<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 June 30, 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 August
10, 1998, given effect to the two-for-one stock split, was:
<TABLE>
<CAPTION>
Class Number of shares
----- -----------------
<S> <C>
A 38,471,178
B 8,442,318
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTH PERIODS ENDING JUNE 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM NO. DESCRIPTION
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations for the Three and Six Month
Periods Ended June 30, 1998 and 1997..................................... 1
Consolidated Balance Sheets as of June 30, 1998 and December 31, 1997.... 2
Consolidated Statements of Cash Flows for the Six Month Period Ended
June 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........................................................ 13
Item 2. Changes in Securities and Use of Proceeds................................ 14
Item 3. Defaults Upon Senior Securities.......................................... 14
Item 4. Submission of Matters to a Vote of Security Holders...................... 14
Item 5. Other Information ....................................................... 14
Item 6. Exhibits and Reports on Form 8-K ........................................ 14
</TABLE>
<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)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue ................................. $ 7,407 $ 468 $ 9,133 $ 542
Expenses:
Cost of sales ....................... 3,319 535 4,553 1,082
Selling, general and administrative . 3,183 1,297 5,914 2,186
Consulting and employment incentives 103 9,979 195 13,420
Settlement agreement ................ -- -- 3,400 --
Depreciation and amortization ....... 230 201 440 373
-------- ------- ------ --------
Income (loss) from operations ........... 572 (11,544) (5,369) (16,519)
Interest income ..................... 1,875 202 3,576 204
Interest expense .................... (6) (210) (12) (679)
Income (loss) from joint venture .... (251) -- (251) --
-------- ------- ------ --------
Net income (loss) ....................... $ 2,190 $(11,552) $ (2,056) $(16,994)
-------- ------- ------ --------
-------- ------- ------ --------
Net income (loss) per share, basic ...... $ 0.05 $ (0.60) $ (0.04) $ (0.87)
-------- ------- ------ --------
-------- ------- ------ --------
Net income (loss) per share, diluted .... $ 0.04 N/A N/A N/A
-------- ------- ------ --------
-------- ------- ------ --------
Weighted average number of shares
outstanding, basic .................. 46,628 19,130 46,404 19,424
-------- ------- ------ --------
-------- ------- ------ --------
Weighted average number of shares
outstanding, diluted ................ 54,304 N/A N/A N/A
-------- ------- ------ --------
-------- ------- ------ --------
</TABLE>
See accompanying notes.
1
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Consolidated Balance Sheets
(in 000's, except share amounts)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
---- ----
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents .............................. $ 120,645 $ 138,846
Prepaid expenses ....................................... 369 485
Accounts receivable .................................... 7,513 837
Other current assets ................................... 438 389
--------- ---------
Total current assets ................................ 128,965 140,557
Fiber optic transmission network and related equipment, net 93,305 24,934
Property and equipment, net ............................... 1,459 759
Investment in/advance to joint venture .................... 2,550 56
Other assets .............................................. 1,269 1,072
--------- ---------
Total assets ........................................ $ 227,548 $ 167,378
--------- ---------
--------- ---------
Liabilities and stockholders' equity
Current liabilities:
Accounts payable ....................................... $ 2,179 $ 3,072
Accrued expenses ....................................... 26,239 3,181
Current portion of deferred revenue .................... 2,882 1,184
Current portion of capital lease obligations ........... 55 --
--------- ---------
Total current liabilities ........................... 31,355 7,437
Capital lease obligations, net of current portion ......... 19,346 --
Deferred revenue .......................................... 25,415 10,311
Other ..................................................... -- 90
Commitments and contingencies (see notes)
Stockholders' equity:
Class A common stock, $.01 par value; 180,000,000
shares authorized; 38,392,700 and 37,448,284 shares
issued and outstanding, respectively ................ 384 374
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 ............................. 196,243 192,305
Accumulated deficit .................................... (45,279) (43,223)
--------- ---------
Total stockholders' equity .......................... 151,432 149,540
--------- ---------
Total liabilities and stockholders' equity .......... $ 227,548 $ 167,378
--------- ---------
--------- ---------
</TABLE>
See accompanying notes.
