<PAGE>
As filed with the Securities and Exchange Commission on August 15, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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FiberNet Telecom Group, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware 4813 13-3859938
(Primary Standard Industrial (I.R.S. Employer
(State or other Classification Code Number) Identification No.)
jurisdiction of
incorporation or
organization)
570 Lexington Avenue
New York, New York 10022
(212) 405-6200
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
--------------------
Michael S. Liss
President and Chief Executive Officer
FiberNet Telecom Group, Inc.
570 Lexington Avenue
New York, New York 10022
(212) 405-6200
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies To:
Gordon Caplan, Esq. Gregory A. Ezring, Esq.
Mintz, Levin, Cohn, Ferris, Latham & Watkins
Glovsky and Popeo, P.C. 885 Third Avenue
Chrysler Center New York, New York 10022
666 Third Avenue (212) 906-1200
New York, New York 10022
(212) 986-7200
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Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are being offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
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<TABLE>
<S> <C> <C>
Proposed Maximum
Title of Each Class Aggregate Offering Price Amount of
of Securities to be Registered (1) Registration Fee
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Common Stock, $.001 par value
per share.................... $143,750,000 $38,000
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</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act.
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell securities, and we are not soliciting offers to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED AUGUST 15, 2000
PRELIMINARY PROSPECTUS
FiberNet Telecom Group, Inc.
[ ] Shares
Common Stock
We are offering [ ] shares of our common stock. Our common stock is
traded on the Nasdaq National Market under the symbol "FTGX." The last reported
sale price of our common stock on the Nasdaq National Market on August 14, 2000
was $14.44 per share.
--------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 8.
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<TABLE>
<CAPTION>
Per
Share Total
------ ------
<S> <C> <C>
Public Offering Price............................................. $[ ] $[ ]
Underwriting Discounts and Commissions............................ $[ ] $[ ]
Proceeds to FiberNet Telecom Group, Inc........................... $[ ] $[ ]
</TABLE>
The Securities and Exchange Commission and state securities regulators have
not approved or disapproved these securities, or determined if this prospectus
is truthful or complete. Any representation to the contrary is a criminal
offense.
We have granted the underwriters an option for a period of 30 days to
purchase up to an additional [ ] shares of common stock to cover over-
allotments.
--------------
Robertson Stephens
First Union Securities, Inc.
CIBC World Markets
Prudential Volpe Technology
a unit of Prudential Securities
Kaufman Bros., L.P.
The date of this prospectus is [ ], 2000
<PAGE>
<TABLE>
<S> <C> <C>
diagram carrier hotel
. Carrier Hotel Connectivity diagram commercial office building
- We supply a next generation
optical network connection to . FiberNet In-Building Network
every floor, allowing quick - We construct and operate FINs in class A office
installation of broadband properties that extend the metropolitan transport
circuits to interconnect with network's next generation optical network to
any carrier in the building every floor of the building
. Gateway to international and detailed diagram
domestic long-haul networks commercial office building
. Diversely routed fiber optic cables
. Customer Equipment Room
. OC-48/192 metropolitan transport
network
. Broadband to every floor
diagram metropolitan transport
network
. Metropolitan Transport Network
- Our metropolitan transport
networks are fiber optic rings
running through city streets that
interconnect carrier hotels
and FIN buildings using a high
capacity next generation
optical network
</TABLE>
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 2
Risk Factors............................................................. 8
Forward Looking Statements............................................... 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Consolidated Financial Data..................................... 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations.......................................................... 24
Business................................................................. 30
Management............................................................... 48
Principal Stockholders................................................... 57
Certain Relationships and Related Transactions........................... 60
Description of Capital Stock............................................. 63
Shares Eligible For Future Sale.......................................... 66
Underwriting............................................................. 68
Legal Matters............................................................ 70
Experts.................................................................. 70
Where You Can Find More Information...................................... 70
Index to the Financial Statements........................................ F-1
</TABLE>
1
<PAGE>
PROSPECTUS SUMMARY
This summary may not contain all of the information that is important to
you. You should read the entire prospectus, including the financial statements
and related notes, before making an investment decision.
Our Business
We deploy, own and operate state-of-the-art, fiber-optic networks
designed to provide comprehensive broadband connectivity for data, voice and
video transmission to communications service providers in major metropolitan
areas. These networks provide an advanced, high bandwidth, fiber-optic solution
to support the growing demand for network capacity in the intra-city market, or
local loop. We provide optical transport within and between carrier hotels,
which are facilities where service providers exchange and route communications
traffic, as well as optical transport from carrier hotels to tenants in select,
class A commercial office buildings. Our networks support multiple transmission
protocols including synchronous optical network, or SONET, Ethernet, Frame
Relay, asynchronous transfer mode, or ATM, and Internet Protocol, or IP. We
believe that our end-to-end connectivity, carrier-neutral position, rapid
provisioning time and carrier-class reliability will make us the preferred
carrier's carrier for metropolitan transport services. Our target markets are
New York, Chicago, Los Angeles, San Francisco, Boston and Washington, D.C.
We began operating our first metropolitan network in New York City in
January 2000. We plan to commence operations in Chicago in the fourth quarter
of this year. As of July 31, 2000, we had accomplished the following:
. We deployed fiber-optic transport infrastructure in three major carrier
hotels in New York City, including 60 Hudson Street and 111 Eighth
Avenue.
. We deployed advanced, vertical in-building networks, known as FiberNet
In-Building Networks, or FINs, in five office buildings in New York
City.
. We entered into exclusive license agreements that give us the right to
build and operate our FINs in 36 office buildings in our target
markets.
. We have exclusive license agreements that give us the right to manage
communications access and infrastructure in 185 other office buildings
nationwide.
. We entered into 21 interconnection agreements with existing and
potential customers, establishing the basis for purchase orders from
them.
We generate revenues on a monthly recurring basis by selling network
capacity and related services to other service providers under long-term
contracts, typically three to five years in length. We currently have 21
customers, including 360networks, Deutsche Telecom, France Telecom, Network
Plus, NEXTLINK, Qwest, Teligent and Winstar.
Our Services
Transport
In our target markets, we are focused on deploying and operating fiber-
optic networks that replicate and expand the geographic and physical
penetration of the incumbent local exchange carriers, or ILECs, and the
regional Bell operating companies, or RBOCs. Our networks enable us to provide
seamless transport in the local loop through the integration of three key
elements:
2
<PAGE>
Carrier point facilities. Our networks originate in carrier point
facilities that we establish in carrier hotels. At these facilities, we house
our optical networking equipment, interconnect with our customers and transfer
their traffic onto our networks.
Metropolitan transport network. Our out-of-building infrastructures, or
metropolitan transport networks, consist of multiple strands of lit fiber
deployed in interconnecting circles, referred to as ring architectures. Our
metropolitan transport networks establish connectivity between our carrier
point facilities in carrier hotels and select multi-tenant, class A commercial
office buildings, which we refer to as on-net buildings.
FiberNet in-building networks, or FINs. In the central equipment rooms of
on-net buildings, our customers' traffic is transferred onto our FINs. Once
installed in an on-net building, our FIN provides a central distribution system
that enables us to transport our customers' traffic directly to their end-users
on each floor of the building. Subject to certain limitations, we are the
exclusive provider of wholesale broadband capacity in our on-net buildings.
Colocation
We offer colocation and ancillary services at several of our carrier
point facilities and on-net buildings. These services provide customers with a
secure technical operating environment in which to locate their communications
and networking equipment. Our colocation facilities enable the interconnection
of our networks with other service providers' networks.
Communications Access Management
We manage communications access and infrastructure for commercial office
properties, which we refer to as our off-net buildings, in markets nationwide.
For the owners and managers of these buildings, we provide the in-building
infrastructure necessary to meet the connectivity needs of tenants and manage
service providers' access to these buildings.
Our Strategy
Our goal is to become a leading provider of metropolitan fiber-optic
transport services. We believe that by utilizing our cost-effective, carrier-
neutral, flexible and scalable networks, service providers will have access to
significantly more bandwidth in the local loop. The following are key elements
of our strategy:
. Establish a presence in multiple carrier interconnection points,
focusing on carrier hotels, to expand the geographic reach of our
network and increase the scope of our transport services;
. Strengthen and expand our relationships with our service provider
customers by emphasizing our carrier-neutral position, open network
architectures, access to end-users and colocation facilities;
. Continue to establish mutually beneficial relationships with major
office property owners and managers to secure the rights to manage
communications access and deploy infrastructure in their buildings; and
. Continuously upgrade the capacity and quality of our network solutions
to enable our customers to deliver new and innovative communications
services to end-users.
3
<PAGE>
Recent Transactions
Devnet. In April 2000, we acquired 3% of Devnet L.L.C. In July 2000, we
acquired the remaining 97%, which gave us 100% control of Devnet. We issued
3,461,162 shares, and granted options to purchase an additional 344,839 shares,
of our common stock and paid approximately $18 million in cash in connection
with these transactions. Devnet manages relationships between service providers
and property owners and managers. Devnet has long-term exclusive contracts to
control communications access to 210 class A commercial office buildings in
major markets nationwide, of which 25 buildings are in our target markets. This
real estate includes properties owned by Teachers Insurance and Annuity
Association of America and Prime Realty Trust.
Nortel Networks Inc. Nortel has invested $50 million in our business. In
June 2000, Nortel invested $20 million by purchasing 2,000,000 shares of our
series G preferred stock in a private placement. On July 31, 2000, Nortel
surrendered its series G preferred stock and accrued dividends on that stock
and invested an additional $22.5 million in a second private placement in
exchange for 426,333 shares of our series H preferred stock at $10.00 per
share, on an as converted basis. On August 11, 2000, Nortel invested $7.5
million by purchasing 62,500 of our series I preferred stock at $12.00 per
share, on an as converted basis. Each share of our series H and series I
preferred stock will be converted into ten shares of our common stock upon
completion of this offering.
In December 1999, we entered into a master purchase agreement with
Nortel, giving us the right to purchase optical networking equipment and
related services for up to $60 million at predetermined volume-based pricing.
In June 2000, we amended the master purchase agreement to expand the scope of
this agreement from $60 million to $260 million and to extend the term of the
agreement to 2002.
Credit Facility. In April 2000, we entered into a $75 million senior
secured credit facility with Deutsche Bank AG New York Branch, Deutsche Bank
Securities Inc., Toronto Dominion (Texas), Inc. and Nortel. The credit facility
has a term of four and one-half years, consisting of revolving availability for
the first eighteen months and a term loan for the remaining three years. The
credit facility is secured by substantially all of our assets. In addition to
the initial lenders, First Union National Bank and IBM Credit Corporation are
now lenders under the credit facility.
Bechtel. In February 2000, we entered into a two year services agreement
with Bechtel Corporation and Bechtel Associates Professional Corporation
pursuant to which Bechtel will provide engineering services, labor, materials
and equipment in connection with the design and installation of our FINs.
Metromedia Fiber Network Services, Inc. In December 1999, we entered into
a 20 year license agreement with Metromedia Fiber Network. Under this
agreement, in exchange for 5,000,000 shares of our common stock, Metromedia
Fiber Network granted us the right to use a significant number of fiber miles
of intra-city dark fiber in our six target markets. As part of the transaction,
we also acquired Metromedia Fiber Network's 10% membership interest in Local
Fiber L.L.C., one of our wholly-owned subsidiaries.
Tishman Speyer Properties, L.P. In May 2000, we entered into an agreement
with Tishman Speyer Properties under which we will issue up to 1,600,000 shares
of our common stock as we enter into exclusive license agreements for the
deployment and operation of our FINs in 25 class A commercial office buildings
owned by Tishman Speyer Properties and its affiliates. These license agreements
generally give us the exclusive right to manage central distribution systems
and provide wholesale transport services in these buildings for 15 years with
options to renew the license for up to 10 years.
4
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered by FiberNet.................... shares
Common stock to be outstanding after this offering.. shares
Use of proceeds..................................... For expansion of our
network infrastructure,
working capital and
general corporate
purposes, including
possible acquisitions of,
or investments in,
complementary businesses,
products and
technologies. See "Use of
Proceeds."
Nasdaq National Market symbol....................... "FTGX"
</TABLE>
--------------------
The number of shares of our common stock that will be outstanding after
the offering is based on shares of common stock outstanding as of ,
2000. This number includes 1,556,255 shares of our series C, D, E, F, H and I
preferred stock, which will convert automatically into 14,809,358 shares of our
common stock upon the closing of this offering.
The number of shares of common stock to be outstanding after the offering
excludes:
. 7,661,728 shares issuable upon the exercise of outstanding stock
options as of July 31, 2000 at a weighted average exercise price of
$6.69 per share;
. 3,476,369 shares available for future grant or issuance under our stock
option plans as of July 31, 2000; and
. 10,589,791 shares issuable upon the exercise of warrants outstanding as
of July 31, 2000 at a weighted average exercise price of $4.01 per
share.
--------------------
About This Prospectus
Unless the context otherwise requires, throughout this prospectus
FiberNet, we, us and our refer to FiberNet Telecom Group Inc., and its
subsidiaries.
Unless otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
This prospectus contains trademarks and trade names of other companies.
Our principal executive offices are located at 570 Lexington Avenue, New
York, New York 10022. We maintain the following web site: www.ftgx.com. The
information contained on this web site is not part of this prospectus.
5
<PAGE>
Summary Consolidated Financial Information
(in thousands, except per share data)
The following table presents our summary consolidated financial
information. You should read this information together with the management's
discussion and analysis of financial condition and results of operations
section beginning on page 24, and our consolidated financial statements, our
unaudited pro forma combined financial statements and the notes to those
financial statements, beginning on page F-1.
Our summary statement of operations data is presented for:
. the years ended December 31, 1997, 1998, and 1999;
. the six months ended June 30, 1999 and 2000; and
. the year ended December 31, 1999 and the six months ended June 30, 1999
and 2000 on a pro forma basis to give effect to the acquisition of
Devnet and the issuance of our series H and series I preferred stock to
Nortel.
Our summary balance sheet data is presented as of June 30, 2000, on an
actual, pro forma and pro forma as adjusted basis.
The pro forma information gives effect to:
. the acquisition of Devnet; and
. the issuance of 426,333 shares of our series H preferred stock and
62,500 shares of our series I preferred stock to Nortel.
The pro forma as adjusted information adjusts the pro forma information to
give effect to:
. the automatic conversion of all of our outstanding convertible
preferred stock into a total of 14,809,358 shares of common stock upon
the completion of this offering; and
. the sale by us of shares of common stock at an assumed offering
price of $ per share after deducting the underwriting discounts and
commissions and estimated offering expenses and the application of the
net proceeds from this offering.
<TABLE>
<CAPTION>
Actual Pro Forma
------------------------------------------------ -------------------------------
Six Months Ended Year Ended Six Months Ended
Year Ended December 31, June 30, December 31, June 30,
----------------------------- ----------------- ------------ ------------------
1997 1998 1999 1999 2000 1999 1999 2000
----------- ------- -------- ------- -------- ------------ -------- --------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ -- $ -- $ -- $ 1,768 $ 1,865 $ 865 $ 3,257
Operating expenses:
Direct costs........... -- -- -- -- 813 3,023 1,512 2,508
Selling, general and
administrative
expenses.............. 712 3,111 12,567 3,071 9,793 15,036 4,065 12,734
Stock related expense.. -- -- -- -- 2,237 3,429 3,429 2,237
Depreciation and
amortization.......... 2 28 520 111 2,415 4,807 2,250 4,565
------- ------- -------- ------- -------- --------- -------- --------
Total operating
expenses............... 714 3,139 13,087 3,182 15,258 26,295 11,256 22,044
------- ------- -------- ------- -------- --------- -------- --------
Loss from operations.... (714) (3,139) (13,087) (3,182) (13,490) (24,430) (10,391) (18,787)
Interest income
(expense), net......... 26 156 (1,284) (199) (1,223) (1,258) (173) (1,172)
Interest expense on
beneficial conversion.. -- -- (7,932) -- -- -- -- --
------- ------- -------- ------- -------- --------- -------- --------
Net loss before minority
interest............... (688) (2,983) (22,303) (3,381) (14,713) (25,688) (10,564) (19,959)
Minority interest....... 23 167 104 87 -- -- -- --
------- ------- -------- ------- -------- --------- -------- --------
Net loss................ (665) (2,816) (22,199) (3,294) (14,713) (25,688) (10,564) (19,959)
Preferred stock
dividends(1) .......... -- -- (50,002) -- (19,532) (77,799) (16,759) (22,638)
------- ------- -------- ------- -------- --------- -------- --------
Net loss applicable to
common stockholders.... $ (665) $(2,816) $(72,201) $(3,294) $(34,245) $(103,487) $(27,323) $(42,597)
======= ======= ======== ======= ======== ========= ======== ========
Net loss applicable to
common stockholders per
share: Basic and
diluted................ $ (0.04) $ (0.18) $ (4.30) $ (0.21) $ (1.25) $ (5.11) $ (1.40) $ (1.38)
Weighted average common
shares outstanding:
Basic and diluted...... 15,000 15,847 16,798 16,025 27,454 20,259 19,486 30,915
Supplemental Data:
EBITDA(2)............... $ (712) $(3,111) $(12,567) $(3,071) $ (8,838) $ (16,194) $ (4,712) $(11,985)
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
June 30, 2000
------------------------------
(unaudited)
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents........................ $ 23,587 $39,828
Other current assets............................. 3,183 3,659
Property, plant and equipment, net............... 67,475 68,054
Total assets..................................... 118,553 196,609
Long-term liabilities............................ 6,859 6,859
Total stockholders' equity....................... 104,291 173,233
</TABLE>
(1) We have recorded non-cash dividends, paid in additional shares of each of
our respective series of preferred stock, on our series D, E, F, G, H and I
preferred stock. There are no longer any shares of our series G preferred
stock authorized or outstanding. Each share of our series D, E, F, H and I
preferred stock is convertible into 10 shares of our common stock. The
recorded amount of the dividends was calculated based on the market price
of our common stock. Our series D, E, F, H and I preferred stock will
convert into shares of our common stock upon completion of this offering.
(2) EBITDA is defined as net loss before income taxes and minority interest,
interest expense, interest income, depreciation and amortization, and stock
related expense. EBITDA is commonly used in the communications industry and
by financial analysts and others who follow the industry to measure
operating performance. EBITDA should not be construed as an alternative to
operating income or cash flows from operating activities, both of which are
determined in accordance with generally accepted accounting principles, or
as a measure of liquidity. Because it is not calculated under generally
accepted accounting principles, our EBITDA may not be comparable to
similarly titled measures used by other companies.
7
<PAGE>
RISK FACTORS
You should consider carefully the risks described below and all other
information contained in this prospectus before making an investment decision.
If any of the following risks, as well as other risks and uncertainties that
are not yet identified or that we currently deem immaterial, actually occur,
our business, financial condition and results of operations could be materially
and adversely affected. In that event, the trading price of our shares could
decline, and you may lose all or part of your investment.
Risks Related to Our Business
We are an early-stage company, and we expect to encounter risks and
difficulties frequently experienced by early-stage companies in new and rapidly
evolving markets
We did not begin to engage in our current business until 1999 and did not
begin to offer our services until the first quarter of 2000. The market for our
services is unproven, and our limited operating history makes the evaluation of
our future prospects very difficult. We will encounter risks and difficulties
frequently experienced by early stage companies in new and rapidly evolving
markets. As a relatively small organization we are at a competitive
disadvantage. The growth we must achieve to reduce that disadvantage will put a
strain on all of our resources and require substantial additional capital. If
we do not successfully address these risks, we may not achieve profitability,
and our business will suffer.
We have and will continue to experience operating losses, net losses and a cash
flow deficit
We may not achieve or sustain operating income, net income or positive
cash flow from operations in the future. Since our inception we have incurred
operating losses and net losses both on an annual and quarterly basis. We have
not achieved profitability and expect to continue to incur operating losses and
net losses in 2000 and for the foreseeable future. In 1998, we had an operating
loss of $3.1 million and a net loss of $2.8 million, and in 1999, we had an
operating loss of $13.1 million and a net loss of $72.2 million. For the first
six months of 2000, we had an operating loss of $13.5 million and a net loss of
$34.2 million. From our inception through 1999, we did not generate any
revenues. For the first six months of 2000, we generated revenues of $1.8
million.
In addition, we expect to continue to incur significant operating costs
and, as a result, will need to generate significant revenue to achieve
profitability, which may not occur. If our revenues do not grow as needed to
offset increases in these costs, it is unlikely our business will succeed.
Furthermore, we will make substantial capital expenditures in deploying our
networks before we know whether our business plan can be successfully executed.
You should also be aware that our financial and operational performance
depends upon a number of factors, many of which are beyond our control. These
factors include:
. the economic and competitive conditions in the communications and
networking industries;
. any operating difficulties, increased operating costs or pricing
pressures we may experience;
. the passage of legislation or other regulatory developments that may
adversely affect us;
. any delays in implementing any strategic projects; and
. our ability to complete our networks in a timely and cost-effective
manner.
We must make significant capital expenditures before generating operating
profits, which may prove insufficient to justify those expenditures
We will have to make significant capital expenditures to develop our
business and deploy our networks, services and systems. The amount and timing
of these expenditures are uncertain and will depend upon our ability to execute
our plans in a timely and cost-effective manner. When we install an in-building
8
<PAGE>
network or construct a carrier point facility, we incur significant initial
expenditures, typically ranging from $400,000 to $1 million for in-building
networks and $500,000 to $5 million for carrier point facilities. Construction
costs vary with building size, location, complexity of the construction project
and other factors. In addition, we typically install infrastructure before
contracting with our customers for use of that infrastructure. Since we
generally do not have binding commitments until our infrastructure is in place,
and because our costs can vary, we may not be able to recoup our expenditures.
If our revenues do not grow as expected, or capital expenditures or operating
costs exceed our estimates, our business will suffer.
We must obtain additional carrier hotel lease agreements and maintain our
existing agreements for space in major carrier hotels or our business will be
harmed
Our business depends upon our ability to lease space in carrier hotels to
establish carrier point facilities where we can locate our networking equipment
and interconnect with our customers. At a minimum, to provide our services in
any one of our target markets, we must obtain space in two of the major carrier
hotels in that target market. In addition, we need adequate space at our
carrier point facilities in order to continue offering colocation services.
There is significant competition for space in major carrier hotels. Our
inability to obtain additional space, or our inability to renew existing
leases, would impede our growth and have a material adverse effect on our
business.
We must obtain additional license agreements with building owners for the
installation of our in-building network infrastructure, or our growth will be
constrained
Our business depends upon our ability to enter into license agreements to
install in-building networks in commercial office buildings. We depend heavily
on a limited number of real estate owners and developers for these license
agreements. A deterioration in our relationship with them would harm our
business. In addition, there are currently a significant number of other
companies competing for these same rights. The failure of property owners and
managers to grant access rights or enter into license agreements with us on
acceptable terms could substantially reduce our potential customer base.
Furthermore, building owners may terminate or fail to renew our existing
license agreements. Current federal and state regulations do not require
building owners to make space available to us, or to do so on terms that are
reasonable or nondiscriminatory. Building owners may decide not to permit us to
install our networks in their buildings. In addition, our competitors may
install networks in any building for which we do not obtain a license
agreement. Our success will ultimately depend upon our ability to quickly
obtain license agreements and install our in-building networks in many more
buildings. We may not be able to accomplish this, which would have a material
adverse effect on our business.
We will require additional capital to complete the build-out of our networks
and to fund our other needs, and an inability to obtain such capital could harm
our business
We believe that in addition to the money raised in this offering, we will
need to raise substantial additional funds through public or private equity or
debt financings to complete the construction of our networks in our target
markets. If we raise funds through the issuance of equity securities, the
ownership percentage of our then-current stockholders will be diluted and the
holders of new equity securities may have rights, preferences or privileges
senior to those of the holders of our common stock. If additional funds are
raised through another bank credit facility or the issuance of debt securities,
the holders of such indebtedness would have rights senior to the rights of the
holders of our common stock, and the terms of this indebtedness could impose
restrictions on our ability to incur additional indebtedness and on our
operations, which could impede the successful completion of our business plan.
There can be no assurance that any such funds will be available at the
time or times needed, or on terms acceptable to us. If we are unable to obtain
additional financing as needed, we may be required to reduce the scope of our
operations or anticipated expansion, which will have a material adverse effect
on our business.
9
<PAGE>
We cannot assure you that we will successfully complete the construction of our
networks
We currently operate a network in New York City, have commenced
construction in Chicago and intend to commence construction in our other target
markets over the next two years. The construction of these networks entails
significant risks, including management's ability to effectively control and
manage these projects, shortages of materials or skilled labor, unforeseen
engineering, environmental problems, work stoppages, and unanticipated cost
increases. Building owners have the ability to delay the installation of our
in-building networks by impeding our access to the building. Moreover, we
currently depend on a limited number of suppliers for our equipment and
outsource a significant portion of the installation and deployment of our
networks to third parties. In particular, we rely on Nortel for our network
equipment and Bechtel for the construction of our FINs. Any supply shortage or
reduction in services from these major equipment vendors or providers could
delay the buildout of our networks. Our vendors may also not be able to meet
our requirements in a timely and satisfactory manner, and we may not be able to
obtain additional services and equipment when and if needed. Although we
believe that there are alternative suppliers for this equipment and these
services, it could take a significant period of time to establish relationships
with alternative suppliers and to substitute their equipment into our networks.
In addition, the price of the equipment we purchase may substantially increase
over time, increasing the costs we pay in the future. Further, there can be no
guarantee that Metromedia Fiber Network will have fiber laid in our target
markets in a time frame that meets our business plan. In such event, we could
be required to wait until the appropriate fiber is laid or to seek fiber from
alternative sources. There is no guarantee that we will be able to obtain
rights to fiber suitable for our business plan on a timely basis, or on
favorable terms, or at all.
We cannot assure you that the budgeted costs of our current and future
projects will not be exceeded or that these projects will become operational
within the contemplated schedules, if at all. Difficulties associated with
constructing our networks could increase the estimated costs and delay the
scheduled completions, either of which could have a material adverse effect on
our business.
We may need to expand or adapt our networks in the future in order to remain
competitive, which could be very costly
Any expansion or adaptation of our networks could require substantial
additional financial, operational and managerial resources which may not be
available to us. We may have to expand or adapt our networks to respond to the
following:
. an increasing number of customers;
. demand for greater capacity;
. changes in our customers' service requirements; and
. technological advances.
We must increase the number of our significant customers and the volume of
traffic on our networks or our business will suffer
We must substantially increase the current volume of traffic on our
networks in order to realize anticipated revenues and cash flows. To do so, we
must obtain long-term commitments from new large-volume customers, as well as
expand our relationships with current customers. This need is more critical as
a wholesale carrier because our potential customers are a limited number of
service providers. Therefore, it is essential for us to succeed at establishing
and expanding customer relationships, otherwise our business will suffer.
During the first six months of 2000, our largest customers, 360networks,
Network Plus and Qwest, accounted for approximately 88% of our net sales. This
high concentration of sales to a few of our largest customers increases the
risk of a substantial decrease in our net sales resulting from a deterioration
in our relations with any of these customers.
10
<PAGE>
There might not be sufficient demand for broadband services, which could impact
our ability to sell network capacity and prevent our revenues from growing as
rapidly as expected
Demand and market acceptance for recently introduced services in the
communications industry are subject to a high level of uncertainty. In
addition, critical issues concerning the commercial use of services requiring
broadband capabilities remain unresolved and may impact the growth of these
services. Historically, some businesses have been reluctant to purchase
broadband services, such as high-speed Internet access, for a number of
reasons, including:
. resistance to the use of the Internet in business applications;
. inconsistent quality of service;
. lack of available cost-effective, high-speed options;
. the need to deal with multiple and frequently incompatible vendors;
. inadequate security for stored or transmitted data;
. lack of networking tools to simplify Internet access and use; and
. lack of high-speed application requirements.
If these issues and concerns cause the commercial market for
communications, voice and data transmission and Internet access and other
broadband services to develop more slowly than expected, demand for our
capacity on our networks will not grow as quickly as anticipated. As a result,
our revenues will not grow rapidly enough to achieve or sustain profitability.
If we cannot maintain the scalability, reliability and speed of our network,
potential customers will not use our services
Because of the limited deployment of our services, our ability to manage
a substantial amount of traffic on our networks while maintaining superior
service is unknown at this time. There is no assurance that our network will be
able to maintain such levels of service as the number of our customers grows.
Our failure to maintain such levels of service would significantly reduce
customer demand for our services and have a material adverse effect on our
business.
Service interruptions on our networks could expose us to liability or cause us
to lose customers
Our operations depend on our ability to avoid and mitigate any damages
from power losses, network software flaws, telecommunications failures,
transmission cable cuts or natural disasters. The failure of any equipment or
facility on our networks could result in the interruption of customer service
until we make the necessary repairs or install replacement equipment. If
service is not restored in a timely manner, agreements with our customers may
obligate us to provide credits or other remedies to them, which would reduce
our revenues. Service disruptions could also damage our reputation with
customers, causing us to lose existing customers or have difficulty attracting
new ones. Many of our customers' communications needs will be extremely time
sensitive, and delays in signal delivery may cause significant losses to a
customer using our networks. Our networks may also contain undetected design
faults and software "bugs" that, despite our testing, may be discovered only
after our networks have been completed and are in use.
Our failure to manage the growth of our operations could harm our business
We have rapidly and significantly expanded our operations. We anticipate
that further significant expansion will be required to grow our customer base
if we are to be successful in implementing our business strategy. Our future
performance depends in part upon our senior management's ability to manage our
growth effectively. We may not be able to implement management information and
control systems in an efficient and timely manner, and our current or planned
personnel, systems, procedures and controls may not be adequate to support our
future operations. We have increased the number of our employees from 34
employees as of December 31, 1999 to 139 employees as of July 31, 2000. If we
are unable to manage our growth effectively, our business will suffer.
11
<PAGE>
Our business will be harmed if our information support systems are not further
developed
Sophisticated information processing systems, including provisioning,
billing, and network management are vital to our growth and our ability to
achieve operating efficiencies. Our plans for the development and
implementation of these systems rely largely upon acquiring products and
services from third-party vendors and integrating those products and services.
We may be unable to implement these systems on a timely basis or at all, and
these systems may not perform as expected. A failure of these systems could
substantially impair our ability to provide services, send invoices and monitor
our operations. We may also be unable to maintain and upgrade our operational
support systems as necessary.
We license key software from third parties. If we are unable to obtain such
software on commercially acceptable terms, our business could be adversely
affected
We rely on software licensed from third parties, including applications
that are integrated with internally developed software and used in our
services. Most notably, we license Doc X Web-Server, DSIT, Portal, Preside and
MetaSolv TBS. These third-party technology licenses may not continue to be
available to us on commercially reasonable terms, or at all, and we may not be
able to obtain licenses for other existing or future technologies that we
desire to integrate into our services. Although we believe that there are
alternative suppliers for the software that we rely upon, it could take a
significant period of time to establish relationships with alternative
suppliers and integrate their software into our services. The loss of any of
our relationships with these suppliers could have a material adverse affect on
our business.
We depend on our key personnel, and the loss of their services may adversely
affect our business
We are highly dependent upon the efforts of our existing senior
management team. Although we have entered into employment agreements with
members of our senior management team, these agreements are typically only for
two years. The death or departure of any of our key personnel could have a
material adverse effect on our business, operating results and financial
condition.
We must attract and retain qualified professionals in a tight labor market, or
we will be unable to manage our growth
Our growth will require us to hire and train additional management,
technical and marketing personnel. There is intense competition for management,
technical and marketing personnel in the communications industry and recruiting
qualified personnel is a difficult and time-consuming process. We may not be
able to attract and retain the necessary personnel to accomplish our business
objectives, and we may experience constraints that will adversely affect our
ability to deploy our service in a timely fashion or to support our users and
operations. We have at times experienced, and continue to experience,
difficulty in recruiting qualified personnel. The failure to attract and retain
additional qualified employees could have a material adverse effect on our
business.
We cannot be certain that we will achieve the anticipated benefits from our
acquisition of Devnet, which may harm our business
We have recently acquired Devnet with a view to expanding our service
offerings. In order for us to realize the benefits of our acquisition, we must:
. integrate the buildings for which Devnet has license agreements into
our business; and
. combine our personnel in an effective, timely and cost-efficient
manner.
If we do not achieve these goals, we will not realize the anticipated
benefits from the acquisition, and our business may be adversely affected.
12
<PAGE>
The sector in which we operate is highly competitive, and we may not be able to
compete effectively
We face competition from many entities with significantly greater
financial resources, well-established brand names and larger customer bases.
The entities that compete with us include cable modem, Internet, digital
subscriber line, microwave, mobile and fixed wireless service providers, local
telephone companies and long distance companies. The numerous companies that
may seek to enter our market may expose us to severe price competition for our
services or for building access rights. We expect competition to intensify in
the future. If these competitors successfully focus on our market opportunity,
there may be intense price competition which could have a material adverse
effect on our business.
We may face competition from various service providers in buildings for which
we have exclusive license agreements
We generally have exclusive license agreements for both our on-net and
off-net buildings. Even though our competitors cannot install a central
distribution system in any of our buildings covered by an exclusive agreement,
they may still compete with us by installing infrastructure designed to
directly service one or more specific tenants in the building as requested by
such tenants. Consequently, they could indirectly compete against us by not
utilizing our FINs to gain connectivity to tenants. In addition, ILECs and
RBOCs currently own pre-existing, copper-based networks in many of our on-net
and off-net buildings. These ILECs and RBOCs may be able to upgrade their
existing networks to provide advanced broadband services which would place them
in direct competition with us. Furthermore, service providers may have pre-
existing license agreements in our buildings, which allow these providers to
install, and possibly expand, their network infrastructure in our buildings. As
a result, we may face competition in some of the buildings for which we have
exclusive license agreements.
Alternative technologies pose competitive threats
In addition to fiber-optic technology, there are other technologies that
provide more capacity and speed than traditional copper wire transmission
technology, such as DSL and wireless technologies, and can be used instead of
our network. Furthermore, these technologies may be improved and other new
technologies may be developed that provide more capacity, reliability,
scalability and speed than the fiber-optic technology we deploy. The
development of new technologies or the significant penetration of alternative
technologies into our target markets may reduce the demand for our services and
consequently could have a material adverse effect on our business.
In the communications industry, continued competition or an excess of network
capacity could cause prices for our services to decline
We anticipate that prices for our services specifically, and fiber-optic
network services in general, will decline over the next several years due
primarily to the following:
. price competition as various service providers continue to install
networks that might compete with our networks;
. recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber; and
. strategic alliances or similar transactions that increase customers'
purchasing power.
We have outstanding debt which may limit our ability to borrow additional
money, restrict the use of our cash flows and constrain our business strategy,
and we may not be able to meet our debt obligations
We have, and will continue to have after this offering of our stock,
outstanding debt and debt service requirements. We will have total debt,
excluding an original issue discount, of approximately $22.1 million, as of
June 30, 2000. As a result of this debt, we will need to devote a portion of
our available cash towards debt service payments and our ability to borrow
additional amounts in the future may be limited. Furthermore, we have agreed to
terms in our credit agreement that expose us to certain risks and limitations:
13
<PAGE>
. as the interest rate on our debt is variable, if interest rates rise,
our debt service payments will increase;
. we have made affirmative financial covenants that we will breach if
our financial results do not meet our expectations; and
. we have agreed to certain negative covenants that may cause us to make
choices regarding the operation of our business that we would not
otherwise make.
You should be aware that our ability to repay or refinance our debt
depends on our successful financial and operating performance and on our
ability to implement our business strategy successfully. We cannot assure you
that our future cash flows and capital resources will be sufficient to repay
our existing indebtedness and any indebtedness we may incur in the future, or
that we will be successful in obtaining alternative financing. In the event
that we are unable to repay our debts, we may be forced to reduce or delay the
completion or expansion of our networks, sell some of our assets, obtain
additional equity capital or refinance or restructure our debt. If we are
unable to meet our debt service obligations or comply with our covenants, a
default under our existing debt agreements would result. To avoid a default, we
may need waivers from third parties, which might not be granted.
Legislation and government regulation could adversely affect us
Regulation of telecommunications. We are subject to federal, state and
local regulations that affect our services, competition, demand costs and other
aspects of our operations. The regulation of the communications industry is
changing rapidly, and varies from state to state. Changes in the regulatory
environment could affect our operating results by increasing competition,
decreasing revenue, increasing costs or impairing our ability to offer
services. Certain communications services are subject to significant regulation
at the federal and state level. The Federal Communications Commission regulates
communications carriers providing intrastate, interstate and international
common carrier services. State public utility commissions exercise jurisdiction
over intrastate communications services. The Federal Communications Commission
and state public utility commissions do not regulate most enhanced services,
which involve more than the pure transmission of customer provided information.
Our subsidiary, Local Fiber, LLC, is regulated as a common carrier by virtue of
its provision of communications services directly to the public for a fee. As a
common carrier, Local Fiber, LLC is subject to extensive federal, state and
local communications regulation, which includes the payment of all applicable
regulatory assessments.
Many of our competitors and vendors, especially ILECs, are subject to
federal and state regulations. These regulations change from time to time in
ways that are difficult for us to predict. Although we believe the services we
provide today, other than those provided by Local Fiber, LLC, are not subject
to regulation imposed on other telecommunications services by the FCC or the
state public utility commissions, changes in regulation or new legislation may
impose regulation on our non-regulated services.
14
<PAGE>
Regulation of access to office buildings could negatively affect our
business. Some states have adopted laws that require that commercial building
owners provide non-discriminatory access to communications providers. Recently,
the FCC initiated a regulatory proceeding relating to access to multiple tenant
buildings, and a bill was introduced in Congress that addresses issues relating
to communications access to buildings owned or used by the federal government.
Some of the issues being considered in these developments include requiring
building owners to provide utility shaft access to communications carriers, and
requiring communications providers to provide access to other communications
providers. Although we do not know whether or in what form these proposals will
be adopted, if they are adopted and regulatory or legal requirements change
access rights to our target building or our networks, these requirements will
facilitate our competitors' entry into buildings where we have access rights,
which in turn will diminish the value of our access rights and adversely affect
our competitive position.
As an access provider, we may incur liability for information
disseminated through our networks. The law relating to the liability of access
providers and on-line services companies for information carried on or
disseminated through their networks is unsettled. Although we have not been
sued for information carried on our networks, it is possible that we could be.
Federal and state statutes have been directed at imposing liability on Internet
service providers for aspects of content carried on their networks. There may
be new legislation and court decisions that may affect our services and expose
us to potential liability.
