agreement,
Mr. Chiaino shall have the right to purchase up to 150,000 shares of the
Company's Common Stock at an exercise price of $1.95 per share. In the event of
a Change of Control, the Company shall pay to Mr. Chiaino severance pay equal to
2.75 times the amount of Mr. Chiaino's annual base salary and 2.75 times
-13-
<PAGE> 14
Mr. Chiaino's bonus in respect of the calendar year preceding the date of
termination. The Company deferred payment to Mr. Chiaino in the amount of
$31,250 until such time as the completion of the Company's financing.
(3) As of January 1, 1998, the Company entered into a consulting agreement with
LPS Consultants, Inc. to provide financial and consulting services for a three
year term at an annual rate of $75,000. Lawrence S. Polan is the majority
shareholder of LPS Consultants, Inc.
(4) As of January 1, 1998, the Company entered into an employment agreement with
John J. Marchaesi, the Company's Vice President of Administration and Finance.
The agreement has a three year term and provides for an annual base salary of
$85,000. Additionally, Mr. Marchaesi may receive an annual bonus to be
determined by the board of directors of the Company. As consideration of past
services, the disinterested members of the Board of Directors granted Mr.
Marchaesi options to purchase 30,000 shares of the Company's Common Stock. In
the event of a Change of Control, the Company shall pay to Mr. Marchaesi
severance pay equal to 2.75 times the amount of Mr. Marchaesi's annual base
salary and 2.75 times Mr. Marchaesi's bonus in respect of the calendar year
preceding the date of termination.
(5) Mr. Lipford left the employ of the Company as of October, 1998. The Company
paid Mr. Lipford $88,645 as compensation for services rendered through his last
date of employment with the Company.
(6) Mr. Elias left the employ of the Company as of February, 1998. The Company
paid Mr. Elias $33,750 as compensation for services rendered through his last
date of employment with the Company.
The following table sets forth information concerning the grant of the
following options to purchase shares of the Common Stock of the Company to the
following executive officers:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<TABLE>
<CAPTION>
- - - ---------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SARS GRANTED TO EXERCISE OR BASE
NAME OPTIONS GRANTED EMPLOYEE IN FISCAL YEAR PRICE
- - - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Frank Chiaino 300,000 44.5% 150,000 @ $1.95
150,000 @ $4.625
- - - ---------------------------------------------------------------------------------------------------------
John J. Marchaesi 120,000 17.8% $ 4.625
- - - ---------------------------------------------------------------------------------------------------------
Mark Lipford 40,000 5.9% $ 4.625
- - - ---------------------------------------------------------------------------------------------------------
Kenneth Elias 10,000 1.5% $ 4.50
- - - ---------------------------------------------------------------------------------------------------------
</TABLE>
THE STOCK PLAN
In November 1997, the Company adopted an employee equity
participation program (the "Stock Plan") covering 1,500,000 shares of Common
Stock of the Company to attract, retain and reward employees. The Board of
Directors administers the Stock Plan. All employees are eligible to receive
awards under the Stock Plan, at the Board's discretion.
Options granted pursuant to the Stock Plan may be either nonqualified
options and/or incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended.
During the fiscal year ended as of December 31, 1998, the Company had
granted an additional 203,000 options under its plan to certain employees
covering approximately 203,000 shares, of which 175,000 options were granted at
an average exercise price of $4.625, 20,000 options were granted at an exercise
price of $5.375 per share and 8,000 options were granted at an exercise price of
$1.875 per share.
-14-
<PAGE> 15
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of December 31, 1998 the beneficial
ownership of the Company's Common Stock by each director, by each beneficial
owner of more than five percent (5%) of the Company's outstanding Common Stock
and all current directors of the Company as a group:
<TABLE>
<CAPTION>
- - - -----------------------------------------------------------------------------------------------------------------
BENEFICIAL OWNERSHIP OF COMMON STOCK(1)
------------------------------------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OWNED PERCENTAGE OF CLASS
- - - -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SMFS, Inc. (2) (3) 6,900,000 43%
12-12 43rd Avenue
Long Island City, New York 11101
- - - -----------------------------------------------------------------------------------------------------------------
LPS Consultants, Inc. (2) (3) 575,000 3.5%
12-12 43rd Avenue
Long Island City, New York 11101
- - - -----------------------------------------------------------------------------------------------------------------
LTJ Group, Inc. (2) (3) 4,025,000 25%
61 Old Well Road
Rochester, New York 14626
- - - -----------------------------------------------------------------------------------------------------------------
Michael Lauer (4) 2,200,000 13.7%
980 Post Road East
Westport, Connecticut 60880
- - - -----------------------------------------------------------------------------------------------------------------
All current directors as a group (4 persons) 7,475,000 46.7%
- - - -----------------------------------------------------------------------------------------------------------------
</TABLE>
(1) In February 1998, the Company converted 1,000,000 shares of the Series A
Preferred Convertible Stock to Common Stock. As a result, outstanding
Common Stock of the Company increased to 16,000,000.
(2) The shares are held of record by Santo Petrocelli, Sr., Lawrence S. Polan
and Joseph A. Tortoretti, respectively.
(3) Taking into account the 16,000,000 shares of Common Stock to be
outstanding, and the 80,000 shares of Series B Preferred Stock, Messrs.
Petrocelli, Polan and Tortoretti have the following voting rights: (a)
Santo Petrocelli, Sr. 11,700,000 votes (48.75%); (b) Lawrence S. Polan
975,000 votes (4.1%); (c) Joseph A. Tortoretti 6,825,000 (28.4%). As a
group these persons have 19,450,000 out of 25,000,000 votes of 81%.
(4) Michael Lauer is the investment manager of Lancer Offshore, Inc. and the
largest shareholder of Lancer Partners LP. Mr. Lauer and his affiliates,
Lancer Offshore, Inc. and Lancer Partners LP are the record owners of the
2.2 million shares of the Company's Common Stock.
-15-
<PAGE> 16
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Santo Petrocelli, Sr., as Chairman of FiberNet Telecom Group, Inc.,
is also President and Chief Executive Officer of Petrocelli Electric Company,
Petrocelli Communications Company, SMFS, Inc. and Petrocelli Industries
Incorporated. In addition, he is a director of National Abatement Corporation.
Petrocelli Industries Incorporated has provided management, marketing and
administrative services to the Company and its affiliates. As a result of an
open bidding process through an independent third party, the Company in 1998
entered into three separate contracts with Petrocelli Electric totaling
approximately $2.5 million to provide electrical contracting for the
construction of a PDS in three commercial buildings. The Company is obligated
for payment to Petrocelli Electric for services rendered in the amount of $1.4
million. Additionally, the company expensed $140,000 of consulting fees in 1998
from this related party.
Joseph Tortoretti, is the majority shareholder of Landtel
Telecommunications Group, Inc. ("Landtel") which provides engineering services
and network development and has been retained to provide consulting work to
FiberNet Telecom Group, Inc. In connection with the provision of such services,
the Company reimburses the travel expenses of Landtel which averages
approximately $3,000 per month. In consideration for services rendered, the
Company is obligated for payment to Landtel of $125,000 per year of which
$83,334 has been paid and the remaining balance of $163,347, which includes
amounts owed for services rendered in 1997, has been deferred until such time
as the completion of the Company's financing. LTJ Group, Inc., a shareholder of
the Company and Landtel Telecommunications Group, Inc. are owned by the same
party.
The Company is obligated for payment of yearly management fees for
services rendered by Landtel Telecommunications Group, Inc. in the amount of
$125,000.
Mr. Lawrence Polan, is a Director of FiberNet Telecom Group, Inc. He
is also Vice President and Chief Financial Officer for Petrocelli Electric
Company, Petrocelli Communications Company and Petrocelli Industries
Incorporated. In addition, he controls LPS Consultants, Inc. Pursuant to a three
(3) year agreement with the Company, LPS Consultants, Inc. provides financial
consulting services at a yearly rate of $75,000, of which $58, 330 has been paid
and $16,670 has been deferred until such time as the completion of the Company's
financing.
