METROMEDIA FIBER NETWORK INC, 10-Q, 1998-11-12

METROMEDIA FIBER NETWORK INC
10-Q, 1998-11-12
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)

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<PAGE>

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------

FORM 10 - Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OF 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the period ended September 30, 1998

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________to ______________

Commission File Number - 000-23269

METROMEDIA FIBER NETWORK, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 11-3168327
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)

c/o Metromedia Fiber Network Services, Inc.
1 North Lexington Avenue
White Plains, NY 10601
-----------------------
(Address of principal executive office) (Zip code)

(914) 421-6700
--------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 1(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )

The number of shares outstanding of the registrant's common stock as of November
6, 1998, given effect to the two-for-one stock split, was:

Class Number of shares
----- ----------------
A 38,730,226
B 8,442,318

<PAGE>

METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 1998

TABLE OF CONTENTS

ITEM NO. DESCRIPTION PAGE

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Operations for the
Three- and Nine-Month Periods Ended
September 30, 1998 and 1997 . . . . . . . . . . . . . . . . . . . 1

Consolidated Balance Sheets as of September 30, 1998
and December 31, 1997 . . . . . . . . . . . . . . . . . . . . . . 2

Consolidated Statements of Cash Flows for the
Nine-Month Periods Ended September 30, 1998 and 1997. . . . . . . 3

Notes to Consolidated Financial Statements . . . . . . . . . . . 4

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . 9

PART II - OTHER INFORMATION

Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 14

Item 2. Changes in Securities and Use of Proceeds . . . . . . . . . . . . 15

Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . . 15

Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . 15

Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . . 15

Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . . 15

<PAGE>

PART 1 - FINANCIAL INFORMATION

Item 1. Financial Statements

METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN 000'S, EXCEPT PER SHARE AMOUNTS)

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue $ 11,707 $ 1,203 $ 20,840 $ 1,745

Expenses:
Cost of sales 4,946 1,310 9,499 2,647
Selling, general and administrative 3,898 1,791 9,811 3,722
Consulting and employment incentives 53 5,705 248 19,124
Settlement agreement - - 3,400 -
Depreciation and amortization 298 194 738 567
--------- --------- --------- ---------
Income (loss) from operations 2,512 (7,797) (2,856) (24,315)

Interest income 1,452 287 5,028 491
Interest expense (4) (53) (16) (732)
Income (loss) from joint venture (13) - (264) -
--------- --------- --------- ---------
Income (loss) before income taxes 3,947 (7,563) 1,892 (24,556)
Income taxes 825 - 825 -
--------- --------- --------- ---------
Net income (loss) $ 3,122 $ (7,563) $ 1,067 $ (24,556)
========= ========= ========= =========

Net income (loss) per share, basic $ 0.07 $ (0.40) $ 0.02 $ (1.27)
========= ========= ========= =========

Net income (loss) per share, diluted $ 0.06 N/A $ 0.02 N/A
========= ========= ========= =========

Weighted average number of shares
outstanding, basic 46,965 19,130 46,598 19,326
========= ========= ========= =========

Weighted average number of shares
outstanding, diluted 55,332 N/A 54,302 N/A
========= ========= ========= =========
</TABLE>

SEE ACCOMPANYING NOTES

<PAGE>

METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S, EXCEPT SHARE AMOUNTS)

SEPTEMBER 30, DECEMBER 31,
1998 1997
------------ ------------
(UNAUDITED)

ASSETS

<S> <C> <C>
Current assets:
Cash and cash equivalents $ 76,335 $ 138,846
Accounts receivable 17,902 837
Prepaid expenses and other current assets 1,042 874
---------- ----------
Total current assets 95,279 140,557
Fiber optic transmission network and related equipment, net 148,579 24,934
Property and equipment, net 1,732 759
Investment in/advances to joint venture 2,537 56
Other assets 7,300 1,072
---------- ----------
Total assets $ 255,427 $ 167,378
========== ==========

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Accounts payable $ 3,409 $ 3,072
Accrued expenses 39,119 3,181
Current portion of deferred revenue 6,409 1,184
Current portion of capital lease obligations 55 -
---------- ----------
Total current liabilities 48,992 7,437
Capital lease obligations 19,687 -
Deferred revenue 32,006 10,311
Other - 90
Commitments and contingencies (see notes)
Stockholders' equity:
Class A common stock, $.01 par value; 180,000,000
shares authorized; 38,730,226 and 37,448,284 shares
issued and outstanding, respectively 387 374
Class B common stock, $.01 par value; 20,000,000
shares authorized; 8,442,318 and 8,442,318 shares
issued and outstanding, respectively 84 84
Additional paid-in capital 196,427 192,305
Accumulated deficit (42,156) (43,223)
---------- ----------
Total stockholders' equity 154,742 149,540
---------- ----------
Total liabilities and stockholders' equity $ 255,427 $ 167,378
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES

<PAGE>

METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN 000'S)

NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997

<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,067 $ (24,556)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 738 567
Options issued for settlement agreement 3,000 -
Stocks, options and warrants issued for services 248 19,344
Reserve for accounts receivable 156 -
Loss from joint venture 264 -
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable (17,221) (162)
Accounts payable and accrued expenses 3,442 (3,877)
Deferred revenue 26,920 8,225
Other (1,749) (3,411)
---------- ----------
Net cash provided by (used in) operating activities 16,865 (3,870)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures on fiber optic transmission
network and related equipment (71,739) (1,522)
Deposit (4,675) -
Investment in/advances to joint venture (2,745) -
Capital expenditures on property and equipment (1,109) (225)
---------- ----------
Net cash used in investing activities (80,268) (1,747)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock 892 10
Proceeds from issuance of preferred stock and warrants - 32,500
Dividends paid on preferred stock - (77)
Repayments of notes payable - private placement - (1,408)
Repayments of notes payable - (5,950)
Purchase of common stock - (1,140)
Purchase of preferred stock - (2,038)
---------- ----------
Net cash provided by financing activities 892 21,897
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (62,511) 16,280
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD 138,846 464
---------- ----------
CASH AND CASH EQUIVALENTS-END OF PERIOD $ 76,335 $ 16,744
========== ==========
Supplemental information:
Interest paid $ 16 $ 1,145
========== ==========
Income taxes paid $ 3,080 $ -
========== ==========
Supplemental disclosure of significant
non-cash investing activities:
Capital lease obligations $ 19,742 $ -
========== ==========
Accrued capital expenditures $ 32,743 $ -
========== ==========

</TABLE>
SEE ACCOMPANYING NOTES

3
<PAGE>

METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
---------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS OPERATIONS AND LINE OF BUSINESS

Metromedia Fiber Network, Inc. and its subsidiaries (collectively, the
"Company") is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate/government customers in the United States. The Company
focuses its operations on domestic intra-city fiber optic networks in
clusters of Tier I cities throughout the United States. The Company currently
operates high-bandwidth fiber optic communications networks in New York and
within the next two quarters expects to operate similar networks in
Philadelphia and Washington, D.C. The Company has also begun engineering and
constructing networks in Chicago, San Francisco and Boston and within the next
two years the Company also plans to complete an expansion into four
additional markets including Los Angeles, Seattle, Dallas and Houston. The
Company expects that its domestic intra-city networks will ultimately
encompass approximately 756,000 fiber miles covering approximately 1,771
route miles.

The Company has also built inter-city fiber optic capacity to link certain of
its intra-city networks. The Company expects to have operational a 241 route
mile network from New York to Washington, D.C. during the first quarter of
1999, and when finally complete, as currently planned, this network will
cover approximately 180,000 fiber miles. The Company has also obtained rights
for fiber optic capacity with other facilities-providers and obtained fiber
optic capacity linking certain of the metropolitan areas (New York--Chicago,
New York--Boston, Chicago--Seattle--Portland) in which the Company plans to
construct intra-city networks.

In addition, the Company has entered into a joint venture with a U.K.
telecommunications company to connect its New York network to London and has
announced that it intends to form a joint venture to construct a
high-bandwidth fiber optic network connecting 13 cities in Germany and obtain
certain additional fiber optic capacity in Western Europe.

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, 1997 contained in the Company's Annual Report on Form
10-K for the year then ended. The Form 10-K 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

<PAGE>

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.

RECOGNITION OF REVENUE
The Company recognizes revenue on telecommunications services ratably over the
term of the applicable lease agreements with customers. Amounts billed in
advance of the service provided are recorded as deferred revenue. The Company
also provides installation services for its customers, and as these services
typically are completed within a year, the Company records the revenues and
related costs for these services under the completed contract method. In
addition, the Company occasionally grants Indefeasible Rights of Use ("IRU's")
to portions of its network. For those grants occurring prior to completion of
the portion of the network granted, the Company recognizes revenue on these
telecommunication services using the percentage of completion method. Under the
percentage of completion method, progress is generally measured on performance
milestones relating to the contract where such milestones fairly reflect the
progress toward contract completion. Network construction costs include all
direct material and labor costs and those indirect costs related to contract
performance. 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. Contract costs are estimated
using allocations of the total cost of constructing the specific phase of the
network. Revisions to estimated profits on contracts are recognized in the
period that they become known.

2. CONSULTING AND EMPLOYMENT INCENTIVES

The amounts represent the value of common stock, warrants and options issued to
consultants, officers, employees and directors of the Company as incentive to
provide services to the Company.

The 1997 amounts represent the value of options to purchase 6,190,470 shares of
the Company's common stock issued in 1997 to officers, employees and directors
of the Company. The options have been valued in accordance with APB Opinion No.
25 at the difference between the exercise price of the options and the fair
market value of the Company's common stock.