As the law in this area develops, the potential imposition of liability
for information carried on and disseminated through our networks could require
us to implement measures to reduce our exposure to such liability, which may
require the expenditure of substantial resources or the discontinuation of
certain products or services offerings. Any significant costs that we incur as
a result of such measures or the imposition of liability could have a material
adverse effect on our operating expenses and our liquidity.
Risks Associated with this Offering
Our principal stockholders, directors and executive officers currently control
a majority of the voting rights of our stock, and this may limit your ability
to affect the outcome of any stockholder vote or exercise any influence over
our business
The concentration of ownership of our stock may have the effect of
delaying, deferring or preventing a change in control, merger, consolidation,
or tender offer that could involve a premium over the price of our common
stock. Upon completion of this offering, our executive officers, directors and
greater-than-five-percent stockholders and their affiliates will, in the
aggregate, beneficially own approximately % of the outstanding common stock,
or % of the outstanding common stock if the underwriters' over-allotment
option is exercised in full. These stockholders, if they vote together, will be
able to exercise significant influence over all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions.
Anti-takeover provisions could prevent or delay a change of control that
stockholders may consider favorable
Provisions in our certificate of incorporation, our amended and restated
by laws and Delaware law could delay or prevent a change of control or change
in management that would provide stockholders with a premium to the market
price of their common stock. The authorization of undesignated preferred stock,
for example, gives our board the ability to issue preferred stock with voting
or other rights or preferences that could impede the success of any attempt to
change control of the company. If a change of control or change in management
is delayed or prevented, this premium may not be realized, or the market price
of our common stock could decline.
15
<PAGE>
Holders of our common stock will not receive a return on their shares until
they sell them, because we do not plan to pay cash dividends on our shares
We have neither declared nor paid any dividends on our common stock and
do not anticipate paying cash dividends in the future. We currently intend to
retain any earnings to fund operations and future growth. Furthermore, our
credit facility currently prohibits, and the terms of any future debt
agreements or preferred stock will likely restrict, the payment of cash
dividends on our common stock.
We may use the proceeds of this offering in ways with which you may not agree
or which prove to be ineffective
We have not committed the net proceeds of this offering to any particular
purpose. We will, therefore, have significant flexibility in applying the net
proceeds of this offering, including ways with which you may disagree. We may,
if the opportunity arises, use a portion, or all, of the net proceeds to
acquire or invest in businesses, products and technologies. If we do not apply
the funds we receive effectively, our accumulated deficit will increase and we
may lose significant business.
Shares eligible for public sale after this offering could adversely affect our
stock price
Sales of a substantial number of shares of our common stock in the public
market following this offering could cause the market price of our common stock
to decline. After this offering, shares of our common stock will be
outstanding. All of the shares sold in this offering will be freely tradable
immediately after this offering. In addition, after 135 days, the lock-up
agreement with Robertson Stephens will expire and shares of common stock
may be sold in the public market by existing stockholders subject to applicable
volume and other limitations imposed under federal securities laws or pursuant
to a registration statement to register for resale shares of common stock
issued upon the exercise of stock options. Robertson Stephens may, in its sole
discretion and at any time without notice, release all or any portion of the
shares subject to the lock-up agreement. In evaluating whether to release all
or any of such shares, Robertson Stephens may consider a number of factors with
a view toward maintaining an orderly market for, and minimizing volatility in
the market price of, our common stock. These factors include, among others,
recent trading volume, recent prices of the stock and the length of time before
the lock-up expires. The occurrence of sales, or the perception that sales
could occur, could cause the amount of our stock available for sale, or
perceived to be available for sale, in the public market to exceed demand,
which could cause the market price of our common stock to drop significantly.
Investors in this offering will suffer immediate and substantial dilution in
the net tangible book value of their shares
The public offering price per share of our common stock is substantially
higher than the net tangible book value per share of our common stock. Our pro
forma net tangible book value per share of common stock as of June 30, 2000 was
$ . Based on the assumed offering price of $ per share, investors will
experience an immediate dilution in pro forma net tangible book value equal to
$ per share. You may experience further dilution if holders of stock options
exercise their options, if warrant holders exercise their warrants to purchase
common stock or we issue additional shares of common stock in the future.
Our stock price is likely to be highly volatile and you may lose all or part of
your investment
Following this offering, the trading price of our common stock may be
highly volatile. Failure to meet market expectations because of quarterly
fluctuations in our financial results could cause our stock price to decline
and you could lose all or part of your investment. Moreover, factors that are
not related to our operating performance could cause our stock price to
decline. The stock market has periodically experienced significant price and
volume fluctuations that have affected the market prices for securities of
technology and communications companies. Consequently, you may experience a
decrease in the market value of your common stock or lose all or part of your
investment, regardless of our operating performance or prospects.
16
<PAGE>
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-
looking statements are not historical facts but rather are based on current
expectations, estimates and projections about our industry, our beliefs and our
assumptions. Words such as "anticipates," "expects," "intends," "plans,"
"believes," "seeks," "estimates" and variations of these words and similar
expressions, are intended to identify forward-looking statements. These
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, are
difficult to predict and could cause actual results to differ materially from
those expressed, implied or forecasted in the forward-looking statements. In
addition, the forward-looking events discussed in this prospectus might not
occur. These risks and uncertainties include, among others, those described in
"Risk Factors" and elsewhere in this prospectus. Readers are cautioned not to
place undue reliance on these forward-looking statements, which reflect our
management's view only as of the date of this prospectus. Except as required by
law, we undertake no obligation to update any forward-looking statement,
whether as a result of new information, future events or otherwise.
17
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds from the sale of our shares
of common stock in this offering of $ million, assuming a public offering
price of $ per share and after deducting estimated underwriting discounts
and commissions and estimated offering expenses. If the underwriters exercise
their over-allotment option in full, we estimate that our net proceeds will be
$ million.
We intend to use the net proceeds of this offering for:
. expansion of our network infrastructure; and
. working capital and general corporate purposes, including possible
acquisitions of, or investments in, complementary businesses, products
and technologies.
As of the date of this offering, we have no understandings, commitments
or agreements to make any material acquisitions or investments. We will have
broad discretion concerning the use of the net proceeds of the offering.
Pending our use of the net proceeds of this offering for the purposes described
above, we intend to invest the net proceeds in short-term, investment-grade,
interest-bearing securities.
PRICE RANGE OF OUR COMMON STOCK
Our common stock began trading on the OTC Bulletin Board on November 24,
1997. Prior to November 24, 1997, there was no public market for our common
stock or any of our other securities. On April 27, 2000, we commenced trading
our common stock on the Nasdaq National Market under the symbol "FTGX." The
following table sets forth, for 1998, 1999 and for the first three quarters to
date for 2000, the high and low sales prices per share of our common stock. The
prices for the period prior to April 27, 2000 were obtained from the OTC
Bulletin Board and the prices for the period commencing April 27, 2000 were
obtained from the Nasdaq National Market.
<TABLE>
<CAPTION>
Price Range of
Common Stock
---------------
High Low
------- -------
<S> <C> <C>
1998:
First Quarter.......................................... $ 8.375 $ 4.500
Second Quarter......................................... $ 6.000 $ 4.000
Third Quarter.......................................... $ 4.688 $ 1.875
Fourth Quarter......................................... $ 2.375 $ 1.000
1999:
First Quarter.......................................... $ 3.250 $ 1.250
Second Quarter......................................... $ 5.313 $ 2.938
Third Quarter.......................................... $ 7.500 $ 4.250
Fourth Quarter......................................... $17.438 $ 4.875
2000:
First Quarter.......................................... $25.500 $13.250
Second Quarter......................................... $18.000 $ 8.750
Third Quarter (to August 14, 2000)..................... $12.875 $18.750
</TABLE>
On August 14, 2000, the last reported sale price of our common stock on
the Nasdaq National Market was $14.44 per share. As of June 7, 2000, there were
approximately 2,988 stockholders of record.
18
<PAGE>
DIVIDEND POLICY
We have not paid any dividends in the past and do not intend to pay cash
dividends on our common stock for the foreseeable future. Instead, for the
foreseeable future, we intend to retain our earnings, if any, for use in the
operation and expansion of our business. Payment of future dividends, if any,
will be at the discretion of our board of directors after taking into account
various factors, including our financial condition, our results of operations
and our current and anticipated cash needs. Our credit facility currently
prohibits, and future debt agreements and preferred stock will likely restrict,
the payment of cash dividends on our common stock.
19
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000 on
actual, pro forma and pro forma as adjusted basis.
Our pro forma information gives effect to:
. the issuance of 426,333 shares of our series H preferred stock and
62,500 series I preferred stock to Nortel; and
. the acquisition of Devnet.
Our pro forma as adjusted information adjusts the pro forma information
to give effect to:
. the conversion of all of our outstanding convertible preferred stock
into 14,809,358 shares of common stock; and
. the sale by us of shares of common stock at an assumed public
offering price of $ per share, after deducting the underwriting
discounts and commissions and estimated offering expenses, and the
application of the net proceeds from this offering.
<TABLE>
<CAPTION>
June 30, 2000
----------------------------------------------
Pro Forma
Actual Pro Forma as Adjusted
-------------- -------------- -------------
(unaudited)
(in thousands, except share amounts)
<S> <C> <C> <C>
Cash and cash equivalents........ $ 23,587 $ 39,828 $
Long-term obligations, less
current maturities............. 6,859 6,859
Stockholders' equity:
Common stock, $0.001 par value,
150,000,000 authorized and
28,519,759 shares issued and
outstanding actual; issued and
outstanding pro forma and pro
forma as adjusted............. 28 31
Preferred stock, $0.001 par
value; 20,000,000 shares
authorized, shares issued and
outstanding:
Series C voting preferred
stock $0.001 par value,
83,688 shares issued and
outstanding actual; 83,688
issued and outstanding pro
forma and none pro forma as
adjusted (preference in
involuntary liquidation
value, $1.50 per share)...... 125 125
Series D preferred stock
$0.001 par value, 316,376
shares issued and
outstanding actual; 316,376
issued and outstanding pro
forma and none pro forma as
adjusted (preference in
involuntary liquidation
value, $15.00 per share)..... 23,623 23,623
Series E preferred stock
$0.001 par value, 305,627
shares issued and
outstanding actual; 305,627
issued and outstanding pro
forma and none pro forma as
adjusted (preference in
involuntary liquidation
value, $15.00 per share)..... 23,457 23,457
Series F preferred stock
$0.001 par value, 361,731
shares issued and
outstanding actual; 361,731
issued and outstanding pro
forma and none pro forma as
adjusted (preference in
involuntary liquidation
value, $30.00 per share)..... 27,763 27,763
Series G preferred stock
$0.001 par value, 2,000,000
shares issued and
outstanding actual; none
authorized, issued or
outstanding pro forma and
none pro forma as adjusted
(preference in involuntary
liquidation value, $10.00
per share)................... 34,000 --
Series H preferred stock
$0.001 par value, none
issued and outstanding
actual; 426,333 issued and
outstanding pro forma and
none pro forma as adjusted
(preference in involuntary
liquidation value, $100.00
per share)................... -- 63,910
Series I preferred stock
$0.001 par value, none
issued and outstanding
actual; 62,500 issued and
outstanding pro forma and
none pro forma as adjusted
(preference in involuntary
liquidation value, $120.00
per share)................... -- 8,906
Additional paid in capital and
other......................... 105,336 149,111
Accumulated deficit............. (110,041) (123,693)
-------------- --------------
Total stockholders' equity.. 104,291 173,233
-------------- --------------
Total capitalization....... $ 134,737 $ 219,920
============== ==============
</TABLE>
The capitalization in the table above excludes:
. 7,072,334 shares of common stock issuable upon the exercise of
outstanding options as of June 30, 2000 at a weighted average exercise
price of $6.43 per share;
.4,091,611 shares of common stock reserved for issuance under our stock
option plans as of June 30, 2000; and
.10,229,591 shares of common stock reserved for issuance upon the
exercise of warrants outstanding as of June 30, 2000 at a weighted
average exercise price of $3.41 per share.
This table should be read in conjunction with our consolidated financial
statements, our unaudited pro forma combined financial statements and the notes
to those financial statements included elsewhere in this prospectus.
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of June 30, 2000 was $ , or
$ per share of common stock. Pro forma net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of common stock outstanding, after giving effect to:
. the acquisition of Devnet; and
. the conversion of all of our convertible preferred stock into
14,809,358 shares of our common stock upon completion of this
offering.
After giving effect to the sale of shares of our common stock in this
offering at an assumed public offering price of $ per share, and after
deducting the underwriting discount and estimated offering expenses payable by
us, our pro forma net tangible book value as of June 30, 2000 would have been
$ , or $ per share of common stock. This represents an immediate increase
in pro forma net tangible book value of $ per share to our existing
stockholders and an immediate dilution in pro forma net tangible book value of
$ per share to new investors. The following table illustrates the per share
dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share............................. $
Pro forma net tangible book value per share as of June 30, 2000... $
Pro forma increase attributable to new investors.................. $
Pro forma net tangible book value per share after the offering...... $
Pro forma dilution per share to new investors who purchase shares in
the offering...................................................... $
</TABLE>
If the underwriters exercise their option to purchase additional shares
in the offering, the pro forma net tangible book value per share after the
offering would be $ per share, the increase in pro forma net tangible book
value per share to existing stockholders would be $ per share and the
dilution to persons who purchase shares in the offering would be $ per
share.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
You should read the selected financial data presented below and our
financial statements, our unaudited pro forma combined financial statements,
the notes to those financial statement and the management's discussion and
analysis of financial condition and results of operations section appearing
elsewhere in this prospectus.
The consolidated statement of operations data for the fiscal year ended
June 30, 1997, and the consolidated balance sheet data as of June 30, 1997 have
been derived from our consolidated financial statements, which have been
audited by Mendelsohn Kary Bell & Natoli, independent public accountants, and
appear elsewhere in this prospectus. The consolidated statement of operations
data for the years ended December 31, 1998 and 1999, and the consolidated
balance sheet data as of December 31, 1998 and 1999 have been derived from our
consolidated financial statements which have been audited by Arthur Andersen
LLP, independent public accountants, and appear elsewhere in this prospectus.
The consolidated statement of operations data for the six months ended December
31, 1997 and the six months ended June 30, 1999 and 2000, and the consolidated
balance sheet data as of December 31, 1997 and June 30, 1999 and 2000 are
derived from unaudited consolidated financial statements appearing elsewhere in
this prospectus. The statements of operations data for the period from August
10, 1994, the date of our inception, to June 30, 1996, the pro forma year ended
December 31, 1999 and the six months ended June 30, 1999 and 2000, and the pro
forma and pro forma as adjusted balance sheet data as of June 30, 2000, have
been derived from our unaudited pro forma combined financial statements
appearing elsewhere in this prospectus. Our historical and pro forma results
are not necessarily indicative of the operating results to be realized in the
future.
Our selected consolidated statement of operations and balance sheet data
are presented on an actual, pro forma and pro forma as adjusted basis.
Our pro forma information gives effect to:
. the issuance of 426,333 shares of our series H preferred stock and
62,500 shares of our series I preferred stock to Nortel; and
. the acquisition of Devnet L.L.C.
Our pro forma as adjusted information adjusts the pro forma information
to give effect to:
. the automatic conversion of all of our outstanding convertible
preferred stock into a total of 14,809,358 shares of common stock upon
the completion of this offering; and
. the sale by us of shares of common stock at an assumed offering
price of $ per share after deducting the underwriting discounts and
commissions and estimated offering expenses and the application of the
net proceeds from this offering.
22
<PAGE>
<TABLE>
<CAPTION>
Actual Pro Forma
------------------------------------------------------------------------ --------------------------------
Period from
August 10,
1994 Six Six Six
(inception) Year Months Year Months Year Months
to Ended Ended Ended Ended Ended Ended
June 30, June 30, December 31, December 31, June 30, December 31, June 30,
----------- -------- ------------ ----------------- ------------------ ------------ -------------------
1996 1997 1997 (1) 1998 1999 1999 2000 1999 1999 2000
----------- -------- ------------ ------- -------- -------- -------- ------------ -------- ---------
(unaudited) (unaudited) (unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Statement of
Operations Data:
Revenues.......... $ -- $ -- $ -- $ -- $ -- $ -- $ 1,768 $. 1,865 $ 865 $ 3,257
Operating
expenses:
Direct costs..... -- -- -- -- -- -- 813 3,023 1,512 2,508
Selling, general
and
administrative
expenses........ 9 374 418 3,111 12,567 3,071 9,793 15,036 4,065 12,734
Stock related
expense......... -- -- -- -- -- -- 2,237 3,429 3,429 2,237
Depreciation and
amortization.... -- -- 2 28 520 111 2,415 4,807 2,250 4,565
------- ------- ------- ------- -------- -------- -------- --------- -------- ---------
Total operating
expenses....... 9 374 420 3,139 13,087 3,182 15,258 26,295 11,256 22,044
------- ------- ------- ------- -------- -------- -------- --------- -------- ---------
Loss from
operations....... (9) (374) (420) (3,139) (13,087) (3,182) (13,490) (24,430) (10,391) (18,787)
Interest
income/(expense),
net.............. -- -- 26 156 (1,284) (199) (1,223) (1,258) (173) (1,172)
Interest expense
on beneficial
conversion....... -- -- -- -- (7,932) -- -- -- -- --
------- ------- ------- ------- -------- -------- -------- --------- -------- ---------
Net loss before
minority
interest......... (9) (374) (394) (2,983) (22,303) (3,381) (14,713) (25,688) (10,564) (19,959)
Minority
interest......... -- -- 23 167 104 87 -- -- -- --
------- ------- ------- ------- -------- -------- -------- --------- -------- ---------
Net loss.......... (9) (374) (371) (2,816) (22,199) (3,294) (14,713) (25,688) (10,564) (19,959)
Preferred stock
dividends (2).... -- -- -- -- (757) -- (19,532) -- -- --
Preferred stock--
beneficial
conversion....... -- -- -- -- (49,245) -- -- (77,799) (16,759) (22,638)
------- ------- ------- ------- -------- -------- -------- --------- -------- ---------
Net loss
applicable to
common
stockholders..... $ (9) $ (374) $ (371) $(2,816) $(72,201) $ (3,294) $(34,245) $(103,487) $(27,323) $ (42,597)
======= ======= ======= ======= ======== ======== ======== ========= ======== =========
Net loss
applicable to
common
stockholders per
share:
Basic and
diluted.......... $(0.001) $(0.025) $(0.025) $ (0.18) $ (4.30) $ (0.21) $ (1.25) $ (5.11) $ (1.40) $ (1.38)
Weighted average
common shares
outstanding:
Basic............ 15,000 15,000 15,000 15,847 16,798 16,025 27,454 20,259 19,486 30,915
Supplemental Data:
EBITDA (3)........ $ (9) $ (374) $ (418) $(3,111) $(12,567) $ (3,071) $ (8,838) $ (16,194) $ (4,712) $ (11,985)
------- ------- ------- ------- -------- -------- -------- --------- -------- ---------
<CAPTION>
As of June 30, As of December 31, June 30, 2000
-------------------- ------------------------------ --------------------------------
Pro Pro Forma
1996 1997 1997 1998 1999 Actual Forma As Adjusted
----------- -------- ------------ ------- -------- -------- -------- ------------
(unaudited) (unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet
Data:
Cash and cash
equivalents...... $ $ 2 $ 5,146 $ 257 $ 9,512 $ 23,587 $ 39,828 $
Other current
assets........... 1 4 309 160 3,183 3,659
Property, plant
and equipment,
net.............. -- 92 5,397 55,177 67,475 68,054
Total assets...... 103 5,374 6,328 77,588 118,553 196,609
Long-term
liabilities...... -- -- -- 956 6,859 6,859
Total
stockholders'
equity........... (241) 4,645 1,912 68,249 104,291 173,233
</TABLE>
(1) At the end of our fiscal year ended June 30, 1997, we changed our fiscal
year end to December 31.
(2) We have recorded non-cash dividends, paid in additional shares of each of
our respective series of preferred stock, on our series D, E, F, G, H and I
preferred stock. We no longer have any shares of our series G preferred
stock authorized or outstanding. Each share of our series D, E, F, H and I
preferred stock is convertible into 10 shares of our common stock. The
recorded amount of the dividends was calculated based on the market price
of our common stock. Our series D, E, F, H and I preferred stock will
convert into shares of our common stock upon completion of this offering.
(3) EBITDA is defined as net loss before income taxes and minority interest,
interest expense, interest income, depreciation and amortization, and stock
related expense. EBITDA is commonly used in the communications industry and
by financial analysts and others who follow the industry to measure
operating performance. EBITDA should not be construed as an alternative to
operating income or cash flows from operating activities, both of which are
determined in accordance with generally accepted accounting principles, or
as a measure of liquidity. Because it is not calculated under generally
accepted accounting principles, our EBITDA may not be comparable to
similarly titled measures used by other companies.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We deploy, own and operate state-of-the-art, fiber-optic networks
designed to provide comprehensive wholesale, broadband connectivity for data,
voice and video transmission in major metropolitan areas. These networks
provide an advanced, high-bandwidth, fiber-optic solution to support the
growing demand for network capacity in the local loop. We believe that our end-
to-end connectivity, carrier-neutral position, rapid provisioning time and
carrier-class reliability will make us the preferred carrier's carrier for
transport services in our target markets.
From our inception through December 31, 1999, we were a development stage
enterprise. During this period, we had no commercial operations and did not
record any revenues. We engaged principally in organizational and developmental
activities, including formulating our business plan, developing strategic
relationships with vendors and property owners, gaining access to capital for
future growth, hiring personnel, purchasing equipment, and deploying our
communications networks. In the first quarter of fiscal 2000, we began
providing services in the New York City market. We are no longer a development
stage enterprise for financial reporting purposes.
We began operating our first metropolitan network in January 2000, in New
York City. In the fourth quarter of this year, we plan to commence operations
in Chicago. As of July 31, 2000, we had accomplished the following:
. We deployed fiber-optic transport infrastructure in three major
carrier hotels in New York City, including 60 Hudson Street and 111
Eighth Avenue.
. We deployed advanced, vertical in-building networks, known as FiberNet
In-Building Networks, or FINs, in five office buildings in New York
City.
. We entered into exclusive license agreements that give us the right to
build and operate our FINs in 36 office buildings in our target
markets.
. We have exclusive license agreements that give us the right to manage
communications access and infrastructure in 185 other office buildings
nationwide.
. We entered into 21 interconnection agreements with existing and
potential customers, establishing the basis for purchase orders from
them.
We intend to establish our metropolitan networks in four other gateway
cities: Los Angeles, San Francisco, Boston and Washington D.C.
We have experienced significant operating losses, net losses and negative
cash flows from operating activities. We expect to continue to experience such
losses and negative cash flows as we continue to deploy our network
infrastructure and expand our business operations. As a result of our limited
operating history, prospective investors have limited operating history and
financial data upon which to evaluate our performance.
Factors Affecting Future Operations
Revenues. We generate revenues from selling network capacity and related
services to other communications service providers. The majority of our
revenues are generated on a monthly recurring basis under long-term contracts,
typically three to five years in length. Most of our customers are obligated to
make minimum payments for the utilization of our networks and facilities.
Customers may elect to purchase additional services in excess of minimum
contractual requirements.
24
<PAGE>
Revenues are derived from three general types of services:
. Transport services. Our transport services include the offering of
broadband circuits on our metropolitan transport networks and FINs.
Over our metropolitan transport networks, we can provision circuits
from one of our carrier point facilities to another carrier point
facility or to an on-net building via an interconnection with our FIN
in that building. We can also provision circuits vertically between
floors in a carrier point facility or an on-net building.
. Colocation services. Our colocation services include providing
customers with the ability to locate their communications and
networking equipment at our carrier point facilities in a secure
technical operating environment. We can also provide our customers
with colocation services in the central equipment rooms of certain of
our on-net buildings. Typically, if a customer colocates its equipment
at our facilities, our agreement with them will include a minimum
commitment to use our transport services.
. Communications access management services. Our access management
services include providing our customers with the non-exclusive right
to market and provide their retail services to tenants in our on-net
and off-net buildings. Customers typically enter into an agreement
with us to gain access to all or a significant number of our
properties. For all of our off-net buildings and some of our on-net
buildings, we have the exclusive right to manage communications
access. Once a customer has entered into an agreement with us for
access services, we typically require that customer to utilize our in-
building networking infrastructure for connectivity to their retail
customers.
The growth of our revenues is dependent upon our ability to add more
carrier point facilities and on-net buildings as points of connectivity on our
networks. We believe that an increase in the number of locations where we can
deliver traffic for our customers provides us with a broader addressable market
to offer our services. Within each carrier point facility, on-net and off-net
building, our revenues will depend upon the demand for our services, the
competition that we face and our customer service.
We typically begin our sales cycle by entering into a non-binding
business services agreement with a customer. This agreement establishes our
mutual interest in exploring a business relationship and the general parameters
upon which we will proceed. As a next step, we execute a telecommunications
services agreement, also known as an interconnection agreement. This is a
technical document that outlines the engineering specifications and operating
standards that are required of us by the customer. With the technical
requirements complete, we finalize a sales contract. Customers can order a
specific circuit or colocation space, or, alternatively, they can purchase
general availability on our networks or in our facilities by establishing
minimum revenue commitments on a recurring basis.
Currently our colocation and access services produce approximately one-
third of our revenues. In the future we anticipate generating significantly
more of our revenues from transport services than from colocation or access
management services. The scalability of our network architecture allows us to
increase transport capacity to a greater degree than is possible with our
colocation and access services. In addition, we typically require our customers
to make minimum commitments for transport services to utilize the inherent
operating leverage in our networks.
We recognize revenues under the contract method on a monthly basis over
the period that services are provided. Pursuant to the terms of certain of our
sales agreements, we submit invoices to customers for the full contract value
at the inception of the contract term. We must recognize the revenues ratably
over the full contract term, regardless of when a customer is invoiced for our
services. As a result, we record deferred revenues for amounts invoiced but not
yet recognized as revenues.
Direct Costs. Direct costs are associated with the operation of our
networks and facilities. These costs typically include maintenance and repair
costs and utility costs. Other specific costs include occupancy expenses at our
carrier point facilities, on-net buildings and off-net buildings. Our license
agreements for our
25
<PAGE>
on-net and off-net buildings require us to pay license fees to the owners of
these properties. These license fees typically are calculated as a percentage
of the revenues that we generate in each particular building. Other than our
license fees, our direct costs are generally fixed in nature. After the
significant capital for our networks and facilities is expended, we do not
anticipate that direct costs will grow commensurately with the growth of our
revenues. We expect these costs to increase in aggregate dollar amount but to
decline as a percentage of revenues.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses generally include all of our personnel costs, including
wages and benefits, occupancy costs for our corporate offices, professional
fees, and other miscellaneous expenses. Sales and marketing expenses, including
advertising and promotions, are also included. We expect these costs to
increase substantially over the next twelve to eighteen months as we continue
to build our organization and expand our operations.
Stock Related Expense. Stock related expense relates to the granting of
stock options to our employees. We grant stock options to our employees as a
form of equity-based compensation to attract, retain and incentivize qualified
personnel. These costs are non-cash charges that are amortized over the vesting
term of each employee's option agreement.
Depreciation and Amortization. Depreciation and amortization expense
includes the depreciation of our network equipment and infrastructure, computer
hardware and software, furniture and fixtures, and leasehold improvements, as
well as the amortization of goodwill and certain deferred charges. We commence
the depreciation of network related fixed assets when they are placed into
service and depreciate those assets over periods ranging from three to 20
years.
Results of Operations
Consolidated Financial Data
(in thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended Three Months
December 31, June 30, Ended June 30,
----------------- ----------------- -----------------
1998 1999 1999 2000 1999 2000
------- -------- ------- -------- ------- --------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ -- $ -- $ -- $ 1,768 $ -- $ 1,657
Operating expense:
Direct costs............ -- -- -- 813 -- 610
Selling, general and
administrative
expenses.............. 3,111 12,567 3,071 9,793 2,330 5,502
Stock related expense... -- -- -- 2,237 -- 541
Depreciation and
amortization.......... 28 520 111 2,415 107 1,240
------- -------- ------- -------- ------- --------
Total operating
expenses.............. 3,139 13,087 3,182 15,258 2,437 7,893
------- -------- ------- -------- ------- --------
Loss from operations.... (3,139) (13,087) (3,182) (13,490) (2,437) (6,236)
Interest
income/(expense)...... 156 (1,284) (199) (1,223) (200) (1,273)
Interest expense on
beneficial
conversion............ -- (7,932) -- -- -- --
------- -------- ------- -------- ------- --------
Net loss before minority
interest (2,983) (22,303) (3,381) (14,713) (2,637) (7,509)
Minority interest....... 167 104 87 -- 63 --
------- -------- ------- -------- ------- --------
Net loss................ (2,816) (22,199) (3,294) (14,713) (2,574) (7,509)
Preferred stock
dividends............. -- (50,002) -- (19,532) -- (16,680)
------- -------- ------- -------- ------- --------
Net loss applicable to
common stockholders... $(2,816) $(72,201) $(3,294) $(34,245) $(2,574) $(24,189)
======= ======== ======= ======== ======= ========
</TABLE>
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Revenues. Revenues for the six months ended June 30, 2000 were $1.8
million. We generated revenues by providing transport, colocation and
communications access management services to our customers. We recognized $1.2
million in transport services, $0.5 million in colocation services and $0.1
million in communications access management and other services during the
period. During this period, three of our customers, 360networks, Network Plus
and Qwest, accounted for approximately 88% of our revenues. We expect such
customer concentration to diminish as we expand our operations. Prior to the
six months ended June 30, 2000, we had no commercial operations and did not
generate any revenues.
26
<PAGE>
Direct Costs. Direct costs for the six months ended June 30, 2000 were
$0.8 million in expenses associated with the operation of our networks. These
costs included on-net building license fees, maintenance and repair costs, rent
expense at carrier point facilities and on-net buildings, and related utility
costs. For the six months ended June 30, 1999, we did not record any direct
costs because we were not offering services during that period.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the six months ended June 30, 2000 were $9.8
million compared to $3.0 million for the six months ended June 30, 1999. This
increase was the result of the rapid expansion of our operations. We have
experienced significant growth in personnel costs, marketing and advertising
expenses, and network construction overhead to support our business strategy.
The number of significant transactions that we have undertaken this year has
also contributed to professional fees, including legal and accounting costs, of
$1.4 million for the six months ended June 30, 2000, included in selling,
general and administrative expenses.
Stock Related Expense. Stock related expense for the six months ended
June 30, 2000 was $2.2 million. This non-cash expense relates to the granting
of stock options to our employees. We did not incur any stock related expense
for the six months ended June 30, 1999.
Depreciation and Amortization. Depreciation and amortization expense for
the six months ended June 30, 2000 was $2.4 million compared to $0.1 million of
depreciation and amortization expense for the six months ended June 30, 1999.
This increase resulted from commencement of the depreciation of certain network
related fixed assets that were placed into service.
Interest Expense, Net. Interest expense, net for the six months ended
June 30, 2000 was $1.2 million compared to $0.2 million of interest expense,
net for the six months ended June 30, 1999. Interest expense was generated as a
result of borrowings under our senior secured credit facility and our
outstanding capital lease obligations.
Preferred Stock Dividends. For the six months ended June 30, 2000, we
paid non-cash dividends on our series D, E and F preferred stock of $5.5
million in the form of additional shares of each respective series of preferred
stock, which are convertible into shares of our common stock. The liquidation
value of the dividends paid was $0.7 million. We also recorded a beneficial
conversion feature of $14.0 million upon the issuance of our series G preferred
stock, which is convertible into common stock at a price of $10.00 per share,
on June 30, 2000. The amounts of the dividends and the beneficial conversion
feature assume a price per share of the underlying common stock of $17.00. We
did not record any preferred dividends during the six months ended June 30,
1999.
Net Loss Applicable to Common Stockholders. We reported a net loss
applicable to common stockholders of $34.2 million for the six months ended
June 30, 2000, compared to a loss of $3.3 million for the six months ended June
30, 1999. This increase is a result of the aforementioned changes in our
operations.
Three Months Ended June 30, 2000 Compared to Three Months Ended June 30, 1999
Revenues. Revenues for the three months ended June 30, 2000 were $1.7
million. We generated revenues by providing transport, colocation and
communications access management services to our customers. We recognized $1.2
million in transport services, $0.4 million in colocation services and $0.1
million in communications access management and other services during the
period. During this period, three of our customers, 360networks, Network Plus
and Qwest, accounted for approximately 88% of our revenues. We expect such
customer concentration to diminish as we expand our operations. For the three
months ended June 30, 1999, we had no commercial operations and did not
generate any revenues.
Direct Costs. Direct costs for the three months ended June 30, 2000 were
$0.6 million in expenses associated with the operation of our networks. These
costs included on-net building license fees, maintenance and repair costs, rent
expense at carrier point facilities and on-net buildings, and related utility
costs. For the three months ended June 30, 1999, we did not record any direct
costs because we were not offering services during that period.
27
<PAGE>
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 2000 were $5.5
million compared to $2.3 million for the three months ended June 30, 1999. This
increase was the result of the rapid expansion of our operations. We have
experienced significant growth in personnel costs, marketing and advertising
expenses, and network construction overhead to support our business strategy.
Stock Related Expense. Stock related expense for the three months ended
June 30, 2000 was $0.5 million. This non-cash expense relates to the granting
of stock options to our employees. We did not incur any stock related expense
for the three months ended June 30, 1999.
Depreciation and Amortization. Depreciation and amortization expense for
the three months ended June 30, 2000 was $1.2 million compared to $0.1 million
of depreciation and amortization expense for the three months ended June 30,
1999. This increase resulted from commencement of the depreciation of certain
network related fixed assets that were placed into service.
Interest Expense, Net. Interest expense, net for the three months ended
June 30, 2000 was $1.3 million compared to $0.2 million of interest expense,
net for the three months ended June 30, 1999. Interest expense was generated as
a result of borrowings under our senior secured credit facility and our
outstanding capital lease obligations.
Preferred Stock Dividends. For the three months ended June 30, 2000, we
paid non-cash dividends on our Series D, E and F preferred stock of $2.7
million in the form of additional shares of each respective series of preferred
stock, which are convertible into shares of our common stock. The liquidation
value of the dividends paid was $0.4 million. We also recorded a beneficial
conversion feature of $14.0 million upon the issuance of our series G preferred
stock, which is convertible into common stock at a price of $10.00 per share,
on June 30, 2000. The amounts of the dividends and the beneficial conversion
feature assume a price per share of the underlying common stock of $17.00. We
did not record any preferred dividends during the three months ended June 30,
1999.
Net Loss Applicable to Common Stockholders. We reported a net loss
applicable to common stockholders of $24.2 million for the three months ended
June 30, 2000, compared to a loss of $2.6 million for the three months ended
June 30, 1999. This increase is a result of the aforementioned changes in our
operations.
Fiscal Year Ended December 31, 1999 Compared to Fiscal Year Ended December 31,
1998
As of December 31, 1999, we were a development stage enterprise that had
no commercial operations and had not generated any revenues. For the fiscal
year ended December 31, 1999 we reported an operating loss of $13.1 million and
a net loss of $72.2 million, compared to losses of $3.1 million and $2.8
million, respectively, in fiscal 1998. Our general and administrative expenses
increased from $3.1 million in 1998 to $8.3 million in 1999, primarily as a
result of an increase in payroll expense and related overhead as our
organizational and developmental activities accelerated.
We recorded non-recurring expenses of $4.3 million in fiscal 1999. Of
these expenses, $3.7 million was a non-cash charge, relating to the settlement
of certain litigation. Net interest expense was $1.3 million in fiscal 1999
compared to $0.2 million of net interest income in fiscal 1998. This change
resulted primarily from the issuance of senior secured convertible notes during
the year. Nearly all of the interest expense on the senior secured convertible
notes accrued in fiscal 1999 was converted into, or exchanged for, shares of
common stock or preferred stock on November 30, 1999.
We recorded two non-cash charges for beneficial conversion features in
fiscal 1999, relating to the issuance of convertible securities, in accordance
with the Emerging Issues Task Force, or EITF, Issue 98-5 "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Ratios." The total amount of these charges was $57.2 million, and we
concurrently recorded an increase to stockholders' equity in an equal amount.
We also recorded preferred stock dividends of $0.8 million in fiscal 1999,
relating to our series D, E and F preferred stock. Such dividends were paid in
additional shares of series D, E and F preferred stock, as of December 31,
1999.
28
<PAGE>
Liquidity and Capital Resources
As a result of our developmental activities and the deployment of our
networks and facilities, we have incurred significant losses from inception to
date. We expect such losses to continue as we further execute our business plan
and expand our operations. Consequently, we have been dependent upon external
sources of capital to fund our operations. Prospectively, we will continue to
incur losses and will not be able to fund our operations with internally
generated funds; therefore we will require additional, external capital.
Additionally, we have no relevant operating history upon which an evaluation of
our performance and prospects can be made. We are subject to unforeseen capital
requirements, failure of market acceptance, failure to establish business
relationships, and competitive disadvantages against larger and more
established companies.
To date, we have financed our operations through direct equity
investments from our stockholders, the issuance of additional debt and equity
securities in private transactions and by arranging a senior secured credit
facility with a group of lenders. Furthermore, we have issued our equity
securities as consideration for certain acquisitions and commercial agreements.
We have incurred an EBITDA loss and a net loss for the six months ended June
30, 2000 of $8.8 million and $34.2 million, respectively, and $3.0 million and
$3.3 million, respectively, during the six months ended June 30, 1999. During
the six months ended June 30, 2000, cash used to fund operating activities was
$10.5 million, and cash purchases of property, plant and equipment were $14.1
million, compared to $4.0 million and $5.0 million, respectively, for the six
months ended June 30, 1999. In addition, we invested $3.0 million in cash in
Devnet on April 12, 2000.
During the six months ended June 30, 2000, we received $41.6 million in
net cash proceeds from financing activities. The net borrowings under our
senior secured credit facility was $18.4 million. In addition, we received $3.3
million in cash proceeds from the exercise of outstanding options to purchase
shares of common stock and $20.0 million from the private placement of series G
preferred stock to Nortel. For the six months ended June 30, 1999, we received
$15.6 million in net cash proceeds from equipment financings and the private
placement of certain debt and equity securities.
Our planned operations will require significant, additional capital to
fund equipment purchases, engineering and construction costs, marketing costs,
administrative expenses and other operating activities. We anticipate spending
over $100 million during the fiscal year 2000 for the deployment of our FINs,
expansion of its metropolitan transport networks, the development of additional
carrier point facilities and other network programs and management systems.