The Company may have continuing relationships with Petrocelli,
Landtel and LPS Consultants, Inc. However, management believes that the terms
and conditions of such dealings will be fair and reasonable to the Company and
based upon terms that would be no less beneficial than could be negotiated with
unrelated parties.
ITEM 13. EXHIBITS
10.1 Master Lease Agreement between ComDisco, Inc. and the Company dated
as of July 27, 1998.
23.1 Consent of Mendelsohn Kary Bell and Natoli, P.C.
23.2 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
-16-
<PAGE> 17
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
FIBERNET TELECOM GROUP, INC.
By: /s/ Frank Chiaino
--------------------------------------------
Name: Frank Chiaino
Title: President and Chief Executive Officer
Date: March 30, 1999
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Santo Petrocelli, Sr.
--------------------------------------------
Name: Santo Petrocelli, Sr.
Title: Chairman
Date: March 30, 1999
By: /s/ Lawrence S. Polan
--------------------------------------------
Name: Lawrence S. Polan
Title: Director
Date: March 30, 1999
-17-
<PAGE> 18
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE> 19
FIBERNET TELECOM GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
TABLE OF CONTENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants..................................... 1
Consolidated Balance Sheets.................................................. 2
Consolidated Statements of Operations........................................ 3
Consolidated Statements of Stockholders' Equity ............................. 4
Consolidated Statements of Cash Flows........................................ 5
Notes to Consolidated Financial Statements................................... 6 - 15
</TABLE>
<PAGE> 20
[MENDELSOHN KARY BELL & NATOLI LETTERHEAD]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
FiberNet Telecom Inc. and Affiliated Entities
(A Development Stage Company)
We have audited the accompanying combined balance sheet of FiberNet Telecom
Inc. and Affiliated Entities (A Development Stage Company) as of June 30, 1997,
and the related combined statements of operations and accumulated deficit,
stockholders' equity and cash flows for the year then ended and for the period
from August 10, 1994 (inception), to June 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of FiberNet Telecom Inc. and
Affiliated Entities as of June 30, 1997, and the results of its operations and
its cash flows for the year then ended and from August 10, 1994 (inception), to
June 30, 1997 in conformity with generally accepted accounting principles.
/s/ Mendelsohn Kary Bell & Natoli, P.C.
New York, New York
November 29, 1997
<PAGE> 21
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FiberNet Telecom Group, Inc.:
We have audited the accompanying consolidated balance sheets of FiberNet Telecom
Group, Inc. (a corporation in the development stage - Note 1) and subsidiaries
as of December 31, 1998 and 1997, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year ended December 31,
1998, the six months ended December 31, 1997 and for the period from inception
(August 10, 1994) to December 31, 1998. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of FiberNet Telecom
Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year ended December 31, 1998, the six months ended December 31, 1997 and for
the period from inception (August 10, 1994) to December 31, 1998, in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
New York, New York
March 8, 1999
-1-
<PAGE> 22
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 257,384 $ 5,146,327
Accounts receivable 309,365 -
Other current assets - 3,954
----------- -----------
Total current assets 566,749 5,150,281
Property, plant and equipment, net 5,397,109 92,223
Deferred charges and other assets 363,839 131,837
----------- -----------
TOTAL ASSETS $ 6,327,697 $ 5,374,341
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,587,085 $ 490,125
Accounts payable - related party 1,387,265 240,000
Accrued expenses 337,384 -
----------- -----------
Total current liabilities $ 4,311,734 $ 730,125
----------- -----------
Minority interest 104,429 (1,142)
Stockholders' Equity
Common Stock, $0.001 par value, 50,000,000 shares authorized, 15,000,000 and
16,000,000 shares issued and outstanding at December 31, 1997 and 1998,
respectively 16,000 15,000
Series A Convertible Preferred Cumulative Stock, $0.001 par value, 5,000,000
shares authorized, 1,000,000 and 0 shares issued and outstanding at December
31, 1997 and 1998, respectively (Preference in involuntary
liquidation value, $5.125 per share) - 1,000
Series B voting Preferred Stock $0.001 par value, 80,000 shares issued and
outstanding (Preference in involuntary liquidation value, $1.00 per share) 80 80
Capital in excess of par value 5,465,564 5,382,901
Deficit accumulated during the development stage (3,570,110) (753,623)
----------- -----------
Total stockholders' equity $ 1,911,534 $ 4,645,358
----------- -----------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 6,327,697 $ 5,374,341
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-2-
<PAGE> 23
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE PERIOD PERIOD FROM
(UNAUDITED) FROM INCEPTION INCEPTION
(UNAUDITED) SIX MONTHS SIX MONTHS (AUGUST 10, (AUGUST
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED 1994) TO 10, 1994) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, JUNE 30, JUNE 30, DECEMBER 31,
1998 1997 1997 1996 1997 1996 1998
------------ ------------ ------------ ------------ ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Cost and expenses:
Cost of sales - - - - - - -
General and
administrative 2,867,108 594,348 299,982 79,308 373,674 9,387 3,550,151
Other - related party 272,000 120,000 120,000 - - - 392,000
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss from operations (3,139,108) (714,348) (419,982) (79,308) (373,674) (9,387) (3,942,151)
Interest income and other 156,392 26,180 26,180 - - - 182,572
------------ ------------ ------------ ------------ ------------ ------------ ------------
Loss before minority
interest (2,982,716) (688,168) (393,802) (79,308) (373,674) (9,387) (3,759,579)
Minority interest 166,229 23,240 23,240 - - - 189,469
------------ ------------ ------------ ------------ ------------ ------------ ------------
Net loss $ (2,816,487) $ (664,928) $ (370,562) $ (79,308) $ (373,674) $ (9,387) $ (3,570,110)
============ ============ ============ ============ ============ ============ ============
Earning per share
Basic and diluted $ (0.18) $ (0.04) $ (0.027) $ (0.005) $ (0.025) $ (0.001) $ (0.23)
============ ============ ============ ============ ============ ============ ============
Weighted average
shares
outstanding 15,847,222 15,000,000 15,000,000 15,000,000 15,000,000 15,000,000 15,847,222
------------ ------------ ------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-3-
<PAGE> 24
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Balance at August 10, 1994 - $ - - $ -
Issuance of 240 shares of common stock for cash,
out of 1,000 shares authorized. August
10, 1994, at $.001 per share - - 240 -
Net loss for the period from inception to June
30, 1996 - - - -
--------- ----------- ---------- -----------
Balance at June 30, 1996 - $ - - $ -
Capital contribution - - - -
Net loss for the year ended June 30, 1997 - - - -
--------- ----------- ---------- -----------
Balance at June 30, 1997 - $ - - $ -
Capital contribution - - - -
Effect of reverse acquisition of DND (See Note 1),
issuance of 15,000,000 share common stock,
0.01 par value. November 24, 1997 - - 15,000,000 15,000
Issuance of 1,000,000 shares Series A
Convertible Preferred Cumulative Stock, $0.001
par value. November 24, 1997 1,000,000 1,000 - -
Issuance of 80,000 shares Series B Preferred
Stock, 0.001 par value. November 24, 1997 80,000 80 - -
Preferred Stock Dividend accrued during 1997 - - - -
Net loss for the six months ended December 31, 1997
- - - -
--------- ----------- ---------- -----------
Balance at December 31, 1997 1,080,000 $ 1,080 15,000,000 $ 15,000
Conversion of the 1,000,000 shares Series A
Preferred Cumulative stock, $0,001 par value into
common stock. February 24, 1998 (1,000,000) (1,000) 1,000,000 1,000
Dividends Paid - - - -
Earned Compensation, Executive Stock Options - - - -
Net loss for year ended December 31,1998 - - - -
--------- ----------- ---------- -----------
Balance at December 31, 1998 80,000 $ 80 16,000,000 $ 16,000
========= =========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
ACCUMULATED
DEFICIT
CAPITAL IN DURING THE
EXCESS OF DEVELOPMENT
PAR VALUE STAGE TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
Balance at August 10, 1994 $ - $ - $ -
Issuance of 240 shares of common stock for cash,
out of 1,000 shares authorized. August
10,1994, at $.001 per share 61,000 - 61,000
Net loss for the period from inception to June