2
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(in 000's)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ....................................................... $ (2,056) $ (16,994)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization ..................................... 440 373
Options issued for settlement agreement ........................... 3,000 --
Stocks, options and warrants issued for services .................. 195 13,640
Loss from joint venture ........................................... 251 --
Change in operating assets and liabilities:
Accounts receivable ............................................... (6,676) (174)
Prepaid expenses .................................................. 116 (261)
Accounts payable and accrued expenses ............................. 1,532 (4,250)
Deferred revenue .................................................. 16,802 8,869
Other ............................................................. (265) (367)
--------- ---------
Net cash provided by operating activities ............................... 13,339 836
--------- ---------
Cash flows from investing activities:
Capital expenditures on fiber optic transmission network and
related equipment, net of capital leases assumed and cost of sales ... (28,779) (666)
Investment in/advance to joint venture .................................. (2,745) --
Capital expenditures on property and equipment .......................... (770) (151)
--------- ---------
Net cash used in investing activities ................................ (32,294) (817)
--------- ---------
Cash flows from financing activities:
Proceeds from issuance of common stock .................................. 754 10
Proceeds from issuance of preferred stock and warrants .................. -- 32,500
Dividends paid on preferred stock ....................................... -- (77)
Repayments of notes payable-private placement ........................... -- (1,396)
Repayments of notes payable ............................................. -- (5,450)
Purchase of common stock ................................................ -- (1,140)
Purchase of preferred stock ............................................. -- (2,038)
--------- ---------
Net cash provided by financing activities ............................ 754 22,409
--------- ---------
Net (decrease) increase in cash and cash equivalents .................... (18,201) 22,428
Cash and cash equivalents-beginning of period ........................... 138,846 464
--------- ---------
Cash and cash equivalents-end of period ................................. $ 120,645 $ 22,892
--------- ---------
--------- ---------
Supplemental information:
Interest paid ........................................................ $ 12 $ 1,145
--------- ---------
--------- ---------
Income taxes paid .................................................... $ 473 --
--------- ---------
--------- ---------
Supplemental disclosure of significant non-cash and financing activities:
Capital lease obligations ............................................ $ 19,401 --
--------- ---------
--------- ---------
Accrued capital expenditures ......................................... $ 20,543 --
--------- ---------
--------- ---------
</TABLE>
See accompanying notes
3
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
($ in 000's, except per share amounts)
1. Summary of Significant Accounting Policies
Business Operations and Line of Business
Metromedia Fiber Network, Inc. and its subsidiaries (collectively, the
"Company") provides technologically advanced, high-bandwidth, private, fiber
optic communications infrastructure within major U.S. markets. The Company
provides its infrastructure to communications carriers competing in the local,
long distance, wireless, and Internet markets as well as corporate and
government customers requiring secure communications networks for the
transmission of large amounts of voice, data, and video. The advanced network
architecture is capable of supporting cutting edge technologies including SONET,
DWDM (dense wave division multiplexing), ATM, and gigabit ethernet.
The Company currently operates a fiber optic network in metropolitan New York.
The Company is currently expanding its New York / New Jersey Network (the "NY
Network") to increase its coverage within the New York/New Jersey/Connecticut
metropolitan area, as well as constructing a fiber optic route between New York
City and Washington, D.C. The Company also is constructing intra-city fiber
optic networks in Washington, D.C., Chicago, and Philadelphia. This expansion
will bring the Company's total infrastructure in these four key Tier 1
telecommunications markets to in excess of 380,000 fiber miles and 1,000 route
miles.
In addition, the Company also recently announced its plans for a major expansion
into Boston, the San Francisco Bay area and Silicon Valley. The Company believes
that the San Francisco Bay area / Silicon Valley and the Boston expansions will
cover an additional 150 and 75 route miles, respectively, and that both will be
completed within 24 months, although there can be no assurance that the projects
will be completed in this period. The Company is currently engaged in the
planning process for construction of this expansion and is also assessing the
amount and nature of additional financing that may be required to implement
these expansion plans.
