<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the quarterly period ended June 30, 2000
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
For the transition period from to
Commission file number 33-7841
FiberNet Telecom Group, Inc.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 13-3859938
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
570 Lexington Avenue, New York, NY 10022
(Address of Principal Executive Offices)
(212) 405-6200
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.001 per share
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for past 90 days. Yes [X] No [_]
The number of shares outstanding of the issuer's common stock, as of July
31, 2000, was 32,084,650 shares of Common Stock, $.001 par value.
--------------------------------------------------------------------------------
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<PAGE>
INDEX
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
PART I. FINANCIAL INFORMATION......................................... 1
Item 1. Consolidated Financial Statements
Report of Independent Public Accountants...................... 7
Consolidated Balance Sheets as of June 30, 2000 and December
31, 1999...................................................... 8
Consolidated Statements of Operations for the six months ended
June 30, 2000 and 1999........................................ 9
Consolidated Statements of Operations for the three months
ended June 30, 2000 and 1999.................................. 10
Consolidated Statements of Cash Flows for the six months ended
June 30, 2000 and 1999........................................ 11
Notes to Consolidated Financial Statements.................... 12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 1
PART II. OTHER INFORMATION............................................. 5
</TABLE>
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
See attached.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
This report contains certain forward-looking statements and information
relating to FiberNet Telecom Group, Inc. and its subsidiaries ("FiberNet" or
the "Company") that are based on the beliefs of the Company's management, as
well as assumptions made by and information currently available to the
Company's management. When used herein, words such as "anticipate," "believe,"
"estimate," "expect," "intend," and similar expressions, as they relate to the
Company or the Company's management, identify forward-looking statements. Such
statements reflect the current views of the Company with respect to future
events and are subject to certain risks, uncertainties and assumptions,
relating to the operations and results of operations of the Company, the
Company's business strategy, competition and changes in economic cycles, as
well as other factors described herein. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual results or outcomes may vary materially from those described herein as
anticipated, estimated, expected or intended.
Overview
FiberNet owns and operates fiber-optic networks designed to provide
comprehensive transmission services to communications service providers in
major metropolitan areas. The Company's technologically advanced, all-optical
network architecture enables it to extend a carrier-class communications
network from carrier points of presence directly to the offices of end-users in
commercial buildings.
FiberNet's networks originate in carrier point facilities, where the
Company offers colocation space and interconnects with other carriers to
transfer their traffic onto its metropolitan transport networks. Each of the
Company's metropolitan transport networks consists of out-of-building lit
fiber-optic rings that enable FiberNet to establish connectivity between
carrier point facilities and commercial office buildings in the local loop.
FiberNet transports its customers' traffic directly to their retail end-users
located in multi-tenant class A office buildings where the Company has
installed its advanced in-building infrastructure, known as its FiberNet In-
Building Networks, or FINs, by interconnecting its metropolitan transport
network and its FINs. FiberNet's FINs, consist of fully redundant, self-
healing, synchronous optical network, or SONET, rings. The Company refers to
each of the buildings in which it installed a FIN as an on-net building.
FiberNet's FINs provide a central distribution system within on-net buildings,
extending from the basement of the building to each floor.
FiberNet believes that its metropolitan network solution addresses the
need for bandwidth in the metropolitan local loop, where there is insufficient
network capacity to meet the growing demand for data-intensive applications.
Communications service providers that use the Company's networks are able to
access the high-bandwidth capacity necessary to offer broadband data, voice and
video services without having to build the infrastructure themselves or use
their competitors' networks. In addition, FiberNet's technologically advanced
fiber-optic networks and rapid provisioning times allow its customers to
deliver their services reliably, quickly and efficiently.
The Company also manages communications access and infrastructure for
commercial office properties nationwide. For the owners and managers of these
buildings, FiberNet provides the in-building infrastructure necessary to meet
the connectivity needs of tenants and controls service providers' access to
these off-net buildings.
FiberNet commenced operations in the New York metropolitan area in 1999
and began providing services in January 2000. The Company is currently
expanding its operations into Chicago, where it expects to be operational in
the fourth quarter of 2000. The Company also intends to establish its
metropolitan networks in other gateway cities, including Los Angeles, San
Francisco, Boston and Washington D.C.
1
<PAGE>
Results of Operations
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. The Company generated revenues by providing transport, colocation and
communications access management services to its customers. FiberNet 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 the Company's customers, 360networks,
Network Plus and Qwest, accounted for approximately 88% of its revenues. The
Company expects such customer concentration to diminish as it expands its
operations. Prior to the six months ended June 30, 2000, the Company had no
commercial operations and did not generate any revenues.
Direct Costs. Direct costs for the six months ended June 30, 2000 were
$0.8 million in expenses associated with the operation of the Company's
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, the Company
did not record any direct costs because it was 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 is consistent with the rapid expansion of the Company's operations.
FiberNet has experienced significant growth in personnel costs, marketing and
advertising expenses, and network construction overhead to support its business
strategy. The number of significant transactions that FiberNet has 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 the Company's employees. FiberNet 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.
The 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 the Company's senior secured credit facility and its
outstanding capital lease obligations.