30, 1996 - (9,387) (9,387)
----------- ----------- -----------
Balance at June 30, 1996 $ 61,000 $ (9,387) $ 51,613
Capital contribution 80,796 - 80,796
Net loss for the year ended June 30, 1997 (373,674) (373,674)
----------- ----------- -----------
Balance at June 30, 1997 $ 141,796 $ (383,061) $ (241,265)
Capital contribution 212,348 - 212,348
Effect of reverse acquisition of DND (See Note 1),
issuance of 15,000,000 share common stock,
0.01 par value. November 24, 1997 (15,000) - -
Issuance of 1,000,000 shares Series A
Convertible Preferred Cumulative Stock, $0.001
par value. November 24, 1997 5,074,000 - 5,075,000
Issuance of 80,000 shares Series B Preferred
Stock, 0.001 par value. November 24, 1997 (80) - -
Preferred Stock Dividend accrued during 1997 (30,163) - (30,163)
Net loss for the six months ended December 31, 1997
(370,562) (370,562)
----------- ----------- -----------
Balance at December 31, 1997 $ 5,382,901 $ (753,623) $ 4,645,358
Conversion of the 1,000,000 shares Series A
Preferred Cumulative stock, $0,001 par value into
common stock. February 24, 1998 - - -
Dividends Paid (44,837) - (44,837)
Earned Compensation, Executive Stock Options 127,500 - 127,500
Net loss for year ended December 31,1998 - (2,816,487) (2,816,487)
----------- ----------- -----------
Balance at December 31, 1998 $ 5,465,564 $(3,570,110) $ 1,911,534
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-4-
<PAGE> 25
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(UNAUDITED)
(UNAUDITED) FOR SIX SIX
YEAR ENDED YEAR ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1998 1997 1997 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $(2,816,487) $ (664,928) $ (370,562) $ (79,308)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Depreciation 27,951 1,842 1,842 -
Amortization and write-off of deferred
charges 227,324 56,200 - -
Minority interest (166,229) (6,446) (6,446) -
Earned Compensation, Executive Stock Options 127,500 - - -
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivable (309,365) - - -
(Increase) decrease in prepaid rent 3,954 - - -
(Increase) decrease in other assets (363,839) (153,160) (34,924) 117,169
Increase (decrease) in accounts payable 1,195,356 645,596 361,482 (45,042)
Increase (decrease) in other liabilities 337,384 - - -
----------- ----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,736,451) (120,896) (48,608) (7,181)
CASH FLOWS FROM INVESTING ACTIVITIES:
Other assets - (800) - -
Capital expenditures (3,077,492) (94,065) (94,065) -
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (3,077,492) (94,865) (94,065) -
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds for the issuance of preferred - 5,075,000 5,075,000 -
stock
Dividends paid (75,000) -
Capital contributed - 286,248 212,348 7,100
----------- ----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (75,000) 5,361,248 5,287,348 7,100
NET INCREASE (DECREASE) IN CASH (4,888,943) 5,145,487 5,144,675 (81)
CASH AT BEGINNING OF PERIOD 5,146,327 840 1,652 921
----------- ----------- ----------- -----------
CASH AT END OF PERIOD $ 257,384 $ 5,146,327 $ 5,146,327 $ 840
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
FOR
THE PERIOD FROM
FROM INCEPTION
INCEPTION (AUGUST 10,
(AUGUST 10, 1994)
YEAR ENDED 1994) TO THROUGH
JUNE 30, JUNE 30, DECEMBER 31,
1997 1996 1998
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (373,674) $ (9,387) $(3,570,110)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
USED IN OPERATING ACTIVITIES:
Depreciation - - 29,793
Amortization and write-off of deferred
charges 56,200 - 283,524
Minority interest - - (172,675)
Earned Compensation, Executive Stock Options - - 127,500
CHANGES IN ASSETS AND LIABILITIES:
(Increase) decrease in accounts receivable - - (309,365)
(Increase) decrease in prepaid rent - - 3,954
(Increase) decrease in other assets (1,067) (56,200) (456,030)
Increase (decrease) in accounts payable 239,072 408 1,796,318
Increase (decrease) in other liabilities - - 337,384
----------- ----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (79,469) (65,179) (1,929,707)
CASH FLOWS FROM INVESTING ACTIVITIES:
Other assets (800) - (800)
Capital expenditures - - (3,171,557)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (800) - (3,172,357)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds for the issuance of preferred - - 5,075,000
stock
Dividends paid - - (75,000)
Capital contributed 81,000 66,100 359,448
----------- ----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 81,000 66,100 5,359,448
NET INCREASE (DECREASE) IN CASH 731 921 257,384
CASH AT BEGINNING OF PERIOD 921 - -
----------- ----------- -----------
CASH AT END OF PERIOD $ 1,652 $ 921 $ 257,384
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
-5-
<PAGE> 26
FIBERNET TELECOM GROUP, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
FiberNet Telecom, Inc. ("FiberNet" or the "Company") was organized
under the laws of the State of Delaware on August 10, 1994. On November
24, 1997, an existing public company, Desert Native Design ("DND") and
its subsidiary ("DND Sub"), acquired FiberNet, pursuant to an Agreement
and Plan of Merger dated that date (the "Merger"). To effect the
Merger, DND effectuated a 3.5 for 1 forward stock split, which entitled
DND shareholders to 3.5 shares of DND stock for every one share held by
them and issued 11,500,000 shares and 80,000 Series B Preferred Stock
in exchange for all of the outstanding shares of FiberNet. Upon
consummation of the Merger, FiberNet became a wholly-owned subsidiary
of DND, which subsequently changed its name to FiberNet Telecom Group,
Inc. For accounting purposes, the acquisition has been treated as a
recapitalization of DND with FiberNet as the acquirer (reverse
acquisition).
The Company is a development stage company and has not realized
revenues. It is an integrated provider of intra-building networks and
competitive local telecommunications services. Through its subsidiary
FiberNet Equal Access, LLC, the Company will build and own high-speed
redundant digital fiber optic transmission networks within major high
rise office buildings and lease bandwidth to carriers to provide
connections to tenants. The Company will provide facilities-based local
telecommunications carrier services through its subsidiary Local Fiber,
LLC, a competitive local exchange carrier (CLEC). FiberNet will enter
the New York City market in 1999 with plans to expand its operations
throughout the top metropolitan markets in the United States. The
developmental nature of the activities is such that inherent risks
exist in the Company's operations. Expenses incurred have primarily
been research and development, administrative and marketing costs.
After services have been successfully introduced into the market,
additional time may be necessary before significant revenues are
realized. During this time, the Company may require additional funds
that may not be available.
Certain of the Company's significant shareholders are committed to fund
operations through December 31, 1999. The Company is actively searching
additional financing for continued construction of its networks and its
operating losses. The Company also believes proceeds from asset sales
would be available to fund operations if required.
The Company has in force and is materially dependant on agreements with
other entities to provide access to networks and other carriers
facilities, access to buildings and experience to obtain permits and
meet regulatory requirements.
-6-
<PAGE> 27
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
a) Basis of Presentation
The accompanying consolidated financial statements include the
accounts of the Company and its majority owned subsidiaries,
FiberNet Telecom Inc., Local Fiber LLC, and FiberNet Equal
Access, LLC. All significant intercompany accounts and
transactions have been eliminated.
b) Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumption that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of expenses during the reporting period. Actual
results could differ from those estimates.
c) Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments with
an original maturity of three months or less. The carrying
amount approximates fair value because of the short maturity of
the instruments.
d) Deferred Charges and Other Assets
Deferred charges consist primarily of rental deposits and
financing costs. Financing costs as of December 31, 1997 were
amortized over the term of the related loan agreement. These
costs were expensed during the year ended December 31, 1998. See
Note 5.
e) Property Plant and Equipment
Plant and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are provided over
the estimated useful lives of the assets using the straight-line
method. The estimated lives are as follows:
Computer software 3 Years
Leasehold improvements 3 Years
Computer equipment 3 Years
Office Equipment 7 Years
Maintenance and repairs are charged to expense as incurred.