In addition to the Company's New York to Washington, D.C. inter-city network,
the Company is establishing inter-city links connecting New York to Chicago,
Chicago to the West Coast and New York to Boston.
The Company entered into a joint venture agreement with Racal
Telecommunications, Inc. ("Racal") on November 26, 1997. The joint venture,
named International Optical Network LLC ("ION") 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 interim unaudited 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 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 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.
4
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
($ in 000's, except per share amounts)
Stock Split
Subsequent to the end of the second quarter, on July 23, 1998, the Company
announced that that the Executive Committee of its Board of Directors, acting
pursuant to authority delegated by the Board, approved 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. All share and per share amounts presented herein give
retroactive effect to the stock split. (See note 7.)
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.
3. Fiber Optic Transmission Network and Related Equipment
Fiber optic transmission network and related equipment consist of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
--------- -----------
<S> <C> <C>
Material-fiber optic cable . . . . . . . . . . . . . . . . . $ 1,243 $ 1,133
Engineering and layout costs . . . . . . . . . . . . . . . . 3,372 3,322
Fiber optic cable installation costs . . . . . . . . . . . . 1,949 1,869
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,468 1,248
Electrical installation costs . . . . . . . . . . . . . . . 408 408
Headends. . . . . . . . . . . . . . . . . . . . . . . . . . . 363 363
Construction in progress . . . . . . . . . . . . . . . . . . 86,098 17,835
------ ------
94,901 26,178
Less: accumulated depreciation .. . . . . . . . . . . . . . . (1,596) (1,244)
------ ------
$ 93,305 $ 24,934
-------- --------
-------- --------
</TABLE>
5
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
($ in 000's, except per share amounts)
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 $3.4 million 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. The Company accounts for its
investment on the equity method. During the first six months of 1998, each party
made capital contributions of $2.8 million. As of June 30, 1998, the Company
recorded a $251 loss from the joint venture based on its 50% interest in the
joint venture. Included in accounts receivable is the outstanding balances of
$442 for administrative services provided to the joint venture through June 30,
1998. The Company expects to receive payment from the joint venture for these
services in the third quarter of 1998.
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. 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 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.
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 due to Metromedia Company as of June 30, 1998 were $250.
In 1997, the Company paid in full the outstanding balance of a loan made to the
Company in prior years by the Company's majority shareholder at the time such
loan was advanced.
6. Settlement Agreements
The Company was a defendant in Katz, et al. v. National Fiber Network, Inc., et
al., No. 97 Civ. 2764 (JGK) (the "Katz Litigation"). The subject matter of the
Katz Litigation is set forth in detail in the Company's Annual Report on Form
10-K for the year ended December 31, 1997, which description is incorporated by
reference herein and made a part hereof. In March 1998, the Company entered into
a settlement agreement with Howard Katz, Realprop Capital Corporation and Evelyn
Katz, among others, in connection
6
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
($ in 000's, except per share amounts)
with the Katz Litigation.
7. Equity Transactions
Stock Split
As discussed in Note 1, subsequent to the end of the second quarter, on July 23,
1998, the Company announced that that the Executive Committee of its Board of
Directors, acting pursuant to authority delegated by the Board, approved 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. The stock dividend is to be issued to
shareholders of record as of the close of business on August 7, 1998. As of
June 30, 1998, adjusted for the effect of the stock dividend, the Company had
38,392,700 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 $103 and $195 for
the three- and six- month periods ending June 30, 1998, respectively, to reflect
the pro-rata value applicable of such grants vesting over the next quarter.
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 (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 $2,115 (which
includes accrued but unpaid dividends on the Series A Preferred Stock) and in
connection therewith the number of Penny Lane Warrants was increased from
228,150 to 456,300.
In January 1998, Penny Lane exercised all its warrants under the terms of the
agreement. Penny Lane elected to make a cashless exercise of its warrants and
the number of shares issuable upon exercise was reduced by the number of shares
at the closing price on the day of exercise having a value equal to the
aggregate exercise price. As such, Penny Lane was issued 345,512 shares in
connection with the exercise of all of its warrants.