<PAGE>

3. Fiber Optic Transmission Network and Related Equipment

Fiber optic transmission network and related equipment consist of the following
(in 000's):

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Material-fiber optic cable.................. $ 4,900 $ 1,133
Engineering and layout costs................ 4,123 3,322
Fiber optic cable installation costs........ 2,668 1,869
Other....................................... 2,750 2,019
Construction in progress.................... 135,960 17,835
------------- ------------
150,401 26,178
Less: accumulated depreciation.............. (1,822) (1,244)
------------- ------------
148,579 24,934
------------- ------------
------------- ------------
</TABLE>

<PAGE>

Construction in progress includes amounts incurred in the Company's expansion of
its network. These amounts include fiber optic cable and other materials,
engineering and other layout costs, fiber optic cable installation costs and
other network assets held under capital leases. Construction in progress also
includes payments for rights of way for the underlying sections of the network
build.

4. INVESTMENT IN/ADVANCES TO JOINT VENTURE

The Company has a joint venture agreement with Racal, that provides broad-based
transatlantic communication services between New York and London. As of
December 31, 1997, neither party had yet made a capital contribution. The
balance of the investment at December 31, 1997 represents advances made to the
joint venture by the Company. The Company accounts for its investment using the
equity method. During the first nine months of 1998, each party made capital
contributions of $2.8 million. The Company and Racal may each be required to
contribute additional capital as needed for their respective 50% interests. As
of September 30, 1998, the Company recorded a $264,000 loss from the joint
venture based on its 50% interest in the joint venture. Included in the
Company's accounts receivable is $168,000 for administrative services provided
to the joint venture through September 30, 1998.

5. GERMAN NETWORK BUILD

The Company signed a letter of intent with Viatel, Inc. and Carrier 1 Holdings,
Ltd. to jointly build a national fiber optic telecommunications network in
Germany. Upon completion of construction, the Company will own its own separate
German broadband network. The Company expects construction to be completed in
stages, with the first segment expected to be available by the third quarter of
1999. In connection with this agreement, the Company made a deposit payment of
$4.7 million. Upon signing a definitive agreement the Company would expect to
be required to provide an irrevocable standby letter of credit as security for
the construction costs of the network.

6. RELATED PARTY TRANSACTIONS

The Company is party to the Management Agreement with Metromedia Company
pursuant to which Metromedia Company provides the Company with consultation and
advisory services. These services encompass legal, insurance, personnel,
benefits and other corporate matters, cash management, internal audit, finance,
taxes and other services as may be reasonably requested by the Company. The
Management Agreement terminates on December 31, 1998 and is automatically
renewed for successive one-year terms unless either party terminates upon 60
days notice. The management fee under the Management Agreement is $500,000 per
year. In addition, the Company is obligated to reimburse Metromedia Company all
of its out-of-pocket costs and expenses incurred in connection with the
agreement.

<PAGE>

In fiscal 1997, Metromedia Company received no payments for its out-of-pocket
costs and expenses or for any other services rendered under the Management
Agreement. With respect to 1998, in accordance with the Management
Agreement, amounts expensed as of September 30, 1998 were $375,000.

In 1997, the Company paid in full the outstanding balance of a loan made to the
Company in prior years by the Company's majority shareholder at the time such
loan was advanced.

7. SETTLEMENT AGREEMENTS

The Company was a defendant in KATZ, ET AL. V. NATIONAL FIBER NETWORK, INC., ET
AL., No. 97 Civ. 2764 (JGK) (the "Katz Litigation"). The subject matter of the
Katz Litigation is set forth in detail in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, which description is incorporated by
reference herein and made a part hereof. In March 1998, the Company entered
into a settlement agreement with Howard Katz, Realprop Capital Corporation and
Evelyn Katz, among others, which settled and resulted in the dismissal of the
Katz Litigation.

8. EQUITY TRANSACTIONS

STOCK SPLIT
As discussed in Note 1, on August 28, 1998, the Company completed a two-for-one
stock split of the Company's Class A and Class B Common Stock in the form of a
100 percent stock dividend to all shareholders of record as of the close of
business on August 7, 1998. All share and per share amounts presented herein
give retroactive effect to the stock split. As of September 30, 1998, adjusted
for the effect of the stock dividend, the Company had 38,730,226 Class A common
shares outstanding and 8,442,318 Class B common shares outstanding.

STOCK OPTIONS
In 1997, the Company granted to key employees, officers and directors options to
purchase up to 6,190,470 shares of the common stock of the Company. The options
have exercise prices ranging from $0.98 to $3.82 per share, vesting schedules
ranging from immediate to twelve months from date of grant and expire ten years
after date of grant. The Company recorded non-cash charges of $53,000 and
$248,000 for the three- and nine-month periods ending September 30, 1998,
respectively, to reflect the pro-rata value applicable to the vesting period of
such grants.