Long-term improvements are capitalized as additions to plant and
equipment.
-7-
<PAGE> 28
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
f) Fair Value of Financial Instrument
Due to short maturities, the Company estimates that the carrying
value of its financial instruments approximates fair value.
g) Earnings per Share
In February 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standard (SFAS) No.
128, "Earnings per Share" which requires companies to present
basic earnings per share and diluted earnings per share, instead
of the primary and fully diluted EPS that was required. In 1997,
the Company adopted SFAS No. 128, "Earnings per Share,"
effective December 15, 1997 for year ended December 31, 1998 and
1997.
On November 24, 1997, the Company's Board of Directors approved
a three and a half for one stock split of its common stock. All
references in the Financial Statement and notes thereto included
in this Form 10-K report to the number of common shares and per
share amounts reflects the stock split and the effect of SFAS
128.
FOR THE YEAR ENDED
DECEMBER 1998
<TABLE>
<CAPTION>
PER-SHARE
INCOME SHARES AMOUNT
----------- ---------- ---------
<S> <C> <C> <C>
Net loss $(2,816,487) - $ -
Less: Preferred stock dividends (44,387) - -
----------- ---------- ---------
Loss available to common
shareholders $(2,860,874) 15,847,222 $ (0.18)
=========== ========== =========
</TABLE>
FOR THE SIX MONTHS ENDED
DECEMBER 1997
<TABLE>
<CAPTION>
PER-SHARE
INCOME SHARES AMOUNT
----------- ---------- ---------
<S> <C> <C> <C>
Net loss $ (370,562) - $ -
Less: Preferred stock dividends (30,163) - -
----------- ---------- ---------
Loss available to common
shareholders $ (400,725) 15,000,000 $ (0.03)
=========== ========== =========
</TABLE>
-8-
<PAGE> 29
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Since the loss per share decreases, when convertible preferred
shares and outstanding options are included in the computation,
those convertible preferred shares and options are antidilutive
and are ignored in the computation of diluted EPS.
The Company follows Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes" (SFAS 109), which
requires the use of the liability method of accounting for
deferred income taxes. Under this method, deferred income taxes
represent the net tax effect of temporary differences between
tax carrying amount of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes.
Additionally, if it is more likely than not that some portion or
all of a deferred tax asset will not be realized, a valuation
allowance is required to be recognized.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ -----------
<S> <C> <C>
Computer software $ 2,661 $ 2,661
Leasehold improvements 69,852 2,984
Computer equipment 61,746 10,134
Office equipment and furniture 360,639 15,536
Construction in progress 4,695,968 62,750
Power equipment 190,902 -
Switching equipment 45,134 -
------------ -----------
Total 5,426,902 94,065
Accumulated depreciation (29,793) (1,842)
------------ -----------
Property, Plant and Equipment, net $ 5,397,109 $ 92,223
============ ===========
</TABLE>
-9-
<PAGE> 30
4. DEFERRED CHARGES AND OTHER ASSETS
Deferred charges consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Rental deposit $ 363,839 -
Loan commitment fee
(See Note 5) - $ 129,000
Other - 2,837
--------- ---------
Total Deferred Charges $ 363,839 $ 131,837
========= =========
</TABLE>
5. COMMITMENTS AND CONTINGENCIES
a) Credit Facilities - Local Fiber, LLC
On June 4, 1997, Local Fiber, LLC obtained a Credit Facility
commitment for project financing associated with its CLEC
operations in New York City.
As of December 31, 1998 this credit facility is no longer
available. The cost associated to this line has been expensed.
b) Credit Facilities - FiberNet Equal Access, LLC
On July 28, 1997, FiberNet Equal Access, LLC obtained a Credit
Facility commitment for project financing in connection with the
purchase and installation of multiple high-speed redundant
digital fiber optic transmission networks.
As of December 31, 1998 this credit facility is no longer
available. The cost associated to this line has been expensed
and is included in the statement of operations.
6. LEASES
The Company has entered into lease agreements for office space in
Rochester, New York, a switching center in New York City and for
collocation space in seven buildings. Lease expense for the years ended
December 31, 1998 and 1997 is $331,288 and $8,334, respectively.
Estimated future minimum lease payments are:
-10-
<PAGE> 31
6. LEASES (CONTINUED)
<TABLE>
<CAPTION>
Amount
---------------
<S> <C>
1999 $ 812,292
2000 812,292
2001 812,292
2002 812,292
2003 and thereafter 4,470,552
---------------
Total $ 7,719,720
===============
</TABLE>
7. STOCK OPTIONS
On November 24, 1997, the Company established an Employee Equity
Participation Program. This plan provides that all employees are
eligible to receive Incentive Stock Options or Nonstatutory Stock
Options. In the case of an optionee who beneficially owns more than ten
percent of the Company's outstanding shares as of the time the option
is granted, the purchase price of the optioned stock must be fixed at
not less than one-hundred and ten percent of the fair market value.
Incentive Stock Options may not be exercised after ten years after the
date they were granted or after five years in the case of an optionee
who beneficially owns more than ten percent of the Company's
outstanding shares of common stock. Options shall vest and become
exercisable by the optionee at the rate of 20% per year for five years.
The Company issued, related to this program, 673,000 and 600,000 stock
options during 1998 and 1997, respectively.
The Company accounts for stock options under APB Opinion No. 25, under
which during 1998 and 1997, $127,500 and $0 of compensation cost was
recognized. Had compensation cost for this program been determined
consistent with SFAS No. 123, the Company's net income and earnings per
share would have been reduced to the following pro forma amounts:
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS ENDED
DECEMBER 31, DECEMBER 31,
1998 1997
------------ ------------
<S> <C> <C>
Net loss: As reported $ 2,816,487 $ 370,562
Pro forma $ 3,111,104 $ 387,225
Basic and diluted EPS As reported $ (0.18) $ (0.03)
Pro forma $ (0.20) $ (0.03)
</TABLE>
-11-
<PAGE> 32
7. STOCK OPTIONS (CONTINUED)
Transactions during the year ended December 31, 1998 and the six months
ended December 31, 1997, respectively, involving stock options are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------- -----------------------------
NUMBER OPTION PRICE NUMBER OPTION PRICE
OF SHARES PER SHARE OF SHARES PER SHARE
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Options outstanding at the
beginning of the period 600,000 $ 1.95 - $ -
Granted 673,000 4.64 600,000 1.95
--------- ------ --------- ------
Options outstanding at the
end of year 1,273,000 2.98 600,000 1.95
--------- ------ --------- ------
Exercisable at end of year 120,000 1.95 - -
--------- ------ --------- ------
Weighted average fair value of
options granted $ 2.63 $ 1.37
</TABLE>
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following
weighted-average assumptions used for grants in December 31, 1998 and
1997: risk-free interest rates of 5.62% and 5.92%; expected dividend
yields of 0% and 0%; expected lives of 4 and 7 years and expected
volatility of 88.0% and 86.1%, respectively.
8. SUBSIDIARY'S WARRANTS
The Company's subsidiary, FiberNet Equal Access, LLC has issued a
warrant for the purchase of up to 10% of its membership interest.
Tishman, Speyer Properties, L.P. is entitled to acquire a limited
liability membership interest, at the exercise price of $25 per unit,
subject to certain terms and conditions, and with an exercise period of
three years from August 7, 1997.
9. PREFERRED SHARES
(a) Series A Convertible Cumulative Preferred Stock
As of November 24, 1997 the Company issued 1,000,000 shares out
of 5,000,000 shares authorized, at $5.125 per share for gross
proceeds of $5,075,000, net of issuance costs. The Company or
the holders of the
-12-
<PAGE> 33
9. PREFERRED SHARES (CONTINUED)
outstanding shares had the right to convert them into common
stock, at any time up to November 24, 2000. Each share of
preferred stock could be converted into one share of common
stock.