8. Contingencies
(a) On or about October 20, 1997, Vento & Company of New York, LLC ("VCNY")
commenced an action against the Company, Stephen A. Garofalo, Peter
Silverman, the law firm of Silverman, Collura, Chernis & Balzano, P.C.,
Peter Sahagen, Sahagen Consulting Group of Florida (collectively, the
"Sahagen Defendants") and Robert Kramer, Birdie Capital Corp, Lawrence
Black, Sterling Capital LLC, Penrush Limited, Needham Capital Group, Arthur
Asch, Michael Asch and Ronald Kuzon (the "Kramer Defendants") in the United
States District Court for the Southern District of New York (No. 97 CIV
7751) (the "VCNY Litigation"). On or about May 29, 1998, plaintiff filed an
amended complaint. The complaint, as amended, alleges four causes of action
including (i) violation
7
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
Notes to Consolidated Financial Statements (unaudited)
($ in 000's, except per share amounts)
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) plaintiffs
reasonable legal fees and the cost of this action. All the defendants,
including the Company and Stephen A. Garafalo, 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 plaintiffs in the VCNY Litigation would
have a material adverse effect on the Company's financial condition or
results of operations.
(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 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 intends
to vigorously defend itself against these allegations based on its
belief that it acted appropriately in connection with the matters at
issued 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.
8
<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.
Results of Operations
Metromedia Fiber Network, Inc. and its subsidiaries (collectively, the
"Company") provides technologically advanced, high-bandwidth, private, fiber
optic communications infrastructure within major U.S. markets. The Company
provides its infrastructure to communications carriers competing in the local,
long distance, wireless, and Internet markets as well as corporate and
government customers requiring secure communications networks for the
transmission of large amounts of voice, data, and video. The advanced network
architecture is capable of supporting cutting edge technologies including SONET,
DWDM (dense wave division multiplexing), ATM, and gigabit ethernet.
The Company currently operates a fiber optic network in metropolitan New York.
The Company is currently expanding its New York / New Jersey Network (the "NY
Network") to increase its coverage within the New York/New Jersey/Connecticut
metropolitan area, as well as constructing a fiber optic route between New York
City and Washington, D.C. The Company also is constructing intra-city fiber
optic networks in Washington, D.C., Chicago, and Philadelphia. This expansion
will bring the Company's total infrastructure in these four key Tier 1
telecommunications markets to in excess of 380,000 fiber miles and in excess
of 1,000 route miles.
In addition, the Company also recently announced its plans for a major expansion
into Boston, the San Francisco Bay area and Silicon Valley. The Company believes
that the San Francisco Bay area / Silicon Valley and the Boston expansions will
cover an additional 150 and 75 route miles, respectively, and that both will be
completed within 24 months, although there can be no assurance that the projects
will be completed in this period. The Company is currently engaged in the
planning process for construction of
9
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
this expansion and is also assessing the amount and nature of additional
financing that may be required to implement these expansion plans.
In addition to the Company's New York to Washington, D.C. inter-city network,
the company is establishing inter-city links connecting New York to Chicago,
Chicago to the West Coast and New York to Boston.
The Company entered into a joint venture agreement with Racal
Telecommunications, Inc. ("Racal") on November 26, 1997. The joint venture,
named International Optical Network LLC ("ION") 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.
Stock Split
Subsequent to the end of the second quarter, on July 23, 1998, the Company
announced that the Executive Committee of its Board of Directors, acting
pursuant to authority delegated by the Board, approved 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. The stock dividend is to be issued to shareholders of
record as of the close of business on August 7, 1998. As of June 30, 1998,
adjusted for the effect of the stock dividend, the Company had 38,392,700 Class
A common shares outstanding and 8,442,318 Class B common shares outstanding.
All share and per share amounts presented herein give retroactive effect to the
stock split.