<PAGE>

STOCK WARRANTS
On December 31, 1996, the Company issued and sold to Penny Lane Partners, LP
("Penny Lane") for aggregate cash consideration of $2,025,000 (i) 150,000 shares
of 10% cumulative convertible preferred stock (the "Series A Preferred Stock")
bearing dividends at a rate of $1.35 per share per annum, and (ii) warrants to
purchase 228,150 shares of Common Stock at an exercise price of $2.47 per share
of Common Stock (such number to be adjusted based on certain future events) at
an exercise price of $0.01 per share (the "Contingent Warrants"). In March
1997, Penny Lane agreed to permit the Series A Preferred Stock and the
Contingent Warrants to be redeemed at an aggregate redemption price of
$2,115,000 (which includes accrued but unpaid dividends on the Series A
Preferred Stock) and in connection therewith the number of Penny Lane Warrants
was increased from 228,150 to 456,300.

In January 1998, Penny Lane exercised all its warrants under the terms of the
agreement. Penny Lane elected to make a cashless exercise of its warrants and
the number of shares issuable upon exercise was reduced by the number of shares
at the closing price on the day of exercise having a value equal to the
aggregate exercise price. As such, Penny Lane was issued 345,512 shares in
connection with the exercise of all of its warrants.

9. CONTINGENCIES

(a) On or about October 20, 1997, Vento & Company of New York, LLC ("VCNY")
commenced an action against the Company, Stephen A. Garofalo, Peter
Silverman, the law firm of Silverman, Collura, Chernis & Balzano, P.C.,
Peter Sahagen, Sahagen Consulting Group of Florida (collectively,
the "Sahagen Defendants") and Robert Kramer, Birdie Capital Corp., Lawrence
Black, Sterling Capital LLC, Penrush Limited, Needham Capital Group, Arthur
Asch, Michael Asch and Ronald Kuzon (the "Kramer Defendants") in the United
States District Court for the Southern District of New York (No. 97 CIV
7751) (the "VCNY Litigation"). On or about May 29, 1998, plaintiff filed
an amended complaint. The complaint, as amended, alleges four causes of
action including (i) violation of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder; (ii) fraud and
fraudulent concealment; (iii) breach of fiduciary duty; and (iv) negligent
misrepresentation and omission made in connection with the sale by VCNY of
900,000 shares (not adjusted for subsequent stock splits) of Class A common
stock to Peter Sahagen and the Kramer Defendants on January 13, 1997 (the
"VCNY Sale"). Plaintiff seeks, among other things, (i) on the first and
second causes of action, rescission of the VCNY Sale, or alternatively,
damages in an amount not presently ascertainable, but believed to be in
excess of $36 million, together with interest thereon; (ii) on the third
and fourth causes of action, damages in an amount not presently
ascertainable, but believed to be in excess of $36 million, together with
interest thereon; (iii) punitive damages in the amount of $50 million, and
(iv) plaintiff's reasonable legal fees and the cost of this action. All
the defendants, including the Company and Stephen A. Garofalo, have moved
to dismiss the amended complaint. The Company intends to vigorously defend
itself against these allegations based on its belief that it acted
appropriately in connection with the matters at issue in this litigation.
However, no assurance can be made that the Company will not determine that
the advantages of entering into a settlement outweigh the risk and expense
of protracted litigation or that ultimately the Company will be successful
in its defense of the allegations. If the Company is unsuccessful in its
defense of the allegations, an award of the magnitude being sought by the
plaintiff in the VCNY Litigation would have a material adverse effect on
the Company's financial condition or results of operations.

<PAGE>

(b) On or about June 12, 1998, Claudio E. Contardi commenced an action against
Peter Sahagen, Sahagen Consulting Group of Florida and the Company in the
United States District Court for the Southern District of New York (No. 98
CIV 4140). The plaintiff alleges a cause of action for, among other
things, breach of a finder's fee agreement entered into between Peter
Sahagen and plaintiff on or about November 14, 1996 and breach of an
implied covenant of good faith and fair dealing contained in the finder's
fee agreement. Plaintiff seeks, among other things, a number of shares of
the Company not presently ascertainable, but believed to be approximately
112,500 shares (calculated as of the date on which the complaint was filed)
or damages in an amount not presently ascertainable, but believed to be
approximately $4.9 million (calculated as of the date on which the
complaint was filed) and all costs and expenses incurred by the plaintiff
in this action. The Company has answered the complaint and asserted
affirmative defenses thereto, and the Company intends to vigorously defend
itself against these allegations based on its belief that it acted
appropriately in connection with the matters at issue in this litigation.
However, no assurances can be made that the Company will not determine that
the advantages of entering into a settlement outweigh the risk and expense
of protracted litigation or that ultimately the Company will be successful
in its defense of the allegations. The Company has filed an answer to
the complaint and has raised affirmative defenses.