Dividend
The holders were entitled to receive annual cumulative dividends
at the rate of six percent based on a liquidation value of
$5.125 per share.
As of February 24, 1998, the Company paid the dividend to the
Series A convertible preferred cumulative stock for $75,000 and
converted all of the Series A convertible preferred stock into
common stock. As of December 31, 1997, $30,163 of this dividend
had been accrued in the financial statements.
(b) Series B Voting Preferred Stock
As of November 24, 1997 the Company issued 80,000 shares out of
5,000,000 shares authorized. Each share shall be entitled to
one-hundred votes to be voted at any meeting of shareholders.
In the event of any voluntary or involuntary liquidation,
dissolution, or winding up of the corporation, the holders of
shares of the Series B Voting Preferred Stock then outstanding,
shall be entitled to be paid, out of the assets of the Company
available for distribution to its stockholders, whether from
capital, surplus or earning, before any payment shall be made in
respect of the Company 's Common Stock, but after payment to
holders of Series A Preferred Stock, an amount equal to $1 per
share.
10. RELATED PARTY TRANSACTIONS
The Company capitalized services from Petrocelli Electrical Services, a
related party, of approximately $2,500,000 and $12,000 during 1998 and
1997, respectively. Additionally, the Company expensed approximately
$140,000 and $20,000 of consultant fees from this related party during
1998 and 1997, respectively. As of December 31, 1998 and 1997, the
Company had a payable of $1,208,048 and $152,595, respectively.
-13-
<PAGE> 34
10. RELATED PARTY TRANSACTIONS (CONTINUED)
The Company capitalized services approximately $57,000 and $6,000 of
consulting services from Landtel Communications, a related party during
1998 and 1997, respectively. Additionally, the Company expensed
approximately $57,000 and $100,000 of consultant fees from this related
party during 1998 and 1997, respectively. As of December 31, 1998 and
1997, the Company had a payable of $163,347 and $87,405, respectively.
The Company purchased approximately $75,000 of consulting fees from LPS
Consultants, a related party, during 1998. As of December 31, 1998, the
Company had a payable of $16,670.
11. INCOME TAXES
The Company is subject to New York State and local taxes, as well as
federal income taxes. The Company had cumulative expenses relating to
new business development costs of approximately $3,500,000 and $750,000
for December 31, 1998 and 1997, respectively, that are not currently
deductible for income taxes. Full valuation allowances have been
recorded for the deferred tax assets related to this temporary
difference.
12. EMPLOYMENT CONTRACTS
The Company has various employment contracts with key executive
employees. The total compensation under these contracts for 1999 and
the future years is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, AMOUNT
------------ -----------
<S> <C>
1999 $ 525,000
2000 525,000
-----------
Total $ 1,050,000
</TABLE>
13. MINORITY INTEREST
The ownership of Local Fiber, LLC is divided into Class A Members (the
Company) owning 90% and Class B Members owning 10%. The Class A Members
have requested that Class B Members enter into a License Agreement with
the Company, and as an inducement therefore, the Class A Members have
made capital contributions on behalf of Class B Members in connection
with each Class A Members' capital contribution.
-14-
<PAGE> 35
14. RECENT ACCOUNTING PRONOUNCEMENTS:
In 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 130, "Reporting
Comprehensive Income," Statement of Financial Accounting Standard No.
131, "Disclosure about Segments of an Enterprise and Related
Information" and Statement of Financial Accounting Standard No. 132,
"Employer's Disclosure about Pension and Other Post Retirement
Benefits" which are effective for the Company's fiscal 1998 financial
statements. During the year ended December 31, 1998 and six months
ended December 31, 1997, the Company had no items of comprehensive
income. The Company is also only in one segment. Furthermore, the
Company does not have any defined benefit plans, therefore, additional
disclosure are not applicable to the notes of the financial statements.
In 1998, Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," ("SFAS
133") and Statement of Position 98-5, "Reporting on the Costs of Start
up Activities" ("SOP 98-5") were issued. SFAS 133 establishes
accounting and reporting standards requiring that every derivative
instrument be recorded in the balance sheet as either an asset or
liability measured at its fair value. The Company will adopt SFAS 133
in fiscal 1999 but since it does not have derivatives currently, there
will be no impact on the financial statements or disclosures. SOP 98-5
provides guidance on accounting for the costs of start-up activities,
which include preopening costs, preoperating costs, organization costs,
and start-up costs. The Company will adopt SOP 98-5 in fiscal 1999. As
of December 31, 1998, the Company does not have any start up costs
capitalized on its balance sheet. Therefore, there will be no impact on
the financial statements.
-15-
<PAGE> 1
[COMDISCO LOGO]
A TECHNOLOGY SERVICES COMPANY
MASTER LEASE AGREEMENT dated July 27, 1998 by and between
--------------------------------------
COMDISCO, INC. ('Lessor') and FiberNet Telecom Group, Inc. ('Lessee').
-----------------------------------------
IN CONSIDERATION of the mutual agreements described below, the parties agree as
follows (all capitalized terms are defined in Section 14.13):
1. PROPERTY LEASED.
Lessor leases to Lessee all of the Equipment described on each Schedule. In
the event of a conflict, the terms of a Schedule prevail over this Master Lease.
2. TERM.
On the Commencement Date Lessee will be deemed to accept the Equipment,
will be bound to its rental obligations for each item of Equipment and the term
of a Schedule will begin and continue through the Initial Term and thereafter
until terminated by either party upon prior written notice received during the
Notice Period. No termination may be effective prior to the expiration of the
Initial Term.
3. RENT AND PAYMENT.
Rent is due and payable in advance, in immediately available funds, on the
first day of each Rent. Interval to the payee and at the location specified in
Lessor's invoice. Interim Rent is due and payable when invoiced, if any payment
is not made when due, Lessee will pay interest at the Overdue Rate.
4. Selection and Warranty and Disclaimer of Warranties.
4.1 Selection. Lessee acknowledges that it has selected the Equipment and
disclaims any refinance upon statements made by the Lessor.
4.2 Warranty and Disclaimer of Warranties. Lessor warrants to Lessee that,
so long as Lessee is not in default, Lessor will not disturb Lessee's quiet and
peaceful possession, and unrestricted use of the Equipment. To the extent
permitted by the manufacturer, Lessor assigns to Lessee during the term of the
Schedule any manufacturer's warranties for the Equipment LESSOR MAKES NO OTHER
WARRANTY. EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT
LIMITATION, THE MERCHANTABILITY OF THE EQUIPMENT OR ITS FITNESS FOR A PARTICULAR
PURPOSE. Lessor is not responsible for any liability, claim, loss, damage or
expense of any kind (including strict liability in part) caused by the Equipment
except for any loss or damage caused by the negligent acts of Lessor. In no
event is Lessor responsible for special, incidental or consequential damages.
5. TITLE AND ASSIGNMENT.
5.1 Title. Lessee holds the Equipment subject and subordinate to the
rights of the Owner, Lessor, any Assignee and any Secured Party. Lessee
authorizes Lessor, as Lessee's agent, to prepare, execute and file in Lessee's
name precautionary Uniform Commercial Code financing statement showing the
interest of the Owner, Lessor, and any Assignee or Secured Party in the
Equipment and to insert serial numbers in Schedules as appropriate. Except as
provided in Sections 5.2 and 7.2, Lessee will, at its expense, keep the
Equipment free and clear from any liens or encumbrances of any kind (except any
caused by Lessor) and will indemnify and hold Lessor, Owner, any Assignee and
Secured Party harmless from and against any loss caused by Lessee's failure to
do so.
5.2 Relocation or Sublease. Upon prior written notice. Lessee may relocate
Equipment to any location within the continued United States provided (i) the
Equipment will not be used by an entity exempt from federal income tax and (ii)
all additional costs (including any administrative fees, additional taxes and
insurance coverage) are reconciled and promptly paid by Lessee.