Revenues
Revenues for the second quarter of 1998 were $7.4 million or 1,380% greater than
revenues of $0.5 million for the second quarter of 1997. Revenues for the six
months ending June 30, 1998 were $9.1 million or 1,720% greater than revenues of
$0.5 million for the six months of 1997. The increase in revenue for the three
and six months ended June 30, 1998 versus the three and six months ended June
30, 1997, respectively, reflects 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 $3.3 million in the second quarter of 1998, a 560% increase
over cost of sales of $0.5 million for the second quarter of 1997. Cost of sales
increased for the three months ended June 30, 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 second
quarters of 1998 and 1997 were 45% and 100%, respectively, declining as a result
of the significant increase in the number of customers and revenues.
Cost of sales were $4.6 million in the six months ending June 30, 1998, a 318%
increase over cost of sales of $1.1 million for the first six months of 1997.
Cost of sales increased for the six months ended June 30, 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 six
months of 1998 and 1997 were 51% and 220%, 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 $3.2 million during
the second quarter of 1998, from $1.3 million during the first quarter of 1997,
an increase of $1.9 million, or 146%. Selling, general and administrative
expenses increased to $5.9 million during the first six months of 1998, from
$2.2 million during the first six months of 1997, an increase of $3.7 million,
or 168%. The increase in selling,
10
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
general and administrative expenses, for the three- and six-month periods ended
June 30, 1998 versus the three and six month periods ended June 30, 1997,
respectively, 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 June 30,
1998 were $0.1 million compared with $10.0 million for the three months ended
June 30, 1997. Consulting and employment incentives expense for the six months
ended June 30, 1998 were $0.2 million compared with $13.4 million for the six
months ended June 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 six months ended June 30, 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 $3.4 million for the six
months ended June 30, 1998 with no expense for the three and six months ended
June 30, 1997 or the three months ended June 30, 1998. The amount recorded in
1998 reflects 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 of $230,000 was recorded during the three
months ended June 30, 1998, versus $201,0000 during the three months ended June
30, 1997, an increase of $29,000, or 14%. Depreciation and amortization expense
of $440,000 was recorded during the six months ended June 30, 1998, versus
$373,000 during the six months ended June 30, 1997, an increase of $67,000, or
18%. The increases in depreciation and amortization expense resulted from
increased investment in the Company's fiber optic network and property and
equipment.
Interest Income
Interest income was $1.9 million during the three months ended June 30, 1998 as
compared to $0.2 million during the comparable 1997 period. Interest income was
$3.6 million during the six months ended June 30, 1998 as compared to $0.2
million during the comparable 1997 period. 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 June 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 June 30, 1998 to $6,000
versus $210,000 for the three months ended June 30, 1997. Interest expense
decreased in the six months ended June 30, 1998 to $12,000 versus $679,000 for
the six months ended June 30, 1997. The decrease in interest expense reflects
the repayment of all of the Company's debt subsequent to June 30, 1997 with the
proceeds from the Metromedia Investment.
Income (Loss) from Joint Venture
The Company recorded a $251,000 loss from its 50% share of the joint venture's
loss for the three- and six-month periods ending June 30, 1998. This loss
primarily represents start-up costs for the joint venture.
Net Income (Loss)
The Company had net income of $2.2 million for the three months ended June 30,
1998, versus a net loss of $11.6 million for the comparable period of 1997. For
the three months ended June 30, 1998, the basic
11
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
net income per share, after giving effect to the two-for-one stock split
announced July 23, 1998, was $0.05 versus a basic net loss per share,
after the stock split, of $0.60 for the three months ended June 30, 1997.
On a diluted basis, the net income per share, after the stock split, for the
three months ended June 30, 1998 was $0.04. The improvement in results 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.
The Company had a net loss of $2.1 million for the six months ended June 30,
1998, versus a net loss of $17.0 million for the comparable period of 1997. For
the six months ended June 30, 1998 and 1997, the basic net loss per share,
after the stock split, was $0.04 and $0.87, 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 $133.9 million in an
initial public offering of 18,216,000 shares of its Class A Common Stock, after
deducting the underwriters' commissions and expenses related to the offering.
