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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 March 31, 1998
or
|_| 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 May 13,
1998 was:
Class Number of shares
----- ----------------
A 18,929,098
B 4,221,159
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<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE MONTH PERIOD ENDING MARCH 31, 1998
TABLE OF CONTENTS
ITEM NO. DESCRIPTION PAGE
- -------- ----------- ----
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the
Three Month Periods Ended March 31, 1998 and 1997 ................ 1
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 ............................................ 2
Consolidated Statements of Cash Flows for the
Three Month Periods Ended March 31, 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 ................................................ 12
Item 2 Changes in Securities and Use of Proceeds ........................ 12
Item 3 Defaults Upon Senior Securities .................................. 13
Item 4 Submission of Matters to a Vote of Security Holders .............. 13
Item 5 Other Information ................................................ 13
Item 6 Exhibits and Reports on Form 8-K ................................. 13
<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
March 31,
----------------------
1998 1997
-------- --------
Revenue .......................................... $ 1,726 $ 74
Expenses
Cost of sales .................................. 1,234 547
Selling, general and administrative ............ 2,733 889
Consulting and employment incentives ........... 91 3,441
Settlement agreement ........................... 3,400 --
Depreciation and amortization .................. 209 172
-------- --------
Loss from operations ............................. (5,941) (4,975)
Interest income .................................. 1,701 3
Interest expense (including financing costs) ..... (7) (469)
-------- --------
Net loss ......................................... $ (4,247) $ (5,441)
======== =========
Net loss per share ............................... $ (0.18) $ (0.55)
======== =========
Weighted average number of shares outstanding .... 23,089 9,830
======== =========
See accompanying notes.
1
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Consolidated Balance Sheets
(in 000's, except share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
---- ----
(Unaudited)
Assets
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 132,413 $ 138,846
Prepaid expenses ........................................ 661 485
Accounts receivable ..................................... 1,724 837
Other current assets .................................... 426 389
--------- ---------
Total current assets ................................. 135,224 140,557
Fiber optic transmission network and related equipment, net 71,683 24,934
Property and equipment, net ............................... 1,312 759
Investment in/advance to joint venture .................... 446 56
Other assets .............................................. 1,261 1,072
--------- ---------
Total assets ........................................ $ 209,926 $ 167,378
========= =========
Liabilities and stockholders' equity
Current liabilities:
Accounts payable ........................................ $ 1,085 $ 3,072
Accrued expenses ........................................ 18,055 3,181
Current portion of deferred revenue ..................... 1,087 1,184
Current portion of capital lease obligations ............ 1,151 --
--------- ---------
Total current liabilities ........................... 21,378 7,437
Capital lease obligations, net of current portion ......... 17,915 --
Deferred revenue .......................................... 22,248 10,311
Other ..................................................... -- 90
Commitments and contingencies
Stockholders' equity:
Class A common stock, $.01 par value; authorized
180,000,000 shares; 18,896,898 and 18,724,142 shares
issued and outstanding, respectively .................. 189 187
Class B common stock, $.01 par value; authorized
20,000,000 shares; 4,221,159 and 4,221,159 shares
issued and outstanding, respectively .................. 42 42
Additional paid-in-capital .............................. 195,624 192,534
Accumulated deficit ..................................... (47,470) (43,223)
--------- ---------
Total stockholders' equity .......................... 148,385 149,540
--------- ---------
Total liabilities and stockholders' equity .......... $ 209,926 $ 167,378
========= =========
</TABLE>
See accompanying notes.