As a result, we will require significant additional financing to complete
our networks. We will continue to have on-going discussions with sources of
additional financing. From time to time, we may consider private or public
sales of additional equity or debt securities and other financings, depending
upon market conditions, in order to finance the continued operations of our
business. To date, no commitments for additional financing have been obtained.
There can be no assurance that we will be able to successfully consummate any
such financing on acceptable terms, or at all.
Market Risk
Our exposure to financial market risk, including changes in interest
rates, relates primarily to our senior secured credit facility and our
marketable security investments. Borrowings under our senior secured credit
facility bear interest at floating rates. As a result we are subject to
fluctuations in interest rates. We generally place our marketable security
investments in high credit quality instruments, primarily U.S. government
obligations and corporate obligations with contractual maturities of less than
one year. We do not believe that a 100 basis point increase or decrease in
interest rates would significantly impact our business. We do not have any
derivative instruments. We operate only in the United States and all sales have
been made in U.S. dollars. We do not have any material exposure to changes in
foreign currency exchange rates.
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BUSINESS
Overview
We deploy, own and operate state-of-the-art, fiber-optic networks
designed to provide comprehensive broadband connectivity for data, voice and
video transmission to service providers in major metropolitan areas. These
networks provide an advanced, high bandwidth fiber-optic solution to support
the growing demand for network capacity in the local loop. We provide optical
transport within and between carrier hotels, which are facilities where service
providers exchange and route communications traffic, as well as optical
transport from carrier hotels to tenants in commercial office buildings. Our
networks support multiple transmission protocols including SONET, Ethernet,
Frame Relay, ATM and IP. Our target markets are New York, Chicago, Los Angeles,
San Francisco, Boston and Washington, D.C.
Industry Background
Increased Communications Traffic and Demand for Network Capacity
Over the past several years, there has been significant growth in the use
of communications services, including Internet access, electronic commerce,
streaming video and virtual private networks. As a result of the deregulation
of the communications industry, these broadband applications are being provided
by a growing number of service providers. This rapid increase in bandwidth
intensive data applications and providers of these services is driving demand
for additional transmission capacity on communications networks. In addition,
more businesses are relying on communications services to conduct mission
critical operations, increasing the need for greater network reliability,
security and speed.
Further, as quickly as network capacity becomes available, new bandwidth
intensive applications are being developed and deployed. As a result, bandwidth
capacity is being consumed almost as rapidly as it is being made available,
requiring carriers to continually expand their network capacity.
The Local Loop Bottleneck
The deployment of communications network infrastructure consists of two
separate segments.
Long-Haul Networks. Demand for transmission capacity was initially most
acute between metropolitan areas. As a result, long-haul fiber-optic networks
were built to function as transport links for vast amounts of traffic between
metropolitan locations worldwide. Communications traffic is aggregated at the
edge of metropolitan networks and transferred onto long-haul networks for
transmission to other metropolitan points. These long haul networks typically
terminate at carrier hotels in metropolitan locations, where traffic is routed
onto the local metropolitan network.
Local Loop Networks. The role of networks in metropolitan areas is to
transport large volumes of traffic delivered by long-haul networks, as well as
traffic generated in the local loop, between carrier interconnection points and
buildings. Existing metropolitan networks mainly consist of copper
infrastructure installed by ILECs and RBOCs. These legacy networks were built
for voice traffic and cannot support the increasing volumes of data intensive
traffic being generated in the local loop. This same infrastructure was
deployed to connect the central equipment rooms of commercial office buildings
to metropolitan networks and to provide connectivity within buildings, from
central equipment rooms to the individual tenant offices. In contrast to this
legacy infrastructure, most tenants within individual commercial offices have
deployed high-capacity local area networks, or LANs which have abundant network
capacity.
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There are numerous technically complex issues involved in building out
local loop networks to increase capacity and extend connectivity in
metropolitan areas:
. Diverse traffic. Data on local loop networks is generated by a large
number of end-users served by a variety of service providers. As a
result, metropolitan traffic is transmitted in multiple protocols
using different technology platforms.
. Complex architecture. The infrastructure of local loop networks must
reach a multitude of locations to access end-users in dense urban
areas.
. Rights of way. Installing fiber-optic networks requires the use of
numerous rights of way, which are controlled by many different public
and private entities in each metropolitan area.
These complexities have impeded the deployment of additional bandwidth
capacity in the local loop. As a result, a bottleneck has developed in many
major metropolitan areas. This bottleneck is the result of insufficient network
capacity starting at the carrier interconnection point, which is the entry
point to the local loop, and extending all the way to the tenants' LANs in
office buildings.
[DIAGRAM]
Needs of Metropolitan Service Providers
Service providers are seeking a local loop network that allows them to
rapidly and cost-effectively provide their communications services to end-
users. In particular, they seek:
End-to-End Fiber Connectivity. Service providers establish points of
presence for their networking equipment in metropolitan areas. Network
connectivity must extend from these points of presence directly to the end-
users of their communications services. In addition, service providers need to
interconnect with other service providers to exchange communications traffic.
Carrier Neutral Transport Services. Traditionally, service providers have
relied on ILECs and RBOCs for metropolitan transport. However, in addition to
providing network transport, both the ILECs and RBOCs provide communications
services directly to end-users. This puts service providers at a competitive
disadvantage. Unless these service providers undertake the time-consuming and
costly construction of their own proprietary networks, they are dependent on
their competitors' networks for transport.
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Advanced, High-Capacity Network. Service providers desire a broadband
network with the highest possible transmission capacity to ensure the speed of
their service. Further, in order to offer a full range of services, providers
are seeking a network that can incorporate multiple transmission protocols and
new technologies. To ensure the quality of these services, providers also
require reliable and secure connectivity.
Rapid Provisioning of Services. Service providers need a network provider
that has lit network elements and the necessary advanced network management
systems to rapidly provision circuits. Currently, much of the fiber in
metropolitan networks is dark fiber, which is inoperative until lit by
installing optical networking equipment. Lighting dark fiber can be expensive
and time consuming. Service providers can significantly decrease the time and
cost to provision services to end-users by obtaining capacity from a network
provider that offers lit network capacity.
Needs of Building Owners
In-Building Communications Infrastructure. We believe that having
technologically advanced communications infrastructure in a commercial office
building gives property owners a sales advantage in attracting and retaining
quality tenants and increases the market value of the building. Many tenants in
class A commercial office buildings are sophisticated, bandwidth-intensive
enterprises. We believe that building owners need to provide state-of-the-art
communications infrastructure capable of delivering high-bandwidth
communications services for these tenants. The communications infrastructure
should be readily accessible to all tenants without limiting their choice of
service providers.
Overall Management of Communications Infrastructure. While upgrading the
communications infrastructure and maximizing tenant choice for broadband
services is a priority for building owners, the overall management of this
process is time consuming and complicated. Building owners desire a partner to
manage the process of upgrading the infrastructure and to deal with the
individual service providers seeking access to the tenants in the building.
Some service providers have provided a partial solution to building
owners' needs by entering into contractual agreements to upgrade existing in-
building communications infrastructures. These arrangements typically allow the
service provider to install its proprietary network in the building and provide
retail communications services to the tenants. While this is one method of
developing in-building infrastructure, it can potentially make tenants captive
to a single broadband service provider, which may be undesirable for both
tenants and the building owners. We believe that it would be preferable for a
third party to install an in-building communications infrastructure, accessible
to all service providers wanting to provide communications services to the
building's tenants.
Our Solution
We are focused on owning and operating fiber-optic networks that provide
superior carrier neutral capacity to service providers in metropolitan areas,
replicating and expanding the geographic and physical penetration of the ILECs'
networks. We are designing, installing and operating local loop networks to
provide wholesale end-to-end, broadband connectivity that is scalable, reliable
and secure. In these and other markets, we also enter into strategic
partnerships with building owners and managers pursuant to which we manage the
communications access and infrastructure in their buildings. The following are
key elements of our solution:
Full Range of Services. In our target markets, our carrier point
facilities, metropolitan transport networks and FINs will offer service
providers cost-effective access to complete optical local loop networks. Our
carrier-to-carrier transport services provide fiber-optic connectivity to
carriers between and within carrier hotels. Our carrier-to-customer transport
services provide fiber-optic transport between carrier points and on-net
buildings in which we have deployed our FINs. By offering both of these
transport services, we believe that we can meet a service providers' end-to-end
connectivity needs.
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We also offer colocation services at certain of our carrier point
facilities and on-net buildings. Colocation refers to the ability of a carrier
to locate its networking equipment in another carrier's facilities. These
colocation facilities provide service providers with a network interconnection
point where they can terminate their traffic and transfer it onto our high-
capacity metropolitan transport network.
In addition, we provide access management services to property owners and
managers of buildings that are not on our metropolitan transport network, which
we refer to as our off-net buildings. In these buildings we deploy network
infrastructure and coordinate service providers' access to that infrastructure.
In addition, we provide ongoing management services that enable building owners
to outsource the management of their communications infrastructure and
services.
State-of-the-Art Network Architecture. In order to provide high quality
local loop network services to our customers, we are deploying what we believe
to be the most advanced all-optical local loop network architecture available.
Features of this state-of-the-art network architecture include:
. the use of optical networking equipment which can transmit data at the
highest speeds currently commercially available;
. dense wave division multiplexing equipment that is capable of
increasing the transmission capacities of each fiber-optic strand in
our networks;
. an open architecture that supports new broadband technologies and
multiple transmission protocols, including SONET, Ethernet, Frame
Relay, ATM and IP, to meet our service provider customers' evolving
demands;
. multiple fibers laid in interconnecting circles, or ring
architectures, over which traffic can be routed in a different
direction or to a different fiber if there is a break in one of the
rings, creating networks that are fully redundant and self-healing;
and
. optical networks that enable our customers to provision and monitor
services on our networks as if the networks were their own.
Rapid Provisioning of Services. Our optical local loop network gives us
the ability to remotely provision new circuits within 10 business days through
our centralized network operations center, or NOC. As a result, we are able to
allocate network capacity rapidly to meet our customers' growing bandwidth
requirements. Our customers can order capacity on a short-term basis and
quickly provision new services to their end-users. We believe that this
provisioning capability is a key factor in our customers' decisions to work
with us.
Superior Value Proposition for Property Owners. We manage the
communications infrastructure in our on-net and off-net buildings. We provide
significant value to property owners by ensuring that each of these buildings
has a readily accessible communications infrastructure that supports broadband
communications solutions, such as high-speed Internet access and streaming
video. Our in-building communications infrastructure and access management
services are appropriate for properties of varying size, class and location and
provide a comprehensive solution to owners of real estate portfolios. Owners of
both our on-net and off-net buildings benefit from the increased desirability
of their buildings to existing and prospective tenants. Further, offering our
services on a wholesale basis allows tenants a range of alternatives in their
choice of service providers.
Our Strategy
Our goal is to be the preferred facilities-based provider of wholesale
metropolitan fiber-optic network capacity in our target markets. We intend to
serve select, class A commercial office properties and major carrier hotels in
our target markets with carrier neutral, end-to-end, optical connectivity that
enables our customers to
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provide next generation services and applications to end-users. In addition, we
plan to establish our presence as a leading manager of communications access
and infrastructure in buildings nationwide. Our strategy for achieving these
goals includes the following key elements:
Establish our position as a leading provider of connectivity to carrier
hotels. We intend to establish a presence in multiple carrier hotels in each of
our target cities by contracting or partnering with a select group of owners
and operators of carrier hotels in those markets. To date, we have deployed
fiber optic transport infrastructure in three major carrier hotels in New York
City and have entered into agreements for three additional carrier hotels, one
in New York City, one in Chicago and one in Los Angeles.
By establishing our presence in multiple carrier hotels, we will expand
the geographic reach of our networks and increase the size of our addressable
market. In addition, this will increase our ability to interconnect with other
service providers, thereby increasing our potential customer base and revenue
opportunities with existing customers.
Strengthen and expand upon our relationships with customers. We believe
that our local loop end-to-end fiber-optic connectivity is currently a unique
service offering. We intend to promote:
. our carrier-neutral position;
. our open architecture that supports multiple transmission protocols;
. our ability to provide services to multiple broadband carriers,
including wireless carriers and building local exchange carriers, or
BLECs, in our on-net and off-net buildings;
. our rapid provisioning time;
. our ability to increase transport capacity rapidly to meet our
customers' needs; and
. the carrier-class reliability of our networks.
We believe that due to our wholesale strategy we have a broader potential
customer base than our competitors. Our potential customers include ILECs,
RBOCs, competitive local exchange carriers, or CLECs, BLECs, inter-exchange
carriers, or IXCs, Internet service providers, or ISPs, application service
providers, or ASPs, and integrated communications providers, or ICPs. We intend
to strengthen our relationships with our existing customers and actively market
our service offerings to this broad range of new customers. As of July 31,
2000, we had 21 customers, including 360networks, Deutsche Telecom, France
Telecom, Network Plus, NEXTLINK, Qwest, Teligent and Winstar.
Partner with real estate owners to expand our portfolio of buildings. We
intend to grow our business aggressively and expand our geographic reach by
continuing to bring additional buildings into our portfolio under exclusive
license agreements. We currently have 226 buildings in our portfolio. We have
installed FINs in five of these buildings and have license agreements to
install FINs in an additional 36 of these buildings.
We intend to establish ourselves as the preferred in-building
communications facilities provider and manager by emphasizing:
. our unique offering of carrier-neutral access and transport;
. our ability to install and manage a state-of-the-art-network in on-net
buildings at no cost to the building owner; and
. our ability to manage all aspects of communications access and
infrastructure in buildings.
In addition, we plan to leverage our existing relationships with key
partners, including Teachers Insurance and Annuity Association and Tishman
Speyer Properties, L.P.
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To date, our license agreements for our on-net buildings have typically
given us the exclusive right, subject to certain limitations, to resell our
network capacity on a wholesale basis within the building. Moreover, in our
off-net buildings we have secured the right to be the exclusive manager of all
communications access in the building. We intend to continue to establish
mutually beneficial relationships with major institutional property owners to
secure the exclusive rights to manage communications access and deploy
infrastructure in their buildings.
Develop the platforms that enable our customers to offer new revenue-
generating communications services to their end-users. We believe that the
demand for new services will drive our customers' growth. To keep pace with
this growth, we intend to ensure that our network architecture continues to
offer the connectivity, scalability, performance and flexibility necessary for
the rapid introduction of new services. We are currently serving as a beta site
for several next generation optical networking equipment providers. Being
involved in beta testing gives us insights into the next-generation of
equipment that will be made commercially available. We test equipment with the
intention of adopting new technologies that can be integrated into our networks
to improve performance and decrease the cost of operating our network.
Our Services
Our services are designed to provide communications transport and
colocation within our target markets, and communications access management and
infrastructure in markets nationwide:
Transport
Our transport services consist of T-1 through OC-48 circuits, 10 Base-T
and 100 Base-T connections and optical wavelengths. We also offer vertical dark
fiber in our on-net buildings.
Carrier-to-Carrier-Transport. We provide carrier-to-carrier transport by
building optical transport facilities within and between carrier hotels. We
offer carrier-to-carrier connectivity ranging from transport between floors of
a carrier hotel, to comprehensive connectivity between carrier hotels within a
metropolitan area.
Carrier-to-Customer Transport. Our carrier-to-customer transport services
provide our customers with connectivity from the carrier hotels where their
communications traffic is aggregated, to their end-user customers in our on-net
buildings. We transport their data from carrier hotels, via our metropolitan
transport networks, to the central equipment rooms that we establish in the
basements of our on-net buildings. Once in the central equipment room, the data
is transferred from our metropolitan transport network onto our FIN and routed
to the appropriate floor of the on-net building, where the end-user is located.
Colocation
In select carrier hotels and on-net buildings, we offer our customers
racks, cabinets, or cages where they can locate their networking equipment. We
also offer ancillary services, including AC/DC power, fire protection,
security, and heating, ventilation and air conditioning, or HVAC.
Communications Access Management
In our off-net buildings, we typically obtain the exclusive right to
manage the communications access and infrastructure for the buildings. We then
enter into agreements with service providers giving them non-exclusive rights
to provide services to tenants in the buildings. The term of our contracts with
service providers typically ranges from three to five years. To date, we have
entered into agreements to provide access management services to 185 off-net
buildings.
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Network Design and Architecture
We have and will continue to design, develop and construct networks for
carrier-to-carrier and carrier-to-customer transport in our target markets. Our
networks have four components: carrier point facilities, metropolitan transport
networks, FINs and a NOC.
Carrier Point Facilities
Carrier point facilities are environmentally controlled, secure sites
within a carrier hotel, designed to house carrier transmission and networking
equipment. At these facilities we establish the interconnection of our
metropolitan transport networks with other service providers' networks. This
interconnection of networks enables us to transfer other carriers' traffic onto
our local loop networks and provide transport services to them. In addition to
utilizing our carrier point facilities to interconnect with service providers,
we also offer colocation and other ancillary services at certain of these
facilities.
Our primary carrier point facilities in New York City are located in 60
Hudson Street and 111 8th Avenue, and we offer colocation at both of these
sites. We have deployed and will establish other carrier point facilities in
New York City, Long Island and New Jersey, which we will connect to both 60
Hudson Street and 111 8th Avenue via our metropolitan transport networks. By
establishing our presence in multiple carrier hotels we will increase our
ability to interconnect with other service providers, thereby increasing our
potential customer base and revenue opportunities with existing customers.
In each of our target cities, we intend to establish at least two primary
carrier point facilities within major carrier hotels and multiple secondary
carrier point facilities. At our primary sites we will offer colocation
facilities in addition to transport and interconnection services. The cost of
constructing a primary carrier point facility generally ranges from $3 million
to $5 million, and a secondary carrier point facility, without colocation
facilities, generally from $500,000 to $1.5 million. In certain of our
secondary carrier point facilities we may colocate in other carriers'
facilities.
Metropolitan Transport Network
We acquire dark fiber rights, install our own optical transmission
equipment to light the fiber and then provide lit circuits to carriers for the
transport of traffic in the out-of-building local loop. We light the dark fiber
in ring configurations with optical networking gear, establishing connectivity
between carrier point facilities and our on-net buildings.
Our existing New York metropolitan transport networks consists of
multiple OC-48 SONET rings deployed in midtown Manhattan, downtown Manhattan,
New York/Long Island and New York/New Jersey. We intend to expand this existing
network, as well as establish metropolitan transport networks in Chicago by the
end of 2000. In the future, we plan on establishing metropolitan transport
networks in our remaining target markets.
Our networks can transmit data at 2.5 gigabits per second or Gbps, (OC-
48) and are scalable to 10.0 Gbps (OC-192). We use dense wave division
multiplexing technology to increase capacity on our networks. Dense wave
division multiplexing can increase the bandwidth of a single fiber-optic strand
by transmitting signals on up to 32 different wavelengths of light on a single
fiber, therefore enabling the transmission of up to 32 times more information
on an existing fiber-optic strand.
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FiberNet In-Building Networks
Our FIN is an advanced central distribution network that we deploy in our
on-net buildings to provide communications transport within the building. We
have a team of highly trained and experienced communications professionals and
engineers that design and oversee the installation of our FINs. This team
performs a thorough analysis of each commercial building that we have targeted,
including an assessment of available space to house equipment in the building
and install fiber cables in the vertical shafts, or risers, the adequacy of the
power supply, and the diversity of fiber-optic entrance conduits from our
metropolitan transport network. The standard design specifications for our FINs
are then tailored to each building. After a thorough evaluation process we
select a bonded and licensed general contractor to perform construction. To
date, we have contracted with Bechtel for the construction of our FINs. A
member of our engineering staff oversees all of the construction in order to
maintain and enforce our strict construction standards.
The total cost for installing a FIN typically ranges from approximately
$400,000 to $1,000,000. We are committed to building the most secure, reliable
fiber-optic systems that adhere to the highest technical standards in the
industry. We strive to provide a system that is flexible and expandable and
able to meet the needs of our customers.
To date, we have constructed our FINs and lit OC-3 SONET rings in five
buildings in Manhattan. We have also entered into, and are in the process of
negotiating, additional license agreements for in-building networks in 85
buildings located in our target markets.
Our in-building fiber-optic network infrastructure consists of:
. Direct and diverse routing to metropolitan transport network. Our
metropolitan transport network enters an on-net building at one or two
discrete points and interconnects with the FIN in our central
equipment room in the basement of the building. Diverse routing and
interconnection in the building basement enables the seamless transfer
of traffic between the FIN and our high-bandwidth metropolitan
transport network. We offer dedicated bandwidth without over-
subscription directly between the tenants' premises and the carrier
point facilities, so that our customers avoid congestion or a
bottleneck, as traffic is transmitted from our FINs to our out-of-
building metropolitan transport networks.
. Central equipment room. We usually lease approximately 100 to 1,500
square feet in the basement of our on-net buildings to establish a
central equipment room, where we install and manage communications
networking equipment. Here we connect the FIN to our metropolitan
transport network, linking the on-net building to all of our other
points of presence. The equipment in this facility aggregates and
disseminates traffic to and from the building. The central equipment
rooms are built to our carrier point specifications with power
supplies and HVAC systems for environment control.
. Redundant, vertical riser system. We configure, install, own and
manage a fiber-optic network in the building's vertical riser system.
We believe our FINs are designed to ensure reliability and
scalability. By deploying over one hundred strands of fiber in dual
risers, our FINs allow for redundant fiber paths in a ring
architecture. Our FINs generally extend from the central equipment
room in the basement of the building throughout the building, with a
termination point on each floor.
. Points of presence on each floor of the on-net building. Typically, we
install secure communications closets on each floor of the building to
house the network equipment and redundant power supplies. This
footprint on every floor facilitates the rapid provisioning of
transmission capacity to tenants, the scalability for growth in
bandwidth and the flexibility to accommodate new technologies.
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Network Operations Center
We monitor and manage traffic on our networks from our NOC located at 60
Hudson Street in New York City using Portal, Preside and MetaSolv TBS software.
During the third quarter of this year, we will relocate our NOC to Newark, New
Jersey. Our NOC enables us to remotely provision circuits to any point on our
networks and to provide timely customer support and maintenance from a
centralized location. Our networks are monitored and maintained 24 hours a day,
7 days a week. Our customers are also able to monitor their traffic on our
networks using the latest technology in network management.
Real Estate
We have highly experienced professionals, familiar with the commercial
real estate markets nationwide, who are dedicated to identifying and securing
access to portfolios of commercial office buildings. We typically target
portfolios of class A commercial office properties with multiple tenants. Other
factors considered in selection include:
. location;
. occupancy levels;
. proximity to our metropolitan transport networks, carrier point
facilities and other on-net buildings;
. feasibility of installation of network infrastructure;
. cost-effectiveness of construction; and
. existing broadband communications infrastructure in the building.
We also identify whether a building will become an on-net or off-net
building. This decision is based on a number of factors. First, we determine if
the building is located in a city where we have metropolitan transport
networks. If so, we then analyze the size of the building, tenant mix and cost-
effectiveness of construction to determine if it is economically feasible to
install a FIN.
On-net buildings. In buildings that we have identified as on-net
buildings, we sign a license agreement with the building owner or manager for
the installation of a FIN. Our licenses generally give us the exclusive right
to install and operate a central distribution system to provide wholesale
transport services in the building. However, ILECs and RBOCs may resell their
existing infrastructure, which they have the right to upgrade, in the building,
and other communications providers may deploy their own infrastructure to
provide retail services to any tenant requesting services from the provider. In
addition, in some instances service providers may have pre-existing license
agreements in our buildings, which allow these providers to install and
possibly expand their network infrastructure in our buildings. Our typical on-
net license agreement has an initial term of 15 years, with renewal options of
up to 10 years. We have installed FINs in five on-net buildings, have licenses
to build FINs in an additional 36 buildings, and are currently in negotiations
for licenses to build FINs in 44 buildings.
Off-net buildings. In buildings that we select as off-net buildings, we
enter into license agreements with the owners or managers for the exclusive
right to manage access and infrastructure in the building. The agreement does,
however, allow for the continuation of any pre-existing communications service
agreements between the building owner or manager and other communications
providers for the installation of communications networks in the building.
These pre-existing agreements may not be extended or renewed unless required by
their terms. Our typical off-net license agreement is for an initial term of
five years, with renewal options of up to 15 years. Once the license agreement
has been executed, we enter into agreements with communications service
providers, giving them non-exclusive access to provide services in the
building. Our agreements with service providers are typically for an initial
term of five years, with a renewal option of up to five years. We currently
have contracts to manage the communications infrastructure in 185 off-net
buildings.
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Sales and Marketing Strategy
Sales. We sell network access to other service providers through our
direct sales staff. Our sales team is comprised of representatives that have
significant expertise in, and knowledge of, the wholesale communications
market. Several of our sales representatives have had extensive work experience
with British Telecom, AT&T, and other major carriers. By using a direct sales
strategy, we provide the personal attention and high quality of service that
our customers require.
Marketing. Our marketing strategy is focused on building relationships
with our customers, our real estate partners, and tenants in our on-net and
off-net buildings. We believe that all segments benefit from targeted
advertising, public relations efforts, promotional materials, event marketing,
and personal selling techniques. In addition, we have marketing activities
directed specifically to each of our constituent markets. These activities
include:
. Service Providers. We support industry organizations, participate in
conferences, tradeshows and seminars, prepare personalized
presentations and engage in direct marketing.
. Real Estate Community. We belong to and sponsor membership
associations, trade shows, conferences, and other special events.
. Tenant Appreciation Programs. We circulate a quarterly newsletter to
tenants in our on-net buildings, and co-sponsor in-building events
with carriers that sell directly to tenants. We believe that if
tenants are aware of the capacity and reliability and security of our
FINs, they will be more likely to select carriers using our networks
to provide their communications services.
Customers
We have a broad target customer base that includes ILECs, RBOCs, CLECs,
IXCs, ISPs, ASPs and ICPs. Our technologically advanced fiber-optic
infrastructure meets the needs not just of small- and medium- sized business
end-users, but also large corporate end-users. This expands the size of our
addressable market beyond that of traditional CLECs, which are generally
focused on the small- and medium-sized business market opportunity. We enter
into long-term contracts with our customers, which are typically three to five
years in length.
Transport and Colocation Customers
We target service providers seeking cost-effective, flexible, reliable,
broadband network connectivity in the local loop. The increase in
communications traffic and data intensive applications and the deregulation of
the telecommunications industry has resulted in rapid growth in the number of
service providers operating in the local loop market. Many of these providers
do not have their own metropolitan networks and rely on us for transport in the
local loop. Our customer base also includes providers that have their own local
networks, but do not have sufficient bandwidth to meet their customers' needs
or are seeking shorter installation intervals and will benefit from our faster
provisioning times. We also generate transport-traffic through agreements with
our colocation customers. Typically, if a service provider colocates its
networking equipment at our facilities, our agreement with them will include a
minimum commitment to use our transport services.
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Our transport and colocation customers are typically:
. service providers that have significant bandwidth demands between
carrier points for the aggregation of their network traffic. These
customers need to interconnect high-capacity circuits with other
service providers' networks. These carriers typically include long
distance providers and international carriers;
. service providers requiring connectivity to their retail customers in
our on-net buildings; and
. service providers requiring a secure technical operating environment
in which to locate their communications and networking equipment.
Our transport and colocation customers include:
. 360networks . Iaxis
. CAIS Internet . Network Plus
. Deutsche Telecom . NEXTLINK
. France Telecom . Qwest
Access Management Customers
Our access management customers include facilities-based providers that
want access to our off-net buildings to provide communications services to
tenants in the building. Our access customers include:
. eLink Communications
. Everest Broadband Networks
. NEXTLINK
. Teligent
. Winstar
Competition
The market for our services is very competitive. Our competitors include
traditional and new communications companies.
Local Telephone Companies. In New York City and other major metropolitan
areas where we plan to do business, we face significant competition from ILECs
and RBOCs, which currently dominate local communications markets, and CLECs,
which are increasing their market penetration for local communications
services. ILECs, including Verizon Communications and Ameritech, have several
competitive advantages over us, which include established brand names,
reputation and significant capital. As a result of the Telecommunications Act
of 1996, ILECs are required to provide other carriers with access to end users
via their existing networks. This type of access is in direct competition to
our services. Moreover, ILECs also sell wholesale connectivity in the local
loop, which competes with our local loop transport services. Various other
competitive communications providers also own communications infrastructure in
the local loop. Some of these carriers currently compete with us in the market
for providing broadband transmission capacity in the local loop, and such
competition may increase in the future.
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Other In-Building Communications Providers. Certain integrated
communications providers are deploying their own network infrastructure in
commercial office properties in our target markets to provide communications
services to tenants. These include, but are not limited to, Advanced Radio
Telecom, Allied Riser Communications, Broadband Office, Cypress Communications,
Eziaz, Intermedia, NEXTLINK, Onsite Access, RCN Telecom Services, Riser
Management Corporation, Teligent, and Winstar. These companies build out
networks on which they offer only their own services. Consequently, they could
indirectly compete against us by not utilizing our FIN to gain connectivity to
tenants. Additionally, many of these companies are seeking to establish license
agreements with building owners to gain access to the buildings. Some companies
have agreements whereby the building owners will not allow other communications
providers to install a central distribution system in their buildings. These
type of agreements reduce the number of buildings available for installation of
our FINs. We have competed and will continue to compete with some of these
companies for license agreements with owners of target buildings.
Metropolitan Network Providers. Many of the leading communications
companies, including AT&T, WorldCom, Sprint, Level 3, Qwest and Williams, have
constructed or are constructing fiber-optic networks nationwide, including
within metropolitan areas. These companies utilize their networks for their own
transmission requirements and in certain circumstances provide excess network
capacity to other carriers. Other communications companies, such as Metromedia
Fiber Network and Telergy, build metropolitan dark fiber networks that are
leased or sold to other carriers and large corporate users. In addition, these
companies could begin to build their own in-building networks. We compete
directly and indirectly with these companies in New York City, and we intend to
compete with them in our other target markets.
Fixed Wireless Service Providers. We may lose potential customers to
fixed wireless service providers. Fixed wireless service providers can provide
high-speed inter-building communications services using microwave or other
facilities or satellite earth stations on building rooftops. Some of these
providers have targeted small- and medium-sized business customers and have
business strategies that are similar to ours. These providers include Winstar,
Teligent, Advanced Radio Telecom, Sprint and WorldCom.
Our History
FiberNet Telecom, Inc. was organized under the laws of the State of
Delaware on August 10, 1994. On November 24, 1997, Desert Native Designs Inc.,
an existing public company incorporated in the State of Nevada, acquired
FiberNet Telecom, Inc. pursuant to an agreement and plan of merger dated as of
the same date. Upon consummation of the merger, FiberNet Telecom, Inc. became a
wholly owned subsidiary of Desert Native Designs, Inc., which subsequently
changed its name to FiberNet Telecom Group, Inc. On February 4, 2000, we
reincorporated in Delaware.
On July 31, 2000, we consummated a corporate reorganization in order to
acquire Devnet L.L.C. As a result of this reorganization, we became a holding
company that directly owns all of the outstanding common stock of FiberNet
Operations, Inc., a Delaware corporation and Devnet L.L.C., a Delaware limited
liability company. FiberNet Operations directly owns all of the outstanding
common stock of FiberNet Telecom, Inc., a Delaware corporation. FiberNet
Telecom, Inc. owns all of the outstanding membership interests in Local Fiber,
L.L.C. and FiberNet Equal Access, LLC, both New York limited liability
companies. We conduct our primary business operations through our operating
subsidiaries, Local Fiber, FiberNet Equal Access and Devnet.
Regulation of FiberNet
General Regulatory Environment
We are subject to federal, state and local regulations that affect our
product offerings, competition, demand, costs and other aspects of our
operations. The regulation of the communications industry varies from state to
state and is changing rapidly. To the extent that our offerings are treated as
telecommunications services, federal and state regulation would apply to those
offerings. Our operations are also subject to a variety of environmental,
safety, health and other governmental regulations. We cannot guarantee that
current or future
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regulatory, judicial or legislative activities will not have a material adverse
effect on our operations or financial condition, or that domestic or
international regulators or third parties will not raise material issues with
regard to our compliance or noncompliance with applicable regulations.
Federal Regulation
Federal regulation has a great impact on the communications industry and
has undergone major changes in the last four years as the result of the
enactment of the Telecommunications Act of 1996. The Telecommunications Act is
the most comprehensive reform of the nation's communications laws since the
Communications Act was enacted in 1934.
Our services are provided through our operating subsidiaries, Local
Fiber, Equal Access and Devnet. The services offered by our subsidiaries fall
into one of two categories:
. telecommunications services or common carriage; and
. non-telecommunications services.
Certain regulations associated with each type of offering are described
below. Although the law establishing regulatory requirements is often unclear,
we expect that our telecommunications services are subject to a lower degree of
federal regulation than those of dominant carriers such as the RBOCs.
Telecommunications Services
One of our subsidiaries, Local Fiber, is regulated as a
telecommunications carrier because it provides telecommunications services
directly to the public on a nondiscriminatory basis subject to standardized
rates, terms and conditions. A telecommunications service, as defined by the
Communications Act, means the offering of telecommunications for a fee directly
to the public, or to such class of users as to be effectively available to the
public, regardless of the facilities used. Telecommunications is defined, as
the transmission between and among points specified by the user of information
of the user's choosing without change in the form or content of the information
as sent. Telecommunications carriers are subject to extensive federal, state
and local telecommunications regulation that may impose substantial
administrative and other burdens on operations.
General Obligations of All Telecommunications Carriers. As a competitive
provider of local telecommunications services, Local Fiber is subject to
federal telecommunications regulation, including, but not limited to:
. rate regulation;
. reporting requirements;
. special assessments;
. access charges;
. the obligation not to charge unreasonable rates or engage in
unreasonable practices;
. the obligation to not unreasonably discriminate in service offerings;
and
. the obligation to allow resale of regulated telecommunications
services.
In addition, telecommunications carriers must contribute to the FCC's
universal service fund, a fund that was established to ensure the availability
of affordable basic telecommunications services.
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The rate of assessment is approximately 5.8% of gross interstate end-user
telecommunications revenues for the year 2000, and may be higher in subsequent
years. FCC rules also require that telecommunications carriers contribute to
various other funds.
Local Fiber is also required to comply with a number of other federal
regulatory requirements. Third parties may file complaints against us at the
FCC for violations of the Communications Act or the FCC's regulations. Certain
statistical reporting requirements may also apply. Although compliance with
these regulatory requirements imposes certain administrative burdens,
similarly situated competitors are subject to comparable regulatory
obligations.
Local Exchange Carrier Regulation. The Telecommunications Act imposes a
number of access and interconnection requirements on telecommunications
carriers and on all local exchange providers, including CLECs, and imposes
additional requirements on ILECs. CLECs compete with the ILECs for local
subscribers of telecommunications services. As discussed under our state
regulation section, Local Fiber provides only local transport services and has
obtained authorization as a CLEC to provide telecommunications services in the
state of New York. However, because of the nature of Local Fiber's service
offerings, not all CLEC obligations will apply to us. As a CLEC in New York,
Local Fiber is subject to the FCC's regulatory structure favoring CLEC entry
into the local market, however, it is also subject to any requirement imposed
by the FCC that is generally applicable to local exchange carrier, or LECs. In
addition, LEC regulations affect us to the extent that they have a direct
affect on our carrier customers.
All telecommunications carriers must interconnect with the facilities of
other telecommunications carriers and may not install features that will
interfere with the interoperability of networks. Accordingly, all ILECs must
permit their competitors to interconnect with their facilities directly and
all CLECs must permit any other telecommunications carrier to interconnect
with their facilities either directly or indirectly. All LECs, including
CLECs, also have a duty to:
. not unreasonably limit the resale of their services;
. provide number portability, if technically feasible, which will allow
a customer to retain its existing phone number if it switches its
local exchange carrier;
. provide dialing parity to competing providers and nondiscriminatory
access to telephone numbers, directory assistance, operator services
and directory listings;
. provide access to poles, ducts, conduits and rights-of-way; and
. establish reciprocal compensation arrangements for the transport and
termination of communications.
Other Federal Communications Regulations. In addition to the general
duties of all LECs, ILECs have the following additional duties:
. interconnect with any requesting telecommunications carrier at any
technically feasible point within their networks, on
nondiscriminatory terms, at prices based on cost (which may include a
reasonable profit) and provide service equal in quality to that
provided to their customers or the ILEC itself;
. provide any requesting telecommunications carrier unbundled access to
network elements at any technically feasible point at just,
reasonable and nondiscriminatory rates, terms and conditions;
. offer retail services to a requesting telecommunications carrier at
wholesale prices;
. provide reasonable public notice of changes in the network or the
information necessary to use the network or which affect
interoperability; and
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. provide for physical co-location for requesting telecommunications
carriers. Physical co-location is an offering by an ILEC that enables
another telecommunications carrier to enter the ILEC's premises to
install, maintain and repair its own equipment that is necessary for
interconnection or access to the ILEC's network elements.
The FCC also adopted guidelines for implementing the interconnection and
local competition provisions of the Telecommunications Act. In order to foster
competition in the local exchange market, the FCC required ILECs to offer
access to their communications networks to CLECs at cost-based rates. All of
these regulations affect the growth opportunities for some of our customers and
thus the demand for our services.
Appeal of the FCC's decision implementing the interconnection and local
competition provisions of the Telecommunications Act have resulted in the
review of certain FCC rules by the U.S. Supreme Court. On January 25, 1999, the
Supreme Court largely reversed an Eighth Circuit Decision and reestablished the
validity of many of the FCC rules that earlier had been vacated by the Eighth
Circuit.
On remand from the Supreme Court, the Eighth Circuit issued a decision on
July 18, 2000. The Eighth Circuit's decision, among other things, vacated and
remanded the FCC's rule that forward-looking costs used to calculate the rates
at which ILECs may charge CLECs for network elements be based on the most
efficient network model. The use of a forward-looking cost model was affirmed,
however. In addition, the Supreme Court recently agreed to hear argument on the
merits of the FCC's forward looking pricing methodology in a separate context
concerning the FCC's universal service support program.
The Supreme Court's January 25 decision also remanded the list of network
elements ILECs must offer to CLECs to the FCC for further consideration of the
necessity of each one under the statutory standard. On November 5, 1999, the
FCC released an order largely retaining its list of unbundled network elements,
but eliminating the requirement that ILECs provide unbundled access to local
switching for customers with four or more lines in the densest parts of the top
50 Metropolitan Statistical Areas in most circumstances, and the requirement to
provide operator services and directory assistance.