The Company anticipated spending approximately $140 million to build-out its
network. Management believes that the cash and cash equivalents on hand at June
30, 1998 coupled with the cash expected to be generated internally (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 for the
next twelve months, prior to the decision to expand into Boston and the San
Francisco Bay area and Silicon Valley. The Company is currently engaged in the
planning process for construction of its West Coast expansion and is also
assessing the amount and nature of additional financing that may be required to
implement such expansion plans. 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 six months ended June 30, 1998, the Company's operating activities
generated $13.3 million of cash, versus $0.8 million during the comparable
six-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 increase in revenues and interest income in the six months ended
June 30, 1998 as compared to the six months ended June 30, 1997. For the six
months ended June 30, 1998, the Company used $32.3 million of cash for investing
activities versus $0.8 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 joint venture. For the six months ended June 30, 1998, the
Company received $0.8 million of net cash from financing activities, compared
to $22.4 million for the same period in 1997. The activity in 1998 related to
the issuance of common stock as a result of the exercise of warrants and
options, while the 1997 activity related to the sale of securities of the
Company net of the repayment of certain of the Company's indebtedness.
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 the Company's business operation or financial condition.
12
<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, in
connection with 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) plaintiffs reasonable legal fees and the cost of this action. All the
defendants, including the Company and Stephen A. Garafalo, 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
plaintiffs 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 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 intends
to vigorously defend itself against these allegations based on its
belief that it acted appropriately in connection with the matters at
issued 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.
13
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
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
The 1998 annual meeting of shareholders of the Company was held on May 18, 1998.
- The shares indicated below have been adjusted for the two-for-one
stock split.
- The following Class A directors were elected at the 1998 annual
meeting of shareholders by the indicated votes of the shares of the
Company's Class A Common Stock:
<TABLE>
<CAPTION>
Name Class of Director Votes For Votes Withheld
---- ----------------- --------- --------------
<S> <C> <C> <C>
Stephen A. Garofalo Class A 31,399,010 156,176
Howard M. Finkelstein Class A 31,399,010 156,176
Vincent A. Galluccio Class A 31,399,010 156,176
</TABLE>
- At the annual meeting, the shareholders voted to approve the adoption
of the 1998 Incentive Stock Plan, by a vote of 18,105,368 Class A
shares voting for, all 8,442,318 Class B shares (84,423,180 votes)
voting for, 8,344,428 Class A shares voting against, 35,830 Class A
shares abstaining and 5,069,560 Class A shares constituting broker
non-votes.
- At the annual meeting, the shareholders voted to ratify the retention
of Ernst & Young LLP as independent auditors for the 1998 fiscal year,
by a vote of 31,510,938 Class A shares voting for, all 8,442,318 Class
B shares (84,423,180 votes) voting for, 36,570 Class A shares voting
against and 7,678 Class A shares abstaining.
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 June 30, 1998.
b) Reports on Form 8-K
On June 15, 1998 the Company filed a current report related to the
Company's plans to expand its fiber optic infrastructure to more than 380,000
fiber miles. Such plans were disclosed in a Press Release, dated June 15, 1998,
filed as an exhibit to such report.
14
<PAGE>
Metromedia Fiber Network, Inc. & Subsidiaries
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.
15
<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)
August 12, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> JUN-30-1998
<CASH> 120,645
<SECURITIES> 0
<RECEIVABLES> 7,513
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 128,965
<PP&E> 96,342
<DEPRECIATION> (1,578)
<TOTAL-ASSETS> 227,548
<CURRENT-LIABILITIES> 30,759
<BONDS> 0
0
0
<COMMON> 468
<OTHER-SE> 151,560
<TOTAL-LIABILITY-AND-EQUITY> 227,548
<SALES> 9,133
<TOTAL-REVENUES> 9,133
<CGS> 4,553
<TOTAL-COSTS> 4,553
<OTHER-EXPENSES> 9,698
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (3,564)
<INCOME-PRETAX> (2,056)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,056)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,056)
<EPS-PRIMARY> (0.04)
<EPS-DILUTED> 0
</TABLE>