2
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in 000's)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss ............................................... $ (4,247) $ (5,441)
Adjustments to reconcile net less to net cash
provided by (used in) operating activities:
Depreciation and amortization ...................... 209 172
Options issued for settlement agreement ............ 3,000 --
Stocks, options and warrants issued for services ... 91 3,661
Changes in operating assets and liabilities:
Accounts receivable ................................ (887) 50
Prepaid expenses ................................... (175) (256)
Accounts payable and accrued expenses .............. 358 (872)
Deferred revenue ................................... 11,840 (5)
Other .............................................. (232) 114
--------- ---------
Net cash provided by (used in) operating activities .. 9,957 (2,577)
--------- ---------
Cash flows from investing activities:
Capital expenditures on fiber optic transmission network
and related equipment, net of capital leases assumed . (15,420) --
Investment in/ advance to joint venture ................ (390) --
Capital expenditures on property and equipment ......... (580) (29)
--------- ---------
Net cash used in investing activities ................ (16,390) (29)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock ................. -- 10
Dividends paid on preferred stock ...................... -- (77)
Net proceeds from notes payable ........................ -- 4,067
Purchase of common stock ............................... -- (1,140)
--------- ---------
Net cash flows from financing activities ............. -- 2,860
--------- ---------
Net (decrease) increase in cash and cash equivalents ... (6,433) 254
Cash and cash equivalents-beginning of period .......... 138,846 464
--------- ---------
Cash and cash equivalents-end of period ................ $ 132,413 $ 718
========= =========
Supplemental information:
Interest paid ........................................ $ 7 $ --
========= =========
Supplemental disclosure of significant non-cash and
financing activities:
Capital lease obligations .......................... $ 19,066 $ --
========= =========
Accrued capital expenditures ....................... $ 12,440 $ --
========= =========
</TABLE>
See accompanying notes.
3
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (unadudited)
($ in 000's, except per share amounts)
1. Summary of Significant Accounting Policies
Business Operations and Line of Business
Metromedia Fiber Network, Inc. (formerly National Fiber Network, Inc.) and its
subsidiaries (the "Company") was granted a nonexclusive right from the City of
New York, effective December 20, 1993, to provide telecommunication services and
construct a fiber optic network for the purpose of providing these services. In
October 1995, the basic backbone of the Fiber Optic Cable Network in the City of
New York was completed and the Company began servicing its customers.
The Company is now expanding further and has under construction an inter-city
network between New York and Washington, D.C. and as well as intra-city networks
in Washington, D.C., Philadelphia, and Chicago. In addition, the Company
recently announced its plan to expand its inter-city network from New York to
Boston and to also build an intra-city network in Boston.
The Company entered into a joint venture agreement with Racal
Telecommunications, Inc. ("Racal") on November 26, 1997. The joint venture will
enable the Company and Racal to provide transatlantic communication services,
between New York and London, to their respective customers. Racal is part of the
Racal Electronics Group, which is headquartered in the United Kingdom.
Basis of Presentation
The consolidated financial statements in this Report have been prepared in
accordance with the United States Securities and Exchange Commission Regulation
S-X and consequently do not include all disclosures required under generally
accepted accounting principles. The interim unaudited financial statements
should be read in conjunction with the audited Consolidated Financial Statements
and accompanying Notes of Metromedia Fiber Network, Inc. & Subsidiaries (the
"Company") 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 are necessary for a fair
presentation of the results of the interim periods presented in this filing 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 sells Indefeasible Rights of Use (IRU's) to
portions of its network. For those sales occurring prior to completion of the
portion of the network sold, 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
4
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (unadudited)
($ in 000's, except per share amounts)
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 3,095,235 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.
3. Fiber Optic Transmission Network and Related Equipment
Fiber optic transmission network and related equipment consist of the following:
March 31, December 31,
1998 1997
--------- ------------
Material-fiber optic cable ..................... $ 1,133 $ 1,133
Engineering and layout costs ................... 3,322 3,322
Fiber optic cable installation costs ........... 1,869 1,869
Other .......................................... 1,248 1,248
Electrical installation costs .................. 408 408
Headends ....................................... 363 363
Construction in progress ....................... 64,760 17,835
-------- --------
73,103 26,178
Less: accumulated depreciation ................. (1,420) (1,244)
======== ========
$ 71,683 $ 24,934
======== ========
Construction in progress includes amounts incurred in the Company's expansion of
its network beyond New York. 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 under construction.
4. Investment in/Advances to Joint Venture
On November 26, 1997, the Company entered into a joint venture agreement with
Racal, to provide broad-based transatlantic communication services between New
York and London. The Company and Racal will each be required to contribute
capital of $3,400 through October 1, 1998 for their respective 50% interests. 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. During the first quarter of 1998, each party made
capital contributions of $300. The remainder of the investment at March 31, 1998
represents additional advances the Company made to the joint venture as part of
its start-up. As of March 31, 1998 the joint venture had not yet begun
operations and accordingly there were no results of operations to be included in
the Company's financial statements. The Company will account for future
operations under the equity method.