The FCC further required ILECs to offer dark fiber as an unbundled
network element on both a local loop and interoffice transport basis. This
availability of dark fiber from ILECs as an unbundled network element could be
in addition to other sources of dark fiber already available in the market. In
the event we offer dark fiber service, it is possible that the availability of
dark fiber from ILECs as an unbundled network element could affect the demand
for our services and the pricing of our services. To the extent our customers
buy unbundled network elements from the ILEC, any court or FCC revisions of the
interconnection and local competition provisions of the Telecommunications Act,
including access to unbundled network elements or pricing, could affect the
growth opportunities for some of our customers and thus demand for our
services.
On December 9, 1999, the FCC ordered ILECs to offer line sharing
arrangements that will permit competing carriers to offer digital subscriber
line services over the same copper loop facilities used by the ILECs to provide
voice telephone service. The prices that carriers charge for these arrangements
will be determined by state utility commissions. If these prices are set at low
levels, it could allow our competitors to offer low-cost alternatives to our
service and put downward pressure on our prices for transport services.
In addition to the numerous decisions to implement the Telecommunications
Act, in August 1999, the FCC issued an Order that provided substantial new
pricing flexibility to ILECs. The pricing flexibility applies primarily to
special access and dedicated transport. This ruling will ultimately permit
ILECs to utilize contract arrangements for the provision of dedicated services
similar to the way in which we offer these same types of services. As a result
of this new pricing flexibility for ILECs, we could face greater competition
with respect to the services we provide.
State Regulation
The Communications Act generally prohibits state and local governments
from enforcing any law, rule or legal requirement that prohibits or has the
effect of prohibiting any person from providing any interstate or
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intrastate telecommunications service. However, states retain jurisdiction to
adopt regulations necessary to preserve universal service, protect public
safety and welfare, ensure the continued quality of telecommunications services
and safeguard the rights of consumers.
Local Fiber must obtain and maintain certificates of authority from
regulatory bodies in states where it offers intrastate telecommunications
services on a common carrier basis. In most states, telecommunications
providers must also file and obtain prior regulatory approval of tariffs for
its regulated intrastate services. Certificates of authority can generally be
conditioned, modified or revoked by state regulatory authorities for failure to
comply with state law or regulations. Fines and other penalties also may be
imposed for such violations. Local Fiber is currently authorized as a CLEC to
provide intrastate services in New York and may seek additional authority in
other states. Delays in receiving required regulatory approvals in other states
could also have a material adverse effect on us. We cannot assure you that
regulators or third parties will not raise material issues with regard to our
compliance or non-compliance with applicable laws or regulations.
State regulatory commissions generally regulate the rates RBOCs charge
for intrastate services, including intrastate access services paid by providers
of intrastate long distance services. Intrastate access rates affect the costs
of carriers providing intrastate long distance services and demand for our
services and those that other carriers provide. Under the Communications Act,
state commissions have jurisdiction to arbitrate and review negotiations
between local telephone companies and CLECs regarding the prices local
telephone companies charge CLECs for interconnection and resale. In setting
these prices, state commissions must use a forward-looking cost methodology as
required by the FCC, and later upheld by the Supreme Court. A state may also
impose telecommunications taxes and fees for state-level universal service and
other programs on providers of services within that state.
Local Regulation
In addition to federal and state laws, local governments exercise legal
authority that may affect Local Fiber's operations. For example, local
governments retain the authority to license public rights-of-way, subject to
the limitation that local governments may not prohibit the provision of
telecommunications services. Local authorities affect the timing and costs
associated with the use of public rights-of-way. These regulations may have an
adverse effect on our business to the extent Local Fiber requires access to
such public rights-of-way.
Non-Telecommunications Services
Our subsidiaries, Equal Access and Devnet are not subject to
telecommunications carrier regulation. Unlike a telecommunications carrier,
Equal Access and Devnet do not hold their offerings out to the public generally
for a fee. Moreover, Equal Access and Devnet do not use public rights-of-way
which may trigger local regulation. Equal Access and Devnet generally enter
into exclusive agreements with building owners to
provide or manage intra-building fiber capacity to telecommunications carriers
on a private contractual basis. As such, Equal Access and Devnet merely provide
the in-building capacity over which telecommunications service providers may
provide telecommunications services, including access to the public telephone
system which enables a tenant to reach any point on the public telephone
system. However, certain proposals have been made before Congress and the FCC
that could have an adverse impact on Equal Access' and Devnet's exclusive
contractual rights, in certain buildings, to provide such capacity.
Regulation of Equal Access and Devnet
Equal Access and Devnet are subject to numerous local regulations such as
building and electrical codes, licensing requirements and construction
requirements. These regulations vary on a city-by-city and county-by-county
basis.
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Equal Access and Devnet generally secure multi-year license agreements
with real estate owners for the exclusive right to lease intra-building fiber
capacity to third parties. Under current FCC regulations, commercial real
estate owners have the right to control wiring within their premises, beyond
the demarcation point at which telecommunications carriers terminate their
facilities. The demarcation point is typically at a minimum point of entry to
the building such as the basement. These rules allow the real estate owners or
managers to install and maintain their own inside wiring, or to contract with
companies, such as Equal Access or Devnet, to maintain wiring on their behalf.
If laws or regulations are enacted that effectively require building owners to
give inside wiring access to all requesting telecommunications providers on
nondiscriminatory terms, Equal Access' and Devnet's ability to secure and
maintain exclusive inside wiring contracts may be inhibited.
Currently, there is no federal legal requirement that owners or managers
of commercial office buildings give access to competitive providers of
telecommunications services. However, such laws have been adopted in certain
states. For example, laws in Connecticut and Texas generally require commercial
real estate owners to provide nondiscriminatory access to requesting
telecommunications providers that have customers within a building, and limit
what the real estate owner may charge for such access. The California Public
Utilities Commission recently ruled that carriers cannot enter, on a
prospective basis, into exclusive access agreements with property owners that
would restrict the access of other carriers to the property or discriminate
against the facilities of other carriers. Although these laws require that
telecommunications carriers be permitted to install their own inside wiring,
there is no requirement that real estate owners allow such carriers to use
existing inside wiring. Thus, in certain states, telecommunications carriers
are permitted to construct inside wiring within buildings even if a provider
such as Equal Access or Devnet already have existing facilities.
Federal laws and regulations concerning building access have been
considered in the past and may be adopted in the future. On June 10, 1999, the
FCC initiated an inquiry into riser access in multiple tenant environments and
requested comment on the following issues:
. the FCC's tentative conclusion that utilities must allow
telecommunications and cable service providers access to rooftop and
other rights-of-way and utility shaft conduits in multiple tenant
environments on just, reasonable and nondiscriminatory rates, terms
and conditions;
. whether incumbent local telephone companies should make available
unbundled access to riser cable and wiring within multiple tenant
environments; and
. whether building owners offering access to any telecommunications
provider should be required to make comparable access available to all
such providers on a nondiscriminatory basis, and whether the FCC has
the authority to impose such a requirement.
In addition, legislation has recently been introduced in the U.S. House
of Representatives that covers similar issues concerning access to building
risers and rights-of-way. Legislation has also been introduced in both the
Senate and the House that addresses issues relating to telecommunications
access to buildings owned or used by the federal government. We cannot predict
the outcome of the FCC's proceeding or of any legislation, nor what effect, if
any, it may have on our business.
Liability for Internet Content
There have been various statutes, regulations and court cases relating to
liability of Internet service providers and other on-line service providers for
information carried on or through their services or equipment, including in the
areas of copyright, indecency, obscenity, defamation and fraud. The laws in
this area are unsettled and there may be new legislation and court decisions
that may affect our services and expose us to liability.
Other Regulations
Our operations are subject to various federal, state, local and foreign
environmental, safety and health laws and governmental regulations. These laws
and regulations govern matters such as the generation, storage,
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handling, use and transportation of hazardous materials, the emission and
discharge of hazardous materials into the atmosphere, the emission of
electromagnetic radiation, the protection of wetlands, historic sites and
endangered species and the health and safety of our employees.
Although we monitor compliance with environmental, safety and health laws
and regulations, we cannot ensure that our operations have been or will be in
complete compliance with these laws and regulations. We may be subject to fines
or other sanctions imposed by governmental authorities if we fail to obtain
certain permits or violate the laws and regulations. We do not expect any
material capital or other expenditures for compliance with laws, regulations or
permits relating to the environment, safety and health to be material in 2000.
In addition, our business may be subject to environmental laws requiring
the investigation and cleanup of contamination at sites we own or operate or at
third party waste disposal sites. These laws often impose liability even if the
owner or operator did not know of, or was not responsible for, the
contamination. Although we operate numerous sites in connection with our
operations, we are not aware of any liability relating to contamination at
these sites or third party waste disposal sites that could have a material
adverse effect on our business or financial condition.
Employees
As of July 31, 2000, we had 139 employees, including 42 in engineering,
50 in network operations, 7 in network construction 24, in sales and marketing
and 16 in finance and administration. We have not experienced any work
stoppages and consider our relations with our employees to be good.
Facilities
Our principal offices are located at 570 Lexington Avenue, in New York,
New York where we lease an aggregate of approximately 12,195 square feet. The
term for these premises expires in 2008. Our subsidiary, Devnet, is located at
325 Riverside Avenue, Westport, Connecticut. We lease 4,930 square feet under a
lease that expires in 2001, with an option to extend the lease to 2006, and
3,260 square feet under a lease that expires in 2002, with an option to extend
the lease to 2007. We also have office space in Rochester, New York, our former
headquarters. We lease 15,000 square feet under a lease that expires in 2005.
Currently, our NOC is located at 60 Hudson Street in New York, and we are in
the process of relocating this facility to the Gateway Center in Newark, New
Jersey. Our warehouse facility is located in Long Island City, New York. We
lease 6,500 square feet under a lease that expires in 2005. We have also leased
two facilities at major carrier hotels in New York, New York. These facilities
are located at 60 Hudson Street and at 111 Eighth Avenue. The lease for the
15,239 square feet facility at 60 Hudson Street extends through 2008 and the
lease for the 5,672 square feet facility at 111 Eighth Avenue extends through
2015. We also lease space in the basements of our on-net buildings for our
central equipment rooms. We intend to lease additional space in the next 12
months.
Legal Proceedings
We are currently not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers and Directors
The following table sets forth certain information concerning our
directors and executive officers:
<TABLE>
<CAPTION>
Name Age Positions
---- --- ---------
<S> <C> <C>
Michael S. Liss (1) 46 President, Chief Executive Officer, Director
Roy (Trey) D. Farmer III 29 Chief Operating Officer, Executive Vice President, Director
Les Hankinson 48 Senior Vice President--Sales and Marketing
Lance L. Mickel 48 Senior Vice President--Network Operations
Warren Miller 59 Senior Vice President--Network Construction
Allan Zendle 46 Senior Vice President--Engineering
Jon A. DeLuca 29 Chief Financial Officer
Timothy P. Bradley (1) 38 Director
Steven G. Chrust (2) 51 Director
Philip L. DiGennaro 40 Director
Charles J. Mahoney (1) 62 Director
Richard E. Sayers (2) 63 Director
William Vrattos (2) 31 Director
</TABLE>
--------
(1) Member of our compensation committee
(2) Member of our audit committee
Michael S. Liss has served as our president and chief executive officer,
and as one of our directors, since May 11, 1999. From 1994 to 1999, he was a
managing director of Lazard Freres & Co. LLC, and prior to that he was a
senior managing director of Bear, Stearns & Co. Inc. Mr. Liss has a B.A. from
Columbia University, a J.D. from Yale Law School and a M.P.P.M. from the Yale
School of Management.
Roy (Trey) D. Farmer III has served as our chief operating officer since
August 9, 2000 and as our executive vice president and one of our directors
since May 11, 1999. From 1998 to 1999, he was a partner of Sterling Capital
LLC, a private investment firm. From 1997 to 1998, Mr. Farmer worked with
Bright Sun Consulting, a strategic consulting firm based in New York City that
repositioned technology companies. He has an A.B. from Princeton University,
an M.Ed. from Harvard University and an M.A.R. from Yale University.
Les Hankinson has served as our senior vice president of sales and
marketing since October 4, 1999. Mr. Hankinson has more than 27 years of
executive level experience in the telecommunications industry. From 1991 to
1999, he was with British Telecommunications plc, where he was responsible for
worldwide wholesale sales and marketing for carrier services as well as
Internet and multimedia. As vice president and general manager of Internet
sales and marketing, he was responsible for launching British
Telecommunications' line of products aimed at the wholesale and retail
Internet market. Mr. Hankinson has also held executive positions at Sprint,
MCI WorldCom, Satellite Business Systems, and Cable & Wireless. He attended
George Mason University and completed a telecommunications master's program at
the Telecommunications Engineering Staff College in London, England.
Lance L. Mickel has served as our senior vice president of network
operations since January 18, 2000. Mr. Mickel has more than 28 years of
executive level experience with AT&T. From 1971 to 2000, Mr. Mickel was
employed by AT&T, most recently as general manager for AT&T's global network
services serving IBM and other large enterprise accounts. Prior to that time,
he was responsible for managing AT&T's global network of voice, data, IP,
wireless, international and local services from its global network operations
center. In addition to leading the design of AT&T's new global network
operations center, Mr. Mickel played an integral role in repositioning the
operations of numerous AT&T business units. He attended College of DuPage.
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Warren Miller has served as our senior vice president of network
construction since June 17, 2000. Mr. Miller has more than 30 years of
executive level experience in the telecommunications industry. From 1998 to
1999, Mr. Miller was president of Avista Fiber, a regional fiber optic CLEC in
the Northwest. From 1985 to 1997, he was the Telecommunications Manager for
Avista Corporation where he was responsible for strategic planning and
implementation of telecommunications infrastructure for the corporation. He
has extensive experience in design of telephony, microwave, and data
applications. Mr. Miller has a B.S. in electrical engineering from the
University of Washington and is a registered Professional Engineer.
Allan Zendle has served as our senior vice president of engineering
since May 26, 2000. Mr. Zendle has over 18 years of experience in executive
level technology management positions in the telecommunications industry. From
1996 to 2000, Mr. Zendle served as vice president, architecture and advanced
technology, for Winstar Communications, Inc., where he pioneered the
development and implementation of next generation fixed wireless broadband
local networks. From 1995 to 1996 he was employed by Bell Atlantic as director
of systems engineering. Previously, Mr. Zendle was employed by MCI WorldCom,
where his responsibilities included development of next generation
telecommunications services based on newly emerging technologies. Mr. Zendle
has a B.S. from Frostburg University, and has several telecommunications
patents pending.
Jon A. DeLuca has served as our chief financial officer since August 9,
2000 and as our vice president of finance since June 14, 1999. From 1997 to
1999, Mr. DeLuca was a Managing Director of Lago Industries, LLC, a private
merchant banking firm. From 1992 to 1997 he was employed in the leveraged
finance groups of Lazard Freres & Co. LLC and Bear, Stearns & Co. Inc. Mr.
DeLuca has a B.A. from Trinity College.
Timothy P. Bradley has served as one of our directors since May 7, 1999.
From 1998 to the present, Mr. Bradley has been a managing partner of Signal
Equity Partners L.P., a private equity investment fund focused on the telecom-
munications and information technology industries, which he co-founded. Mr.
Bradley also co-founded Signal Partners LLC, a financial advisory firm whose
clients included Fortune 500 companies and premier private equity funds, where
he worked from 1996 to 1998. From 1992 to 1996, Mr. Bradley was a general
partner at the Exeter Group of Funds, a private equity investment firm. Prior
to that, Mr. Bradley was a practicing attorney in New York City. Mr. Bradley
currently serves as a director of Telecommunications Systems, Inc. He has a
B.A. from Yale University, a J.D. from New York University School of Law, and
an M.B.A. from Columbia Business School.
Philip L. DiGennaro has served as the president of our subsidiary,
Devnet, and as one of our directors since July 31, 2000. Mr. DiGennaro served
as president and chief operating officer of Devnet from 1996 to 2000. In 1996,
Mr. DiGennaro founded Sound Development Group, a commercial real estate
investment and development company based in Westport, Connecticut, which he
ran until 1998. From 1982 to 1988, Mr. DiGennaro was employed by the New York
State Employees Retirement System as an investment manager. Mr. DiGennaro
specialized in real estate and underwrote and placed several billion dollars
of first mortgage loans on major commercial properties throughout the United
States. He has a B.S. in Finance from Fairfield University.
Steven G. Chrust has served as one of our directors since December 8,
1999. From 1998 to present, he has served as founder and president of SGC
Advisory Services, Inc., an advisory and money-management firm specializing in
telecommunications and technology, and has been involved with the
telecommunications and financial services industries for over 25 years. He was
a co-founder and served as vice chairman of Winstar Communications, Inc. from
1995 through 1998. Previously, Mr. Chrust was director of technology research
at Sanford C. Bernstein & Co., an investment management firm. Mr. Chrust was
chairman of the Association for Local Telecommunications Services, the
national organization representing facilities-based competitive local exchange
carriers. Currently, Mr. Chrust serves as a director of Worlds.com Inc. Mr.
Chrust has a B.A. from Baruch College.
Charles J. Mahoney has served as one of our directors since May 7, 1999.
He is currently president and chief executive officer of Arcade Building
Services, a wholly owned subsidiary of Tishman Speyer
49
<PAGE>
Properties, L.P. From 1990 to 2000, he was a senior managing director and
managing director with Tishman Speyer Properties. Prior to his employment at
Tishman Speyer Properties, Mr. Mahoney held positions at the Helmsley
Organization and at Con Edison. He has a B.S. from C.W. Post College.
Richard E. Sayers has served as one of our directors since May 7, 1999.
Since 1996, he has served as the president of Taurus Telecommunications, Inc.,
a private consulting company in the telecommunications industry. From 1994 to
1996, Mr. Sayers was the vice chairman of ACC Corp. and president of its
international group, serving as chairman of ACC Telenterprises (ACC-Canada) and
chairman of ACC Long Distance, United Kingdom. Mr. Sayers has nearly 40 years
of executive level experience in the telecommunications industry. He has a B.S.
from Union College.
William Vrattos has served as one of our directors since September 29,
1999. Since 1997, he has been a managing director of Waterview Advisors LLC and
Georgica Advisors LLC, investment management firms focusing on public and
private investments in the media, communications and entertainment industries.
Prior to that, Mr. Vrattos worked in the investment banking division of Morgan
Stanley & Co. Incorporated from 1991 until 1997. Mr. Vrattos has a B.A. from
Dartmouth College and an M.B.A. from Harvard University.
Composition of the board of directors
Under our certificate of incorporation and by laws, the number of our
directors is determined by the board of directors. The board of directors
currently consists of eight members. 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. Messrs. Liss and DiGennaro's
employment agreements provide that they shall serve on our board of directors
for the duration of their employment agreements. There are no family
relationships among any of our directors or officers.
Committees of the board of directors
Our board of directors has a compensation committee and an audit
committee.
The members of our compensation committee are Timothy P. Bradley, Michael
S. Liss and Charles J. Mahoney. The compensation committee reviews, approves
and makes recommendations concerning salaries and incentive compensation for
our employees and consultants, establishes and approves salaries and incentive
compensation for our executive officers, and administers our stock plans. The
compensation committee also administers and reviews general policies relating
to compensation and employee benefits.
The members of our audit committee are Richard E. Sayers, Steven G.
Chrust and William Vrattos. The audit committee oversees the engagement of our
independent public accountants, reviews the results and scope of annual audits
and other services provided by our independent public accountants.
Compensation of directors
Our directors do not receive an annual retainer or any fees for attending
regular meetings of the board of directors. Non-employee directors are
reimbursed for travel costs and other reasonable out-of-pocket expenses
incurred in connection with attending meetings of the board of directors or any
committee thereof.
Non-employee directors are eligible to receive grants of non-qualified
stock options under our equity incentive plan and we may, in the future, grant
such options to non-employee directors as an incentive to join or
50
<PAGE>
remain on our board of directors. Options exercisable for 225,000 shares of our
common stock were granted to non-employee directors under our 1999 stock option
plan during fiscal 1999 as follows:
<TABLE>
<CAPTION>
Date Number Per Share
of of Exercise
Name of Recipient Grant Options Price
----------------- ------- ------- ---------
<S> <C> <C> <C>
Charles J. Mahoney.................................... 5/24/99 25,000 $4.25
12/3/99 75,000 $5.00
William Vrattos(1).................................... 9/29/99 25,000 $3.00
Steven G. Chrust...................................... 12/3/99 100,000 $5.00
</TABLE>
--------
(1) Mr. Vrattos beneficially owns these shares as a managing director of
Waterview Advisors LLC, which is the investment management firm of
Waterview Partners L.P.
In addition, in March 1999 we granted Richard E. Sayers non-qualified
stock options to purchase 250,000 shares of our common stock at a per share
exercise price of $1.875.
Compensation committee interlocks and insider participation
The compensation committee has three members, Timothy P. Bradley, Michael
S. Liss and Charles J. Mahoney. While Mr. Liss, our chief executive officer and
president, participates in decisions relating to compensation of executive
officers, he does not vote on matters relating to his own compensation. None of
our executive officers serves as a member of the board of directors or
compensation committee of any entity that has one or more executive officers
serving as a member of our board of directors or compensation committee.
Executive compensation
The following table sets forth the compensation paid by us during 1999 to
our chief executive officer and our executive vice president. No other
executive officer or employee had compensation in excess of $100,000 during
1999. We refer to both of these people as our named executive officers in this
prospectus.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
----------------------------- ----------------------
Securities Payouts
Name and Principal Restricted Underlying LTIP All other
Position Salary Bonus Stock Awards Options/SARs Payouts Compensation
------------------ -------- ------- ------------ ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Liss......... $158,653 $ -- $ -- 1,005,000 -- --
President, CEO &
Director(1)
Roy (Trey) D. Farmer 107,757 15,000 -- 340,000 -- --
III...................
Chief Operating
Officer, Executive
Vice President &
Director(2)
</TABLE>
--------
(1) Mr. Liss was elected as an executive officer on May 7, 1999, at an annual
base salary of $250,000. As of January 1, 2000, Mr. Liss' annual base
salary was increased to $325,000.
(2) Mr. Farmer was elected as an executive officer on May 7, 1999, at an annual
base salary of $175,000. As of January 1, 2000, Mr. Farmer's annual base
salary was increased to $250,000.
Option Grants in 1999
Option Grants. In 1999, we granted options to purchase an aggregate of
3.4 million shares of our common stock to employees under our equity incentive
plan. Generally, we grant options at an exercise price equal to the fair market
value of the underlying common stock on the date of grant, as determined by our
board of directors, and the options vest over four years from the date of
grant. Because we are a publicly-held company, the fair market value of our
common stock equals the closing price of our common stock on the Nasdaq
National Market on a given day.
51
<PAGE>
The following table sets forth information relating to stock options
granted to our named executive officers in 1999. All of these options were
awarded under our equity incentive plan and have a term of 10 years from the
date of grant.
Individual Grants
<TABLE>
<CAPTION>
Percent Potential Realizable Value at
Number of of Total Exercise Assumed Annual Rates of
Shares Options or Base Stock Price Appreciation
Underlying Granted Price for Option Term
Options to Per Expiration --------------------------------
Name Granted Employees Share($) Date 0% 5% 10%
---- ---------- --------- -------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Michael S. Liss......... 125,000 4.4% $4.000 5/11/2009 $ -- $ 314,447 $ 796,871
440,000 15.4 3.750 12/3/2009 1,540,000 3,546,174 6,624,038
440,000 15.4 6.000 12/3/2009 550,000 2,556,174 5,634,038
Roy (Trey) D. Farmer
III.................... 125,000 4.4 4.000 5/11/2009 -- 314,447 796,871
215,000 7.5 5.000 12/3/2009 483,750 1,464,039 2,967,996
</TABLE>
In accordance with the rules of the Securities and Exchange Commission,
the above table sets forth the potential realizable value over the ten-year
period from the grant date to the expiration date, assuming rates of stock
appreciation of 5% and 10%, compounded annually. These amounts do not represent
our estimate of future stock price performance. Actual realizable values, if
any, of stock options will depend on the future performance of our common
stock.
Option Exercises and Year-End Option Values. The following table sets
forth information for our named executive officers, relating to the number and
value of securities underlying exercisable and unexercisable options held at
December 31, 1999. Neither of the named executive officers exercised stock
options during 1999.
Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Securities Underlying Value of the Unexercised
Shares Unexercised Options In-The Money Options
Acquired at Fiscal Year End at Fiscal Year End
on Value ------------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------- -------- --------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Liss......... -- -- 83,125 921,875 $924,765.62 $9,485,859.30
Roy (Trey) D. Farmer
III................... -- -- 83,125 256,875 $924,765.62 $2,642,734.30
</TABLE>
The value of unexercised in-the-money options at December 31, 1999 in the
table above is based on a value of $15.125 per share, the last reported sale
price of our common stock on the OTC Bulletin Board on December 31, 1999, less
the per share exercise price, multiplied by the number of shares issuable upon
exercise of the option. All options were granted under our 1999 stock option
plan.
Employment Agreements
On May 7, 1999, we entered into executive employment agreements with
Michael S. Liss and Roy (Trey) D. Farmer III. The agreements with Mr. Liss and
Mr. Farmer provide for a term of two years. The terms of the agreements with
Mr. Liss and Mr. Farmer provide that Mr. Liss will serve as our president,
chief executive officer and as a member of our board of directors and Mr.
Farmer will serve as our executive vice president. Under these agreements, Mr.
Liss will receive a minimum annual base salary of $250,000, and Mr. Farmer will
receive a minimum annual base salary of $175,000, both of which may be
increased at the discretion of our board of directors, or a committee thereof.
Mr. Liss and Mr. Farmer are eligible to receive a cash bonus at the reasonable
discretion of our board of directors. In addition, Mr. Liss and Mr. Farmer are
each entitled to receive incentive stock options, as defined in Section 422 of
the Internal Revenue Code of 1986, under our equity incentive plan for 25,000
shares of our common stock, or such lesser amount then allowed under the
Internal Revenue Code, with an exercise price equal to the fair market value of
our common stock as of May 5, 1999. Mr. Liss and Mr. Farmer are also each
entitled to receive non-qualified stock options to purchase up to 100,000
shares of our common stock at $4.75 per share.
52
<PAGE>
If we terminate Mr. Liss or Mr. Farmer without cause, or either Mr. Liss
or Mr. Farmer terminates his employment agreement for good reason, they will be
entitled to receive an amount equal to 12 months of their then current base
salary, all of the options granted to them under their employment agreement
shall vest and they shall have 12 months to exercise such options. The
agreements for Mr. Liss and Mr. Farmer contain a one year post-termination non-
compete and non-solicitation provision.
We have also entered into employment agreements with Messrs. Hankinson,
Mickel, Miller and Zendle. Each of their employment agreements has a two year
term and is subject to non-competition and non-solicitation provisions. Mr.
Miller receives a minimum annual salary of $200,000 and the others each receive
a minimum annual salary of $225,000, all subject to increase by the
compensation committee of our board of directors. In addition, each of them,
except for Mr. Miller, received a $30,000 signing bonus. All of them are
eligible for additional bonuses under certain circumstances. Mr. Hankinson was
guaranteed a minimum bonus of $80,000 for the year ended December 31, 2000 and
shall receive a minimum bonus of $80,000 for his services during the year 2001.
They each received the following options to purchase our common stock, which
vest over the term of their employment agreements. The vesting of these options
will accelerate if they are terminated by us without cause or if they terminate
their agreement for good reason:
<TABLE>
<CAPTION>
Number
of
Executive Officer Options Grant Price
----------------- ------- -----------
<S> <C> <C>
Les Hankinson..................... 162,792 $ 4.500
137,208 $ 5.375
Lance Mickel...................... 275,000 $ 9.313
Warren Miller..................... 250,000 $13.125
Alan Zendle....................... 275,000 $ 8.750
</TABLE>
We also entered into an employment agreement with Mr. DiGennaro. His
employment agreement is for a one year term and is subject to non-competition
and non-solicitation provisions. He receives a minimum annual salary of
$200,000, subject to increase by the compensation committee of our board of
directors. In addition, Mr. DiGennaro is eligible to receive a bonus under
certain circumstances. He received options to purchase 300,000 shares of our
common stock, which vest over a two-year period. The vesting of his options
will accelerate if he is terminated by us without cause or if he terminates his
agreement for good reason. The exercise price for Mr. DiGennaro's stock options
is $14.75.
Employee Benefit Plans
Equity incentive plan
On May 23, 2000, our board of directors approved, and on April 27, 2000
our stockholders ratified, the adoption of an equity incentive plan, which
amends and restates our 1999 stock option plan. The equity incentive plan
provides for the grant of incentive stock options, non-qualified stock options
and other performance and non-performance based equity awards, including
restricted stock, performance awards, stock appreciation rights, or SARs, and
other types of awards based on our common stock. We are generally granted a
repurchase option exercisable upon voluntary or involuntary termination of a
participant's employment with us.
Shares available and award limitations. A maximum of 10 million shares of
common stock are available for issuance under the equity incentive plan. In the
event of a recapitalization, stock split, stock dividend, reorganization,
business combination, or other similar corporate transaction or event affecting
the common stock, adjustments may be made to the number and kind of shares
available for issuance under the equity incentive plan.
We may only issue an aggregate of 10% of the shares reserved under the
equity incentive plan for awards designated as each of restricted stock,
performance units and performance shares. For awards of options
53
<PAGE>
designated as incentive stock options, the aggregate number of shares that may
be subject to such options shall not exceed the initial 10 million shares
reserved under the equity incentive plan. Shares available for awards under the
equity incentive plan may be either authorized and unissued shares or shares
held in or acquired for our treasury.
In order to qualify awards as performance-based compensation, our equity
incentive plan also limits the number of shares subject to awards that may be
granted to any one participant in any given fiscal year. No participant in our
equity incentive plan may, in any year, be granted options or restricted stock
awards with respect to more than 900,000 shares of common stock. This limit
includes the number of shares that may be paid to a participant pursuant to the
exercise or settlement of an award. In addition, the equity incentive plan
limits the amount of cash that may be paid to an individual pursuant to an
exercise or settlement of an award in any given fiscal year to a maximum
aggregate amount of $5,000,000.
Under our equity incentive plan, as of July 31, 2000:
. options to purchase 6,497,783 shares of common stock had been granted
and were outstanding;
. no shares of restricted stock had been granted; and
. 3,476,369 shares of common stock remained available for the grant of
awards under the plan as of July 31, 2000.
Eligibility. All of our, and our subsidiaries', current and future
employees, including officers, non-employee directors, and consultants are
eligible to participate in and receive a grant or grants of an award under our
equity incentive plan.
Administration. Our equity incentive plan is administered by the
compensation committee of our board of directors or another committee appointed
by our board to administer the plan. The compensation committee has the
authority to make all determinations required under our equity incentive plan,
including:
. individuals eligible to receive awards;
. the type and number of awards to be granted;
. the number of shares subject to the awards; and
. the time or times at which awards will be granted, exercisable or
settled, including any performance conditions to be satisfied in
connection with the awards.
The compensation committee also has the authority to:
. interpret and establish rules and regulations relating to the equity
incentive plan and any individual agreements entered pursuant to the
plan; and
. make all other determinations that may be necessary or advisable for
administration of the equity incentive plan.
Change in control. The equity incentive plan provides that upon a change
in control of FiberNet, unless a participant's award agreement provides
otherwise:
. outstanding awards will immediately vest and become fully exercisable;
. any restrictions, deferral of settlement and forfeiture conditions of
such awards will lapse; and
. goals relating to performance-based awards will be deemed met or
exceeded.
Our board of directors may determine that an event that otherwise would
constitute a change in control will not result in accelerated vesting and
exercisability or other enhancements of rights under the equity
54
<PAGE>
incentive plan. If our board of directors makes such a determination, the award
will remain outstanding and the value of the award will not be materially
impaired.
Amendment and termination of the equity incentive plan. Our board of
directors may amend, suspend or terminate the equity incentive plan or the
compensation committee's authority to grant awards under the plan, without
stockholder approval unless stockholder approval is required by law,
regulation, or stock exchange rule.
Employee Equity Participation Program
We previously had in place a stock option plan known as the employee
equity participation program. We granted 1,328,390 stock options under this
plan. On May 7, 1999, our board of directors terminated this plan. Accordingly,
additional stock options can not be granted under the employee equity
participation program. Options to purchase an aggregate of 913,945 shares of
our common stock remain outstanding under our employee equity participation
program.
401(k) Plan
We have adopted a 401(k) plan in which all eligible employees are
entitled to make pre-tax contributions. This plan is intended to qualify under
Section 401 of the Internal Revenue Code of 1986, so that contributions by
employees or by us to the plan, and income earned on plan contributions, are
not taxable to employees until withdrawn from the plan, and so that
contributions by us, if any, will be deductible by us when made. All full-time
employees become eligible for participation in the plan on the date of their
employment. Eligible participants may make pre-tax contributions to the 401(k)
Plan of up to 15% of their eligible earnings, subject to a statutorily
prescribed annual limit. On a discretionary basis, we may match contributions
made by participating employees under the plan. As of July 31, 2000, we have
not matched any contributions made under the plan.
As of July 31, 2000, we granted options to our executive officers and
five of our directors pursuant to our equity incentive plan. The options
typically vest annually over one or two years from the date of grant. Our
section on executive compensation of management, beginning on page 52, provides
more information on options granted to our named executive officers.
<TABLE>
<CAPTION>
Director/Executive Officer Grant Date Total Grant Price
-------------------------- ---------- ------- -----------
<S> <C> <C> <C>
Mahoney, Charles............................ 05/24/99 25,000 $ 4.250
12/03/99 75,000 $ 5.000
Vrattos, William ........................... 08/29/99 25,000 $ 3.000
Chrust, Steven.............................. 12/03/99 100,000 $ 5.000
Hankinson, Les.............................. 10/04/99 137,208 $ 5.375
10/04/99 162,792 $ 4.500
Mickel, Lance............................... 05/23/00 300,000 $ 9.313
Miller, Warren.............................. 05/23/00 24,000 $ 9.313
05/23/00 2,600 $13.120
05/23/00 6,700 $18.740
05/23/00 6,700 $20.170
06/17/00 250,000 $13.125
Zendle, Allan............................... 05/26/00 275,000 $ 8.750
DeLuca, Jon................................. 06/14/99 90,000 $ 4.031
12/03/99 85,000 $ 5.000
12/18/99 50,000 $ 5.000
12/18/99 75,000 $ 5.000
</TABLE>
55
<PAGE>
Limitation of Directors' Liability and Indemnification
Our certificate of incorporation limits the liability of directors to the
maximum extent permitted by Delaware law. Delaware law provides that directors
of a corporation will not be personally liable for monetary damages for breach
of their fiduciary duties as directors, except liability for any of the
following:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
This limitation of liability does not apply to liabilities arising under
the federal securities laws and does not affect the availability of equitable
remedies such as injunctive relief or rescission.
Our bylaws provide that we must indemnify our directors and executive
officers and may indemnify our other officers and employees and other agents to
the fullest extent permitted by law. We believe that indemnification under our
bylaws covers at least negligence and gross negligence on the part of
indemnified parties. Our bylaws also permit us to secure insurance on behalf of
any officer, director, employee or other agent for any liability arising out of
his or her actions in this capacity, regardless of whether the bylaws would
permit indemnification. We have purchased directors and officers liability
insurance, which provides coverage against specified liabilities.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of our outstanding shares of common stock as of July 31, 2000 by:
. each stockholder known by us to own beneficially more than 5% of our
common stock. Beneficial ownership is determined in accordance with
the rules of the Securities and Exchange Commission, and includes
voting or investment power with respect to the securities;
. our named executive officers;
. each of our directors; and
. all of our current directors and executive officers as a group.
Shares of common stock that may be acquired by an individual or group
within 60 days of July 31, 2000, pursuant to the exercise of options, warrants
or conversion privileges are deemed to be outstanding for the purpose of
computing the percentage ownership of such individual or group, but are not
deemed to be outstanding for the purpose of computing the percentage ownership
of any other person shown in the table.
Except as indicated in footnotes to this table, we believe that the
stockholders named in this table have sole voting and investment power with
respect to all shares of common stock shown to be beneficially owned by them
based on information provided to us by such stockholders. The percentage of
beneficial ownership prior to the offering is based on 32,084,650 shares of
common stock outstanding on July 31, 2000 and gives effect to the conversion of
all of our outstanding shares of preferred stock into 14,809,358 shares of
common stock. The percentage of beneficial ownership after the offering is
based on shares of common stock outstanding after the completion of this
offering.
This table reflects the grant by SMFS, Inc., LTJ Group, Inc. and LPS
Consultants, Inc. of a proxy to vote all of their shares, an aggregate of
12,635,580 shares, at meetings of stockholders, to:
. Signal Equity Partners, L.P., of which Mr. Bradley, one of our
directors, is a managing partner;
. Trident Telecom Partners, LLC, which is controlled by Trident Telecom
Management, LLC; and
. Concordia Telecom Management, L.L.C., of which Mr. Liss is a sole
member.
This proxy terminates upon the completion of this offering.
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to the Owned After the
Offering Offering
--------------------- --------------------
Number Percentage Number Percentage
---------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Five Percent Stockholders
Concordia Telecom Management, 14,121,334 29.78% 1,485,754 %
L.L.C.(1)(2).....................
570 Lexington Avenue
New York, New York 10022
LTJ Group, Inc.(1)(3).............. 4,581,690 9.80 4,581,690
61 Old Well Road
Rochester, New York 16462
Metromedia Fiber Network Services, 5,000,000 10.80 5,000,000
Inc..............................
One North Lexington Avenue
White Plains, New York 10601
Nortel Networks Inc.(4)............ 4,263,330 9.20 4,263,330
GMS 991 15 A40
2221 Lakeside Blvd.
Richardson, Texas 75082
Signal Equity Partners, 18,616,379 40.18 5,980,799
L.P.(1)(5).......................
10 East 53rd Street
New York, New York 10022
SMFS, Inc.(1)(6)................... 7,090,000 13.54 7,090,000
12-12 43rd Avenue
Long Island City, New York 11101
Trident Telecom Management, 13,838,384 29.75 1,202,804 --
LLC(1)(7)........................