<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
---------------------------------------------

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements in this Quarterly Report on Form 10-Q (this "Form 10-Q")
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and the Private Securities Litigation Reform Act of
1995 (collectively, the "Reform Act"). Certain, but not necessarily all, of such
forward-looking statements can be identified by the use of forward-looking
terminology such as "believes," "expects," "may," "will," "should," or
"anticipates" or the negative thereof or other variations thereon or comparable
terminology, or by discussions of strategy that involve risks and uncertainties.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause the actual results, performance or
achievements of Metromedia Fiber Network, Inc. and its subsidiaries
(collectively, the "Company") to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, but are not limited to, the
following: general economic and business conditions; competition in the
telecommunications industry; industry capacity; success of acquisitions and
operating initiatives; management of growth; dependence on senior management;
brand awareness; general risks of the telecommunications industries; development
risk; risk relating to the availability of financing; the existence or absence
of adverse publicity; changes in business strategy or development plan;
availability, terms and deployment of capital; business abilities and judgment
of personnel; availability of qualified personnel; labor and employee benefit
costs; changes in, or failure to comply with, government regulations;
construction schedules; the costs and other effects of legal and administrative
proceedings; changes in methods of marketing and technology; changes in
political, social and economic conditions and other factors referenced in this
Form 10-Q. The Company will not undertake and specifically declines any
obligation to publicly release the results of any revisions which may be made to
any forward-looking statement to reflect events or circumstances after the date
of such statements or to reflect the occurrence of anticipated or unanticipated
events.

<PAGE>
BACKGROUND

The Company is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate/government customers in the United States. The Company
focuses its operations on domestic intra-city fiber optic networks in
clusters of Tier I cities throughout the United States. The Company currently
operates high-bandwidth fiber optic communications networks in New York and
within the next two quarters expects to operate similar networks in
Philadelphia and Washington, D.C. The Company has also begun engineering and
constructing networks in Chicago, San Francisco and Boston and within the
next two years the Company also plans to complete an expansion into four
additional markets including Los Angeles, Seattle, Dallas and Houston. The
Company expects that its domestic intra-city networks will ultimately
encompass approximately 756,000 fiber miles covering approximately 1,771
route miles.

<PAGE>

METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
---------------------------------------------

STOCK SPLIT
On August 28, 1998, the Company completed a two-for-one stock split of the
Company's Class A and Class B Common Stock in the form of a 100 percent stock
dividend to all shareholders of record as of the close of business on August 7,
1998. All share and per share amounts presented herein give retroactive effect
to the stock split. As of September 30, 1998, adjusted for the effect of the
stock dividend, the Company had 38,730,226 Class A common shares outstanding and
8,442,318 Class B common shares outstanding.

RESULTS OF OPERATIONS

REVENUES
Revenues for the third quarter of 1998 were $11.7 million or 875% greater than
revenues of $1.2 million for the third quarter of 1997. Revenues for the nine
months ending September 30, 1998 were $20.8 million or 1,124% greater than
revenues of $1.7 million for the nine months of 1997. The increase in revenue
for the three and nine months ended September 30, 1998 versus the three and nine
months ended September 30, 1997, respectively, reflected higher revenues
associated with commencement of service to an increased total number of
customers, as well as revenue recognized related to sales of indefeasible rights
of use to portions of the Company's network.

COST OF SALES
Cost of sales were $4.9 million in the third quarter of 1998, a 277% increase
over cost of sales of $1.3 million for the third quarter of 1997. Cost of sales
increased for the three months ended September 30, 1998 as compared to the same
period in 1997 due to costs associated with the commencement of service to
customers, higher fixed costs associated with the operation of the Company's
network in service and the allocated costs of the network related to revenue
recognized for sales of indefeasible rights of use to portions of the Company's
network. Costs of sales as percentages of revenue for the third quarters of 1998
and 1997 were 42% and 108%, respectively, declining as a result of the
significant increase in the number of customers and revenues associated with
those customers.

<PAGE>

METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
---------------------------------------------

Cost of sales were $9.5 million in the nine months ending September 30, 1998,
a 265% increase over cost of sales of $2.6 million for the first nine months
of 1997. Cost of sales increased for the nine months ended September 30,
1998 as compared to the same period in 1997 due to costs associated with the
commencement of service to customers, higher fixed costs associated with the
operation of the Company's network in service and the allocated costs of the
network related to revenue recognized for sales of indefeasible rights of use
to portions of the Company's network. Costs of sales as percentages of
revenue for the first nine months of 1998 and 1997 were 46% and 153%,
respectively, declining as a result of the significant increase in the number of
customers and revenues.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $3.9 million during
the third quarter of 1998, from $1.8 million during the third quarter of 1997,
an increase of $2.1 million, or 117%. Selling, general and administrative
expenses increased to $9.8 million during the first nine months of 1998, from
$3.7 million during the first nine months of 1997, an increase of $6.1 million,
or 165%. The increase in selling, general and administrative expenses, for both
the three- and nine-month periods ended September 30, 1998 versus the three- and
nine-month periods ended September 30, 1997, respectively, resulted primarily
from increased overhead to accommodate the Company's network expansion.