Lessee may sublease the Equipment upon the reasonable consent of the Lessor
and the Secured Party. Such consent to sublease will be granted if: (i) Lessee
meets the relocation requirements set out above, (ii) the sublease is expressly
subject and subordinate to the terms of the Schedule, (iii) Lessee assigns its
rights in the sublease to Lessor and the Secured Party as additional collateral
and security, (iv) Lessee's obligation to maintain and insure the Equipment is
not altered, (v) all financing statements required to continue the Secured
Party's prior perfected security interest are filed, and (vi) the sublease is
not to a leasing entity affirmed with the manufacturer of the Equipment
described on the Schedule. Lessor acknowledges Lessee's right to sublease for a
term which extends beyond the expiration of the initial Term. If Lessee
subleases the Equipment for a term extending beyond the expiration of such
initial Term of the applicable Schedule. Lessee shall remain obligated upon the
expiration of the Initial Term to return such Equipment, or, at Lessor's sole
discretion to (i) return Like Equipment or (ii) negotiate a mutually acceptable
lease extension or purchase. If the parties cannot mutually agree upon the terms
of an extension or purchase, the term of the Schedule will extend upon the
original terms and conditions until terminated pursuant to Section 2.
No relocation or sublease will relieve Lessee from any of its obligations
under this Master Lease and the applicable Schedule.
5.3 Assignment by Lessee. The terms and conditions of each Schedule have
been fixed by Lessor. In order to permit Lessor to sell another assign of
transfer its
<PAGE> 2
interest or grant a security interest in each Schedule and/or the Equipment to
a Secured Party or Assignee. In that event the term Lessor will mean the
Assignee and any Secured Party. However, any assignment, sale, or other
transfer by Lessor will not relieve Lessor of its obligations to Lessee and will
not materially change Lessee's duties or materially increase the burdens or
risks imposed on Lessee. The Lessee consents to and will acknowledge such
assignments in a written notice given to Lessee. Lessee also agrees that:
(a) The Secured Party will be entitled to exercise all of Lessor's rights,
but will not be obligated to perform any of the obligations of Lessor.
The Secured Party will not disturb Lessee's quiet and peaceful
possession and unrestricted use of the Equipment so long as Lessee is
not in default and the Secured Party continues to receive all Rent
payable under the Schedule;
(b) Lessee will pay all Rent and all other amounts payable to the Secured
Party, despite any defense or claim which it has against Lessor.
Lessee reserves its right to have recourse directly against Lessor for
any defense or claim; and
(c) Subject to and without impairment of Lessee's leasehold rights in the
Equipment, Lessee holds the Equipment for the Secured Party to the
extent of the Secured Party's rights in that Equipment.
6. NET LEASE AND TAXES AND FEES.
6.1 Net Lease. Each Schedule constitutes a net lease. Lessee's obligation
to pay Rent and all other amounts is absolute and unconditional and is not
subject to any abatement, reduction, set-off, defense, counterclaim,
interruption, deferment of recoupment for any reason whatsoever.
6.2 Taxes and Fees. Lessee will pay when due or reimburse Lessor for all
taxes, fees or any other charges (together with any related interest or
penalties not arising from the negligence of Lessor) accrued for or arising
during the term of each Schedule against Lessor, Lessee or the Equipment by any
governmental authority (except only Federal, state and local taxes on the
capital or the net income of Lessor). Lessor will file all personal property tax
returns for the Equipment and pay all property taxes due. Lessee will reimburse
Lessor for property taxes within thirty (30) days of receipt of an invoice.
7. CARE, USE AND MAINTENANCE, ATTACHMENTS AND RECONFIGURATIONS AND INSPECTION
BY LESSOR.
7.1 Care, Use and Maintenance. Lessee will maintain the Equipment in good
operating order and appearance, protect the Equipment from deterioration, other
than normal wear and tear, and will not use the Equipment for any purpose other
than that for which it was designed. If commercially available, Lessee will
maintain in force a standard maintenance contract with the manufacturer of the
Equipment, or another party acceptable to Lessor, and upon request will provide
Lessor with a complete copy of that contract. If Lessee has the Equipment
maintained by a party other than the manufacturer, Lessee agrees to pay any
costs necessary for the manufacturer to bring the Equipment to then current
release, revision and engineering change levels, and to re-certify the Equipment
as eligible for manufacturer's maintenance at the expiration of the lease term.
The lease term will continue upon the same terms and conditions until
recertification has been obtained.
7.2 Attachments and Reconfigurations. Upon prior written notice to Lessor,
Lessee may reconfigure and install Attachments on the Equipment. In the event of
such a Reconfiguration or Attachment, Lessee shall, upon return of the
Equipment, at it expense, restore the Equipment to the original configuration
specified on the Schedule in accordance with the manufacturer's specifications
and in the same operating order, repair and appearance as when installed (normal
wear and tear excluded). If any parts are removed from the Equipment during the
Reconfiguration or Attachment, the restoration will include, at Lessee's option,
the installation of either the original removed parts or Like Parts.
Alternatively, with Lessor's prior written consent which will not be
unreasonably withheld, Lessee may return the Equipment with any Attachment or
upgrade. If any parts of the Equipment are removed during a Reconfiguration or
Attachment, Lessor may require Lessee to provide additional security,
satisfactory to the Lessor. In order to ensure performance of Lessee's
obligations set forth in this subsection. Neither Attachments nor parts
installed on Equipment in the course of Reconfiguration shall be accessions to
the Equipment.
However, if the Reconfiguration or Attachment (i) adversely affects
Lessor's tax benefits relating to the Equipment; (ii) is not capable of being
removed without causing material damage to the Equipment; or (iii) if at the
time of the Reconfiguration or Attachment the manufacturer does not offer on a
commercial basis a means for the removal of the additional items; then such
Reconfiguration or
Attachment is subject to the prior written consent of Lessor.
7.3 Inspection by Lessor. Upon request, Lessee, during reasonable business
hours and subject to Lessee's security requirements, will make the Equipment and
its related log and maintenance records available to Lessor for inspection.
<PAGE> 3
8. REPRESENTATIONS AND WARRANTIES OF LESSEE.
Lessee represents and warrants that for the Master Lease and each Schedule:
(a) The execution, delivery and performance of the Lessee have been
duly authorized by all necessary corporate action;
(b) The individual executing was duly authorized to do so;
(c) The Master Lease and each Schedule constitute legal, valid and
binding agreements of the Leases enforceable in accordance with
their terms, and
(d) The Equipment is personal property and when subjected to use by the
Lessee will not be or become fixtures under applicable law.
9. DELIVERY AND RETURN OF EQUIPMENT.
Lessee assumes the full expense of transportation and in-transit insurance
to Lessee's premises and for installation of the Equipment. Upon expiration or
termination of each Schedule, Lessee will, at Lessor's instructions and at
Lessee's expense (including transportation and in-transit insurance), have the
Equipment reinstalled, audited by the manufacturer, packed and shipped in
accordance with the manufacturer's specifications and returned to Lessor in the
same operating order, repair and appearance as when installed (ordinary wear and
tear excluded), to a location within the continental United States as directed
by Lessor. All items returned to Lessor in addition to the Equipment become
property of Lessor.
10. LABELLING.
Upon request, Lessee will mark the Equipment indicating Lessor's interest.
Lessee will keep all Equipment free from any other marketing or labeling which
might be interpreted as a claim of ownership.
11. INDEMNITY.
Lessee will indemnify and hold Lessor, any Assignee and any Secured Party
harmless from and against any and all claims, costs, expenses, damages and
liabilities, including reasonable attorney's fees, arising out of the ownership
(for strict liability in tort only), selection, possession, leasing, operation,
control, use, maintenance, delivery, return or other disposition of the
Equipment. However, Lessee is not responsible to a party indemnified hereunder
for any claims, costs, expenses, damages and liabilities occasioned by the
negligent acts of such indemnified party. Lessee agrees to carry bodily injury
and property damage liability insurance during the term of the Master Lease in
amounts and against risks customarily insured against by the Lessee on equipment
owned by it. Any amounts received by Lessor under that insurance will be
credited against Lessee's obligations under this Section.