445 Park Avenue
New York, New York 10022
</TABLE>
57
<PAGE>
<TABLE>
<CAPTION>
Shares Beneficially Shares Beneficially
Owned Prior to the Owned After the
Offering Offering
--------------------- ---------------------
Number Percentage Number Percentage
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Directors and Executive Officers
Michael S. Liss(1)(8)............. 15,186,334 25.32% 2,550,754
Roy (Trey) D. Farmer III(9)....... 540,000 1.15 540,000
Timothy P. Bradley(1)(10)......... 18,616,379 35.63 5,980,799
Steven Chrust(11)................. 134,390 * 134,390
Charles J. Mahoney(12)............ 62,500 * 62,500
Richard Sayers(13)................ 531,337 1.14 531,337
William Vrattos(14)............... 378,780 * 378,780
Philip L. DiGennaro(15)........... 760,608 1.64 760,608
All current executive officers and
directors as a group (13
persons)(16).................... 24,178,532 46.05 11,542,952
</TABLE>
--------
* Less than 1%
(1) SMFS, Inc., LTJ Group, Inc. and LPS Consultants, Inc. hold 7,090,000,
4,581,690 and 963,890 shares of our common stock, respectively. Pursuant
to our stockholders agreement dated May 7, 1999, they each granted
irrevocable proxies to Signal Equity Partners, L.P., Trident Telecom
Partners, LLC and Concordia Telecom Management, L.L.C. to vote all of
their shares, an aggregate of 12,635,580 shares, at all meetings of
stockholders. The proxy will terminate upon completion of this offering.
(2) Includes the right to vote 12,635,580 shares pursuant to the proxy
described in note (1) above and 1,145,001 shares of common stock issuable
upon the exercise of warrants that are exercisable within 60 days of July
31, 2000.
(3) Includes 231,134 shares of common stock issuable upon the exercise of
warrants that are exercisable within 60 days of July 31, 2000, and
190,000 shares of common stock issuable upon the exercise of options that
are exercisable within 60 days of July 31, 2000.
(4) Represents 4,263,330 shares of common stock issuable upon the conversion
of preferred stock upon the completion of this offering.
(5) Represents the right to vote 12,635,580 shares pursuant to the proxy
described in note (1) above, 2,349,000 shares of common stock issuable
upon the exercise of warrants that are exercisable within 60 days of July
31, 2000 and 3,631,799 shares of common stock issuable upon the
conversion of preferred stock upon the completion of this offering. This
number includes 33,333 shares of common stock issuable upon the exercise
of warrants held by Signal Equity Management Corp.
(6) Includes 190,000 shares of common stock issuable upon the exercise of a
stock option that was exercisable as of July 31, 2000.
(7) Includes the right to vote 12,635,580 shares pursuant to the proxy
described in note (1) above. The proxy is held by Trident Telecom
Partners LLC, which is managed by Trident Telecom Management LLC. This
number also includes 966,861 shares of common stock issuable upon the
exercise of warrants that are exercisable within 60 days of July 31,
2000.
(8) Represents the shares owned by Concordia Telecom Management, L.L.C.,
including those described in note (2) above, of which Mr. Liss holds 100%
of the membership interests, 60,000 shares of common stock issuable upon
the exercise of a warrant that is exercisable within 60 days of July 31,
2000 and 1,005,000 shares of common stock issuable upon the exercise of
stock options that were exercisable as of July 31, 2000.
(9) Includes 200,000 shares of common stock issuable upon the exercise of
warrants that are exercisable within 60 days of July 31, 2000 and 340,000
shares of common stock issuable upon the exercise of stock options
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<PAGE>
that were exercisable as of July 31, 2000. The number of shares does not
include 200,000 shares of common stock issuable upon the exercise of stock
options that are not exercisable within 60 days of July 31, 2000.
(10) Represents the shares owned by Signal Equity Partners, L.P. described in
note (5) above, of which Mr. Bradley is the managing partner. Mr. Bradley
disclaims beneficial ownership of such shares except to the extent of his
pecuniary interest.
(11) Represents 34,965 shares of common stock issuable upon the exercise of
warrants that are exercisable within 60 days of July 31, 2000 and 50,000
shares of common stock issuable upon the exercise of a stock option that
was exercisable as of July 31, 2000. The number of shares does not
include 50,000 shares of common stock issuable upon the exercise of stock
options that are not exercisable within 60 days of July 31, 2000.
(12) Represents 62,500 shares of common stock issuable upon the exercise of
stock options that were exercisable as of July 31, 2000.
(13) Includes 71,809 shares of common stock issuable upon the exercise of
warrants that are exercisable within 60 days of July 31, 2000, 294,000
shares of common stock issuable upon the exercise of a stock option that
was exercisable as of July 31, 2000, and 72,856 shares of common stock
issuable upon the conversion of our preferred stock upon completion of
this offering. Mr. Sayers beneficially owns the warrants to purchase
44,000 shares and the 72,856 shares of common stock through Taurus
Telecommunications Inc., of which Mr. Sayers is the president.
(14) Represents the shares owned by Waterview Partners, L.P., which is
controlled by Waterview Advisors LLC, of which Mr. Vrattos is a managing
director. Mr. Vrattos disclaims beneficial ownership of such shares
except to the extent of his pecuniary interest. The number of shares
represents 353,780 shares of common stock issuable upon the conversion of
preferred stock upon the completion of this offering and 25,000 shares of
common stock issuable upon the exercise of a stock option that was
exercisable as of July 31, 2000.
(15) Represent shares owned by F.P. Enterprises L.L.C., beneficially owned by
Mr. DiGennaro.
(16) Includes 3,904,775 shares of common stock issuable upon the exercise of
warrants that are exercisable within 60 days of July 31, 2000, 2,335,833
shares of common stock issuable upon the exercise of options that were
exercisable as of July 31, 2000 and 4,058,435 shares of common stock
issuable upon the conversion of preferred stock upon the completion of
this offering.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Equity Issuances and Financings
November 1997 Private Placement
In connection with a corporate restructuring, on November 27, 1999, we
issued series A and B preferred stock in a private placement. Messrs.
Petrocelli, Polan and Tortoretti, certain of our then officers and directors,
received series B preferred stock through entities beneficially controlled by
them. These entities included SMFS, Inc. and LTJ Group, Inc., beneficial owners
of 5% of our common stock, and LPS Consultants, Inc. Mr. Petrocelli is the
president and chief executive officer of Petrocelli Electric Co. and SMFS,
Inc., Mr. Polan controls LPS Consultants, Inc. and Mr. Tortoretti is a
principal of LTJ Group, Inc.
Option Grants
On November 24, 1997, we granted Messrs. Petrocelli, Polan and Tortoretti
stock options to each purchase 190,000 shares of our common stock.
On March 29, 1999, we entered into an agreement with Richard Sayers, one
of our directors, for financial advisory services in connection with our
financing needs. Pursuant to this agreement, we granted Mr. Sayers stock
options to purchase 250,000 shares of our common stock. Stock options to
purchase 125,000 shares vested on March 29, 1999 and the remaining 125,000
options vested in equal monthly installments during the one year term of the
agreement.
May 1999 Private Placement
On May 7, 1999, we entered into a $14.1 million financing transaction
pursuant to which we issued convertible notes, series C preferred stock, class
A warrants and class B warrants. In addition, all of our outstanding series B
preferred stock was converted into common stock.
Signal Equity Partners, L.P., Concordia Telecom Management, L.L.C. and
Taurus Telecommunications, Inc. were among the investors in this transaction.
As part of this financing, the size of our board of directors was expanded from
three to six directors, with the addition of Mr. Bradley, a managing partner of
Signal Equity Partners, Mr. Liss, the sole member of Concordia, and Mr. Sayers,
the president of Taurus Telecommunications. Mr. Liss was also appointed as our
president and chief executive officer. The transaction also resulted in the
resignation from our board of directors of Messrs. Chiaino, Petrocelli and
Polan. These vacant seats on our board of directors were filled by Messrs.
Farmer, Mahoney and Tortoretti. Also in connection with this transaction,
Messrs. Tortoretti, Petrocelli and Polan granted an irrevocable proxy to Signal
Equity Partners, Trident Telecom Partners and Concordia Telecom Management to
vote all of the shares beneficially owned by them at all meetings of our
stockholders.
June 1999 Conversion Warrants
At the time of the May private placement, we had outstanding payables to
Messrs. Chiaino, Petrocelli, Polan, Tortoretti and entities controlled by them.
We paid these accounts payable as follows:
. on June 30, 1999, we issued to Mr. Chiaino 41,664 shares of common
stock and warrants to purchase 27,498 shares of our common stock at a
purchase price of $0.67 per share.
. on June 30, 1999, we issued 309,865 shares of our common stock,
warrants to purchase 204,511 shares of our common stock at a purchase
price of $0.67 per share and warrants to purchase 390,000 shares of
our common stock at a purchase price of $1.50 per share to Petrocelli
Electric Company Inc., LPS Consultants, Inc. and LTJ Group.
The exercise price of these warrants approximated the fair market value
of our common stock on the date the terms of the issuances were determined.
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The warrants issued to Mr. Chiaino, Petrocelli Electric Company Inc., LPS
Consultants, Inc. and LTJ Group, may be exercised, in whole or in part, at any
time from June 30, 1999 through June 30, 2004, upon payment of the exercise
price. The conversion warrants also allow the holders to pay the exercise price
due under the warrant by tendering to us a portion of the shares subject to the
warrant instead of paying the exercise price in cash.
September 1999 Private Placement
On September 28, 1999, we entered into a further financing transaction
pursuant to which we issued 8% senior secured convertible notes due September
28, 2004 to investors in the aggregate principal amount of $12.5 million. These
notes were convertible into shares of our common stock at a price of $3.00 per
share. Signal Equity Partners, L.P., which beneficially owns more than 5% of
our voting securities, participated in this transaction.
November 1999 Conversion and Exchange Transaction
On November 30, 1999, pursuant to a conversion and exchange agreement,
the September notes and the notes issued in the May 1999 and September 1999
financings, were converted into shares of our common stock. In connection with
this conversion, we issued:
. 309,143 shares of our series D preferred stock and 40,551 shares of
our series F preferred stock to Signal Equity Partners, L.P., a
beneficial owner of 5% of our voting shares;
. 336,025 shares of our common stock to Concordia Telecom Management,
L.L.C., of which Michael Liss, our president, chief executive officer
and one of our directors, is the sole member; and
. 6,868 shares of our series E preferred stock to Taurus
Telecommunications, Inc., of which Mr. Sayers, one of our directors,
is the president.
Nortel Networks Inc.
Nortel has invested $50 million in our business. In June 2000, Nortel
invested $20 million by purchasing 2,000,000 shares of our series G preferred
stock in a private placement. On July 31, 2000, Nortel surrendered its series G
preferred stock and accrued dividends on that preferred stock and invested an
additional $22.5 million in a second private placement in exchange for 426,333
shares of our series H preferred stock at $10.00 per share, on an as converted
basis. On August 11, 2000, Nortel invested $7.5 million by purchasing 62,500 of
our series I preferred stock at $12.00 per share, on an as converted basis.
Each share of our series H and series I preferred stock will be converted into
ten shares of our common stock upon completion of this offering.
Related Party Transactions
Landtel Telecommunications Group, Inc.
From 1997 to 1999, we paid Landtel consulting fees ranging from $83,000
to $125,000 per year for management, engineering and network development
services. Mr. Tortoretti is the majority shareholder of Landtel.
LPS Consultants, Inc.
During 1998, we paid consulting fees of $75,000 to LPS Consultants, which
is controlled by Mr. Polan.
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<PAGE>
Petrocelli Electric Co.
Petrocelli Electric, which is controlled by Mr. Petrocelli, received
consulting fees from 1997 to 1999 ranging from $100,000 to $120,000 per year.
SMFS, Inc.
During 1998, we entered into three contracts with SMFS, which is
controlled by Mr. Petrocelli, for electrical contracting. The total value of
these contracts was $2.5 million.
Concordia Telecom Management, L.L.C.
In connection with our May 1999 financing, we entered into an agreement
with Concordia for investment banking services, under which Concordia received
a fee of $145,000. Mr. Liss, our president, chief executive officer, and one of
our directors, is the sole member of Concordia.
Nortel Networks Inc.
On June 22, 2000 we amended our existing master purchase agreement with
Nortel, so that we now have the right to purchase up to $260 million worth of
optical networking equipment and related services at predetermined volume-based
pricing by 2002.
Signal Equity Management Corp.
On July 20, 2000, we entered into an agreement with Signal for financial
advisory services, in connection with the Devnet acquisition, under which
Signal received a fee of $250,000. Mr. Bradley, one of our directors, is the
president of Signal.
Waterview Advisors LLC.
On July 20, 2000, we entered into an agreement with Waterview Advisors
for financial advisory services, in connection with the Devnet acquisition.
Under this agreement, Waterview Advisors received a fee of $250,000. Mr.
Vrattos, one of our directors, is a managing director of Waterview Advisors.
We believe that the terms of our agreements entered into with related
parties are comparable to those that would have resulted from arms-length
negotiations with any unrelated party.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of:
. 150,000,000 shares of common stock, $0.001 par value per share;
. 20,000,000 shares of undesignated preferred stock, par value $0.001
per share, of which 2,723,333 shares have been designated as follows:
--133,333 shares of series C preferred stock, $0.001 par value per
share;
--500,000 shares of series D preferred stock, $0.001 par value per
share;
--750,000 shares of series E preferred stock, $0.001 par value per
share;
--500,000 shares of series F preferred stock, $0.001 par value per
share;
--750,000 shares of series H preferred stock, $0.001 par value per
share; and
--90,000 shares of series I preferred stock, $0.001 par value per
share.
Upon completion of this offering, there will be shares of common
stock outstanding and no shares of preferred stock outstanding.
As of July 31, 2000, we had:
. 32,084,650 shares of common stock outstanding;
. 1,556,255 shares of convertible preferred stock, convertible into
14,809,358 shares of common stock upon the closing of the offering;
and
. outstanding options and warrants to purchase 18,251,519 shares of
common stock.
Common Stock
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders, and do not have
cumulative voting rights. Subject to preferences that may be applicable to any
outstanding shares of preferred stock, holders of common stock are entitled to
receive ratably such dividends, if any, as declared by our board of directors
out of funds legally available for dividend payments. All outstanding shares of
common stock are fully paid and nonassessable, and the holders of common stock
have no preferences or rights of conversion, exchange or pre-emption. In the
event of any liquidation, dissolution or winding-up of our affairs, holders of
common stock will be entitled to share ratably in our assets that are remaining
after payment or provision for payment of all of our debts and obligations and
after liquidation payments to holders of outstanding shares of preferred stock,
if any.
Preferred Stock
Upon the completion of this offering, each outstanding share of preferred
stock will be converted into shares of our common stock. Each share of series C
preferred stock will be converted into one share of common stock and each share
of series D, series E, series F, series H and series I preferred stock will be
converted into ten shares of common stock. No cash dividends have been declared
on the preferred stock. A new certificate of incorporation will be filed
immediately after the completion of this offering to delete all references to
the series C, series D, series E, series F, series H and series I preferred
stock.
Under our certificate of incorporation, our board of directors is
authorized to issue shares of preferred stock from time to time without
stockholder approval. Our board of directors will also be authorized to
establish the number of shares to be included in such series and to fix the
terms, limitations, relative rights and preferences and variations of each
series. Although we have no present plans to issue additional shares of
preferred stock, the issuance of shares of preferred stock, or the issuance of
rights to purchase such shares, could decrease the amount of earnings and
assets available for distribution to the holders of common stock, could
adversely affect the rights and powers, including voting rights, of the common
stock, and could have the
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<PAGE>
effect of delaying, deterring or preventing a change in control of FiberNet or
an unsolicited acquisition proposal.
Stockholders Agreement
We have entered into a stockholders agreement with holders of
approximately 44,568,077 shares of our common stock, including 14,184,358
shares of common stock issuable upon the conversion of our preferred stock upon
completion of this offering, 8,607,619 shares of our common stock issuable upon
the exercise of warrants and 3,550,655 shares of our common stock issuable upon
the exercise of options. The stockholders agreement will terminate upon this
offering. However, the parties to this agreement shall not transfer any of
their stock for the period provided for in any lock-up agreement entered into
by such stockholder at the request of Robertson Stephens in connection with
this offering. If the stockholder does not enter into such lock-up agreement,
pursuant to our stockholders agreement they will not be permitted to transfer
any of their stock until July 1, 2001.
Registration Rights
The following registration rights are subject to certain conditions and
limitations, including:
. the limitations on transfer contained in our stockholders agreement;
and
. the right of underwriters of an offering generally to limit the number
of shares included in any such registration under certain
circumstances.
We are a party to three different registration rights agreements. After
completion of this offering, the holders of approximately 52,106,920 shares of
common stock, including shares that the holders have the rights to acquire, can
cause us to register their shares of common stock for public resale pursuant to
one of our three registration rights agreements as more fully described below.
Demand Rights
May 7, 1999 Registration Rights Agreement. Under a registration rights
agreement dated May 7, 1999, any two of Signal Equity Partners, L.P., Concordia
Telecom Management LLC, or Trident Telecom Management LLC may demand that we
register up to 35,645,561 shares of our common stock held by stockholders that
purchased securities under the May or September purchase agreements and certain
other stockholders. These demand rights may be exercised on two occasions.
In addition, any party to our registration rights agreement dated May 7,
1999, who has obtained the consent of Signal and Concordia or the consent of
Trident and Concordia, may request that we register the shares held by them on
a Form S-3 registration statement. This demand right is limited to two requests
within a 12 month period. The registration rights of these stockholders will
terminate when the shares held by them may be sold under Rule 144 under the
Securities Act.
Metromedia Fiber Network Services, Inc. Registration Rights Agreement. We
have entered into an exchange and registration rights agreement with Metromedia
Fiber Network Services, Inc., dated as of December 17, 1999. Under this
agreement, at any time at least six months after the completion of this
offering, Metromedia may demand that we register all or part of their 5,000,000
shares of common stock. This demand right may be exercised on two occasions.
Nortel Networks Inc. Registration Rights Agreement. We have entered into
a registration rights agreement with Nortel Networks Inc., dated as of June 30,
2000. Under this agreement, Nortel may demand that we register up to 4,263,330
shares of our common stock held by them. This demand right may be exercised on
two occasions.
In addition, Nortel may request that we register the shares held by them
on a Form S-3 registration statement. This demand right is limited to two
requests within a 12 month period. This right will terminate when the shares
held by Nortel may be sold under Rule 144 under the Securities Act.
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<PAGE>
Piggyback Rights
Pursuant to our registration rights agreements, after this offering, the
holders of approximately 52,106,920 shares of our common stock and shares of
our common stock issuable upon the exercise of outstanding options and warrants
will be entitled to piggyback registration rights with respect to registration
of their shares under the Securities Act, subject to various limitations. These
piggyback registration rights require us to notify the holders anytime we
propose to register any of our securities under the Securities Act, whether for
our own account or for the account of other security holders exercising
registration rights, and to use our best efforts to include their shares of
common stock in the registration.
Delaware Law and Certain Charter and By Law Provisions
The provisions of Delaware law and of our certificate of incorporation
and bylaws discussed below could discourage or make it more difficult to
accomplish a proxy contest or other change in our management or the acquisition
of control by a holder of a substantial amount of our voting stock. It is
possible that these provisions could make it more difficult to accomplish, or
could deter, transactions that stockholders may otherwise consider to be in
their best interests or the best interests of FiberNet.
Delaware Statutory Business Combinations Provision. We are subject to the
anti-takeover provisions of Section 203 of the Delaware General Corporations
Law. In general, Section 203 prohibits a publicly-held Delaware corporation
from engaging in a business combination with an interested stockholder for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is, or the
transaction in which the person became an interested stockholder was, approved
in a prescribed manner or another prescribed exception applies. For purposes of
Section 203, a business combination is defined broadly to include a merger,
asset sale or other transaction resulting in a financial benefit to the
interested stockholder, and, subject to certain exceptions, an interested
stockholder is a person who, together with his or her affiliates and
associates, owns, or within three years prior, did own, 15% or more of the
corporation's voting stock.
Special Meetings of Stockholders. Special meetings of the stockholders
may be called only by our board of directors or president.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is Interwest
Transfer Company.
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SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of common stock, including shares
issued upon exercise of outstanding options and warrants, in the public market
following this offering could adversely affect market prices prevailing from
time to time and could impair our ability to raise capital through sale of our
equity securities.
Summary of Shares Eligible for Future Sale. Upon the completion of this
offering and conversion of our preferred stock, we will have a total of
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of options or warrants outstanding at
, 2000. Of the outstanding shares, the following shares are freely tradable
without restriction under the Securities Act, except that any shares purchased
by our "affiliates" (as that term is defined in Rule 144 promulgated under the
Securities Act) may be sold only in compliance with the limitations described
below:
. shares sold in this offering;
. 1 million shares registered pursuant to our initial public offering in
October 1996; and
. shares, no longer subject to 144 limitations
The remaining shares of common stock will be deemed "restricted
securities" as defined under Rule 144 and may not be sold publicly unless they
are registered under the Securities Act or are sold pursuant to Rule 144 or
another exemption from registration.
In addition, shares of common stock held by existing stockholders
are subject to lock-up agreements with the underwriters providing that the
stockholder, subject to certain exceptions, will not offer to sell, contract to
sell or otherwise sell, dispose of, loan, pledge or grant any rights to, any
shares of common stock or any securities that are convertible into common
stock, owned as of the date of this prospectus or subsequently acquired, until
135 days after the date of this prospectus without the prior written consent of
FleetBoston Robertson Stephens Inc. FleetBoston Robertson Stephens Inc. may, in
its sole discretion and at any time without notice, release all or any portion
of the shares subject to lock-up agreements. There are no existing agreements
between FleetBoston Robertson Stephens Inc. and any of our stockholders who
have executed a lock-up agreement providing consent to the sale of shares prior
to the expiration of the lock-up.
As a result of these lock-up agreements and the provisions of Rule 144,
including Rule 144(k), the shares of common stock outstanding upon the
completion of this offering will be available for sale in the public market as
follows:
<TABLE>
<CAPTION>
Approximate
Number of
Shares Description
----------- -----------
<C> <S>
Shares currently traded on Nasdaq.
After the date of this prospectus, freely tradable shares sold
in this offering, and shares saleable under Rule 144 that are
not subject to the 135-day lock-up.
After 135 days from the date of this prospectus, the 135-day
lock-up is released and these shares are saleable at various
times under Rule 144 (subject, in some cases, to volume
limitations) or pursuant to as registration statement to
register for resale share of common stock issued upon the
exercise of stock options.
</TABLE>
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Rule 144
In general, under Rule 144, as currently in effect, a person who has
beneficially owned restricted shares for at least one year including the
holding period of any prior owner except an affiliate would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
. 1.0% of the number of shares of common stock then outstanding, which
will equal approximately shares immediately after this offering;
or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the filing of a Form 144.
Sales under Rule 144 are also subject to certain manner of sale
provisions and notice requirements and to the availability of current public
information about FiberNet. Under Rule 144(k), a person who is not deemed to
have been an affiliate of FiberNet at any time during the three months
preceding a sale, and who has beneficially owned the shares proposed to be sold
for at least two years including the holding period of any prior owner except
an affiliate, is entitled to sell those shares without complying with the
manner of sale, public information, volume limitation or notice provisions of
Rule 144.
Options. As of July 31, 2000, options to purchase a total of 7,661,728
shares of common stock were outstanding, of which 4,021,395 were exercisable.
Prior to the completion of this offering, we intend to file a registration
statement to register the 10,888,097 shares of common stock outstanding or
reserved for issuance under our stock plans. That registration statement will
become effective immediately upon filing. However, holders of the shares
covered by that registration statement may not resell their shares in the open
market for 135 days, because they have all entered into lock-up agreements.
Warrants. As of July 31, 2000, there were outstanding warrants to
purchase 10,589,791 shares of common stock, some of which may be exercised
prior to this offering. Upon the completion of this offering, holders of
warrants to purchase shares of common stock are entitled to demand
registration rights on these shares for sale in the public market. However, the
holders of the warrants are subject to the lock-up agreement entered into with
Robertson Stephens. Registration of these shares under the Securities Act would
result in their becoming freely tradable without restriction under the
Securities Act immediately upon the effectiveness of the registration. However,
all warrant holders that are entitled to demand registration rights have
entered into a 135 day lock-up agreement.
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UNDERWRITING
The underwriters named below, acting through their representatives,
FleetBoston Robertson Stephens Inc., First Union Securities, Inc., CIBC World
Markets, Prudential Securities Incorporated and Kaufman Bros., L.P., have
severally agreed with us, subject to the terms and conditions of the
underwriting agreement, to purchase from us the number of shares of common
stock set forth below opposite their respective names. The underwriters are
committed to purchase and pay for all shares if any are purchased.
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
FleetBoston Robertson Stephens Inc...............................
First Union Securities, Inc......................................
CIBC World Markets...............................................
Prudential Securities Incorporated...............................
Kaufman Bros., L.P...............................................
</TABLE>
The representatives have advised us that the underwriters propose to
offer the shares of common stock to the public at the public offering price set
forth on the cover page of this prospectus and to certain dealers at that price
less a concession of not in excess of $ per share, of which $ may be
reallowed to other dealers. After this offering, the public offering price,
concession and reallowance to dealers may be reduced by the representatives. No
such reduction shall change the amount of proceeds to be received by us as set
forth on the cover page of this prospectus. The common stock is offered by the
underwriters as stated herein, subject to receipt and acceptance by them and
subject to their right to reject any order in whole or in part.
Over-Allotment Option
We have granted to the underwriters an option, exercisable during the 30-
day period after the date of this prospectus, to purchase up to additional
shares of common stock to cover over-allotments, if any, at the public offering
price less the underwriting discount set forth on the cover page of this
prospectus. If the underwriters exercise their over-allotment option to
purchase any of the additional shares of common stock, each of the
underwriters will have a firm commitment and, the underwriters have severally
agreed, subject to certain conditions, to purchase approximately the same
percentage thereof as the number of shares to be purchased by each of them
bears to the total number of shares of common stock offered in this offering.
If purchased, these additional shares will be sold by the underwriters on the
same terms as those on which the shares offered hereby are being sold. We will
be obligated, pursuant to the over-allotment option, to sell shares to the
underwriters to the extent the over-allotment option is exercised. The
underwriters may exercise the over-allotment option only to cover over-
allotments made in connection with the sale of the shares of common stock
offered in this offering.
The following table shows the per share and total public offering price,
underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. Other than the per share information, this information
is presented assuming either no exercise or full exercise by the underwriters
of the over-allotment option:
<TABLE>
<CAPTION>
Total
------------------------
Per Without Over- With Over-
Share allotment allotment
----- ------------- ----------
<S> <C> <C> <C>
Public offering price.......................... $ $ $
Underwriting discounts and commissions payable
by us........................................ $ $ $
Proceeds, before expenses, to us............... $ $ $
</TABLE>
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We estimate that expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $ .
Indemnity
The underwriting agreement contains covenants of indemnity among the
underwriters, and us against certain civil liabilities, including liabilities
under the Securities Act, and liabilities arising from breaches of
representations and warranties contained in the underwriting agreement.
Lock-Up Agreements
Pursuant to the terms of lock-up agreements, the holders of shares of
our common stock, including each of our directors and officers, have agreed,
for a period of up to 135 days after the date of this prospectus, that, subject
to certain exceptions, they will not to offer to sell, contract to sell, or
otherwise sell, dispose of, loan, pledge or grant any rights with respect to
any shares of common stock or any options or warrants to purchase any shares of
common stock, or any securities convertible into or exchangeable for shares of
common stock owned directly by such holders or with respect to which they have
the power of disposition, without the prior written consent of FleetBoston
Robertson Stephens Inc. However, FleetBoston Robertson Stephens Inc. may, in
its sole discretion and at any time or from time to time, without notice,
release all or any portion of the securities subject to lock-up agreements.
There are no existing agreements between the representatives and any of our
stockholders who have executed a lock-up agreement providing consent to the
sale of shares prior to the expiration of the lock-up period.
Future Sales
In addition, we have agreed that during the lock-up period we will not,
without the prior written consent of FleetBoston Robertson Stephens Inc.,
subject to certain exceptions, offer, sell, contract to sell, or otherwise
dispose of any shares of common stock, any options or warrants to purchase any
shares of common stock or any securities convertible into, exercisable for or
exchangeable for shares of common stock other than our sale of shares in this
offering, the issuance of our common stock upon the exercise of outstanding
options or warrants, and the issuance of options under our existing equity
incentive plan provided that those options do not vest prior to the expiration
of the lock-up period. See "Shares Eligible for Future Sale."
Stabilization
The representatives have advised us that, pursuant to Regulation M under
the Securities Act, some persons participating in the offering may engage in
transactions, including stabilizing bids, syndicate covering transactions or
the imposition of penalty bids, that may have the effect of stabilizing or
maintaining the market price of the shares of common stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of shares of common stock on behalf of the underwriters
for the purpose of fixing or maintaining the price of the common stock. A
"syndicate covering transaction" is the bid for or purchase of common stock on
behalf of the underwriters to reduce a short position incurred by the
underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the representatives to reclaim the selling concession otherwise
accruing to an underwriter or syndicate member in connection with the offering
if the common stock originally sold by such underwriter or syndicate member
purchased by the representatives in a syndicate covering transaction and has
therefore not been effectively placed by such underwriter or syndicate member.
The representatives have advised us that such transactions may be effected on
the Nasdaq National Market or otherwise and, if commenced, may be discontinued
at any time.
Pursuant to an assignment dated August 11, 2000, First Union National
Bank has a $26.25 million commitment under our credit facility that we entered
into on April 11, 2000. First Union National Bank's commitment was assigned to
it from Nortel. In connection with the assignment, First Union Investors, Inc.
69
<PAGE>
received warrants to purchase 425,000 shares of our common stock. The exercise
price per share is $18.06. First Union National Bank, First Union Investors,
Inc. and First Union Securities, Inc. are each subsidiaries of First Union
Corporation.
The underwriters, their representatives and their affiliates have
performed investment banking and advisory services for us in the past for which
they have received compensation and reimbursement of expenses. The underwriters
and their representatives may continue to engage in transactions with, and
perform services for us in the ordinary course of business.
Electronic Offers, Sales or Distribution
Prudential Securities Incorporated facilitates the marketing of new
issues online through its Prudential Securities.com division. Clients of
Prudential AdvisorSM, a full service brokerage firm program, may view offering
terms and a prospectus online and place orders through their financial
advisors.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., New York,
New York. Attorneys for Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
collectively own 11,827 shares of our common stock. Certain matters will be
passed upon for the underwriters by Latham & Watkins, New York, New York.
EXPERTS
Arthur Andersen LLP, independent auditors, have audited our consolidated
financial statements for the years ended December 31, 1998 and 1999, and for
the six-month period ended December 31, 1997, as described in their report. We
have included our consolidated financial statements in the prospectus and
elsewhere in this registration statement in reliance on Arthur Andersen LLP's
report given on their authority as experts in accounting and auditing.
Mendelsohn Kary Bell & Natoli, independent public accountants, have
audited our consolidated financial statements for the period from August 10,
1994, the date of our inception, to June 30, 1997, and for the fiscal year
ended June 30, 1997, as described in this report. We have included our
consolidated financial statements in the prospectus and elsewhere in this
registration statement in reliance on Mendelsohn Kary Bell & Natoli's report
given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act, with respect to the common stock offered by this prospectus.
This prospectus, which is part of the registration statement, omits certain
information, exhibits, schedules and undertakings set forth in the registration
statement. For further information pertaining to us and our common stock,
reference is made to such registration statement and the exhibits and schedules
to the registration statement. Statements contained in this prospectus as to
the contents or provisions of any documents referred to in this prospectus are
not necessarily complete, and in each instance where a copy of the document has
been filed as an exhibit to the registration statement, reference is made to
the exhibit for a more complete description of the matters involved.
You may read and copy all or any portion of the registration statement
without charge at the office of the SEC at 450 Fifth Street, N.W., Washington,
D.C. 20549. Copies of the registration statement may be obtained from the SEC
at prescribed rates from the Public Reference Room of the SEC at such address,
and at the SEC's regional offices located at 7 World Trade Center, 13th Floor,
New York, New York 10048, and at
70
<PAGE>
Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
In addition, registration statements and certain other filings made with the
SEC electronically are publicly available through the SEC's Web site at
http://www.sec.gov. The registration statement, including all exhibits and
amendments to the registration statement, has been filed electronically with
the SEC.
We are subject to the information and reporting requirements of the
Securities and Exchange Act of 1934, and are required to file annual and
quarterly reports, proxy statements and other information with the SEC. These
reports, proxy statements and other information are available for inspection
and copying at the SEC's public reference rooms and the SEC's Web site referred
to above.
71
<PAGE>
FIBERNET TELECOM GROUP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FiberNet Telecom Group, Inc. Consolidated Financials:
Report of Independent Public Accountants................................ F-2
Independent Auditor's Report............................................ F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998............ F-4
Consolidated Statements of Operations................................... F-5
Consolidated Statements of Stockholders' Equity......................... F-6
Consolidated Statements of Cash Flows................................... F-7
Notes to Consolidated Financial Statements.............................. F-8
Report of Independent Public Accountants................................ F-19
Consolidated Balance Sheets as of June 30, 2000 and December 31, 1999... F-20
Consolidated Statements of Operations for the six months ended June 30,
2000 and 1999......................................................... F-21
Consolidated Statements of Operations for the three months ended June
30, 2000 and 1999..................................................... F-22
Consolidated Statements of Cash Flows for the six months ended June 30,
2000 and 1999......................................................... F-23
Notes to Consolidated Financial Statements.............................. F-24
Devnet L.L.C. Financials
Report of Independent Public Accountants................................ F-28
Balance Sheets as of December 31, 1999 and 1998......................... F-29
Statements of Operations................................................ F-30
Statements of Members' Capital.......................................... F-31
Statements of Cash Flows................................................ F-32
Notes to Financial Statements........................................... F-33
Report of Independent Public Accountants................................ F-37
Balance Sheets as of June 30, 2000 and December 31, 1999................ F-38
Statement of Operations for the six months ended June 30, 2000 and
1999.................................................................. F-39
Statement of Cash Flows for the six months ended June 30, 2000 and
1999.................................................................. F-40
Notes to Financial Statements........................................... F-41
Unaudited Pro Forma Combined Financial Statements of FiberNet Telecom
Group, Inc.