5
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (unadudited)
($ in 000's, except per share amounts)
5. 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 relating to 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 per year. In addition, the
Company is obligated to reimburse Metromedia Company all its out-of-pocket costs
and expenses incurred in connection with the agreement.
In fiscal 1997, the Metromedia Company received no money 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 accrued as due to Metromedia Company as of March 31, 1998 were $125.
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.
6. Settlement Agreements
In March 1998, the Company entered into an Amendment, Settlement and Release
Agreement with Howard Katz, Realprop Capital Corporation ("Realprop") and Evelyn
Katz in connection with the Katz Litigation. Pursuant to the Agreement, the
Company issued to Realprop options to acquire 90,566 shares of Class A Common
Stock valued at $3,000 and paid an additional purchase price of $400 to Realprop
in connection with the purchase of certain securities that were the subject of
the Katz Litigation. (See Note 8).
7. Equity Transactions
Stock Options
In 1997, the Company granted to key employees, officers and directors options to
purchase up to 3,095,235 shares of the common stock of the Company. The options
have exercise prices ranging from $1.97 to $7.63 per share, vesting schedules
ranging from immediate to twelve months from date of grant and expire ten years
after date of grant. The Company has recorded a non-cash charge of $91 to
reflect the pro-rata value applicable to the first quarter of 1998 of such
grants vesting over the next two quarters.
Stock Warrants
On December 31, 1996, the Company issued and sold to Penny Lane Partners, L.P.
("Penny Lane") for aggregate cash consideration of $2,025 (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 114,075 shares of Common Stock at an exercise price of $4.93 per share
of Common Stock (such number to be adjusted based on certain future events) at
an exercise price of $0.02 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 $2,115
6
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (unadudited)
($ in 000's, except per share amounts)
(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
114,075 to 228,150.
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 its 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 172,756 shares in
connection with the exercise of all of its warrants.
8. Contingencies
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 an Amendment, Settlement and Release
Agreement with Howard Katz, Realprop Capital Corporation ("Realprop") and
Evelyn Katz in connection with the Katz Litigation. Pursuant to the
Agreement, the Company issued to Realprop options to acquire 90,566 shares
of Class A Common Stock valued at $3,000 and paid an additional purchase
price of $400 to Realprop in connection with the purchase of certain
securities that were the subject 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"). The complaint alleges causes of
action for, among other things, violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,
fraud and fraudulent concealment, breach of fiduciary duty and negligent
misrepresentation and omission made in connection with the sale by VCNY of
1,368,900 shares of Class A common stock to Peter Sahagen and the Kramer
Defendants on January 13, 1997 (the "VCNY Sale"). The complaint also
alleges a cause of action for declaratory judgment asserting that certain
"piggyback" registration rights are applicable to shares of the Company's
Class A common stock which VCNY owns (or which may be reacquired by VCNY
pursuant to its requested remedies). The complaint further requests a
declaratory judgment that a stockholders' agreement between the Company,
Stephen A. Garofalo and VCNY be declared operative, which agreement
indirectly required VCNY, through designated directors, to approve
significant transactions, and, accordingly, the Metromedia Loan and the
Metromedia Investment (as such terms are defied in the Company's Annual
Report on Form 10-K for the year ended December 31, 1997) should be
rescinded and Mr. Vento should be reappointed as Chief Executive Officer
of the Company. The Company believes, among other things, that the
stockholder's agreement to which Mr. Vento was a party had terminated and,
as a result, Mr. Vento had no such rights to approve the Metromedia
Investment or the Metromedia Loan or to remain as Chief Executive Officer
of the Company. Plaintiff seeks, among other things, (i) rescission of the
VCNY Sale, or alternatively, damages in an amount not presently
ascertainable, but believed to be in the excess of $30,000, together
with interest thereon, (ii) punitive damages in the amount of $50,000
and (iii) the declaratory judgments discussed above. The Company intends
to vigorously defend itself against these allegations based on its belief
that it acted appropriately in connection with the matters at issue in
this litigation. However, no assurance can be made that the Company will
not determine that the advantages of entering into a settlement
7
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (unadudited)
($ in 000's, except per share amounts)
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 plaintiffs in the VCNY Litigation would have
a material adverse effect on the Company's financial condition or results
of operations.