CONSULTING AND EMPLOYMENT INCENTIVES
Consulting and employment incentives expense for the three months ended
September 30, 1998 were $0.1 million compared with $5.7 million for the three
months ended September 30, 1997. Consulting and employment incentives expense
for the nine months ended September 30, 1998 were $0.2 million compared with
$19.1 million for the nine months ended September 30, 1997. Consulting and
employment incentives expense incurred in 1997 reflects the value of stock
options issued to key employees, officers and directors in order to attract or
retain their services. For the three and nine months ended September 30, 1998,
the amount recorded reflects amortization for the unvested component of options
issued in 1997 to key employees.

SETTLEMENT AGREEMENT
The Company recorded $3.4 million for a settlement agreement in the nine months
ended September 30, 1998. The amount was recorded in the first quarter of 1998
for the expense associated with the issuance of stock options and payment of
cash related to the settlement agreement.

DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $0.3 million during the three months
ended September 30, 1998, versus $0.2 million during the three months ended
September 30, 1997, an increase of $0.1 million, or 50%. Depreciation and
amortization expense was $0.7 million during the nine months ended September 30,
1998, versus $0.6 million during the nine months ended September 30, 1997, an
increase of $0.1 million, or 17%. The increases in depreciation and
amortization expense resulted from increased investment in the Company's
completed fiber optic network and property and equipment.

<PAGE>

METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
---------------------------------------------

INTEREST INCOME
Interest income was $1.5 million during the three months ended September 30,
1998 as compared to $0.3 million during the comparable 1997 period, an increase
of $1.2 million, or 400%. Interest income was $5.0 million during the nine
months ended September 30, 1998 as compared to $0.5 million during the
comparable 1997 period, an increase of $4.5 million, or 900%. Interest income
during 1998 was derived from investment of the Company's excess cash received as
proceeds from the initial public offering in October 1997. At September 30,
1997, the Company had excess cash derived from the Metromedia Investment of
April 30, 1997.

INTEREST EXPENSE
Interest expense decreased in the three months ended September 30, 1998 to
$4,000 versus $53,000 for the three months ended September 30, 1997. Interest
expense decreased in the nine months ended September 30, 1998 to $16,000 versus
$732,000 for the nine months ended September 30, 1997. The decrease in interest
expense reflects the repayment of all of the Company's debt in 1997 with the
proceeds from the Metromedia Investment in the second quarter.

INCOME (LOSS) FROM JOINT VENTURE
The Company recorded a $13,000 and $264,000 loss from its 50% share of the ION
joint venture's loss for the three- and nine-month periods, respectively, ending
September 30, 1998. The loss primarily represents start-up costs and operating
activities for the joint venture.

INCOME TAXES
The Company recorded a provision for income taxes for the three- and nine-month
periods ended September 30, 1998 in the amount of $825,000. This represents an
estimated effective tax rate, for federal and state taxes, of 43.6%.

NET INCOME (LOSS)
The Company had net income of $3.1 million for the three months ended September
30, 1998, versus a net loss of $7.6 million for the comparable period of 1997.
For the three months ended September 30, 1998, basic net income per share was
$0.07 versus a basic net loss per share of $0.40 for the three months ended
September 30, 1997. On a diluted basis, net income per share for the three
months ended September 30, 1998 was $0.06.

The Company had net income of $1.1 million for the nine months ended September
30, 1998, versus a net loss of $24.6 million for the comparable period of 1997.
For the nine months ended September 30, 1998, basic net income per share was
$0.02 versus a basic net loss per share of $1.27 for the nine months ended
September 30, 1997. On a diluted basis, net income per share for the nine
months ended September 30, 1998 was $0.02.

The improvements in results for the three- and nine-month periods were primarily
attributable to the growth of revenues and the improvements in gross margins, as
noted above, as well as the increase in net interest income versus net interest
expense related to the Metromedia Investment and the funds raised through the
Company's initial public offering.

LIQUIDITY AND CAPITAL RESOURCES
On November 3, 1997, the Company's initial public offering of 18,216,000
shares of Class A Common Stock (the "Initial Public Offering") generated
net proceeds of $133.9 million, after deducting the underwriters' commission
and expenses relating to the Initial Public Offering.

<PAGE>

METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
---------------------------------------------

For the nine months ended September 30, 1998, the Company's operating activities
generated $16.9 million of cash, compared with a use of $3.9 million during the
comparable nine-month period of 1997. The increase in cash provided by
operations was primarily due to the increase in advance payments received from
customers as well as the improvement in net income as a result of increases in
revenues and interest income in the nine months ended September 30, 1998 as
compared to the nine months ended September 30, 1997. For the nine months ended
September 30, 1998, the Company used $80.3 million of cash for investing
activities versus $1.7 million for the comparable period in 1997. This increase
was due primarily to the investment by the Company in the expansion of its
networks and related construction in progress as well as capital contributions
to the Company's ION joint venture and a deposit on the German network build.
For the nine months ended September 30, 1998, the Company received $0.9 million
of net cash from financing activities, compared to $21.9 million for the same
period in 1997. The cash from financing activities in 1998 came from the
issuance of common stock from exercises of warrants and options, while the
1997 amount related to the sale of securities of the Company net of the
repayment of certain of the Company's indebtedness.