Financial Information................................................... F-43
Balance Sheet as of June 30, 2000....................................... F-44
Statement of Operations as of December 31, 1999......................... F-45
Statement of Operations for the six months ended June 30 1999........... F-46
Statement of Operations for the six months ended June 30 2000........... F-47
Notes to Financial Statements........................................... F-48
</TABLE>
F-1
<PAGE>
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, 1999 and December 31, 1998, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended December 31, 1999 and 1998 and for the six month period ended
December 31, 1997. 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 auditing standards generally
accepted in the United States. 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, 1999 and December 31,
1998, and the results of their operations and their cash flows for the years
ended December 31, 1999 and 1998 and for the six month period ended December
31, 1997, in conformity with accounting principles generally accepted in the
United States.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
New York, New York
March 7, 2000
F-2
<PAGE>
[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 statements of operations,
stockholder's equity and cash flows of FiberNet Telecom, Inc. and affiliated
entities ( a development stage company) for the year ended June 30, 1997 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 assurances 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 results of operations, shareholder's
equity and cash flows of FiberNet Telecom, Inc. and Affiliated Entities for
the year ended June 30, 1997, 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
F-3
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents......................... $ 9,512,480 $ 257,384
Prepaid expenses and other........................ 159,907 309,365
------------ -----------
Total current assets............................ 9,672,387 566,749
Property, plant and equipment, net.................. 55,176,713 5,397,109
Other Assets:
Goodwill, net..................................... 8,667,471 --
Deferred charges, net............................. 3,697,501 --
Other assets...................................... 373,620 363,839
------------ -----------
Total other assets.............................. 12,738,592 363,839
------------ -----------
TOTAL ASSETS........................................ $ 77,587,692 $ 6,327,697
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable including related party of $1.4
million in 1998.................................. $ 3,732,216 $ 3,974,350
Accrued expenses.................................. 4,447,016 337,384
Capital lease--current portion.................... 203,031 --
------------ -----------
Total current liabilities....................... 8,382,263 4,311,734
Long-term Liabilities:
Capital lease obligation.......................... 956,360 --
------------ -----------
Total Liabilities............................... 9,338,623 4,311,734
Minority Interest................................. -- 104,429
Stockholders' Equity:
Common Stock, $.001 par value, 50,000,000 shares
authorized and 25,932,464 and 16,000,000 shares
issued and outstanding at December 31, 1999 and
1998, respectively............................... 25,933 16,000
Series B Voting Preferred Stock $.001 par value,
80,000 shares issued and outstanding at December
31, 1998 (Preference in involuntary liquidation
value, $1.00 per share).......................... -- 80
Series C Voting Preferred Stock $.001 par value,
133,333 shares issued and outstanding at December
31, 1999 (Preference in involuntary liquidation
value, $1.50 per share).......................... 200,000 --
Series D Preferred Stock $.001 par value, 310,173
shares issued and outstanding at December 31,
1999 (Preference in involuntary liquidation val-
ue, $15.00 per share)............................ 22,553,205 --
Series E Preferred Stock $.001 par value, 293,872
shares issued and outstanding at December 31,
1999 (Preference in involuntary liquidation val-
ue, $15.00 per share)............................ 21,429,777 --
Series F Preferred Stock $.001 par value, 347,819
shares issued and outstanding at December 31,
1999 (Preference in involuntary liquidation val-
ue, $30.00 per share)............................ 25,329,198 --
Additional paid in capital and other.............. 74,506,595 5,465,564
Deficit accumulated during the development stage.. (75,795,639) (3,570,110)
------------ -----------
Total Stockholders' Equity...................... 68,249,069 1,911,534
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.......... $ 77,587,692 $ 6,327,697
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Period From
Six Months Inception
Year Ended Year Ended Year Ended Ended Year Ended August 10, 1994
December 31, December 31, December 31, December 31, June 30, to December 31,
1999 1998 1997 1997 1997 1999
------------ ------------ ------------ ------------ ---------- ---------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues........ $ -- $ -- $ -- $ -- $ -- $ --
Operating
expenses:
General and
administrative.. 8,263,981 3,111,157 712,506 418,140 373,674 12,176,339
Non-recurring
expenses...... 4,303,587 -- -- -- -- 4,303,587
Depreciation and
amortization.. 519,880 27,951 1,842 1,842 -- 549,673
------------ ----------- ---------- ---------- ---------- ------------
Total operating
expenses...... 13,087,448 3,139,108 714,348 419,982 373,674 17,029,599
------------ ----------- ---------- ---------- ---------- ------------
Loss from
operations.... (13,087,448) (3,139,108) (714,348) (419,982) (373,674) (17,029,599)
Interest
(expense)/income,
net........... (1,283,563) 156,392 26,180 26,180 -- (1,100,991)
Interest expense
on beneficial
conversion.... (7,932,188) -- -- -- -- (7,932,188)
------------ ----------- ---------- ---------- ---------- ------------
Loss before
minority
interest...... (22,303,199) (2,982,716) (688,168) (393,802) (373,674) (26,062,778)
Minority
interest...... 104,429 166,229 23,240 23,240 -- 293,898
------------ ----------- ---------- ---------- ---------- ------------
Net loss........ (22,198,770) (2,816,487) (664,928) (370,562) (373,674) (25,768,880)
Preferred stock
dividends..... (756,807) -- -- -- -- (756,807)
Preferred
stock--
beneficial
conversion.... (49,245,855) -- -- -- -- (49,245,855)
------------ ----------- ---------- ---------- ---------- ------------
Net loss
applicable to
common
stockholders.. $(72,201,432) $(2,816,487) $ (664,928) $ (370,562) $ (373,674) $(75,771,542)
============ =========== ========== ========== ========== ============
Net loss
applicable to
common
stockholders
per share--
basic and
diluted....... $(4.30) $(0.18) $(0.04) $(0.025) $(0.025) $(4.51)
------------ ----------- ---------- ---------- ---------- ------------
Weighted average
shares
outstanding... 16,798,254 15,847,222 15,000,000 15,000,000 15,000,000 16,798,254
------------ ----------- ---------- ---------- ---------- ------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accumulated
Deficit
Preferred Stock Common Stock Capital in During the
----------------------- ------------------- Excess of Development
Shares Amount Shares Amount Par Value Stage Total
---------- ----------- ---------- ------- ------------ ----------- ------------
<S> <C> <C> <C> <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 par value........ -- -- 240 -- 61,000 -- 61,000
Net loss for the period
from inception to June
30, 1996............... -- -- -- -- -- (9,387) (9,387)
---------- ----------- ---------- ------- ------------ ------------ ------------
Balance at June 30,
1996................... -- -- 240 -- 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................... -- -- 240 -- 141,796 (383,061) (241,265)
Capital contribution.... -- -- -- -- 212,348 -- 212,348
Effect of reverse
acquisition of DND;
issuance of 15,000,000
share common stock,
$.001 par value,
November 24, 1997...... -- -- 15,000,000 15,000 (15,000) -- --
Other................... -- -- (240) -- -- -- --
Issuance of 1,000,000
shares Series A
Preferred Stock, $.001
par value, November 24,
1997................... 1,000,000 1,000 -- -- 5,074,000 -- 5,075,000
Issuance of 80,000
shares Series B
Preferred Stock, $.001
par value, November 24,
1997................... 80,000 80 -- -- (80) -- --
Preferred Stock
dividends accrued in
1997................... -- -- -- -- (30,163) -- (30,163)
Net loss for the six
months ended
December 31, 1997...... -- -- -- -- -- (370,562) (370,562)
---------- ----------- ---------- ------- ------------ ------------ ------------
Balance at December 31,
1997................... 1,080,000 1,080 15,000,000 15,000 5,382,901 (753,623) 4,645,358
Conversion of 1,000,000
shares Series A
Preferred Stock, $.001
par value, into common
stock, February 24,
1998................... (1,000,000) (1,000) 1,000,000 1,000 -- -- --
Dividends paid.......... -- -- -- -- (44,837) -- (44,837)
Earned compensation,
executive stock
options................ -- -- -- -- 127,500 -- 127,500
Net loss for the year
ended December 31,
1998................... -- -- -- -- -- (2,816,487) (2,816,487)
---------- ----------- ---------- ------- ------------ ------------ ------------
Balance at December 31,
1998................... 80,000 80 16,000,000 16,000 5,465,564 (3,570,110) 1,911,534
Redemption of Series B
Preferred Stock........ (80,000) (80) -- -- -- -- (80)
Issuance of Series C
Preferred Stock........ 133,333 200,000 -- -- -- -- 200,000
Conversion of Senior
Secured Convertible
Notes to common
stock, net............. -- -- 13,826,868 13,826 34,528,040 -- 34,541,866
Exchange of common stock
for preferred stock and
beneficial conversion
feature:
Issuance of Series D
Preferred Stock....... 309,143 22,412,867 (3,091,430) (3,091) (4,634,067) -- 17,775,709
Issuance of Series E
Preferred Stock....... 291,926 21,164,635 (2,919,260) (2,919) (4,376,133) -- 16,785,583
Issuance of Series F
Preferred Stock....... 345,515 25,049,838 (3,455,243) (3,455) (10,362,447) -- 14,683,936
Series D Preferred Stock
dividends.............. 1,030 140,338 -- -- -- -- 140,338
Series E Preferred Stock
dividends.............. 1,946 265,142 -- -- -- -- 265,142
Series F Preferred Stock
dividends.............. 2,304 279,360 -- -- -- -- 279,360
Beneficial conversion
feature on preferred
stock dividends........ -- -- -- -- 71,967 -- 71,967
Exercise of warrants to
common stock........... -- -- 220,000 220 147,180 -- 147,400
Issuance of common stock
for purchase of MFN
dark fiber, minority
interest and other..... -- -- 5,351,529 5,352 43,971,939 -- 43,977,291
Deferred compensation... -- -- -- -- (4,289,919) -- (4,289,919)
Stock compensation to
consultants and
employees.............. -- -- -- -- 13,764,039 -- 13,764,039
Other................... -- -- -- -- 220,432 (24,097) 196,335
Net loss for the year
ended December 31,
1999................... -- -- -- -- -- (72,201,432) (72,201,432)
---------- ----------- ---------- ------- ------------ ------------ ------------
Balance at December 31,
1999................... 1,085,197 $69,512,180 25,932,464 $25,933 $ 74,506,595 $(75,795,639) $ 68,249,069
========== =========== ========== ======= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Period From
For Six Inception August
Year Ended Year Ended Year Ended Months Ended Year Ended 10, 1994 to
December 31, December 31, December 31, December 31, June 30, December 31,
1999 1998 1997 1997 1997 1999
------------ ------------ ------------ ------------ ---------- ----------------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from
operating activities:
Net loss applicable to
common stockholders... $(72,201,432) $(2,816,487) $ (664,928) $ (370,562) $ (373,674) $(75,771,542)
Adjustments to
reconcile net loss to
net cash used in
operating activities:
Depreciation and
amortization........ 551,296 27,951 1,842 1,842 -- 581,089
Amortization of
deferred financing
costs............... 500,574 227,324 56,200 -- 56,200 784,098
Preferred stock
dividend and other
non-cash interest... 1,093,290 -- -- -- -- 1,093,290
Stock option
compensation
expense............. 3,175,269 127,500 -- -- -- 3,302,769
Beneficial conversion
charges............. 57,771,291 -- -- -- -- 57,771,291
Litigation
settlement.......... 3,710,339 -- -- -- 3,710,339
Minority interest.... (104,429) (166,229) (6,446) (6,446) -- (277,104)
Change in assets and
liabilities:
(Increase) decrease
in prepaid expenses
and other assets.... 139,677 (669,250) (153,160) (34,924) (1,067) (621,764)
Increase (decrease)
in accounts payable
and accrued
expenses............ 157,159 1,532,740 645,596 361,482 239,072 2,290,861
Other................ (97,702) -- -- -- -- (97,702)
------------ ----------- ---------- ---------- ---------- ------------
Cash used in operating
activities............. (5,304,668) (1,736,451) (120,896) (48,608) (79,469) (7,234,375)
Cash flows from
investing activities:
Capital expenditures... (10,827,171) (3,077,492) (94,865) (94,065) (800) (13,999,528)
------------ ----------- ---------- ---------- ---------- ------------
Cash used in investing
activities............. (10,827,171) (3,077,492) (94,865) (94,065) (800) (13,999,528)
Cash flows from
financing activities:
Net proceeds from
issuance of debt
securities............ 25,331,145 -- -- -- -- 25,331,145
Net proceeds from
issuance of equity
securities............ 200,000 -- 5,075,000 5,075,000 -- 5,275,000
Repayment of capital
lease obligation...... (144,210) -- -- -- -- (144,210)
Payment of dividends... -- (75,000) -- -- -- (75,000)
Capital contributed.... -- -- 286,248 212,348 81,000 359,448
------------ ----------- ---------- ---------- ---------- ------------
Cash provided from
financing activities... 25,386,935 (75,000) 5,361,248 5,287,348 81,000 30,746,383
------------ ----------- ---------- ---------- ---------- ------------
Net increase (decrease)
in cash................ 9,255,096 (4,888,943) 5,145,487 5,144,675 731 9,512,480
Cash at beginning of
period................. 257,384 5,146,327 840 1,652 921 --
------------ ----------- ---------- ---------- ---------- ------------
Cash at end of period... $ 9,512,480 $ 257,384 $5,146,327 $5,146,327 $ 1,652 $ 9,512,480
============ =========== ========== ========== ========== ============
Supplemental disclosures
of cash flow
information:
Interest paid.......... $ 109,707 -- -- -- -- $ 109,707
Income taxes paid...... -- -- -- -- -- --
Non-Cash Financing
Activities
Issuance of common
stock to acquire MFN
dark fiber and
minority interest..... $ 43,450,000 -- -- -- -- $ 43,450,000
Issuance of
capitalized stock
options............... $ 7,115,100 -- -- -- -- $ 7,115,100
Capital expenditures
financed through
capital leases........ $ 1,303,601 -- -- -- -- $ 1,303,601
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
FIBERNET TELECOM GROUP, INC.
(a Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND OPERATIONS
FiberNet Telecom, Inc. ("Original FiberNet") 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, Inc. ("DND"), acquired Original FiberNet,
pursuant to an agreement and plan of merger dated that date (the "Original
Merger"). To effect the Original 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 of common stock and
80,000 Series B Preferred Stock in exchange for all of the outstanding shares
of Original FiberNet. Upon consummation of the Original Merger, Original
FiberNet became a wholly-owned subsidiary of DND, which subsequently changed
its name to FiberNet Telecom Group, Inc., a Nevada corporation ("FiberNet
Nevada"). For accounting purposes, the acquisition was treated as a
recapitalization of DND with Original FiberNet as the acquirer (reverse
acquisition). On February 4, 2000, FiberNet Nevada changed its state of
incorporation to Delaware (hereinafter referred to as "FiberNet" or the
"Company").
FiberNet is an all-optical facilities-based communications provider
focused on providing wholesale broadband connectivity for data, voice and video
transmission on its state-of-the-art fiber optic networks in major metropolitan
areas. The Company offers an advanced high bandwidth, fiber optic solution to
support the growing demand for network capacity in the intra-city market, or
local loop. The Company has established operations in the New York metropolitan
area and expects to expand operations into other markets, including Chicago.
FiberNet is holding a company that owns all of the outstanding common
stock of FiberNet Telecom, Inc., a Delaware corporation and an intermediate
level holding company. FiberNet Telecom, Inc. owns all of the outstanding
membership interests of Local Fiber, LLC ("Local Fiber"), a New York limited
liability company, and all of the outstanding membership interests of FiberNet
Equal Access, LLC ("Equal Access"), also a New York limited liability company,
subject to a warrant owned by Tishman Speyer Properties, L.P. to purchase up to
10% of Equal Access. The Company conducts its primary business operations
through its operating subsidiaries, Local Fiber and Equal Access.
The Company is a development stage company and has not realized any
revenues. To date, the Company has incurred operating losses and operating cash
flow deficits. The developmental nature of the Company's activities is such
that inherent risks exist in its operations. Prior to being able to offer its
services to its customers, the Company will incur significant expenditures.
Such expenditures have been and will continue to be primarily for the design,
development and deployment of the Company's telecommunications networks and
related infrastructure and for administrative, marketing and payroll costs.
After FiberNet offers services in its markets and buildings, there can be no
assurance that sufficient revenues will be realized to fund the ongoing
operations of the Company. As a result, the Company may require additional
funds that may not be available.
The Company has in force and is materially dependant on certain
agreements with other entities, including telecommunications license agreements
with on-net building landlords, interconnection agreements with other
telecommunications service providers and leases with carrier hotel property
owners. FiberNet also has entered into material contracts with suppliers for
the components of its telecommunications networks. These contracts and
agreements are critical to the Company's ability to execute its business
strategy and operating plan.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of the Company
and its subsidiaries, FiberNet Telecom, Inc., FiberNet Equal Access, LLC and
Local Fiber, LLC. All significant intercompany balances and transactions have
been eliminated.
F-8
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
The Company's operations and ability to grow may be affected by numerous
factors, including the fact that the Company is an early-stage company
operating in a new and rapidly evolving market, has experienced and will
continue to experience operating losses, net losses and cash flow deficits,
must make significant capital expenditures before generating operating profits,
which may prove insufficient to justify those expenditures, must obtain
additional carrier hotel lease agreements and maintain existing agreements in
major carrier hotels, must obtain additional license agreements and leases with
building owners for the installation of in-building network infrastructure,
requires additional capital to complete the build-out of networks and fund
other needs, and depends heavily on a limited number of real estate owners and
developers. The Company cannot assure the successful completion of network
construction, must increase the volume of traffic on the network, may need to
expand or adapt its networks in the future in order to remain competitive, may
be unable to obtain licenses for key third party software on commercially
acceptance terms in the future, depends on key personnel, must attract and
retain qualified professionals in a tight labor market, cannot be certain of
achieving the anticipated benefits from the acquisition of Devnet, may not be
able to compete effectively in its highly competitive sector, has outstanding
debt which may limit its ability to borrow additional funds, restrict the use
of cash flows, constrain its business strategy and cause the Company to be
unable to meet its debt obligations.
Additionally, there might not be sufficient demand for the Company's
services. If the Company cannot maintain the scalability, reliability and speed
of the network, potential customers will not use the FiberNet's services.
Service interruptions on networks could expose the Company to liability, or
cause it to lose customers. The Company's failure to manage the growth of its
operations or development of its information support systems could harm its
business. Alternative technologies pose competitive threats. Continued
competition or excess network capacity could cause prices for FiberNet's
services to decline, and legislation and government regulation could adversely
affect the Company. Further information on the risks of the Company are
included in the risk factors of the accompanying registration statement on Form
S-1 filed with the Securities and Exchange Commission for the sale of the
Company's Common Stock.
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.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are provided using the straight-
line method over the estimated useful lives of the assets, once placed in
service. The estimated lives are as follows:
<TABLE>
<S> <C>
Computer software.......................................... 3-5 Years
Computer hardware.......................................... 3-5 Years
Furniture and fixtures..................................... 5-10 Years
Leasehold improvements..................................... 9-15 Years
Network equipment.......................................... 5-10 Years
Network infrastructure..................................... 5-20 Years
</TABLE>
F-9
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maintenance and repairs are expensed as incurred. Long-term improvements
are capitalized as additions to property, plant and equipment.
Fair Value of Financial Instruments
Due to short maturities, the Company estimates that the carrying value of
its financial instruments approximates fair value.
Goodwill and Intangibles
Cost in excess of net assets of acquired businesses is amortized on the
straight-line method over 15 years. Intangibles, primarily access rights to
buildings referred to as deferred charges, are amortized over 15 years, the
life of the agreement with the building owners. The Company reviews long-lived
assets including goodwill, other intangible assets, and property, plant and
equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. Determination of any
impairment would include a comparison of estimated future cash flows to be
generated during the remaining life of the asset versus the net carrying value
of the asset.
Earnings Per Share
Basic earnings per share have been computed using the weighted average
number of shares during the period. Diluted earnings per shares is computed by
including the dilutive effect on common stock that would be issued assuming
conversion of stock options, warrants and other dilutive securities.
Stock Option Plan
The Company accounts for stock option grants in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and, accordingly, recognizes compensation expense for
stock option grants to the extent that the estimated fair value of the stock
exceeds the exercise price of the option at the measurement date. The
compensation expense is charged against operations ratably over the vesting
period of the options.
Accounting for Income Taxes
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.
Reclassification
Certain prior year amounts have been reclassified in the consolidated
financial statements to conform to current year presentation.
Recent Accounting Pronouncements
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
F-10
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Start up Activities" (SOP 98-5) were issued. As amended by SFAS 137, 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 2001 but
since it does not have derivatives currently, there would 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 pre-opening costs,
organization costs and start-up costs. The Company has expensed all start-up
costs as incurred, as a result, adoption of SOP 98-5 has no material impact on
the Company's financial statements.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1999 1998
------------ ------------
<S> <C> <C>
Computer software.............................. $ 307,323 $ 2,661
Leasehold improvements......................... 6,844,364 69,852
Computer equipment............................. 235,347 61,746
Office equipment and furniture................. 381,443 360,639
Construction in progress....................... 46,173,480 4,695,968
Power equipment................................ 190,887 190,902
Transmission equipment......................... 1,480,242 45,134
----------- ----------
Total.......................................... 55,613,086 5,426,902
Accumulated depreciation....................... (436,373) (29,793)
----------- ----------
Property, plant and equipment, net............. $55,176,713 $5,397,109
=========== ==========
</TABLE>
4. LEASE COMMITMENTS AND CONTINGENCIES
The Company has entered into an equipment leasing agreement requiring the
payment of $1.0 million over a five year period that commenced August 1999. The
present value of this amount has been included as a capital lease obligation on
the consolidated balance sheet as of December 31, 1999.
The Company has also entered into various operating lease agreements for
office space in New York, New York and for other space relating to the
Company's operations. Rent expense for the years ended December 31, 1999, 1998
and 1997 were approximately $0.8 million, $0.3 million and $8,000,
respectively.
Estimated future minimum operating and capital lease payments are as
follows:
<TABLE>
<CAPTION>
Operating Capital
----------- ----------
<S> <C> <C>
2000.............................................. $ 1,073,396 $ 203,031
2001.............................................. 1,086,199 232,617
2002.............................................. 1,092,049 249,997
2003.............................................. 1,119,705 261,770
2004 and thereafter............................... 8,026,088 97,526
----------- ----------
Total............................................. $12,397,437 $1,044,941
=========== ==========
</TABLE>
5. STOCK OPTIONS
In December 1999, the Company adopted an employee equity participation
program (the "1999 Stock Option Plan") covering 4,500,000 shares of Common
Stock of the Company to advance the growth and success
F-11
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
of FiberNet by enabling employees, directors and consultants to acquire a
proprietary interest in the Company. The Board of Directors administers the
1999 Stock Option Plan. All employees are eligible to receive awards under the
1999 Stock Option Plan, at the Board's discretion. Options granted pursuant to
the 1999 Stock Option Plan (i) 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, (ii) have a term of ten years and (iii)
typically vest on an annual basis over three years.
During the fiscal year ended December 31, 1999, the Company granted
approximately 3.4 million options under the 1999 Stock Option Plan and 1.9
million options not under the 1999 Stock Option Plan, covering a total of 5.3
million shares, at an average exercise price of approximately $3.78 per share,
with a vesting period of up to three years. The Company's previous Employee
Equity Participation Program was terminated during 1999.
The Company accounts for stock options under APB Opinion No. 25. During
the years ended December 31, 1999, 1998 and 1997, the Company granted stock
options to employees with exercise prices below the market price on the date of
the grant. As such the Company recorded compensation expense to employees of
approximately $0.8 million, $0.1 million and $0 for those years, respectively.
If the Company had calculated stock option compensation expense as
prescribed by SFAS No. 123, the Company's net loss and net loss per share would
have been the following pro forma amounts:
<TABLE>
<CAPTION>
Year Ended December Six Months
31, Ended
----------------------- December 31,
1999 1998 1997
----------- ---------- ------------
<S> <C> <C> <C> <C>
Net loss.................... As reported $72,201,432 $2,816,487 $370,562
<CAPTION>
Pro forma $74,081,018 $3,111,104 $387,225
<S> <C> <C> <C> <C>
Net loss per share--basic
and diluted................ As reported $ (4.30) $ (0.18) $ (0.04)
Pro forma $ (4.41) $ (0.20) $ (0.03)
</TABLE>
Transactions during the years ended December 31, 1999, 1998 and 1997,
respectively, involving stock options are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ---------------------- ----------------------
Number of Option Price Number of Option Price Number of Option Price
Shares Per Share Shares Per Share Shares Per Share
--------- ------------ --------- ------------ --------- ------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding at
the beginning of the
period................. 1,273,000 $2.98 600,000 $1.95 -- $ --
Granted................. 5,332,833 3.78 673,000 4.64 600,000 1.95
Terminated.............. (434,832) 4.37 -- -- -- --
--------- ----- --------- ----- ------- -----
Options outstanding at
the end of year....... 6,171,001 3.59 1,273,000 2.98 600,000 1.95
--------- ----- --------- ----- ------- -----
Exercisable at end of
year................... 3,336,126 2.52 120,000 1.95 -- --
--------- ----- --------- ----- ------- -----
Weighted average fair
value of options
granted............... $4.32 $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 assumptions
used for grants in December 31, 1999, 1998 and 1997: risk-free interest rates
of 5.50%, 5.62% and 5.92%, respectively, expected dividend yields of 0%,
expected lives of 4 years and expected volatility of 88%.
F-12
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. STOCK OPTION GRANTS TO NON-EMPLOYEES
During 1999, the Company granted stock options to certain consultants for
services rendered in connection with the design, development and construction
of the Company's telecommunications network infrastructure. As a result, the
Company recognized costs of approximately $3.3 million that were capitalized
and included in property, plant and equipment. The Company also granted stock
options to Tishman Speyer Properties, L.P. As a result, the Company recognized
costs of approximately $3.8 million that were capitalized and included in
deferred charges. In addition, the Company granted stock options with a one-
year vesting period to outside consultants for pre-acquisition due diligence
services. As a result, FiberNet recognized approximately $658,000 of
compensation expense which is included in general and administrative expense in
the accompanying statement of operations for the year ended December 31, 1999.
7. STOCK RESERVED FOR FUTURE ISSUANCE
In addition to shares of Common Stock underlying outstanding stock
options, the Company has reserved for future issuance additional shares of
Common Stock, relating to outstanding warrants and convertible securities. As
of December 31, 1999, the Company had outstanding (i) warrants exercisable into
approximately 8.7 million shares of Common Stock at exercise prices ranging
from $0.50 to $1.50 per share and (ii) convertible preferred stock convertible
into approximately 9.7 million shares of Common Stock with conversion prices of
$1.50 and $3.00 per share.
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 STOCK
Series A Convertible Cumulative Preferred Stock
As of November 24, 1997 the Company issued 1.0 million shares of Series A
Convertible Cumulative Preferred Stock at $5.125 per share for gross proceeds
of approximately $5.1 million, net of issuance costs. The Company or the
holders of the 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. The holders were entitled to
receive annual cumulative dividends at the rate of 6% per annum 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 Cumulative Preferred
Stock into common stock.
Series B Voting Preferred Stock
On November 24, 1997 the Company issued 80,000 shares of Series B Voting
Preferred Stock. Each share was entitled to 100 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, were 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 $1.00 per share. As of
May 7, 1999, all of the issued and outstanding shares of the Series B Voting
Preferred Stock were redeemed by the Company for $.001 per share.
F-13
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Series C Voting Preferred Stock
On May 7, 1999 the Company issued approximately 133,000 shares of Series
C Voting Preferred Stock. Each share shall be entitled to 117.03 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 C 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 an
amount equal to $1.50 per share. Each holder of each share of Series C Voting
Preferred Stock shall have the right to convert such share for one share of
Common Stock at a conversion price of $1.50 per share, subject to adjustment.
The holders of the Series C Voting Preferred Stock shall be entitled to share
in any dividends declared and paid by the Company to the Common Stock on a
ratable basis. (See Note 14)
Series D, E and F Preferred Stock
As of November 30, 1999 the Company issued approximately (i) 309,000
shares of Series D Preferred Stock, (ii) 292,000 shares of Series E Preferred
Stock and (iii) 346,000 shares of Series F Preferred Stock. The shares of
Series D, E and F Preferred Stock shall not be entitled to any 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 D, E and F 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 an
amount equal to $15.00, $15.00 and $30.00 per share, respectively. Each holder
of each share of Series D, E and F Preferred Stock shall have the right to
convert such share for ten shares of Common Stock at conversion prices of
$1.50, $1.50 and $3.00 per share, respectively, subject to adjustment. The
holders of the Series D, E and F Preferred Stock shall be entitled to receive
dividends at a rate of 4%, 8% and 8% per annum, respectively. Such dividends
shall be payable semi-annually and at the option of the Company in cash or in
additional shares of the respective series of Series D, E or F Preferred Stock.
(See Note 14).
10. RELATED PARTY TRANSACTIONS
As part of the May 7, 1999 financing discussed in Note 14, the size of
the Company's board of directors was expanded from three to six directors, with
the addition of, a managing partner of Signal Equity Partners, the sole member
of Concordia, and the president of Taurus Telecommunications. The sole member
of Concordia was also appointed as the Company's president and chief executive
officer. Also in connection with this transaction, certain shareholders granted
an irrevocable proxy to Signal Equity Partners, Trident Telecom Partners and
Concordia Telecom Management to vote all of the shares beneficially owned by
certain shareholders at all meetings of our stockholders. This proxy will
terminate upon a public offering of the Company's Stock.
On March 29, 1999, the Company entered into an agreement with one of its
directors, for financial advisory services in connection with its financing
needs. Pursuant to this agreement the Company granted stock options to purchase
250,000 shares of its common stock. Stock options to purchase 125,000 shares
vested on March 29, 1999 and the remaining 125,000 options vested in equal
monthly installments during the one year term of the agreement.
During 1999, the Company made payments to Petrocelli Electric Co., a
related party, of approximately $1.3 million for consulting and contracting
services rendered. Other consulting fees to related parties included
F-14
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
approximately: (i) $100,000 to Santo Petrocelli, a former officer (ii) $96,000
to Richard D. Sayers, a current director, (iii) $85,000 to Frank Chiaino, a
former officer and (iv) $83,000 to Landtel Telecommunications, a current
affiliated entity. The Company also issued approximately 973,000 warrants and
shares of Common Stock as consideration for accounts payable of $527,000 due to
related parties, including Petrocelli Electric Co., LPS Consultants, Inc.,
Landtel Telecommunications and Frank Chiaino. The pricing of these transactions
has been determined on an arms-length basis.
The Company capitalized services from Petrocelli Electrical Services, a
related party, of approximately $2.5 million 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
approximately $1.2 million and $153,000, respectively.
The Company capitalized services of approximately $57,000 and $6,000 of
consulting services from Landtel Telecommunications 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
approximately $163,000 and $87,000, respectively.
The Company recognized approximately $75,000 of consulting fees from LPS
Consultants, Inc. during 1998. As of December 31, 1998, the Company had a
payable of approximately $17,000.
11. INCOME TAXES
A reconciliation of the actual income tax (provision) benefit and the tax
computed by applying the U.S. federal rate (35%) to the loss from continuing
operations, before income taxes for the three years ended December 31, 1999
follows:
<TABLE>
<CAPTION>
1999 1998 1997
------------ ----------- ---------
<S> <C> <C> <C>
Computed tax at statutory rate........... $(25,432,427) $ (985,770) $(232,725)
State and local, net of FIT benefit...... 885 -- --
Preferred stock dividends................ 264,882 -- --
Other.................................... 7,700 -- --
Debt conversion.......................... 17,150,000 -- --
Minority interest........................ (36,550) (83,115) (8,134)
Valuation allowance...................... 8,045,510 1,068,885 240,859
------------ ----------- ---------
Total.................................... $ -- $ -- $ --
============ =========== =========
<CAPTION>
1999 1998 1997
Deferred taxes: ------------ ----------- ---------
<S> <C> <C> <C>
Deferred expenses........................ $ 4,466,054 $ 1,293,966 $ --
Stock options............................ 1,441,607 -- --
Depreciation............................. (14,231) (3,731) --
Net operating loss....................... 3,861,740 418,541 --
Valuation allowance...................... (9,755,170) (1,708,776) --
------------ ----------- ---------
Net deferred tax asset................... $ -- $ -- $ --
============ =========== =========
</TABLE>
As of December 31, 1999, the Company has federal income tax net operating
loss carryforwards of approximately $11.0 million. The federal tax loss
carryforwards begin expiring in 2012. Full valuation allowances have been
recorded against all temporary differences.
F-15
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1999 the Company did not record a current or deferred federal tax
provision.
12. EMPLOYMENT CONTRACTS
The Company has various employment contracts with key executive
employees. The total compensation under these contracts for 2000 and future
years is as follows:
<TABLE>
<CAPTION>
Amount
----------
<S> <C>
2000.......................................................... $1,187,500
2001.......................................................... 679,583
2002.......................................................... 37,500
2003.......................................................... --
2004.......................................................... --
----------
Total....................................................... $1,904,583
==========
</TABLE>
13. MINORITY INTEREST
The ownership of Local Fiber, LLC was divided into Class A Members (the
Company) owning 90% and Class B Members (Metromedia Fiber Network Services,
Inc.) owning 10%. The Class A Members requested that Class B Members enter into
a license agreement with the Company, and as an inducement therefore, the Class
A Members made capital contributions on behalf of Class B Members in connection
with each Class A Members' capital contribution. On December 17, 1999, the
Company purchased all of the Class B membership interests from Metromedia Fiber
Network Services, Inc. (See Note 15).
14. SIGNIFICANT TRANSACTIONS
On May 7, 1999 (the "Closing Date"), the Company entered into a
securities purchase agreement with certain investors, including Signal Capital
Partners, L.P., Trident Telecom Partners LLC and Concordia Telecom Management,
L.L.C., for the sale of $14.1 million of securities, consisting of $13.9
million aggregate amount of 4% to 8% Senior Secured Convertible Notes due 2004
(the "May Convertible Notes") and 133,333 shares of convertible Series C
Preferred Stock with an aggregate redemption value of $0.2 million, or $1.50
per share, (the "Series C Preferred Stock," together with the May Convertible
Notes, the "Securities"). The Securities are convertible into shares of the
Company's Common Stock at a conversion price of $1.50 per share, which
represented the approximate fair market value of the Company's common stock
when the conversion price of the Securities was determined. The May Convertible
Notes are secured by, among other things, a pledge by the Company of the shares
of Common Stock of its wholly-owned subsidiaries. Together with the sale of the
May Convertible Notes, the Company issued approximately 7.9 million warrants to
purchase common stock to the purchasers of the May Convertible Notes (the
"Warrants"). The Warrants are exercisable at $0.67 to $1.50 per share and
expire five years after the Closing Date.
In connection with the issuance of the May Convertible Notes and the
related Warrants, the Company recorded an original issue discount on the May
Convertible Notes in the amount $5.4 million. The original issue discount was
amortized over the five-year life of the May Convertible Notes. Certain
financing costs related to the issuance of the May Convertible Notes were
capitalized as deferred charges and amortized over the five-year life of the
May Convertible Notes.
As of June 18, 1999, the Company converted certain accounts payable to
related parties, totaling $0.5 million, into shares of Common Stock and
warrants.
F-16
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On September 28, 1999, the Company entered into another securities
purchase agreement with certain investors, including Signal Equity Partners,
L.P. (formerly Signal Capital Partners, L.P.) and Waterview Partners, L.P. for
the sale of $7.8 million of 8% Senior Secured Convertible Notes due 2004. On
October 19, 1999, the Company issued an additional $4.7 million of 8% Senior
Secured Convertible Notes due 2004 to certain other investors, for a total of
$12.5 million (the "September Convertible Notes"). The September Convertible
Notes were convertible into shares of the Company's common stock at a
conversion price of $3.00 per share, subject to anti-dilution adjustments. The
September Convertible Notes were secured by, among other things, a pledge by
the Company of the shares of Common Stock of its wholly-owned subsidiaries. In
connection with this transaction, the Company recorded a non-recurring, non-
cash charge for a beneficial conversion feature in the amount of $7.9 million,
included in interest expense on beneficial conversion in the accompanying
statement of operations, to reflect the market price of the common stock as of
the dates of issuance thereof.
In connection with the issuance of $7.8 million of the September
Convertible Notes on September 28, 1999, certain financing costs, totaling
approximately $135,000, were capitalized as deferred charges and amortized over
the five-year life of those September Convertible Notes.
On November 30, 1999, holders of the Company's May Convertible Notes and
September Convertible Notes converted their principal and accrued interest into
shares of Common Stock. Subsequently, certain holders of the 4% May Convertible
Notes exchanged their Common Stock for Series D Preferred Stock;, certain
holders of the 8% May Convertible Notes exchanged their Common Stock for Series
E Preferred Stock; and certain holders of the September Convertible Notes
exchanged their Common Stock for Series F Preferred Stock.
The Series D Preferred Stock and Series E Preferred Stock are convertible
into Common Stock at a price of $1.50 per share, and the Series F Preferred
Stock is convertible into Common Stock at a price of $3.00 per share. In
connection with the transaction, the Company recorded a non-recurring, non-cash
charge for a beneficial conversion feature in the amount of $49.2 million, to
reflect the market price as of the date thereof.
In December 1999, the Company entered into a master purchase agreement
with Nortel, under which the Company will purchase optical networking equipment
and related services for up to $60 million from Nortel at predetermined volume-
base pricing.
15. METROMEDIA FIBER NETWORK SERVICES, INC. PRIVATE NETWORK AGREEMENT
Pursuant to a Private Network Agreement dated as of December 17, 1999 and
other related agreements by and between Metromedia Fiber Network Services, Inc.
("MFN") and the Company ("the Network Agreement"), the Company issued five
million shares at an assumed price of $8.69 per share. As part of the Network
Agreement, the Company issues four million shares (of the total five million)
to acquire an exclusive right of use of dark fiber in multiple markets for a
total price of approximately $34.8 million. This amount has been reflected in
the accompanying consolidated financial statements as property, plant and
equipment. As part of the remaining part of the Network Agreements, the Company
issued one million shares (of the total five million) to repurchase a 10%
membership interest in Local Fiber, LLC held by MFN. The transaction was
recorded as a purchase business combination. The Company recorded approximately
$8.7 million of goodwill in the accompanying consolidated financial statements,
which will be amortized over a period of 15 years. The Company has recorded a
purchase allocation on a preliminary basis and will complete the allocation by
the fourth quarter of 2000.
F-17
<PAGE>
FIBERNET TELECOM GROUP, INC.
(A Development Stage Enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. NON-RECURRING EXPENSES
During 1999, the Company recorded non-recurring expenses of $4.3 million,
comprised of a $3.7 million non-cash charge, relating to a settlement of
certain litigation, and $0.6 million, relating to the decommission of the
Company's Lucent 5ESS-2000 telecommunication switch located at its facility at
60 Hudson Street in New York, New York.
F-18
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To FiberNet Telecom Group, Inc.:
We have reviewed the accompanying balance sheet of FiberNet Telecom Group, Inc.
and subsidiaries as of June 30, 2000, and the related consolidated statements
of operations for the three-month and six-month periods ended June 30, 2000 and
1999, and the consolidated statements of cash flows for the six-month periods
ended June 30, 2000 and 1999. These financial statements are the responsibility
of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States
of America.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
New York, New York
August 10, 2000
F-19
<PAGE>
FIBERNET TELECOM GROUP, INC.
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................... $ 23,587 $ 9,512
Accounts receivable................................. 2,621 26
Prepaid expenses and other.......................... 562 134
--------- --------
Total current assets.............................. 26,770 9,672
Property, plant and equipment, net.................... 67,475 55,177
Goodwill, net......................................... 8,377 8,667
Deferred charges, net................................. 12,301 3,698
Other assets.......................................... 3,630 374
--------- --------
TOTAL ASSETS.......................................... $ 118,553 $ 77,588
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................... $ 3,709 $ 3,733
Accrued expenses.................................... 2,703 4,447
Deferred revenues................................... 774 --
Capital lease obligation--current portion........... 217 203
--------- --------
Total current liabilities......................... 7,403 8,383
Notes payable, less discount.......................... 6,015 --
Capital lease obligation.............................. 844 956
--------- --------
Total liabilities................................. 14,262 9,339
Stockholders' equity:
Common Stock, $.001 par value, 150,000,000 and
50,000,000 shares authorized and 28,519,759 and
25,932,464 shares issued and outstanding,
respectively...................................... 28 26
Series C Voting Preferred Stock $.001 par value
83,688 and 133,333 issued and outstanding,
respectively. (Preference in involuntary
liquidation value, $1.50 per share)............... 125 200
Series D Preferred Stock $.001 par value, 316,376
and 310,173 shares issued and outstanding,
respectively. (Preference in involuntary
liquidation value, $15.00 per share).............. 23,623 22,553
Series E Preferred Stock $.001 par value, 305,627
and 293,872 shares issued and outstanding,
respectively. (Preference in involuntary
liquidation value, $15.00 per share).............. 23,457 21,430
Series F Preferred Stock $.001 par value, 361,731
and 347,819 shares issued and outstanding,
respectively. (Preference in involuntary
liquidation value, $30.00 per share).............. 27,763 25,329
Series G Preferred Stock $.001 par value, 2,000,000
shares issued and outstanding (Preference in
involuntary liquidation value, $10.00 per share).. 34,000 --
Additional paid in capital and other................ 105,336 74,507
Accumulated deficit................................. (110,041) (75,796)
--------- --------
Total stockholders' equity........................ 104,291 68,249
--------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............ $ 118,553 $ 77,588
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-20
<PAGE>
FIBERNET TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
2000 1999
------------ ------------
<S> <C> <C>
Revenues........................................... $ 1,768 $ --
Operating expenses:
Direct costs..................................... 813 --
Selling, general and administrative expenses..... 9,793 2,984
Stock related expense............................ 2,237 --
Depreciation and amortization.................... 2,415 111
------------ ------------
Total operating expenses........................... 15,258 3,095
------------ ------------
Loss from operations............................... (13,490) (3,095)
Interest expense, net.............................. 1,223 199
------------ ------------
Net loss........................................... (14,713) (3,294)
Preferred stock dividends.......................... (19,532) --
------------ ------------
Net loss applicable to common stockholders......... $ (34,245) $ (3,294)
============ ============
Net loss applicable to common stockholders per
share--basic and diluted......................... $ (1.25) $ (0.21)
Weighted average shares outstanding................ 27,453,872 16,025,248
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-21
<PAGE>
FIBERNET TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
Three Months Ended June 30,
----------------------------
2000 1999
------------- -------------
<S> <C> <C>
Revenues........................................ $ 1,657 $ --
Operating expenses:
Direct costs.................................. 610 --
Selling, general and administrative expenses.. 5,502 2,267
Stock related expense......................... 541 --
Depreciation and amortization................. 1,240 107
------------- -------------
Total operating expenses........................ 7,893 2,374
------------- -------------
Loss from operations............................ (6,236) (2,374)
Interest expense, net........................... 1,273 200
------------- -------------
Net loss........................................ (7,509) (2,574)
Preferred stock dividends....................... (16,680) --
------------- -------------
Net loss applicable to common stockholders...... $ (24,189) $ (2,574)
============= =============
Net loss applicable to common stockholders per
share--basic and diluted...................... $ (0.86) $ (0.16)
Weighted average shares outstanding............. 28,094,644 16,050,218
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-22
<PAGE>
FIBERNET TELECOM GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss applicable to common stockholders........ $ (34,245) $ (3,294)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 2,415 111
Preferred stock dividends....................... 19,532 --
Stock related expense........................... 2,237 --
Other non-cash expense.......................... 918 1,000
Change in assets and liabilities:
(Increase) decrease in accounts receivable,
prepaid expenses and other assets........... (3,279) 113
Increase (decrease) in accounts payable,
accrued expenses and deferred revenues...... 1,948 (1,928)
------------- ------------
Cash used in operating activities................... (10,474) (3,998)
Cash flows from investing activities:
Investment in Devnet L.L.C. ...................... (3,000) --
Capital expenditures.............................. (14,080) (5,038)
------------- ------------
Cash used in investing activities................... (17,080) (5,038)
Cash flows from financing activities:
Net proceeds from debt financings................. 18,427 12,952
Net proceeds from issuance of equity securities... 23,300 2,606
Repayment of capital lease obligation............. (98) --
------------- ------------
Cash provided by financing activities............... 41,629 15,558
------------- ------------
Net increase in cash................................ 14,075 6,522
Cash at beginning of period......................... 9,512 257
------------- ------------
Cash at end of period............................... $ 23,587 $ 6,779
============= ============
Supplemental disclosures of cash flow information:
Interest paid..................................... $ 76 $ --
Income taxes paid................................. -- --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-23
<PAGE>
FIBERNET TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS OPERATIONS
FiberNet Telecom Group, Inc. ("FiberNet" or the "Company") is an all-
optical, facilities-based communications provider focused on providing
wholesale broadband connectivity for data, voice and video transmission on its
state-of-the-art fiber-optic networks in major metropolitan areas. The Company
offers an advanced high bandwidth, fiber-optic solution to support the growing
demand for network capacity in the intra-city market, or local loop. The
Company has established operations in the New York metropolitan area and
expects to expand operations into other target markets, including Chicago, Los
Angeles, San Francisco, Boston and Washington D.C.