12. RISK OF LOSS.
12.1 Lessee's Risk of Loss. If the Schedule indicates that the Lessee has
responsibility for the risk of loss of the Equipment, then the following terms
will apply:
Effective upon delivery and until the Equipment is returned, Lessee
relieves Lessor of responsibility for all risks of physical damage to or loss or
destruction of the Equipment. Lessee will carry casualty insurance for each item
of Equipment in an amount not less than the Casualty Value. All policies for
such insurance will name the Lessor and any Secured Party as additional insured
and as loss payee, and will provide for at least thirty (30) days prior written
notice to the Lessor of cancellation or expiration. The Lessee will furnish
appropriate evidence of such insurance.
Lessee shall promptly repair any damaged item of Equipment unless such
Equipment has suffered a Casualty Loss. Within fifteen (15) days of a Casualty
Loss, Lessee will provide written notice of that loss to Lessor and Lessee will,
at Lessor's option, either (a) replace the item of Equipment with Like Equipment
and marketable title to the Like Equipment will automatically vest in Lessor or
(b) pay the Casualty Value and after that payment and the payment of all other
amounts due and owing, Lessee's obligation to pay further Rent for the item of
Equipment will cease.
12.2 Lessor's Risk of Loss. If the Schedule indicates that the Lessor has
responsibility for the risk of loss of the Equipment, then the following terms
will apply:
Effective upon delivery and throughout the Initial Term of a Schedule and
any extension, Lessor agrees to insure the Equipment against physical damage to
or loss or destruction due to external cause as specified by the terms of
Lessor's then current insurance policy. Lessor relieves Lessee of responsibility
for physical damage to or loss or destruction of Equipment reimbursed by that
insurance. Lessee will give Lessor prompt notice of any damage, loss or
destruction to any item of Equipment and Lessor will determine within fifteen
(15) days of his receipt of that notice whether the item has suffered a Casualty
Loss.
If any item of Equipment suffers damage or a Casualty Loss which is
reimbursable under Lessor's insurance, upon payment by Lessee of Lessor's
deductible, Lessor will: (i) (for damaged Equipment) arrange and pay for the
<PAGE> 4
repair of any damaged Item of Equipment or (ii) (for any Casualty Loss) at
Lessor's option either replace the Item of Equipment with Like Equipment or upon
payment of all other amounts due by Lessee terminate the relevant Schedule as it
relates to that Item of Equipment.
If any Item Equipment settles damage or a Casualty Loss which is not
reimbursable under Lessor's insurance, then Lessee will comply with the
provisions of the last paragraph of Section 12.1 regarding repair, replacement
or payment of Casualty Value.
If Lessor fails to maintain insurance coverage as required by this
subsection 12.2 Lessee will assume such risk of loss and, at the request of any
Assignee or Secured Party, will promptly provide insurance coverage. This
paragraph does not relieve lessor of its obligations to maintain coverage of the
Equipment.
13. DEFAULT, REMEDIES AND MITIGATION.
13.1 Default. The occurrence of any one or more of the following Events of
Default constitutes a default under a Schedule:
(a) Lessee's failure to pay Rent or other amounts payable by Lessee when
due if that failure continues for ten (10) days after written notice;
or
(b) Lessee's failure to perform any other item or condition of the
Schedule or the material inaccuracy of any representation or warranty
made by the Lessee in the Schedule or in any document or certificate
furnished to the Lessor hereunder if that failure or inaccuracy
continues for fifteen (15) days after written notice; or
(c) An assignment by Lessee for the benefit of its creditors, the failure
by Lessee to pay its debts when due, the insolvency of Lessee, the
filing by Lessee or the filing against Lessee of any petition under
any bankruptcy or insolvency law or for the appointment of a trustee
or other officer with similar powers, the adjudication of Lessee as
insolvent, the liquidation of Lessee, or the taking of any action for
the purpose of the foregoing; or
(d) The occurrence of an Event of Default under any Schedule or other
agreement between Lessee and Lessor or its Assignee or Secured Party.
13.2 Remedies. Upon the occurrence of any of the above Events of Default,
Lessor, at the option, may:
(a) enforce Lessee's performance of the provisions of the applicable
Schedule by appropriate court action in law or in equity:
(b) recover from Lessee any damages and or expenses, including Default
Costs;
(c) with notice and demand, recover all sums due and accelerate and
recover the present value of the remaining payment stream of all Rent
due under the defaulted Schedule (discounted at the same rate of
interest at which such defaulted Schedule was discounted with a
Secured Party plus any prepayment fees charged to Lessor by the
Secured Party or, if there is no Secured Party, then discounted at 8%)
together with all Rent and other amounts currently due as liquidated
damages and not as a penalty;
(d) with notice and process of law and in compliance with Lessee's
security requirements. Lessor may enter Lessee's premises to remove
and repossess the Equipment without being liable to Lessee for damages
due to the repossession, except those resulting from Lessor's, its
assignees', agents' or representatives' negligence; and
(e) pursue any other remedy permitted by law or equity.
The above remedies, in Lessor's discretion and to the extent permitted by
law, are cumulative and may be exercised successively or concurrently.
13.3 Mitigation. Upon return of the Equipment pursuant to the terms of
Section 13.2, Lessor will use its best efforts in accordance with its normal
business procedures (and without obligation to give any priority to such
Equipment) to mitigate Lessor's damages as described below. EXCEPT AS SET FORTH
IN THIS SECTION, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY
STATUTE OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS DAMAGES OR MODIFY
ANY OF LESSOR'S RIGHTS OR REMEDIES STATED HEREIN. Lessor may sell, lease or
otherwise dispose of all or any part of the Equipment at a public or private
sale for cash or credit with the privilege of purchasing the Equipment. The
proceeds from any sale, lease or other disposition of the Equipment are defined
as either:
(a) if sold or otherwise disposed of, the cash proceeds less the Fair
Market Value of the Equipment at the expiration of the initial Term
less the Default Costs; or
(b) if leased, the present value (discounted at three points over the
prime rate as referenced in the Wall Street Journal at the time of the
mitigation) of the rentals for a term not to exceed the initial Term,
less the Default Costs.
Any proceeds will be applied against liquidated damages and any other sums
due to Lessor from Lessee. However, Lessee is liable to Lessor for, and Lessor
may recover, the amount by which the proceeds are less than the liquidated
damages and other sums due to Lessor from Lessee.
<PAGE> 5
14. ADDITIONAL PROVISIONS.
14.1 Entire Agreement. This Master Lease and associated Schedules
supersede all other oral or written agreements or understandings between the
parties concerning the Equipment including, for example, purchase orders. ANY
AMENDMENT OF THIS MASTER LEASE OR A SCHEDULE, MAY ONLY BE ACCOMPLISHED BY A
WRITING SIGNED BY THE PARTY AGAINST WHOM THE AMENDMENT IS SOUGHT TO BE ENFORCED.
14.2 No Waiver. No action taken by Lessor or Lessee shall be deemed to
constitute a waiver of compliance with any representation, warranty or covenant
contained in this Master Lease or a Schedule. The waiver by Lessor or Lessee of
a breach of any provision of this Master Lease or a Schedule will not operate or
be construed as a waiver of any subsequent breach.
14.3 Binding Nature. Each Schedule is binding upon, and inures to the
benefit of Lessor and its assigns. LESSEE MAY NOT ASSIGN ITS RIGHTS OR
OBLIGATIONS.
14.4 Survival of Obligations. All agreements, obligations including, but
not limited to those arising under Section 6.2, representations and warranties
contained in this Master Lease, any Schedule or in any document delivered in
connection with those agreements are for the benefit of Lessor and any Assignee
or Secured Party and survive the execution, delivery, expiration or termination
of this Master Lease.