The Company has entered into a commitment letter with four lenders (the
"Lenders"), to provide up to a five-year $300 million senior secured
revolving credit facility (the "Credit Facility"), the proceeds of which will
be used by the Company to construct its fiber optic networks and for general
corporate purposes. Consummation of the Credit Facility is subject to a
number of conditions precedent including, negotiation and execution of
definitive documentation for the transaction, satisfactory completion of a
due diligence investigation of the Company by the Lenders, no material
adverse change in the Company's business, operations or conditions or
material disruption of the debt syndication markets and other customary terms
and conditions. In addition, the Company has announced that it is engaged in
a private offering of up to $350 million of senior notes, the proceeds of
which will be used to construct the Company's fiber optic networks and for
general working capital purposes. There can be no assurance that the Company
will consummate either the Credit Facility or the offering of senior notes on
acceptable terms or at all. The Company believes that the aforementioned
financing will be sufficient to implement such expansion plans. If the
Company does not consumate either the Credit facility or the offering of
senior notes it will seek alternative sources of financing or delay certain
expansion plans.

The Company anticipates that it will continue to incur net operating losses
as the Company expands and completes its existing networks, constructs
additional networks and markets its services to an expanding customer base.
The Company anticipates spending approximately $300.0 million for the year
ending December 31, 1999 and approximately $200.0 million for the year ending
December 31, 2000 on the build-out of its fiber optic networks in 10 Tier I
cities and its planned international networks. The Company believes that the
net proceeds of this offering, amounts available under the Credit Facility,
certain vendor financing, cash on hand as of September 30, 1998 and cash
generated in 1999 and 2000 (including advance customer payments), will be
sufficient to fund the planned build-out of the Company's fiber optic
networks and other working capital needs through the year ended December
31, 2000. The Indenture permits the Company to incur additional indebtedness
to finance the construction of its networks. As a result, the Company may
also consider from time to time private or public sales of additional equity
or debt securities and other financings, depending upon market conditions, in
order to finance the continued build-out of its network, including
alternative financing to replace the Credit Facility. The Company can make no
assurances that it will be able to successfully consummate any such financing
at all, or on acceptable terms. Accordingly, the Company expects to continue
experiencing net operating losses and negative cash flows for the foreseeable
future.

<PAGE>

YEAR 2000 SYSTEM MODIFICATIONS

The Company is currently working to evaluate and resolve the potential impact of
the Year 2000 on the processing of date-sensitive information and network
systems. The Year 2000 problem is the result of computer programs being written
using two digits (rather than four) to define the Year 2000, which could result
in miscalculations or system failures resulting from recognition of a date using
"00" as the year 1900 rather than the year 2000.

The Company has delegated responsibility to a group of executives, to coordinate
the identification, evaluation and implementation of changes to computer systems
and applications necessary to achieve the Company's goal of a Year 2000 date
conversion which would minimize the effect on its customers, and avoid
disruption to business operations. The Company is also focusing on hardware and
software tools, programming and outside forces that may affect the Company's
operations, including the Company's vendors, banks and utility companies. The
Company's analysis of the Year 2000 threat is on-going and will be continuously
updated throughout 1998 and 1999 as necessary.

The Company has completed a questionnaire and project plan for the Company's
systems and operating personnel to identify all business and computer
applications, so the Company can identify potential compliance problems. The
Company plans, in the fourth quarter of 1998, to initiate communications with
all of its significant suppliers, contractors and major systems developers to
determine their plans to remedy any Year 2000 issues that arise in the business
with the Company. The Company plans to compile a database of information based
upon these responses, which it expects to be complete by the end of the first
quarter of 1999. To the extent problems are identified, the Company will
implement corrective procedures where necessary, then test the applications for
Year 2000 compliance. The Company expects to complete this project prior to
January 1, 2000.

Based on the preliminary data, the Company's estimate is that the Year 2000
effort will have a nominal cost impact, although there can be no assurance as to
the ultimate cost of the Year 2000 effort or the total cost of information
systems. Such costs will be expensed as incurred, except to the extent such
costs are incurred for the purchase or lease of capital equipment. The Company
expects to make some of the necessary modifications through its ongoing
investment in system upgrades. The Company believes that its exposure to this
issue, based on its internal systems, is somewhat limited by the fact that
substantially all of its existing systems have been purchased or replaced since
1996.

As of September 30, 1998, the Company had incurred nominal consulting costs in
respect of its Year 2000 conversion effort. No other information system
projects of the Company have been deferred due to the Year 2000 efforts. The
Company expects that the source of funds for Year 2000 costs will be cash on
hand. Accordingly, the Company plans to devote the necessary resources to
resolve all significant Year 2000 issues.

If the Company's customers or vendors are unable to resolve Year 2000 processing
issues in a timely manner, a material adverse effect on the Company's results of
operations and financial condition could result.