FiberNet is a holding company that owns all of the outstanding common
stock of FiberNet Telecom, Inc., a Delaware corporation and an intermediate
level holding company. FiberNet Telecom, Inc. owns all of the outstanding
membership interests of Local Fiber, LLC ("Local Fiber"), a New York limited
liability company, and all of the outstanding membership interests of FiberNet
Equal Access, LLC ("Equal Access"), also a New York limited liability company.
The Company conducts its primary business operations through its operating
subsidiaries, Local Fiber and Equal Access.
The Company was a development stage enterprise through December 31, 1999.
During the fiscal quarter ended March 31, 2000, the Company began offering its
services to customers and recognizing revenues.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The interim unaudited consolidated financial statements in this report
have been prepared in accordance with the United States Securities and Exchange
Commission's Regulation S-X and consequently do not include all disclosures
required under generally accepted accounting principles. The interim unaudited
consolidated financial statements should be read in conjunction with the
audited consolidated financial statements of the Company and accompanying notes
for the year ended December 31, 1999, contained in the Company's Annual Report
on Form 10-KSB. The Form 10-KSB includes information with respect to the
Company's significant accounting and financial reporting policies and other
pertinent information. The Company believes that all adjustments of a normal
recurring nature that are necessary for a fair presentation of the results of
the interim periods presented in this report have been made. Certain balances
have been reclassified to conform to the current period presentation. All
significant intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
FiberNet generates revenues from selling network capacity and related
services to other communications service providers. The majority of the
Company's revenues are generated on a monthly recurring basis under long-term
contracts, typically three to five years in length. Most of its customers are
F-24
<PAGE>
FIBERNET TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
obligated to make minimum payments for the utilization of its networks and
facilities. Customers may elect to purchase additional services in excess of
minimum contractual requirements.
Revenues are derived from three general types of services:
. Transport services. FiberNet's transport services include the offering
of broadband circuits on its metropolitan transport networks and in-
building networks. Over its metropolitan transport networks, the
Company can provision circuits from one of its carrier point
facilities to another carrier point facility or to an on-net building
via an interconnection with its in-building network in that building.
The Company can also provision circuits vertically between floors in a
carrier point facility or an on-net building.
. Colocation facility services. FiberNet's colocation services include
providing customers with the ability to locate their communications
and networking equipment at its carrier point facilities in a secure
technical operating environment. The Company also can provide its
customers with colocation services in the central equipment rooms of
certain of its on-net buildings. If a customer purchases colocation
services, the Company typically requires the customer to make a
minimum commitment for transport services, as well.
. Communications access management services. FiberNet's access
management services include providing its customers with the non-
exclusive right to market and provide their retail services to tenants
in its on-net and off-net buildings. Customers typically enter into an
agreement with the Company to gain access to all or a significant
number of its properties. For all of its off-net buildings and some of
its on-net buildings, the Company has the exclusive right to manage
communications access. Once a customer has entered into an agreement
with the Company for access services, FiberNet typically requires that
customer to utilize its in-building network infrastructure for
connectivity to end-user tenants.
The Company recognizes revenue on transport services, colocation facility
services and communication access management and other services ratably over
the term of the contract with each customer.
Direct Costs
The Company classifies expenses of an identifiable activity related to a
contract with a customer that is substantially complete as direct costs. Costs
of contracts in process are accumulated, but there are no interim charges to
income. General and administrative costs are charged to expense as incurred. If
necessary, the estimated loss on an uncompleted contract is expensed in the
period in which it is identified.
Impairment of Long-Lived Assets
The Company reviews the carrying value of long-lived assets for
impairment whenever events and circumstances indicate the carrying value of an
asset may not be recoverable from the estimated future cash flows expected to
result from its use and eventual disposition. In cases where undiscounted
expected future cash flows are less than the carrying value, an impairment loss
would be recognized equal to an amount by which the carrying value exceeds the
fair value of the assets.
F-25
<PAGE>
FIBERNET TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
June 30, 2000 December 31, 1999
------------- -----------------
<S> <C> <C>
Computer software........................ $ 968 $ 307
Leasehold improvements................... 885 297
Computer equipment....................... 654 235
Office equipment and furniture........... 418 381
Construction in progress................. 6,261 54,393
Network equipment and infrastructure..... 60,507 --
------- -------
Total.................................... 69,693 55,613
Accumulated depreciation................. (2,218) (436)
------- -------
Property, plant and equipment, net....... $67,475 $55,177
======= =======
</TABLE>
4. SIGNIFICANT AND SUBSEQUENT EVENTS
On July 31, 2000, FiberNet acquired the remaining 97% of the membership
interests of Devnet L.L.C. ("Devnet") not already beneficially owned by the
Company pursuant to the Agreement and Plan of Reorganization, dated as of June
2, 2000. Devnet manages the communications access and infrastructure for
approximately 40 million square feet of class A commercial real estate in major
markets nationwide. In connection with the acquisition, the Company issued
3,461,162 shares of its Common Stock and paid approximately $15 million in
exchange for approximately 97% of the membership interests in Devnet. The
acquisition will be accounted for under the purchase method of accounting.
FiberNet had previously acquired approximately 3% of the Devnet membership
interests for a purchase price of $3 million in April 2000. The acquisition of
the remaining Devnet membership interests gave the Company control of 100% of
Devnet. The Company has not yet allocated the purchase price of approximately
$60 million to the assets and liabilities of Devnet and will complete the
allocation within one year. In connection with the acquisition, the Company
paid an aggregate of $500,000 to related parties for financial advisory
services.
On June 22, 2000, the Company amended its master purchase agreement with
Nortel Networks Inc. ("Nortel") to expand the scope of this agreement from
$60.0 million to $260.0 million and to extend the term of the agreement to
2002. On December 31, 1999, FiberNet entered into this master purchase
agreement giving it the right to purchase optical networking equipment and
related services at predetermined volume-based pricing.
On June 30, 2000, FiberNet issued and sold 2,000,000 shares of Series G
Preferred Stock to Nortel in a private placement for an aggregate purchase
price of $20.0 million. Each share of Series G Preferred Stock was convertible
into one share of Common Stock of FiberNet at $10.00 per share, subject to
anti-dilution adjustments. In connection with this transaction, the Company
recorded a nonrecurring non-cash charge for a beneficial conversion feature in
the amount of $14.0 million to reflect the market price of the Common Stock as
of the date of the issuance.
On July 31, 2000 FiberNet issued and sold 426,333 shares of Series H
Preferred Stock, $.001 par value per share (the "Series H Preferred Stock") to
Nortel in a private placement for an aggregate purchase price consisting of
$22.5 million in cash plus the cancellation by Nortel of the 2,000,000 shares
of the Series G Preferred Stock, including all accrued and unpaid dividends
thereon. Each share of Series H Preferred Stock is convertible into ten shares
of Common Stock at $10.00 per share, subject to anti-dilution adjustments. This
amount is reflected in the accompanying balance sheet net of the value of
warrants to purchase 425,000 shares of Common Stock of the Company issued in
connection with this transaction. The value of these warrants was
F-26
<PAGE>
FIBERNET TELECOM GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
estimated on the date of issuance using an acceptable pricing model. In
connection with this transaction, the Company recorded a nonrecurring non-cash
charge for the beneficial conversion feature in the amount of $12.2 million to
reflect the market price of the Common Stock as of the date of the issuance.
On August 11, 2000 FiberNet issued and sold 62,500 shares of Series I
Preferred Stock, $.001 par value per share (the "Series I Preferred Stock") to
Nortel in a private placement for an aggregate purchase price of $7.5 million.
Each share of Series I Preferred Stock is convertible into ten shares of Common
Stock at $12.00 per share, subject to anti-dilution adjustments. The Company
anticipates recording a beneficial conversion feature in connection with this
issuance. To date, Nortel has invested a total of $50.0 million in preferred
stock of the Company.
On May 26, 2000, FiberNet entered into an amended, expanded agreement
with Tishman Speyer Properties, L.P. ("TSP"). Under the agreement, FiberNet
will issue up to 1.6 million shares of its Common Stock to TSP as the Company
enters into license agreements for the deployment and operation of its in-
building networks in certain class A commercial office properties owned or
managed by TSP. As of June 30, 2000, approximately 700,000 shares have been
issued under the agreement for a total value of $6.4 million, based on fair
market value on the date of issuance. This amount is included in deferred
charges on the accompanying balance sheet and is being amortized over 15 years,
the term of the underlying license agreement. In a related transaction, TSP
exchanged a warrant it held for membership interests in Equal Access, an
indirect wholly-owned subsidiary of FiberNet. This exchange had no impact on
the financial statements of the Company.
On May 23, 2000, FiberNet's board of directors approved, and on July 27,
2000 the Company's stockholders ratified, the adoption of an equity incentive
plan, which amends and restates the Company's 1999 stock option plan. The
equity incentive plan provides for the grant of incentive stock options, non-
qualified stock options and other performance and non-performance based equity
awards, including restricted stock, performance awards, stock appreciation
rights, or SARs, and other types of awards based on the Company's Common Stock.
On April 27, 2000, the Company began trading its Common Stock on the
Nasdaq National Market System under the ticker symbol "FTGX". Previously, the
Company's Common Stock was quoted on the OTC Bulletin Board under the same
ticker symbol.
On April 11, 2000, the Company entered into a $75.0 million Senior
Secured Credit Facility (the "Credit Facility") with Deutsche Bank AG New York
Branch, Deutsche Bank Securities Inc., Toronto Dominion (Texas), Inc. and
Nortel. In addition to the initial lenders, First Union National Bank and IBM
Credit Corporation are currently lenders under the Credit Facility. FiberNet
intends to use the funds available under the Credit Facility for the
acquisition and construction of its network infrastructure and for general
corporate purposes. The Credit Facility has a term of four and one-half years,
consisting of revolving availability for the first eighteen months and a term
loan for the remaining three years. The Credit Facility is secured by the
Company's assets, except for the assets pledged in connection with its capital
lease obligations, and contains certain restrictive covenants customary for a
financing of this type. As of June 30, 2000, $21.0 million was outstanding
under the Credit Facility. This amount is included in notes payable in the
accompanying balance sheet net of a discount of $14.9 million. This discount
represents the value of warrants to purchase approximately 1,500,000 shares of
Common Stock of the Company at a price of $18.06 per share issued to the
lenders in connection with the Credit Facility. The discount is being amortized
over the term of the Credit Facility. The fair value of the warrants was
estimated on the date of issuance using an acceptable pricing model.
In February 2000, FiberNet entered into a two year services agreement
with Bechtel Corporation and Bechtel Associates Professional Corporation for
engineering services, labor, materials and equipment in connection with the
design and installation of the Company's in-building networks.
F-27
<PAGE>
Report of Independent Public Accountants
To Devnet L.L.C.:
We have audited the accompanying balance sheets of Devnet L.L.C., (a Delaware
limited liability company), as of December 31, 1999 and 1998, and the related
statements of operations, members' (deficit) equity and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Devnet L.L.C. as of December
31, 1999 and 1998, and the results of its operations and its cash flows for the
years then ended in conformity with accounting principles generally accepted in
the United States.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
July 31, 2000
F-28
<PAGE>
DEVNET L.L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1999 1998
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................. $1,733,036 $1,965,106
Accounts receivable................................... 365,769 158,801
---------- ----------
Total current assets............................... 2,098,805 2,123,907
Property, plant and equipment, net...................... 165,831 59,216
Lease acquisition costs, net............................ 355,033 381,576
---------- ----------
TOTAL ASSETS....................................... $2,619,669 $2,564,699
========== ==========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable including related party of $85,166
in 1998............................................. $ 119,245 $ 333,729
Accrued expenses and other............................ 2,003,708 134,847
Deferred revenue...................................... 4,219,139 2,060,198
---------- ----------
Total current liabilities.......................... 6,342,092 2,528,774
Members' capital........................................ (3,722,423) 35,925
---------- ----------
TOTAL LIABILITIES AND MEMBERS' CAPITAL............. $2,619,669 $2,564,699
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
DEVNET L.L.C.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998
----------- -----------
<S> <C> <C>
Revenues............................................. $ 1,865,419 $ 750,272
Operating expenses:
Direct costs....................................... 3,023,467 1,499,787
General and administrative......................... 2,572,613 1,794,842
Depreciation and amortization...................... 53,222 32,607
----------- -----------
Total operating expenses........................ 5,649,302 3,327,236
----------- -----------
Loss from operations................................. (3,783,883) (2,576,964)
Interest income, net................................. 38,360 19,940
Other................................................ (12,825) (5,767)
----------- -----------
Net loss............................................. $(3,758,348) $(2,562,791)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
DEVNET L.L.C.
STATEMENTS OF MEMBERS' CAPITAL
<TABLE>
<S> <C>
Balance, at December 31, 1997..................................... $ 98,573
Members' contributions.......................................... 2,500,143
Net loss ....................................................... (2,562,791)
-----------
Balance, at December 31, 1998..................................... 35,925
Net loss ....................................................... (3,758,348)
-----------
Balance, at December 31, 1999..................................... $(3,722,423)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE>
DEVNET L.L.C.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
December 31,
1999 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss........................................... $(3,758,348) $(2,562,791)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities--
Depreciation and amortization................... 53,222 32,607
Other........................................... 12,825 5,767
Changes in operating assets and liabilities--
Accounts receivable............................. (206,968) (71,401)
Leasehold acquisition costs..................... -- (398,146)
Other assets.................................... -- 106,205
Accounts payable................................ (214,484) 43,025
Accrued expenses................................ 1,868,861 134,847
Deferred revenues............................... 2,158,941 2,060,198
----------- -----------
Net cash used in operating activities......... (85,951) (649,689)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for property, plant and equipment..... (153,619) (34,900)
Proceeds from sale of property, plant and
equipment........................................ 7,500 --
----------- -----------
Net cash used in investing activities......... (146,119) (34,900)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Members' contributions............................. -- 2,500,143
----------- -----------
Net cash provided by financing activities....... -- 2,500,143
----------- -----------
Net (decrease) increase in cash and cash
equivalents................................... (232,070) 1,815,554
CASH AND CASH EQUIVALENTS, beginning of year......... 1,965,106 149,552
----------- -----------
CASH AND CASH EQUIVALENTS, end of year............... $ 1,733,036 $ 1,965,106
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE>
DEVNET L.L.C.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION
Devnet L.L.C., ("Devnet" or the "Company"), provides access to office
buildings and the intra-building passive transport infrastructure to
competitive local exchanges carriers, incumbent local exchange carriers,
application Service Providers and internet Service Providers ("Service
Providers"). Devnet has acquired long term, exclusive communications access
rights to office space in markets nationwide. In turn, the Company has licensed
such rights to Service Providers on a largely non-exclusive basis in exchange
for a share of revenue, rents and service fees generated by the Service
Providers.
At December 31, 1999, Devnet has Telecommunications Services Lease
Agreements ("Services Leases") with ten property owners. The Services Leases
cover multiple properties and allow for additional properties to be added in
the future. Devnet's Services Leases provide for exclusive rights relating to
telecommunications access and the installation, management and operation of a
passive transport infrastructure. Devnet's agreements with property owners
typically have a five-year initial term with multiple renewal options. In some
instances, Devnet's exclusivity is subject to a tenant's right to utilize a
provider of its choice and to the existence of certain legacy distribution
infrastructure.
Devnet has exclusive signed and pending agreements for more than 40
million square feet of commercial office space. Owners of these buildings
include TIAA-CREF (23 million square feet), HIRO REIT (3 million square feet),
Greenfield Partners (300,000 square feet), Prime REIT (10 million square feet)
and Douglas Elliman, Beitler (2 million square feet).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
The Company generates revenue from fixed and variable license fees and
infrastructure charges to Service Providers. Fixed license fees, which are
typically based on the total square footage of a building under contract, are
paid monthly in advance over the life of the contract. Variable fees consist of
a percentage of gross sales achieved by Service Providers and are paid
quarterly in arrears. Revenue is recognized as services are performed and
revenue can be measured reliably.
Prorated contract revenues and costs are reflected in income each period.
Changes in estimates are recorded in the period in which they become known.
Losses on contracts are recognized in full when they become known. Amendments
to contracts resulting in additional revenues are recognized in the period when
future services are performed.
Deferred Revenue
In exchange for the option to enter into Service Leases with Devnet's
real estate portfolio, Devnet received advance payments from customers in 1999
and 1998 of approximately $2,286,000 and $2,084,000, respectively. These
payments are being deferred over various terms equal to the estimated customer
life, of five to ten years.
F-33
<PAGE>
DEVNET L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In addition Onsite Access, Inc. ("Onsite"), a customer, granted 228,775
warrants in connection with the issue of access rights to Devnet's real estate
portfolio, with 200,000 additional warrants available to Devnet upon selection
of optional additional sites by the customer prior to November 1, 2001. The
warrants vest upon performance of the terms stated in the contract, including
the execution of non-disturbance agreements with each of the properties
selected by Onsite. The warrants are not exercisable until Onsite is publicly
traded. Onsite is currently not publicly traded, and the Onsite warrants have
no value at December 31, 1999. They will be recorded under the guidelines
specified for available for sale securities in accordance with Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities". As of December 31, 1999, none of
these warrants have vested.
Segment Reporting
Devnet enters into exclusive lease agreements with office property owners
to provide telecommunications carriers access to the properties. The Company
has determined that it is a single segment operating company.
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 due to the short maturity of the instruments.
Property, Plant and Equipment
Property, plant and equipment are stated at cost less accumulated
depreciation. Depreciation and amortization are provided on a straight-line
basis over the estimated useful lives of the assets, once placed in service.
The estimated useful lives are as follows:
<TABLE>
<S> <C>
Computer equipment............................................ 5 Years
Leasehold improvements........................................ 5-10 Years
Furniture and fixtures........................................ 7 Years
Network infrastructure........................................ 15 Years
</TABLE>
Maintenance and repairs are charged to expense as incurred. Long-term
improvements are capitalized as additions to property, plant and equipment.
Lease Acquisition Costs
The Company paid up-front costs to TIAA-CREF during 1998. These amounts
were capitalized and are being amortized over the life of the lease.
Fair Value of Financial Instruments
Due to short maturities, the Company estimates that the carrying value of
its financial instruments approximates fair value. These instruments include
accounts receivable, accounts payable, accrued expenses, deferred revenue and
customer deposits.
F-34
<PAGE>
DEVNET L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Income Taxes
As Devnet is a limited liability company, Devnet is not liable for any
federal or state income taxes, nor is it entitled to any tax benefit resulting
from operating losses. Each member of the Company has the responsibility to
include its share of taxable income or to deduct its share of the Company's
losses in its individual income tax return.
Recent Accounting Pronouncements
In 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," was reissued. As amended by SFAS No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities" SFAS No. 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 No. 133 in fiscal 2001 and has not
quantified the impact of this statement on its financial statements.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
As of December
31,
1999 1998
-------- -------
<S> <C> <C>
Computer equipment........................................ $ 30,523 $26,708
Leasehold improvements.................................... 35,424 18,614
Furniture and fixtures.................................... 62,916 32,068
Network infrastructure.................................... 96,297 --
-------- -------
225,160 77,390
Accumulated depreciation.................................. (59,329) (18,174)
-------- -------
Property, plant and equipment, net........................ $165,831 $59,216
======== =======
</TABLE>
4. RELATED PARTY TRANSACTIONS
Payables due to a related party represent amounts due to Devnet Energy
Group, LLC ("Devnet Energy"), an affiliated company under common control, for
shared expenses such as office rent and payroll. Payroll costs were allocated
based on the estimated portion of employees' time spent on Devnet Energy, and
rent was allocated based on estimated office space occupied by Devnet Energy.
The methodology used to allocate these costs is considered reasonable.
5. LEASE COMMITMENTS AND CONTINGENCIES
The Company has entered into an operating lease agreement for office
space and equipment. Rent expense for the years ended December 31, 1999 and
1998 was $78,444 and $77,986, respectively.
Estimated future minimum operating lease payments are as follows:
<TABLE>
<CAPTION>
Year ending December 31:
------------------------
<S> <C>
2000............................................................ $ 74,485
2001............................................................ 79,326
2002............................................................ 62,349
--------
Total........................................................... $216,160
========
</TABLE>
F-35
<PAGE>
DEVNET, L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. EMPLOYMENT CONTRACTS
The Company has various employment contracts with key executive
employees. Expenses related to these contracts for the years ended December 31,
1999 and 1998 were approximately $351,000 and $483,000, respectively. Future
payments under these contracts total $330,000 in 2000. The Company does not
have any commitments under these contracts beyond December 31, 2000.
7. SIGNIFICANT CUSTOMERS
For the years ended December 31, 1999 and 1998, revenue generated from
major customers exceeding 10% of total revenue is summarized as follows:
<TABLE>
<CAPTION>
1999 1998
------------------ ----------------
% of % of
Total Total
Revenue Revenue Revenue Revenue
---------- ------- -------- -------
<S> <C> <C> <C> <C>
Winstar.................................. $ 651,771 35% $236,529 32%
Teligent................................. 503,605 27% 197,821 26%
STF...................................... 458,269 25% 180,090 24%
US West.................................. -- -- 119,244 16%
---------- --- -------- ---
$1,613,645 87% $733,684 98%
========== === ======== ===
</TABLE>
8. SUBSEQUENT EVENT
On July 31, 2000, the Company completed a merger with FiberNet Telecom
Group, Inc. ("FiberNet") whereby FiberNet acquired the remaining 97% membership
interest in the Company in exchange for $15.0 million in cash and 3,461,162
shares of stock. The transaction is accounted for under the purchase method of
accounting. FiberNet previously acquired 3% membership interest in the Company
for $3.0 million in cash on April 12, 2000.
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Devnet L.L.C.:
We have reviewed the accompanying balance sheet of Devnet L.L.C. as of June 30,
2000, and the related statements of operations for the six-month periods ended
June 30, 2000 and 1999, and the statements of cash flows for the six-month
periods ended June 30, 2000 and 1999. These financial statements are the
responsibility of the company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with accounting principles generally accepted in the United States
of America.
/s/ ARTHUR ANDERSEN LLP
Arthur Andersen LLP
New York, New York
July 31, 2000
F-37
<PAGE>
DEVNET L.L.C.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December
2000 31, 1999
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .......................... $ 2,141,251 $1,733,036
Accounts receivable................................. 475,600 365,769
----------- -----------
Total current assets.............................. 2,616,851 2,098,805
Property, plant and equipment, net.................... 579,258 165,831
Lease acquisition costs, net.......................... 341,761 355,033
----------- -----------
TOTAL ASSETS.......................................... $ 3,537,870 $2,619,669
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities:
Accounts payable.................................... $ 436,352 $ 119,245
Accrued expenses and other.......................... 2,106,208 2,003,708
Deferred revenue.................................... 4,846,462 4,219,139
----------- -----------
Total current liabilities......................... 7,389,022 6,342,092
Members' capital...................................... (3,851,152) (3,722,423)
----------- -----------
TOTAL LIABILITIES AND MEMBERS' CAPITAL................ $ 3,537,870 $ 2,619,669
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-38
<PAGE>
DEVNET L.L.C.
STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June
30,
2000 1999
----------- -----------
<S> <C> <C>
Revenues $ 1,488,613 $ 864,898
Operating expenses:
Direct costs....................................... 1,694,705 1,511,734
General and administrative......................... 2,940,805 1,081,525
Depreciation and amortization...................... 33,285 21,978
----------- -----------
Total operating expenses......................... 4,668,795 2,615,237
Loss from operations................................. (3,180,182) (1,750,339)
Interest income, net................................. 51,453 25,727
----------- -----------
Net loss............................................. $(3,128,729) $(1,724,612)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-39
<PAGE>
DEVNET L.L.C.
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended June
30,
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(3,128,729) $(1,724,612)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization..................... 33,285 21,978
Changes in operating assets and liabilities:
Accounts receivable............................... (109,831) (58,545)
Accounts payable.................................. 317,107 (186,339)
Accrued expenses.................................. 102,500 648,183
Deferred revenues................................. 627,323 135,353
------------ -----------
Net cash used in operating activities........... (2,158,345) (1,163,982)
------------ -----------
Cash flows from investing activities:
Expenditures for property, plant and equipment..... (433,440) --
------------ -----------
Net cash used in investing activities........... (433,440) --
------------ -----------
Cash flows from financing activities:
Members' contributions............................. 3,000,000 --
------------ -----------
Net cash provided by financing activities....... 3,000,000 --
------------ -----------
Net increase (decrease) in cash and cash equiva-
lents.......................................... 408,215 (1,163,982)
Cash and cash equivalents, beginning of year........ 1,733,036 1,965,106
------------ -----------
Cash and cash equivalents, end of year.............. $ 2,141,251 $ 801,124
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-40
<PAGE>
DEVNET L.L.C.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION
Devnet L.L.C., ("Devnet" or the "Company"), provides access to office
buildings and the intra-building passive transport infrastructure to
competitive local exchanges carriers, incumbent local exchange carriers,
application service providers and internet service providers ("Service
Providers"). Devnet has acquired long term, exclusive communications access
rights to office space in markets nationwide. In turn, the Company has licensed
such rights to Service Providers on a largely non-exclusive basis in exchange
for a share of revenue, rents and service fees generated by the Service
Providers.
Devnet has Telecommunications Services Lease Agreements ("Services
Leases") with several property owners. These Services Leases cover multiple
properties and allow for additional properties to be added in the future.
Devnet's Services Leases provide for exclusive rights relating to
telecommunications access and the installation, management and operation of a
passive transport infrastructure. Devnet's agreements with property owners
typically have a five-year initial term with multiple renewal options. In some
instances, Devnet's exclusivity is subject to a tenant's right to utilize a
provider of its choice and to the existence of certain legacy distribution
infrastructure.
Devnet has exclusive signed and pending agreements for more than 40
million square feet of commercial office space. Owners of these buildings
include TIAA-CREF (23 million square feet), HIRO REIT (3 million square feet),
Greenfield Partners (300,000 square feet), Prime REIT (10 million square feet)
and Douglas Elliman, Beitler (2 million square feet).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
The Company generates revenue from fixed and variable license fees and
infrastructure charges to Service Providers. Fixed license fees, which are
typically based on the total square footage of a building under contract, are
paid monthly in advance over the life of the contract. Variable fees consist of
a percentage of gross sales achieved by Service Providers and are paid
quarterly in arrears. Revenue is recognized as services are performed and
revenue can be measured reliably.
Prorated contract revenues and costs are reflected in income each period.
Changes in estimates are recorded in the period in which they become known.
Losses on contracts are recognized in full when they become known. Amendments
to contracts resulting in additional revenues are recognized in the period when
future services are performed.
Deferred Revenue
In exchange for the option to enter into Service Leases with Devnet's
real estate portfolio, Devnet received advance payments from certain customers.
These payments are being deferred over various terms equal to the estimated
customer life, of five to ten years.
F-41
<PAGE>
DEVNET L.L.C.
NOTES TO FINANCIAL STATEMENTS--(Continued)
(UNAUDITED)
2. SUBSEQUENT EVENT
On July 31, 2000, the Company completed a merger with FiberNet Telecom
Group, Inc. ("FiberNet") whereby FiberNet acquired the remaining 97% membership
interest in the Company in exchange for $15.0 million in cash and 3,461,162
shares of stock. The transaction is accounted for under the purchase method of
accounting. FiberNet previously acquired 3% membership interest in the Company
for $3.0 million in cash on April 12, 2000.
F-42
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
We have prepared the following unaudited pro forma combined financial
information to reflect our acquisition of Devnet L.L.C. on July 31, 2000 and
our issuances of Series H and Series I Preferred Stock, on July 31, 2000 and
August 11, 2000, respectively. The unaudited pro forma combined balance sheet
is intended to demonstrate how the combined companies might have looked if the
acquisition of Devnet and the issuances of the Series H and Series I Preferred
Stock had been completed as of June 30, 2000. The unaudited pro forma combined
statements of operations are intended to demonstrate how the combined companies
might have looked if the acquisition of Devnet and the issuances of the Series
H and Series I Preferred Stock had been completed on January 1, 1999. We refer
to the combined companies, after the acquisition of Devnet and issuances of the
Series H and Series I Preferred Stock, as Pro Forma FiberNet. This unaudited
pro forma combined financial information does not give effect to this offering.
These unaudited pro forma combined financial statements are not
necessarily indicative of the actual financial results that would have occurred
if the transactions described above had been effective on and as of the dates
indicated and may not be indicative of operations in future periods or as of
future dates.
We have prepared the unaudited pro forma combined financial information
using the purchase method of accounting for the acquisition of Devnet. The pro
forma adjustments are based on preliminary estimates and certain assumptions
that we believe are reasonable under the circumstances. The unaudited pro forma
combined financial information does not include any potential synergies or
increased opportunities to generate additional revenues as a result of the
acquisition.
With respect to the acquisition, the preliminary allocation of the
purchase price to assets and liabilities of Devnet reflects the assumption that
assets and liabilities are carried at historical amounts that approximate fair
market value. The actual allocation of the purchase price may differ from that
reflected in the unaudited pro forma combined financial statements after a more
extensive review of the fair market values of the assets and liabilities has
been completed. When such a review is completed, a portion of the purchase
price may be ascribed to goodwill and intangible assets that have a different
amortization lives than the life ascribed to these assets in preparing the
accompanying unaudited pro forma combined financial statements. Thus, the
resulting amortization charges, from that portion of the purchase price
ascribed to goodwill and intangible assets relating to this transaction could
be materially different from the amortization expense presented in the
unaudited pro forma combined financial statements.
Actual results may differ from the estimates reflected in the pro forma
adjustments. The following unaudited pro forma combined financial statements
are based on assumptions and include adjustments as explained in the
accompanying notes. You should read these unaudited pro forma combined
financial statements in conjunction with the more detailed historical financial
information that is included in this document beginning on page F-1.
F-43
<PAGE>
FIBERNET TELECOM GROUP, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
June 30, 2000
(IN 000'S)
<TABLE>
<CAPTION>
Historical Devnet Preferred Stock
------------------ Aquisition Financing Pro Forma
FiberNet Devnet Adjustments (1) Adjustments (2) FiberNet
-------- -------- ---------------- --------------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equiva-
lents................ $ 23,587 $ 2,141 $(15,000)(a) $29,100 (g) $ 39,828
Accounts receivable... 2,621 476 3,097
Prepaid expenses and
other................ 562 -- 562
-------- -------- --------
Total current assets.. 26,770 2,617 43,487
Property, plant and
equipment, net......... 67,475 579 68,054
Goodwill and intangible
assets, net............ 8,377 -- 63,516 (b) 71,893
Deferred charges, net... 12,301 -- (98)(c) 12,203
Other assets ........... 3,630 342 (3,000)(d) 972
-------- -------- --------
TOTAL ASSETS ........... $118,553 $ 3,538 $196,609
======== ======== ========
LIABILITIES AND STOCK-
HOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 3,709 $ 436 $ 4,145
Accrued expenses...... 2,703 2,106 1,725 (e) 6,534
Deferred revenues..... 774 4,847 5,621
Capital lease obliga-
tion--current por-
tion................. 217 -- 217
-------- -------- --------
Total current liabili-
ties................. 7,403 7,389 16,517
Notes payable, less dis-
count 6,015 -- 6,015
Capital lease obliga-
tion................... 844 -- 844
-------- -------- --------
Total liabilities..... 14,262 7,389 23,376
Stockholders' equity:
Common Stock, $.001
par value,
150,000,000 shares
authorized and
28,519,759 and
31,980,921 shares
issued and
outstanding,
respectively......... 28 -- 3 (f) 31
Series C Voting
Preferred Stock $.001
par value 83,688
issued and
outstanding.
(Preference in
involuntary
liquidation value,
$1.50 per share)..... 125 -- 125
Series D Preferred
Stock $.001 par
value, 316,376 issued
and outstanding.
(Preference in
involuntary
liquidation value,
$15.00 per share).... 23,623 -- 23,623
Series E Preferred
Stock $.001 par val-
ue, 305,627 issued
and outstanding.
(Preference in invol-
untary liquidation
value, $15.00 per
share)............... 23,457 -- 23,457
Series F Preferred
Stock $.001 par
value, 361,731 issued
and outstanding.
(Preference in
involuntary
liquidation value,
$30.00 per share).... 27,763 -- 27,763
Series G Preferred
Stock $.001 par
value, 2,000,000
shares and none
issued and
outstanding,
respectively
(Preference in
involuntary
liquidation value,
$10.00 per share).... 34,000 -- (34,000)(h) --
Series H Preferred
Stock $.001 par
value, none and
426,333 shares issued
and outstanding,
respectively.
(Preference in
involuntary
liquidation value,
$100.00 per share)... -- -- 63,910 (i) 63,910
Series I Preferred
Stock $.001 par
value, none and
62,500 shares issued
and outstanding,
respectively
(preference in
involuntary
liquidation value,
$120.00 per share)... -- -- 8,906 (l) 8,906
Additional paid in
capital and other.... 105,336 -- 39,839 (f) 3,936 (j) 149,111
Accumulated deficit... (110,041) (3,851) 3,851 (f) (13,652)(k) (123,693)
-------- -------- --------
Total stockholders'
equity............... 104,291 (3,851) 173,233
-------- -------- --------
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY................. $118,553 $ 3,538 $196,609
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-44
<PAGE>
FIBERNET TELECOM GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For The Year Ended December 31, 1999
(IN 000'S)
<TABLE>
<CAPTION>
Historical Devnet Preferred Stock
--------------------- Acquisition Financing Pro Forma
FiberNet Devnet Adjustments (1) Adjustments (2) FiberNet
----------- -------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues.............. $ -- $ 1,865 $ 1,865
Operating expenses:
Direct costs.......... -- 3,023 3,023
Selling, general and
administrative
expenses............. 12,463 2,573 15,036
Stock related
expense.............. -- -- $ 3,429(a) 3,429
Depreciation and
amortization......... 520 53 4,234(b) 4,807
----------- -------- -----------
Total operating
expenses............. 12,983 5,649 26,295
----------- -------- -----------
Loss from operations.. (12,983) (3,784) (24,430)
Interest income and
other (expense),
net.................. (1,284) 26 (1,258)
----------- -------- -----------
Net loss.............. (14,267) (3,758) (25,688)
Preferred stock
dividends............ (57,934) -- $ (19,865)(c) (77,799)
----------- -------- -----------
Net loss applicable to
common stockholders.. $ (72,201) $ (3,758) $ (103,487)
=========== ======== ===========
Net loss applicable to
common stockholders
per share basic
and diluted.......... $ (4.30) $ (5.11)
Weighted average
shares outstanding... 16,798,254 3,461,162(d) 20,259,416
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-45
<PAGE>
FIBERNET TELECOM GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 1999
(IN 000'S)
<TABLE>
<CAPTION>
Historical Devnet Preferred Stock
-------------------- Acquisition Financing Pro Forma
FiberNet Devnet Adjustments(1) Adjustments(2) FiberNet
----------- ------- -------------- --------------- ----------
<S> <C> <C> <C> <C> <C>
Revenues................ $ -- $ 865 $ 865
Operating expenses:
Direct costs............ -- 1,512 1,512
Selling, general and ad-
ministrative
expenses............... 2,984 1,081 4,065
Stock related expense... -- -- $ 3,429(a) 3,429
Depreciation and amorti-
zation.................. 111 22 2,117(b) 2,250
----------- ------- ----------
Total operating ex-
penses.................. 3,095 2,615 11,256
----------- ------- ----------
Loss from operations.... (3,095) (1,750) (10,391)
Interest income
(expense), net and
other................... (199) 26 (173)
----------- ------- ----------
Net loss................ (3,294) (1,724) (10,564)
Preferred stock divi-
dends................... -- -- $(16,759)(c) $ (16,759)
----------- ------- ----------
Net loss applicable to
common
stockholders........... $ (3,294) $(1,724) $ (27,323)
=========== ======= ==========
Net loss applicable to
common stockholders per
share--basic and
diluted................ $ (0.21) $ (1.40)
Weighted average shares
outstanding............ 16,025,248 3,461,162(d) 19,486,410
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-46
<PAGE>
FIBERNET TELECOM GROUP, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
For the Six Months Ended June 30, 2000
(IN 000'S)
<TABLE>
<CAPTION>
Historical Devnet Preferred Stock
-------------------- Acquisition Financing Pro Forma
FiberNet Devnet Adjustments(1) Adjustments(2) FiberNet
----------- ------- -------------- --------------- -----------
<S> <C> <C> <C> <C> <C>
Revenues................ $ 1,768 $ 1,489 $ 3,257
Operating expenses:
Direct costs............ 813 1,695 2,508
Selling, general and
administrative
expenses............... 9,793 2,941 12,734
Stock related expense... 2,237 -- 2,237
Depreciation and
amortization........... 2,415 33 $ 2,117(b) 4,565
----------- ------- -----------
Total operating
expenses............... 15,258 4,669 22,044
----------- ------- -----------
Loss from operations.... (13,490) (3,180) (18,787)
Interest income
(expense), net......... (1,223) 51 (1,172)
----------- ------- -----------
Net loss................ (14,713) (3,129) (19,959)
Preferred stock
dividends.............. (19,532) -- $(3,106)(c) (22,638)
----------- ------- -----------
Net loss applicable to
common stockholders.... $ (34,245) $(3,129) $ (42,597)
=========== ======= ===========
Net loss applicable to
common stockholders per
share--
basic and diluted...... $ (1.25) $ (1.38)
Weighted average shares
outstanding............ 27,453,872 3,461,162(d) 30,915,034
</TABLE>
The accompanying notes are an integral part of these unaudited pro forma
combined financial statements.