8
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations ($ in 000's, except per share amounts).
Special Note Regarding Forward-looking Statements
Certain statements in this Quarterly Report on Form 10-Q (this "Form 10-Q").
Management's Discussion and Analysis of Financial Condition and Results of
Operations," 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. ("MFN" or the "Company") and
its subsidiaries 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.
Results of Operations
The Company is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to carrier and
corporate/government customers. The Company is expanding its existing network to
encompass in excess of 229,000 fiber miles, or in excess of 650 route miles,
concentrated in the northeastern United States, a market which the Company
believes is characterized by significant demand for a limited supply of fiber
optic capacity. Within the next eighteen months the Company plans to complete an
expansion of its New York / New Jersey Network (the "NY Network") to increase
its coverage within the New York/New Jersey/Connecticut metropolitan area. The
Company is also constructing a fiber optic route between New York City and
Washington, D.C. and intends to construct intra-city fiber optic networks in
Washington, D.C., Chicago, Philadelphia and Boston. In addition, the Company
recently announced its plan to expand its inter-city network from New York to
Boston and to also build an intra-city network in Boston. The Company has also
entered into a 50/50 joint venture, International Optical Network, L.L.C.
("ION") with a subsidiary of Racal Electronics plc, a United Kingdom
manufacturer of electronics and other equipment and a provider of
telecommunications services in the UK. ION will enable the Company to offer its
customers seemless connectivity between cities served by the Company and London.
9
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Revenues
Revenues for the first quarter of 1998 were $1,726 or 2,232% greater than
revenues of $74 for the first quarter of 1997. The increase in revenue for the
three months ended March 31, 1998 versus the three months ended March 31, 1997
reflect higher revenues associated with commencement of service to customers, as
well as an increase in the total number of customers served and revenue
recognized related to sales of indefeasible rights of use to the Company's
network.
Cost of Sales
Cost of sales were $1,234 in the first quarter of 1998, a 126% increase over
cost of sales of $547 for the first quarter of 1997. Cost of sales increased for
the three months ended March 31, 1998 as compared to the same period in 1997 due
to costs associated with the commencement of service to customers, as well as
higher fixed costs associated with the build-out of the Company's network. Costs
of sales as percentages of revenue for the first quarters of 1998 and 1997 were
71% and 639%, 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 $2,733 during the
first quarter of 1998, from $889 during the first quarter of 1997, an increase
of $1,844, or 207%. The increase in selling, general and administrative expenses
for the three months ended March 31, 1998 versus the three months ended March
31, 1997 resulted primarily from increased overhead to accommodate the Company's
expansion and increased legal expenses as a result of the increased business
activities of the Company.
Consulting and Employment Incentives
Consulting and employment incentives expense for the three months ended March
31, 1998 were $91 compared with $3,441 for the three months ended March 31,
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 months ended March 31, 1998,
the amount recorded reflects the amortization for the unvested component of
options issued in 1997 to key employees.
Settlement Agreement
The amount recorded for a settlement agreement was $3,400 for the three months
ended March 31, 1998 with no expense for the three months ended March 31, 1997.
The amount recorded in 1998 reflects an expense associated with the issuance of
stock options and payment of cash related to the settlement agreement.
Depreciation and Amortization
Depreciation and amortization expense of $209 was recorded during the three
months ended March 31, 1998, versus $172 during the three months ended March 31,
1997, an increase of $37, or 22%. The increases in depreciation and amortization
expense resulted from increased investment in the Company's fiber optic network.
Interest Income
Interest income was $1,701 during the three months ended March 31, 1998 as
compared to $3 during the comparable 1997 period. Interest income during 1998
was derived from investment of the Company's excess cash as a result of the
initial public offering in October 1997. In 1997, the Company had no significant
excess cash to invest and, accordingly, earned nominal interest income.
Interest Expense (including financing costs)
Interest expense (including financing costs) decreased in the three months ended
March 31, 1998 to $7 versus $469 for the three months ended March 31, 1997. The
decrease in interest expense reflects the
10
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
repayment of all of the Company's debt subsequent to March 31, 1997 with the
proceeds of the Metromedia Investment.