<PAGE>

METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
---------------------------------------------

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

(a) The Company was a defendant in KATZ, ET AL. V. NATIONAL FIBER NETWORK,
INC., ET AL., No. 97 Civ. 2764 (JGK) (the "Katz Litigation"). The subject
matter of the Katz Litigation is set forth in detail in the Company's
Annual Report on Form 10-K for the year ended December 31, 1997, which
description is incorporated by reference herein and made a part hereof. In
March 1998, the Company entered into a settlement agreement with Howard
Katz, Realprop Capital Corporation and Evelyn Katz, among others, which
settled and resulted in the dismissal of the Katz Litigation

(b) On or about October 20, 1997, Vento & Company of New York, LLC ("VCNY")
commenced an action against the Company, Stephen A. Garofalo, Peter
Silverman, the law firm of Silverman, Collura, Chernis & Balzano, P.C.,
Peter Sahagen, Sahagen Consulting Group of Florida (collectively, the
"Sahagen Defendants") and Robert Kramer, Birdie Capital Corp., Lawrence
Black, Sterling Capital LLC, Penrush Limited, Needham Capital Group, Arthur
Asch, Michael Asch and Ronald Kuzon (the "Kramer Defendants") in the United
States District Court for the Southern District of New York (No. 97 CIV
7751) (the "VCNY Litigation"). On or about May 29, 1998, plaintiff filed
an amended complaint. The complaint, as amended, alleges four causes of
action including (i) violation of Section 10(b) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder; (ii) fraud and
fraudulent concealment; (iii) breach of fiduciary duty; and (iv) negligent
misrepresentation and omission made in connection with the sale by VCNY of
900,000 shares (not adjusted for subsequent stock splits) of Class A common
stock to Peter Sahagen and the Kramer Defendants on January 13, 1997 (the
"VCNY Sale"). Plaintiff seeks, among other things, (i) on the first and
second causes of action, rescission of the VCNY Sale, or alternatively,
damages in an amount not presently ascertainable, but believed to be in
excess of $36 million, together with interest thereon; (ii) on the third
and fourth causes of action, damages in an amount not presently
ascertainable, but believed to be in excess of $36 million, together with
interest thereon; (iii) punitive damages in the amount of $50 million, and
(iv) plaintiff's reasonable legal fees and the cost of this action. All the
defendants, including the Company and Stephen A. Garofalo, have moved to
dismiss the amended complaint. The Company intends to vigorously defend
itself against these allegations based on its belief that it acted
appropriately in connection with the matters at issue in this litigation.
However, no assurance can be made that the Company will not determine that
the advantages of entering into a settlement outweigh the risk and expense
of protracted litigation or that ultimately the Company will be successful
in its defense of the allegations. If the Company is unsuccessful in its
defense of the allegations, an award of the magnitude being sought by the
plaintiff in the VCNY Litigation would have a material adverse effect on
the Company's financial condition or results of operations.

(c) On or about June 12, 1998, Claudio E. Contardi commenced an action against
Peter Sahagen, Sahagen Consulting Group of Florida and the Company in the
United States District Court for the Southern District of New York (No. 98
CIV 4140). The plaintiff alleges a cause of action for, among other
things, breach of a finder's fee agreement entered into between Peter
Sahagen and plaintiff on or about November 14, 1996 and breach of an
implied covenant of good faith and fair dealing contained in the finder's
fee agreement. Plaintiff seeks, among other things, a number of shares of
the Company not presently ascertainable, but believed to be approximately
112,500 shares (calculated as of the date on which the complaint was filed)
or damages in an amount not presently ascertainable, but believed to be
approximately $4.9 million (calculated as of the date on which the
complaint was filed) and all costs and expenses incurred by the plaintiff
in this action. The Company has answered the complaint and asserted
affirmative defenses thereto, and the Company intends to vigorously defend
itself against these allegations based on its belief that it acted
appropriately in connection with the matters at issue in this litigation.
However, no assurances can be made that the Company will not determine that
the advantages of entering into a settlement outweigh the risk and expense
of

18
<PAGE>

METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
---------------------------------------------

protracted litigation or that ultimately the Company will be successful in
its defense of the allegations. The Company has filed an answer to the
complaint and has raised affirmative defenses.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

Not applicable

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable

ITEM 5. OTHER INFORMATION

Not applicable

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

a) Exhibits

EXHIBIT #
27 Financial Data Schedule for the period ended September 30, 1998.

b) Reports on Form 8-K

On July 16, 1998 the Company filed a current report related to the
Company's announcement of a major expansion into the San Francisco Bay area and
Silicon Valley, and the establishment of inter-city links connecting Chicago to
the West Coast. Such plans were disclosed in a Press Release, dated July 16,
1998, filed as an exhibit to such report.

<PAGE>

SIGNATURE

Pursuant to the requirements of the United States Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.

METROMEDIA FIBER NETWORK, INC.
(Registrant)

By: /s/Gerard Benedetto
-----------------------------
Gerard Benedetto
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized
Officer)

November 10, 1998

<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
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</TABLE>