F-47
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. On April 12, 2000, we acquired a 3% membership interest in Devnet for $3.0
million in cash. On July 31, 2000, we acquired the remaining 97% membership
interest of Devnet for 3,461,162 shares of our common stock and
approximately $15 million in cash. In addition, 344,839 stock options with
immediate vesting were granted. Of this amount, 281,596 were granted Devnet
to employees and 63,243 were granted to non-employees.
The total purchase price of Devnet was calculated as follows:
<TABLE>
<S> <C>
Value of common stock issued..................................... $39,003
Value of options granted to non-employees........................ 839
Cash consideration............................................... 18,000
Acquisition-related costs........................................ 1,823
-------
Total purchase price............................................. $59,665
=======
The value of the common stock issued was computed using a price per share
of our common stock of $11.27, which was the average price for the five
days before, after and including June 30, 2000, the date the acquisition
was announced. The fair market value for options granted to non-employees
was estimated using a reasonable pricing model. Direct acquisition-related
costs consist of legal, accounting and other professional fees estimated
to be incurred in connection with the acquisition.
The purchase price of Devnet was allocated as follows:
Devnet assets acquired........................................... $ 3,538
Devnet liabilities assumed....................................... (7,389)
Goodwill and intangible assets................................... 63,516
-------
Total purchase price............................................. $59,665
=======
</TABLE>
The Devnet assets acquired and liabilities assumed are derived from the
historical balance sheet of Devnet as of June 30, 2000, which approximates
fair market value. Estimated annual amortization expense, based on an
amortization period of 15 years, the term of Devnet's underlying service
leases, is $4.2 million.
2. On July 31, 2000 we issued and sold 426,333 shares of Series H Preferred
Stock to Nortel Networks Inc. in a private placement for an aggregate
purchase price consisting of $22.5 million in cash plus the transfer by
Nortel of 2,000,000 shares of Series G Preferred Stock, including all
accrued and unpaid dividends, to us for cancellation. On June 30, 2000 we
issued the 2,000,000 shares of Series G Preferred Stock to Nortel for an
aggregate purchase price of $20.0 million and a book value of $34 million
resulting from the beneficial conversion feature of $14 million recorded at
the time of issuance. The Series H Preferred Stock pays an annual dividend
of 8%, payable in additional shares of Series H Preferred Stock. Each share
of Series H Preferred Stock is convertible into ten shares of our common
stock at a conversion price of $10.00 per share.
On August 11, 2000 we issued and sold 62,500 shares of Series I Preferred
Stock to Nortel Networks Inc. in a private placement for an aggregate
purchase price consisting of $7.5 million in cash. The Series I Preferred
Stock pays an annual dividend of 8%, payable in additional shares of Series
I Preferred Stock. Each share of Series I Preferred Stock is convertible
into ten shares of our common stock at a conversion price of $12.00 per
share.
3. These unaudited pro forma combined financial statements have been prepared
based on preliminary estimates of the purchase consideration and the
allocation of the purchase price to the fair value of Devnet assets and
liabilities as of June 30, 2000. The actual consideration and allocation
may differ from that reflected in the pro forma combined financial
statements after further asset valuations and other procedures have been
completed.
F-48
<PAGE>
4. Unaudited pro forma combined balance sheet adjustments:
(a) Represents the cash consideration paid for the acquisition of the
remaining 97% membership interest of Devnet.
(b) Represents the portion of the Devnet purchase price related to goodwill
and intangible assets.
(c) Represents the elimination of deferred charges previously incurred in
connection with the acquisition.
(d) Represents the elimination of our investment of a 3% membership
interest in Devnet prior to the acquisition.
(e) Represents the accrual of acquisition-related costs.
(f) Represents the issuance of common stock in connection with the
acquisition and elimination of Devnet's members' deficit, as follows:
<TABLE>
<CAPTION>
Additional
Common Paid in Accumulated
Stock Capital Deficit
------ ---------- -----------
<S> <C> <C> <C>
Value of common stock issued............... $ 3 $39,839 $ --
Elimination of Devnet's members' deficit... -- -- 3,851
--- ------- ------
Pro forma adjustment....................... $ 3 $39,839 $3,851
=== ======= ======
</TABLE>
(g) Represents the cash proceeds of $30 million from the issuance of the
Series H and Series I Preferred Stock, net of origination fees paid of
$900,000.
(h) Represents the cancellation of the Series G Preferred Stock.
(i) Represents the issuance of the Series H Preferred Stock, net of the
value of warrants to purchase 425,000 shares of common stock issued as a
placement fee. This assumes a book value for the Series H Preferred Stock
equal to the fair market value of the underlying common stock into which
the Series H Preferred Stock is convertible at a price of $16.125 per
share, which was the closing price of FiberNet's common stock on the date
of the transaction.
(j) Represents the issuance of warrants to purchase 425,000 shares of
common stock issued as a fee for the placement of the Series H Preferred
Stock, net of transaction costs for the issuance of Series H and Series I
Preferred Stock. These warrants are valued based on a reasonable pricing
model.
(k) Represents the beneficial conversion feature upon the issuance of the
Series H and Series I Preferred Stock. The beneficial conversion is
calculated as the difference between the convertible preferred stock
price and the aggregate market value of the underlying shares of common
stock on the date of the issuance of the preferred stock.
(l) Represents the issuance of Series I Preferred Stock. This assumes a
book value for the Series I Preferred Stock equal to the fair market
value of underlying common stock into which the Series I Preferred Stock
is convertible at a price of $14.25 per share, which was the closing
price of our common stock on August 11, 2000.
5. Unaudited pro forma combined statements of operations adjustment:
(a) Represents compensation expense associated with stock options granted
to employees. As the options vest immediately, the value is based on the
intrinsic value at the date of grant calculated as follows:
<TABLE>
<S> <C>
Options granted............................................... 281,596
Intrinsic value based on difference between market value on
date of issuance ($16.125) and exercise price ($3.9469)..... $ 12.18
----------
$3,429,304
==========
</TABLE>
(b) Represents the amortization of goodwill and intangible assets
associated with the Devnet acquisition. The goodwill and intangible
assets are amortized on a straight-line basis over 15 years, the term of
the Devnet service leases.
F-49
<PAGE>
(c) Represents the beneficial conversion feature upon the issuance of the
Series H and Series I Preferred Stock and the accrual of dividends on the
Series H and Series I Preferred Stock for the period indicated.
(d) Following is the calculation of the combined weighted average shares
outstanding for the periods indicated.
<TABLE>
<CAPTION>
December 31, June 30,
1999 1999 2000
------------ ---------- ----------
<S> <C> <C> <C>
Weighted average shares outstanding..... 16,798,254 16,025,248 27,453,872
Shares issued in acquisition............ 3,461,162 3,461,162 3,461,162
---------- ---------- ----------
Pro forma weighted average shares
outstanding........................... 20,259,416 19,486,410 30,915,034
========== ========== ==========
</TABLE>
F-50
<PAGE>
[FIBERNET LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth an itemization of all estimated expenses,
all of which we will pay, in connection with the issuance and distribution of
the securities being registered:
<TABLE>
<S> <C>
SEC Registration Fee...................................................
Nasdaq National Market Additional Listing Fee..........................
NASD Filing Fee........................................................
Printing and Engraving Fees............................................
Legal Fees and Expenses................................................
Accounting Fees and Expenses...........................................
Blue Sky Fees and Expenses.............................................
Transfer Agent and Registrar Fees......................................
Miscellaneous..........................................................
</TABLE>
Item 14. Indemnification of Directors and Officers.
Our certificate of incorporation provides that we shall indemnify to the
fullest extent authorized by the Delaware General Corporation Law, each person
who is involved in any litigation or other proceeding because such person is or
was one of our directors or officers or is or was serving as an officer or
director of another entity at our request, against all expense, loss or
liability reasonably incurred or suffered in connection therewith.
Section 145 of the Delaware General Corporation Law permits a corporation
to indemnify any director or officer of the corporation against expenses,
including attorney's fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with any action, suit or
proceeding brought by reason of the fact that such person is or was a director
or officer of the corporation, if such person acted in good faith and in a
manner that he reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if he or she had no reason to believe his or her conduct was
unlawful. In a derivative action, that is one brought by or on behalf of the
corporation, indemnification may be provided only for expenses actually and
reasonably incurred by any director or officer in connection with the defense
or settlement of such an action or suit if such person acted in good faith and
in a manner that he or she reasonably believed to be in, or not opposed to, the
best interests of the corporation, except that no indemnification shall be
provided if such person shall have been adjudged to be liable to the
corporation, unless and only to the extent that the court in which the action
or suit was brought shall determine that the defendant is fairly and reasonably
entitled to indemnity for such expenses despite such adjudication of liability.
Pursuant to Section 102(b)(7) of the Delaware General Corporation Law,
Article VII of our certificate of incorporation eliminates the liability of a
director to us or our stockholders for monetary damages for such a breach of
fiduciary duty as a director, except for liabilities arising:
. from any breach of the director's duty of loyalty to us or our
stockholders;
. from acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law; and
. from any transaction from which the director derived an improper
personal benefit.
Our bylaws provide that we must indemnify our directors, officers, and
employees to the fullest extent permitted by law. We believe that
indemnification under our bylaws covers at least negligence and gross
II-1
<PAGE>
negligence on the part of indemnified parties. Our bylaws also permit us to
secure insurance on behalf of any officer, director, employee or other agent
for any liability arising out of his or her actions in this capacity,
regardless of whether the bylaws would permit indemnification. We have
purchased directors and officers liability insurance, which provides coverage
against specified liabilities.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the underwriters of
FiberNet, our directors and officers who sign the Registration Statement and
persons who control us, under certain circumstances.
Item 15. Recent Sales of Unregistered Securities.
Previous Private Placements and Sales of Unregistered Securities
During the last three years, we have issued securities in private
placement transactions as follows:
November 1997 private placement. On November 24, 1997, we issued
1,000,000 shares of series A convertible preferred stock, at $5.125 per share,
and 80,000 shares of series B voting preferred stock in a private placement.
The series A convertible preferred stock was convertible into common stock at
any time up to November 24, 2000. On February 24, 2000, we converted all of
the outstanding series A convertible preferred stock to common stock. On May
7, 1999, we redeemed all of the outstanding series B voting preferred stock
for $.001 per share. These transactions were private placements, exempt from
registration pursuant to section 4(2) of the Securities Act.
Bridge warrants. On March 23, 1999 we issued a warrant to Trident
Technology Partners LLC to purchase 400,000 shares of common stock at a per
share exercise price equal to $0.50, in connection with a bridge loan. The
bridge warrants are exercisable in whole or in part, at any time from March
23, 1999 through March 23, 2004, upon payment of the exercise price. The
warrant allows Trident to pay the exercise price due under the warrant by
tendering to us a portion of the shares subject to the warrant instead of
paying the exercise price in cash. The transaction was a private placement and
exempt from registration pursuant to Regulation D of the Securities Act. On
May 1, 2000, Trident distributed all of their warrants to its members in
exchange for a redemption of their membership interests.
May 1999 private placement. On May 7, 1999, we entered into a securities
purchase agreement with a group of private investors, pursuant to which we
issued:
. 4% and 8% senior secured convertible notes, due May 7, 2004, referred
to as the May notes, to investors, in the principal aggregate amount
of $13.9 million, convertible into shares of our common stock at a
price of $1.50 per share;
. 133,333 shares of our series C convertible preferred stock, $0.001 par
value per share for a purchase price of $1.50 per share;
. class A warrants to purchase 6,204,000 shares of our common stock at a
purchase price of $0.67 per share; and
. class B warrants to purchase 1,700,000 shares of our common stock at a
purchase price of $1.50 per share.
The class A warrants and class B warrants may be exercised, in whole or
in part, at any time from May 7, 1999 through May 7, 2004, upon payment of the
exercise price. The warrants also allow the holder to pay the exercise price
by tendering to us a portion of the shares subject to the warrant instead of
paying the exercise price in cash. The exercise price may be adjusted from
time to time, as provided in the warrants, in order to prevent dilution of the
rights granted under the warrants. The transaction was a private placement and
exempt from registration pursuant to Regulation D of the Securities Act.
II-2
<PAGE>
September 1999 private placement. On September 28, 1999, we entered into
a securities purchase agreement pursuant to which we issued 8% senior secured
convertible notes due September 28, 2004, referred to as the September notes,
to a private group of investors in the aggregate principal amount of $12.5
million. The September notes are convertible into shares of our common stock at
a price of $3.00 per share. The transaction was a private placement and exempt
from registration pursuant to Regulation D of the Securities Act.
Conversion Transaction. On November 30, 1999, all of the May and
September notes were converted into shares of our common stock and we entered
into a conversion and exchange agreement giving the holders of the 4% May notes
the option of exchanging their common stock for series D preferred stock, the
holders of the 8% May notes the option of exchanging their common stock for
series E preferred stock, and the holders of the September notes the option of
exchanging their common stock for series F preferred stock. The series C
preferred stock held by purchasers of our May and September notes that did not
opt to convert their common stock into series D preferred stock, series E
preferred stock, or series F preferred stock automatically converted into
common stock on November 30, 1999. Pursuant to the conversion and exchange
agreement, we issued 4,360,935 shares of common stock, 309,143 shares of series
D preferred stock and 345,515 shares of series E preferred stock to the
noteholders.
Credit Facility Warrants. On April 11, 2000, we issued warrants to
purchase 1,513,842 shares of our common stock at a purchase price of $18.062
per share. The warrants were issued in connection with a $75 million senior
secured credit facility. We have agreed to issue additional warrants to
purchase up to an additional 1% of our common stock every six months as long as
the loans under the credit facility remain outstanding, up to a maximum of 4%
of our common stock. This transaction was a private placement exempt from
registration pursuant to Section 4(2) of the Securities Act.
Nortel Issuance. On June 30, 2000, we entered into a securities purchase
agreement, with Nortel Networks Inc. under which we issued 2,000,000 shares of
series G convertible preferred stock to Nortel for an aggregate purchase price
of $20,000,000. On July 31, 2000, we entered into a second securities purchase
agreement with Nortel under which we issued 426,333 shares of series H
convertible preferred stock to Nortel for an aggregate purchase price of
$42,633,333, consisting of $22,500,000 in cash and their 2,000,000 shares of
series G preferred stock, including $133,333 of accrued dividends. On August
11, we entered into a third securities purchase agreement under which we issued
62,500 shares of series I convertible preferred stock to Nortel for an
aggregate purchase price of $7.5 million. The conversion ratio for the series H
series I preferred stock is ten shares of common stock for every one share of
series H preferred stock, subject to certain customary anti-dilution
adjustments made from time to time pursuant to the certificate of designation
of the series H preferred. These transactions were private placements exempt
from registration pursuant to section 4(2) of the Securities Act.
Option Grants
On May 7, 1999, we entered into an employment agreement with Richard
Sayers under which we granted Mr. Sayers stock options to purchase 250,000
shares of our common stock. Stock options to purchase 125,000 shares vested on
May 7, 1999 and the remaining 125,000 options vested in equal monthly
installments during the one year term of the agreement. This option grant was a
private placement exempt from registration pursuant to section 4(2) of the
Securities Act.
On June 30, 1999 we entered into an option agreement with Tishman Speyer
Properties, L.P., referred to as TSP, under which we granted TSP stock options
to purchase 1,000,000 shares of our common stock for a purchase price of $1.50
per share. On February 1, 2000, TSP exercised its stock options to purchase all
1,000,000 shares. This option grant was a private placement exempt from
registration pursuant to section 4(2) of the Securities Act.
On October 1, 1999 we entered into an option agreement with Pacer
International, Inc. under which we issued to Pacer stock options to purchase
600,000 shares of our common stock at $3.00 per share. On February 29, 2000,
Pacer exercised its stock options with respect to all 600,000 shares. The
transaction was a private placement and exempt from registration pursuant to
Regulation D of the Securities Act.
II-3
<PAGE>
Prior to terminating our employee equity participation program on May 7,
1999 we had granted 1,328,168 stock options under this plan. Options to
purchase an aggregate of 768,945 shares of our common stock remain outstanding
under our employee equity participation program. These option grants were
private placements exempt from registration pursuant to section 4(2) of the
Securities Act.
As of June 30, we had granted stock options to purchase approximately
7,072,334 shares of our common stock to 40 employees, directors and consultants
pursuant to our equity incentive plan. The options typically vest annually over
three years from the date of grant. The exercise price for the options ranges
from $3.00 to $11.06 per share. These option grants were private placements
exempt from registration pursuant to section 4(2) of the Securities Act.
Other Issuances of Unregistered Securities
Agreement with Metromedia Fiber Network Services. On December 17, 1999 we
entered into a private network agreement and a related exchange and
registration agreement with Metromedia Fiber Network Services, Inc., referred
to as MFN, under which we issued 5,000,000 shares of our common stock to MFN.
The transaction assumed a per share price of $8.69. As a result of the
transaction, MFN holds approximately eighteen percent of our common stock. The
transaction was a private placement and exempt from registration pursuant to
Regulation D of the Securities Act of 1933.
Conversion Warrants. At the time of the May private placement, we had
outstanding payables to Messrs. Chiaino, Petrocelli, Polan, Tortoretti and
entities controlled by them. We paid these accounts payable with the following:
. on June 30, 1999 we entered into an agreement with Mr. Chiaino under
which we issued to Mr. Chiaino 41,664 shares of common stock and
warrants to purchase 27,498 shares of our common stock at a purchase
price of $0.67 per share.
. on June 30, 1999 we also entered into an agreement with Petrocelli
Electric Company Inc., LPS Consultants, Inc. and LTJ Group under which
we issued 309,865 shares of our common stock, warrants to purchase
204,511 shares of our common stock at a purchase price of $0.67 per
share and warrants to purchase 390,000 shares of our common stock at a
purchase price of $1.50 per share.
The warrants issued to Mr. Chiaino, Petrocelli Electric Company Inc., LPS
Consultants, Inc. and LTJ Group, may be exercised, in whole or in part, at any
time from June 30, 1999 through June 30, 2004, upon payment of the exercise
price. The conversion warrants also allow the holders to pay the exercise price
due under the warrant by tendering to us a portion of the shares subject to the
warrant instead of paying the exercise price in cash.
Settlement Agreement. On March 1, 2000 in settlement of certain
litigation, we issued:
. warrants to purchase 23,422 shares of our common stock at a purchase
price of $0.67 per share to Trident Telecom Management, LLC;
. 66,667 shares of our common stock and warrants to purchase 44,000
shares of our common stock at a purchase price of $0.67 per share to
Trident Telecom Management, LLC, for consideration of $100,000;
. 35,764 shares of our common stock and warrants to purchase 1,997
shares of our common stock at a purchase price of $0.67 per share to
Bruno Guazzoni, for consideration of approximately $290,000;
. 47,074 shares of our common stock and warrants to purchase 3,994
shares of our common stock at a purchase price of $0.67 per share to
Pacific Alliance, LLC; and
. 35,305 shares of our common stock and warrants to purchase 2,995
shares of our common stock at a purchase price of $0.67 per share to
Emral Holdings, Ltd.
II-4
<PAGE>
All of the warrants issued pursuant to the settlement agreement are
exercisable in whole or in part, at any time from May 7, 1999 through May 7,
2004, upon payment of the exercise price. The warrants also allow the holders
to pay the exercise price due under the warrant by tendering to us a portion of
the shares subject to the warrant instead of paying the exercise price in cash.
The exercise price may be adjusted from time to time to prevent dilution of the
rights granted under the warrants. The shares and warrants issued pursuant to
this agreement were a private placement, exempt from registration pursuant to
section 4(2) of the Securities Act.
Agreement with Tishman Speyer Properties, L.P. On May 26, 2000, we
entered into an agreement with Tishman Speyer Properties, L.P. under which we
will issue up to 1.6 million shares of our common stock in exchange for
exclusive license agreements for the deployment and operation of our FINs in
selected buildings.
Any stock issuances under this agreement will be exempt from registration
pursuant to Section 4(2) of the Securities Act.
Devnet Acquisition. In April 2000, we acquired 3% of Devnet L.L.C. In
July 2000, we acquired the remaining 97%, which gave us control of 100% of
Devnet. We issued 3,461,162 shares of our common stock, granted options to
purchase an additional 344,839 shares of our common stock and paid
approximately $18 million in cash in connection with these transactions. Devnet
manages relationships between service providers and property owners and
managers. Devnet has long-term exclusive contracts to control communications
access to 210 class A commercial office buildings in major markets nationwide,
of which 25 buildings are in our target markets. This real estate includes
properties owned by Teachers Insurance and Annuity Association of America and
Prime Realty Trust.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the Underwriting Agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus filed
as part of this Registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed
to be part of this Registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a
form of prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
II-5
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
*1.1 Form of Underwriting Agreement.
2.1 Agreement and Plan of Reorganization, dated as of June 2, 2000, by and
among us, FiberNet Holdco, Inc., FiberNet Merger Sub, Inc., Devnet
Merger Sub, LLC, Devnet L.L.C. and FP Enterprises L.L.C. (excluding
the annexes, schedules and exhibits thereto) (incorporated by
reference to Exhibit 2.1 to our Form 8-K filed on June 8, 2000).
3.1 Certificate of Incorporation, dated May 17, 2000.
3.2 Certificate of Amendment to Certificate of Incorporation, dated July
31, 2000.
3.3 Certificate of Designation of Series C Preferred Stock, dated July 31,
2000.
3.4 Certificate of Designation of Series D Preferred Stock, dated July 31,
2000.
3.5 Certificate of Designation of Series E Preferred Stock, dated July 31,
2000.
3.6 Certificate of Designation of Series F Preferred Stock, dated July 31,
2000.
3.7 Certificate of Designation of Series H Preferred Stock, dated July 28,
2000.
3.8 Certificate of Designation of Series I Preferred Stock, dated August
11, 2000.
3.9 By-Laws of the Company adopted May 17, 2000.
4.1 Form of certificate for our Common Stock.
4.2 Form of Warrant.
4.3 Form of Warrant.
4.4 Registration Rights Agreement, dated as of May 7, 1999 by and among us
and the stockholders listed therein (incorporated by reference to
Exhibit I of our Schedule 13D filed on May 17, 1999).
4.5 Stockholders Agreement, dated as of May 7, 1999 by and among us and
the stockholders listed therein (incorporated by reference to Exhibit
H of our Schedule 13D, filed on May 17, 1999).
4.6 Amendment, dated as of June 30, 2000, between FiberNet Telecom Group,
Inc., Signal Equity Partners, L.P. (formerly known as Signal Capital
Partners, L.P.), as the Majority in Interest of the Purchasers, and
Nortel Networks Inc., to the Stockholders Agreement dated as of May 7,
1999 by and among FiberNet Telecom Group, Inc. and the Stockholders
listed therein (incorporated by reference to Exhibit 4.2 to our Form
8-K filed on July 11, 2000).
4.7 Second Amendment, dated as of July 28, 2000, between FiberNet Telecom
Group, Inc., Signal Equity Partners, L.P. (formerly known as Signal
Capital Partners, L.P.), as the Majority in Interest of the
Purchasers, and Nortel Networks Inc., to the Stockholders Agreement
dated as of May 7, 1999 by and among FiberNet Telecom Group, Inc. and
the Stockholders listed therein (incorporated by reference to Exhibit
4.1 to our Form 8-K filed on August 4, 2000).
4.8 Third Amendment, dated as of August 11, 2000, between FiberNet Telecom
Group, Inc., Signal Equity Partners, L.P. (formerly known as Signal
Capital Partners, L.P.), as the Majority in Interest of the
Purchasers, and Nortel Networks Inc., to the Stockholders Agreement
dated as of May 7, 1999 by and among FiberNet Telecom Group, Inc. and
the Stockholders listed therein (incorporated by reference to Exhibit
4.1 to our Form 8-K filed on August 15, 2000).
4.9 Warrant Agreement, dated as of April 11, 2000 by and among us,
Deutsche Bank Securities Inc. and Toronto Dominion (Texas), Inc.
(incorporated by reference to Exhibit 4.2 of our Form 10-QSB filed on
May 15, 2000).
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
*4.10 Warrant Agreement, dated as of July 31, 2000 by and among us and First
Union National Bank.
4.11 Warrant Escrow Agreement, dated as of April 11, 2000 by and among us,
Deutsche Bank Securities Inc., Toronto Dominion (Texas), Inc. and
Bankers Trust Company (incorporated by reference to Exhibit 4.3 of our
Form 10-QSB filed on May 15, 2000).
4.12 Registration Rights Agreement, dated as of June 30, 2000, between
FiberNet Telecom Group and Nortel Networks Inc. (incorporated by
reference to Exhibit 4.1 to our Form 8-K filed on July 11, 2000).
*5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. with
respect to the legality of securities being registered.
10.1 Office Lease Agreement, between Hudson Telegraph Associates and
FiberNet Telecom Group, Inc. dated as of February 17, 1998
(incorporated by reference to Exhibit 10.1 to our Form 10-QSB filed on
November 16, 1998).
10.2 Master Lease Agreement, between Comdisco, Inc. and us dated as of July
27, 1998 (incorporated by reference to Exhibit 10.1 to our Form 10-KSB
filed on March 31, 1999).
10.3 Agreement of Lease, between 570 Lexington Company, L.P. and FiberNet
Telecom Group, Inc. dated as of August 3, 1998 (incorporated by
reference to Exhibit 10.5 to our Form 10-QSB filed on May 15, 1998).
10.4 Securities Purchase Agreement, dated as of May 7, 1999 by and among us
and the purchasers listed therein (incorporated by reference to
Exhibit A of our Schedule 13D filed on May 17, 1999).
10.5 Employment Agreement, dated as of May 7, 1999 between us and Michael
S. Liss. (incorporated by reference to Exhibit 10.4 to the our Form
10-KSB filed on March 20, 2000).
10.6 Employment Agreement, dated as of May 7, 1999 between us and Roy
(Trey) D. Farmer (incorporated by reference to Exhibit 10.5 to the our
Form 10-KSB filed on March 20, 2000).
10.7 Securities Purchase Agreement, dated as of September 28, 1999 by and
among us and the purchasers listed therein (incorporated by reference
to Exhibit N to our Schedule 13D/A filed on October 14, 1999).
10.8 First Amendment dated as of September 28, 1999 to the Security
Agreement dated as of May 7, 1999 from us and our subsidiaries to the
Collateral Agent listed therein (incorporated by reference to Exhibit
4.5 of our Form 8-K filed on October 5, 1999).
10.9 First Amendment dated as of September 28, 1999 to the Guaranty
Agreement dated as of May 7, 1999 made by FiberNet Telecom, Inc.,
FiberNet Equal Access, L.L.C. and Local Fiber, L.L.C. (incorporated by
reference to Exhibit 4.6 of our Form 8-K filed on October 5, 1999).
10.10 First Amendment dated as of September 28, 1999 to the Pledge Agreement
dated as of May 7, 1999 between FiberNet Telecom, Inc. and the
Collateral Agent listed therein (incorporated by reference to Exhibit
4.7 of our Form 8-K filed on October 5, 1999).
10.11 First Amendment dated as of September 28, 1999 to the Parent Pledge
Agreement dated as of May 7, 1999 between us and the Collateral Agent
listed therein (incorporated by reference to Exhibit 4.8 of our Form
8-K filed on October 5, 1999).
10.12 Option Agreement, between us and Pacer International, Inc. dated as of
October 1, 1999 (incorporated by reference to Exhibit 10.8 to the our
Form 10-KSB filed on March 20, 2000).
10.13 Employment Agreement, dated as of October 4, 1999 between us and Les
Hankinson (incorporated by reference to Exhibit 10.7 to the our Form
10-KSB filed on March 20, 2000).
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.14 Conversion and Exchange Agreement dated as of November 30, 1999
(incorporated by reference to Exhibit S to our Schedule 13D filed on
December 2, 1999).
+10.15 Private Network Agreement, dated December 17, 1999 between us and
Metromedia Fiber Network Services, Inc. (incorporated by reference to
Exhibit 10.9 to the our Form 10-KSB filed on March 20, 2000).
*10.16 Master Purchase Agreement dated as of December 31, 1999, between us
and Nortel Networks Inc.
*10.17 Employment Agreement, dated as of January 18, 2000 between us and
Lance L. Mickel.
10.18 Lease Agreement, dated February 29, 2000 between 111 Eighth Avenue LLC
and FiberNet Telecom Group, Inc. (incorporated by reference to Exhibit
10.11 to the our Form 10-KSB filed on March 20, 2000).
10.19 Credit Agreement, dated as of April 11, 2000 by and among us, the
institutions party thereto from time to time as lenders, Deutsche Bank
AG New York Branch, Deutsche Bank Securities Inc. and Toronto Dominion
(Texas), Inc. (incorporated by reference to Exhibit 4.1 of our Form
10-QSB filed on May 15, 2000).
10.20 Note in favor of Deutsche Bank AG New York Branch dated as of April
11, 2000 (incorporated by reference to Exhibit 4.16 of our Form 10-QSB
filed on May 15, 2000).
10.21 Note in favor of Nortel Networks Inc. dated as of April 11, 2000
(incorporated by reference to Exhibit 4.16 of our Form 10-QSB filed on
May 15, 2000).
10.22 Note in favor of Toronto Dominion (Texas), Inc. dated as of April 11,
2000 (incorporated by reference to Exhibit 4.17 of our Form 10-QSB
filed on May 15, 2000).
*10.23 Note in favor of First Union National Bank dated as of July 31, 2000.
10.24 Borrower Security Agreement dated as of April 11, 2000 by and between
us and Deutsche Bank AG New York Branch (incorporated by reference to
Exhibit 4.5 of our Form 10-QSB filed on May 15, 2000).
10.25 Borrower Pledge Agreement dated as of April 11, 2000 by and between us
and Deutsche Bank AG New York Branch (incorporated by reference to
Exhibit 4.6 of our Form 10-QSB filed on May 15, 2000).
10.26 Subsidiary Security Agreement, dated as of April 11, 2000 by and
between FiberNet Telecom, Inc. and Deutsche Bank AG New York Branch
(incorporated by reference to Exhibit 4.7 of our Form 10-QSB filed on
May 15, 2000).
10.27 Subsidiary Security Agreement, dated as of April 11, 2000 by and
between FiberNet Equal Access, L.L.C. and Deutsche Bank AG New York
Branch (incorporated by reference to Exhibit 4.10 of our Form 10-QSB
filed on May 15, 2000).
10.28 Subsidiary Security Agreement, dated as of April 11, 2000 by and
between Local Fiber L.L.C. and Deutsche Bank AG New York Branch
(incorporated by reference to Exhibit 4.11 of our Form 10-QSB filed on
May 15, 2000).
10.29 Subsidiary Pledge Agreement, dated as of April 11, 2000 by and between
FiberNet Telecom, Inc. and Deutsche Bank AG New York Branch
(incorporated by reference to Exhibit 4.8 of our Form 10-QSB filed on
May 15, 2000).
10.30 Subsidiary Pledge Agreement, dated as of April 11, 2000 by and between
FiberNet Telecom, Inc. and Deutsche Bank AG New York Branch
(incorporated by reference to Exhibit 4.9 of our Form 10-QSB filed on
May 15, 2000).
</TABLE>
II-8
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.31 Subsidiary Guaranty Agreement, dated as of April 11, 2000 by and
between FiberNet Telecom, Inc. and Deutsche Bank AG New York Branch
(incorporated by reference to Exhibit 4.12 of our Form 10-QSB filed on
May 15, 2000).
10.32 Subsidiary Guaranty Agreement, dated as of April 11, 2000 by and
between FiberNet Equal Access, L.L.C. and Deutsche Bank AG New York
Branch (incorporated by reference to Exhibit 4.13 of our Form 10-QSB
filed on May 15, 2000).
10.33 Subsidiary Guaranty Agreement, dated as of April 11, 2000 by and
between Local Fiber, L.L.C. and Deutsche Bank AG New York Branch
(incorporated by reference to Exhibit 4.14 of our Form
10-QSB filed on May 15, 2000).
*10.34 Employment Agreement dated as of May 23, 2000 between us and Alan
Zendle.
*10.35 Employment Agreement dated as of June 17, 2000 between us and Warren
Miller.
10.36 Securities Purchase Agreement, dated as of June 30, 2000, between us
and Nortel Networks Inc. (incorporated by reference to Exhibit 10.1 to
our Form 8-K filed on July 11, 2000).
10.37 Securities Purchase Agreement, dated as of July 28, 2000, between us
and Nortel Networks Inc. (incorporated by reference to Exhibit 10.2 to
our Form 8-K filed on August 4, 2000).
10.38 Employment Agreement dated as of July 31, 2000 between us and Philip
DiGennaro (incorporated by reference to Exhibit 10.1 to our Form 8-K
filed on August 4, 2000).
10.39 Securities Purchase Agreement, dated as of August 11, 2000, between us
and Nortel Networks Inc. (incorporated by reference to Exhibit 10.1 to
our Form 8-K filed on August 15, 2000).
10.40 First Amendment and Consent to the Credit Agreement, dated as of July
14, 2000 by and among us, FiberNet Operations, the institutions party
thereto from time to time as lenders, Deutsche Bank AG New York
Branch, Deutsche Bank Securities Inc. and Toronto Dominion (Texas),
Inc.
10.41 Second Amendment to the Credit Agreement, dated as of July 28, 2000 by
and among us, FiberNet Operations, the institutions party thereto from
time to time as lenders, Deutsche Bank AG New York Branch, Deutsche
Bank Securities Inc. and Toronto Dominion (Texas), Inc.
*10.42 First Amendment to Borrower Pledge Agreement, dated as of August 11,
2000, between FiberNet Operations, Inc., and Deutsche Bank AG New York
Branch.
*10.43 Subsidiary Security Agreement, dated as of August 11, 2000, by and
between Devnet L.L.C. and Deutsche Bank AG New York Branch.
*10.44 Subsidiary Guaranty Agreement, dated as of August 11, 2000, by and
between Devnet L.L.C. and Deutsche Bank AG New York Branch.
*10.45 Pledge Agreement, dated as of August 11, 2000, by and between us and
Deutsche Bank AG New York Branch.
*10.46 Pledge Agreement, dated as of August 11, 2000, by and between us and
Deutsche Bank AG New York Branch.
*10.47 Guaranty Agreement, dated as of July 14, 2000, by and between us and
Deutsche Bank AG New York Branch.
</TABLE>
II-9
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
*10.48 Security Agreement, dated as of July 14, 2000, by and between us and
Deutsche Bank AG New York Branch.
10.49 Assignment and Assumption Agreement, dated as of August 11, 2000, by
and between us and FiberNet Operations, Inc. (incorporated by
reference to Exhibit 10.2 to our Form 8-K filed on August 15, 2000).
21.1 Subsidiaries.
23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C.
23.3 Consent of Mendelsohn Kary Bell & Natoli, P.C., Certified Independent
Auditors.
24.1 Powers of Attorney. (see page II-11)
</TABLE>
*To be filed by amendment.
+Portions have been omitted pursuant to a confidential treatment request.
(b) Financial Statement Schedules
Financial Statement Schedules are omitted because the information is
included in our consolidated financial statements or notes to those
consolidated financial statements.
II-10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in New
York, New York on August 15, 2000.
FiberNet Telecom Group, Inc.
/s/ Michael S. Liss
By: _________________________________
Michael S. Liss
President and Chief Executive
Officer
POWER OF ATTORNEY
We the undersigned officers and directors of FiberNet Telecom Group,
Inc., hereby severally constitute and appoint Michael S. Liss our true and
lawful attorney-in-fact and agent, with full power of substitution and
resubstitution in each of us for him and in his name, place and stead, and in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement (or any other Registration
Statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933), and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agent, full power and authority to do and perform each and every act and thing
requisite or necessary to be done in and about the premises, as full to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent or his substitute or
substitutes may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities held on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Michael S. Liss President, Chief Executive August 15, 2000
______________________________________ Officer, and Director
Michael S. Liss (principal executive
officer)
/s/ Jon A. DeLuca Chief Financial Officer August 15, 2000
______________________________________ (principal financial and
Jon A. DeLuca accounting officer)
/s/ Roy (Trey) D. Farmer III Chief Operating Officer, August 15, 2000
______________________________________ Executive Vice President
Roy (Trey) D. Farmer III and Director
/s/ Timothy P. Bradley Director August 15, 2000
______________________________________
Timothy P. Bradley
</TABLE>
II-11
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Steven G. Chrust Director August 15, 2000
______________________________________
Steven G. Chrust
/s/ Philip L. DiGennaro Director August 15, 2000
______________________________________
Philip L. DiGennaro
/s/ Charles J. Mahoney Director August 15, 2000
______________________________________
Charles J. Mahoney
/s/ Richard E. Sayers Director August 15, 2000
______________________________________
Richard E. Sayers
/s/ William Vrattos Director August 15, 2000
______________________________________
William Vrattos
</TABLE>
II-12