Net Loss
A net loss of $4,247 was recorded for the three months ended March 31, 1998,
versus a net loss of $5,441 for the comparable period of 1997. For the three
months ended March 31, 1998 and 1997, the net loss per share was $0.18 and
$0.55, respectively. The decrease in net losses was 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 generated net proceeds of $133,900 million in
an initial public offering of 9,108,000 shares of its Class A Common Stock,
after deducting the underwriters' commissions and expenses related to the
offering. The Company anticipates spending approximately $140,000 through 1998
on the build-out of its network. Management believes that the proceeds of the
initial public offering and cash generated internally within the next nine
months (including advance customer payments), will be sufficient to fund the
Company's planned build-out of its fiber optic network and its other working
capital needs through the year ended December 31, 1998. The Company may also
consider from time to time the private or public sale of additional equity or
debt securities of the Company, depending upon market conditions.
For the three months ended March 31, 1998, the Company's operating activities
generated $9,957 of cash, versus an operating cash requirement of $2,577 during
the comparable period of 1997. The decreased cash requirement was primarily due
to the increase in advance payments received from customers as well as the
increase in revenues and interest income in the three months ended March 31,
1998 as compared to the three months ended March 31, 1997. For the three months
ended March 31, 1998, $16,390 of cash was utilized for investing activities
versus $29 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. There were no cash flows from financing activities
during the three months ended March 31, 1998 as compared to $2,860 for the same
period in 1997 relating to the issuance of notes payable.
Year 2000
The Company has completed an assessment of its exposure to the "year 2000"
computer problem. Based on this assessment, the Company believes that no
critical software systems will be impacted by this situation. Systems currently
in use are already "year 2000" compliant. Although the Company believes that it
is taking appropriate precautions against disruption of its systems due to the
"year 2000" problem, there can be no assurance that the Company's suppliers and
customers will not be adversely affected by the "year 2000" problem.
Nonetheless, the Company believes that the "year 2000" issue will not have a
material impact on MFN's business operations or financial condition.
11
<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 an Amendment, Settlement and Release
Agreement with Howard Katz, Realprop Capital Corporation ("Realprop") and
Evelyn Katz in connection with the Katz Litigation. Pursuant to the such
Agreement, the Company issued to Realprop options to acquire 90,566 shares
of Class A Common Stock and paid an additional purchase price of $400,000
to Realprop in connection with the purchase of certain securities that
were the subject 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"). The complaint alleges causes of
action for, among other things, violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder,
fraud and fraudulent concealment, breach of fiduciary duty and negligent
misrepresentation and omission made in connection with the sale by VCNY of
1,368,900 shares of Class A common stock to Peter Sahagen and the Kramer
Defendants on January 13, 1997 (the "VCNY Sale"). The complaint also
alleges a cause of action for declaratory judgment asserting that certain
"piggyback" registration rights are applicable to shares of the Company's
Class A common stock which VCNY owns (or which may be reacquired by VCNY
pursuant to its requested remedies). The complaint further requests a
declaratory judgment that a stockholders' agreement between the Company,
Stephen A. Garofalo and VCNY be declared operative, which agreement
indirectly required VCNY, through designated directors to approve
significant transactions, and, accordingly, the Metromedia Loan and the
Metromedia Investment should be rescinded and Mr. Vento should be
reappointed as Chief Executive Officer of the Company. The Company
believes, among other things, that the stockholder's agreement to which
Mr. Vento was a party had terminated and, as a result, Mr. Vento had no
such rights to approve the Metromedia Investment or the Metromedia Loan or
to remain as Chief Executive Officer of the Company. Plaintiff seeks,
among other things, (i) rescission of the VCNY Sale, or alternatively,
damages in an amount not presently ascertainable, but believed to be in
the excess of $36 million, together with interest thereon, (ii) punitive
damages in the amount of $50 million, and (iii) the declaratory judgments
discussed above. 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
plaintiffs in the VCNY Litigation would have a material adverse effect on
the Company's financial condition or results of operations.
Item 2. Changes in Securities and Use of Proceeds
Not applicable
12
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
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 March 31, 1997
b) Reports on Form 8-K
Not applicable.
13
<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 Accountin
Officer and Duly Authorized Officer)
May 15, 1998
14
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