Preferred Stock Dividends. For the six months ended June 30, 2000,
FiberNet paid non-cash dividends on its 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 the Company's common
stock. The liquidation value of the dividends paid was $0.7 million. The
Company also recorded a beneficial conversion feature of $14.0 million upon the
issuance of the 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. The Company did not record any preferred
dividends during the six months ended June 30, 1999.
Net Loss Applicable to Common Stockholders. The Company 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. The increase is a result of the aforementioned changes in
the Company's operations.
2
<PAGE>
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. The Company generated revenues by providing transport, colocation and
communications access management services to its customers. FiberNet recognized
$1.2 million in transport services, $0.4 in colocation services and $0.1
million in communications access management and other services during the
period. During this period, three of the Company's customers, 360networks,
Network Plus and Qwest, accounted for approximately 88% of its revenues. The
Company expects such customer concentration to diminish as it expands its
operations. For the three months ended June 30, 1999, the Company 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 the Company's
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, FiberNet
did not record any direct costs because it was not offering services during
that period.
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 is consistent with the rapid expansion of the Company's operations.
FibertNet has experienced significant growth in personnel costs, marketing and
advertising expenses, and network construction overhead to support its 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 the Company's employees. FiberNet 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. The 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 the Company's senior secured credit facility and
its outstanding capital lease obligations.
Preferred Stock Dividends. For the three months ended June 30, 2000,
FiberNet paid non-cash dividends on its 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 the Company's common
stock. The liquidation value of the dividends paid was $0.4 million. The
Company also recorded a beneficial conversion feature of $14.0 million upon the
issuance of the 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. The Company did not record any preferred
dividends during the three months ended June 30, 1999.
Net Loss Applicable to Common Stockholders. The Company 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. The increase is a result of the aforementioned changes in
the Company's operations.
Liquidity and Capital Resources
As a result of FiberNet's developmental activities and the deployment of
its networks and facilities, the Company has incurred significant losses from
inception to date. The Company expects such losses to continue, as it further
executes its business plan and expands its operations. Consequently, the
Company has been dependent upon external sources of capital to fund its
operations. Prospectively, the Company will continue to
3
<PAGE>
incur losses and will not be able to fund its operations with internally
generated funds. Therefore it will require additional, external capital.
Additionally, the Company has no relevant operating history upon which an
evaluation of its performance and prospects can be made. The Company is subject
to unforeseen capital requirements, failure of market acceptance, failure to
establish business relationships, and competitive disadvantages against larger
and more established companies.
To date, FiberNet has financed its operations through direct equity
investments from its 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. The Company has 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, the Company invested $3.0 million in Devnet L.L.C. on April 12, 2000.
During the six months ended June 30, 2000, the Company received $41.6
million in net cash proceeds from financing activities. The net borrowings
under its senior secured credit facility were $18.4 million. The Company
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 Networks Inc. For the six months ended
June 30, 1999, the Company received $15.6 million in net cash proceeds from
equipment financings and the private placement of certain debt and equity
securities.
FiberNet's planned operations will require significant, additional
capital to fund equipment purchases, engineering and construction costs,
marketing costs, administrative expenses and other operating activities. The
Company anticipates spending over $100 million during the fiscal year 2000 for
the deployment of its FINs, expansion of its metropolitan transport networks,
the development of additional carrier point facilities and other network
programs and management systems.
As a result, the Company will require significant additional financing to
complete its networks. FiberNet continues to have on-going discussions with
sources of additional financing. From time to time, FiberNet 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 its business. To date, no commitments for additional financing
have been obtained. There can be no assurance that the Company will be able to
successfully consummate any such financing on acceptable terms, or at all.
4
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities and Use of Proceeds
On June 30, 2000 FiberNet entered into a securities purchase agreement
with Nortel Networks Inc. ("Nortel"), under which the Company issued 2,000,000
shares of Series G Preferred Stock, $.001 par value per share, to Nortel for an
aggregate purchase price of $20.0 million. Each share of Series G Preferred
Stock is convertible into one share of common stock, $.001 par value per share
("Common Stock"), subject to certain customary anti-dilution adjustments made
from time to time pursuant to the certificate of designation of the Series G
Preferred Stock, at a conversion price of $10.00 per share. This transaction
was a private placement and exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933, as amended.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) The following documents are filed herewith as part of this Form 10-Q:
<TABLE>
<CAPTION>
Exhibit Name
------------
<C> <S>
27.1 Financial Data Schedule
</TABLE>
(b) Two reports on Form 8-K, dated April 14, 2000 and June 8, 2000, were
filed during the quarter ended June 30, 2000 reporting matters under Item 5,
Other Information, and Item 7, Financial Statements and Exhibits. A subsequent
report on Form 8-K was filed on August 4, 2000 reporting matters under Item 2,
Acquisition or Disposition of Assets, Item 5, Other Information, and Item 7,
Financial Statements and Exhibits.
5
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
FIBERNET TELECOM GROUP, INC.
/s/ Jon A. DeLuca
By: _________________________________
Name:Jon A. DeLuca
Title: Chief Financial Officer
6
<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
7
<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, 305,626
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, 361,730
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.
8
<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.
9
<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.
10
<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.
11
<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
12
<PAGE>
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.
13
<PAGE>
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 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.
14
<PAGE>
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.
15