14.5 Notices. Any notice, request or other communication to either party
by the other will be given in writing and deemed received upon the earlier of
actual receipt or three days after mailing if mailed postage prepaid by regular
or airmail to Lessor (to the attention of ""Lease Administrator'') or Lessee, at
the address set out in the Schedule or, one day after it is sent by courier or
facsimile transmission if receipt is verified by the receiving party.
14.6 Applicable Law. THIS MASTER LEASE HAS BEEN, AND EACH SCHEDULE WILL
HAVE BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF ILLINOIS AND WILL BE
GOVERNED AND CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE STATE
OF ILLINOIS WITHOUT GIVING EFFECT TO CONFLICT OF LAW PROVISIONS. NO RIGHTS OR
REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE
CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR A SCHEDULE.
14.7 Severability. If any one or more of the provisions of this Master
Lease or any Schedule is for any reason held invalid, illegal or unenforceable,
the remaining provisions of this Master Lease and any such Schedule will be
unimpaired, and the invalid, illegal or unenforceable provision replaced by a
mutually acceptable valid, legal and enforceable provision that is closest to
the original intention of the parties.
14.8 Counterparts. This Master Lease and any Schedule may be executed in
any number of counterparts, each of which will be deemed an original, but all
such counterparts together constitute one and the same instrument. If Lessor
grants a security interest in all or any part of a Schedule, the Equipment or
sums payable thereunder, only that counterpart Schedule marked ""Secured Party's
Original'' can transfer Lessor's rights and all other counterparts will be
marked ""Duplicate''.
14.9 Nonspecified Features and Licensed Products. If the Equipment is
supplied from Lessor's inventory and contains any features not specified in the
Schedule, Lessee grants Lessor the right to remove any such features. Any
removal will be performed by the manufacturer or another party acceptable to
Lessee, upon the request of Lessor, at a time convenient to Lessee, provided
that Lessee will not unreasonably delay the removal of such features.
Lessee shall obtain no title to Licensed Products which will at all times
remain the property of the owner of the Licensed Products. A license from the
owner may be required and it is Lessee's responsibility to obtain any required
license before the use of the Licensed Products. Lessee agrees to treat the
Licensed Products as confidential information of the owner, to observe all
copyright restrictions, and not to reproduce or sell the Licensed Products.
14.10 Additional Documents. Lessee will, upon execution of this Master
Lease and as may be requested thereafter, provide Lessor with a secretary's
certificate of incumbency and authority and any other documents reasonably
requested by Lessor. Upon the execution of each Schedule with an aggregate Rent
in excess of $2,000,000, Lessee will provide Lessor with an opinion from
Lessee's counsel regarding the representations and warranties in Section 8.
Lessee will furnish, upon request, audited financial statements for the most
recent period.
14.11 Electronic Communications. Each of the parties may communicate with
the other by electronic means under mutually agreeable terms.
<PAGE> 6
14.12 Lessor's Right to Match. Lessee's rights under Section 5.2 and 7.1
are subject to Lessor's right to match any sublease or upgrade proposed by a
third party. Lessee will provide Lessor with the terms of the third party offer
and Lessor will have three (3) business days to match the offer. Lessee shall
obtain such upgrade from or sublease the Equipment to Lessor if Lessor has
timely matched the third party offer.
14.13 Definitions.
ASSIGNEE -- means an entity to whom Lessor has sold or assigned
its rights as owner and Lessor of Equipment.
ATTACHMENT -- means any accessory, equipment or device and the Installation
thereof that does not impair the original function or use of the Equipment and
is capable of being removed without causing material damage to the Equipment and
is not an accession to the Equipment.
CASUALTY LOSS -- means the irreparable loss or destruction of Equipment.
CASUALTY VALUE -- means the greater of the aggregate Rent remaining to be paid
for the balance of the lease term or the Fair Market Value of the Equipment
immediately prior to the Casualty Loss. However, if a Casualty Value Table is
attached to the relevant Schedule its terms will control.
COMMENCEMENT CERTIFICATE -- means the Lessor provided certificate which must be
signed by Lessee within ten days of the Commencement Date as requested by
Lessor.
COMMENCEMENT DATE -- is defined in each Schedule.
DEFAULT COSTS -- means reasonable attorney's fees and remarketing costs
resulting from a Lessee default or Lessor's enforcement of its remedies.
EQUIPMENT -- means the property described on a Schedule and any replacement for
that property required or permitted by this Master Lease or a Schedule but not
including any Attachment.
EVENT OF DEFAULT -- means the events described in Subsection 13.1.
FAIR MARKET VALUE -- means the aggregate amount which would be obtainable in an
arms-length transaction between an informed and willing buyer/user and an
informed and willing seller under no compulsion to sell.
INITIAL TERM -- means the period of time beginning on the first day of the first
full Rent Interval following the Commencement Date for all items of Equipment
and continuing for the number of Rent Intervals indicated on a Schedule.
INSTALLATION DATE -- means the day on which Equipment is installed and qualified
for a commercially available manufacturer's standard maintenance contract or
warranty coverage, if available.
INTERIM RENT -- means the pro-rate portion of Rent due for the period from the
Commencement Date through but not including the first day of the First full Rent
Interval included in the Initial Term.
LICENSED PRODUCTS -- means any software or other licensed products attached to
the Equipment.
LIKE EQUIPMENT -- means replacement Equipment which is lien free and of the same
model, type, configuration and manufacture as Equipment.
LIKE PART -- means a substituted part which is lien free and of the same
manufacturer and part number as the removed part, and which when installed on
the Equipment will be eligible for maintenance coverage with the manufacturer of
the Equipment.
NOTICE PERIOD -- means the time period described in a Schedule during which
Lessee may give Lessor notice of the termination of the term of that Schedule.
OVERDUE RATE -- means the lesser of 18% per year or the maximum rate permitted
by the law of the state where the Equipment is located.
OWNER -- means the owner of Equipment.
RECONFIGURATION -- means any change to Equipment that would upgrade or downgrade
the performance capabilities of the Equipment in any way.
RENT -- means the rent, including Interim Rent, Lessee will pay for each item of
Equipment expressed in a Schedule either as a specific amount or an amount equal
to the amount which Lessor pays for an Item of Equipment multiplied by a lease
rate factor plus all other amounts due to Lessor under this Master Lease or a
Schedule.
RENT INTERVAL -- means a full calendar month or quarter as indicated on a
Schedule.
SCHEDULE -- means an Equipment Schedule which incorporates all of the terms and
conditions of this Master Lease and, for purposes of Section 14.B its associated
Commencement Certificate(s).
SECURED PARTY -- means an entity to whom Lessor has granted a security interest
in a Schedule and reused Equipment for the purpose of securing a loan.
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have executed this Master Lease on or as
of the day and year first above written.
FIBERNET TELECOM GROUP, INC. COMDISCO, INC.,
as Lessee as Lessor
By: [Name] By: [Name]
------------------------------------ ---------------------------------
Title: Sr. VP Financial & Administration Title:
--------------------------------- ------------------------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENT AS OF DECEMBER 31, 1998 AND 1997, AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 357,384 5,146,327
<SECURITIES> 0 0
<RECEIVABLES> 309,365 0
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 566,749 5,150,281
<PP&E> 5,426,902 94,065
<DEPRECIATION> 27,951 1,842
<TOTAL-ASSETS> 6,327,697 5,374,341
<CURRENT-LIABILITIES> 4,311,734 730,125
<BONDS> 0 0
0 0
80 1,080
<COMMON> 16,000 15,000
<OTHER-SE> 5,465,564 5,382,901
<TOTAL-LIABILITY-AND-EQUITY> 6,327,697 5,374,341
<SALES> 0 0
<TOTAL-REVENUES> 0 0
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 3,139,108 419,982
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (156,392) (26,180)
<INCOME-PRETAX> (2,982,716) (393,802)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,982,716) (393,802)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,816,487) (370,562)
<EPS-PRIMARY> (0.18) (0.03)
<EPS-DILUTED> (0.18) (0.03)
</TABLE>
