<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 27, 1999.
REGISTRATION NO. 333-89087
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
METROMEDIA FIBER NETWORK, INC.
(Exact name of registrant as specified in its charter)
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<S> <C> <C>
DELAWARE 4813 11-3168327
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of incorporation) Classification Code Number) Identification No.)
</TABLE>
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ONE NORTH LEXINGTON AVENUE
WHITE PLAINS, NY 10601
PHONE: (914) 421-6700
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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ARNOLD L. WADLER, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
METROMEDIA FIBER NETWORK, INC.
C/O METROMEDIA COMPANY
ONE MEADOWLAND PLAZA
EAST RUTHERFORD, NJ 07073
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
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Copy to:
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<S> <C>
DOUGLAS A. CIFU, ESQ. NICHOLAS P. SAGGESE, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
1285 AVENUE OF THE AMERICAS 300 SOUTH GRAND AVENUE
NEW YORK, NY 10019-6064 LOS ANGELES, CA 90071
(212) 373-3000 (213) 687-5000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time or at one time after the effective date of this Registration Statement
as determined by the Registrant or the Selling Stockholders.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
(CALCULATION TABLE ON FOLLOWING PAGE)
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1)(2) PER SHARE(1)(2) OFFERING PRICE(1)(3) REGISTRATION FEE(4)
<S> <C> <C> <C> <C>
Primary Offering:
Debt Securities.......................
Preferred Stock, par value $.01 per
share(5)............................
Class A Common Stock, par value $.01
per share(6)........................
Warrants(7)...........................
Subtotal: $1,500,000,000 $417,000
Secondary Offering:
Class A Common Stock, par value $.01
per share(8)........................ 21,505,376 $34.875 $750,000,000 $208,500
Subtotal: $750,000,000 $208,500
Total: $2,250,000,000 $625,500(9)
</TABLE>
(1) There are being registered under this Registration Statement such
indeterminate number of shares of Class A Common Stock and Preferred Stock
of the Registrant, such indeterminate number of Warrants of the Registrant,
and such indeterminate principal amount of Debt Securities of the
Registrant, as shall have an aggregate initial offering price not to exceed
$2,250,000,000. If any Debt Securities are issued at an original issue
discount, then the securities registered shall include such additional Debt
Securities as may be necessary such that the aggregate initial public
offering price of all securities issued pursuant to this Registration
Statement will equal $2,250,000,000. Any securities registered under this
Registration Statement may be sold separately or as units with other
securities registered under this Registration Statement. The proposed
maximum initial offering price per unit will be determined, from time to
time, by the Registrant in connection with the issuance by the Registrant of
the securities registered under this Registration Statement.
(2) Not specified with respect to each class of securities to be registered
pursuant to General Instruction II.D. of Form S-3 under the Securities Act.
(3) Estimated solely for the purpose of calculating the registration fee. Any
offering of Debt Securities denominated in any foreign currency or currency
unit will be treated as the equivalent in U.S. dollars based on the exchange
rate applicable to the purchase of such Debt Securities from the Registrant.
(4) Calculated pursuant to Rule 457 of the rules and regulations under the
Securities Act.
(5) Including such indeterminate number of shares of Preferred Stock as may from
time to time be issued (i) at indeterminate prices or (ii) upon conversion
or exchange of Debt Securities registered hereunder, to the extent any such
Debt Securities are, by their terms, convertible into Preferred Stock.
(6) Including such indeterminate number of shares of Class A Common Stock as may
from time to time be issued (i) at indeterminate prices or (ii) upon
conversion or exchange of Debt Securities or Preferred Stock registered
hereunder, to the extent any of such Debt Securities or shares of Preferred
Stock are, by their terms, convertible into Class A Common Stock.
(7) Including such indeterminate number of Warrants as may from time to time to
be issued at indeterminate prices, representing rights to purchase certain
of the Class A Common Stock, Preferred Stock or Debt Securities registered
hereunder.
(8) Pursuant to Rule 457(c), the offering price and registration fee are
computed on the basis of the average of the high and low prices of the
Class A Common Stock, as reported by The Nasdaq Stock Market's National
Market on October 8, 1999.
(9) This amount was previously paid.
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS
SUPPLEMENT IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT
PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 27, 1999
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED , 1999)
[LOGO]
$600,000,000
METROMEDIA FIBER NETWORK, INC.
$ % SENIOR NOTES DUE 2009
[EURO] % SENIOR NOTES DUE 2009
---------
The Dollar notes will accrue interest from the date of their issuance at the
rate of % per year and the Euro notes will accrue interest from the date of
their issuance at the rate of % per year, in each case payable semi-annually
in arrears on each June 15 and December 15 of each year, commencing on June 15,
2000.
The notes will be unsecured, will rank equal in right of payment with all
our other existing and future senior unsecured indebtedness and will be
effectively subordinated to all our existing and future secured indebtedness to
the extent of the assets that secure that indebtedness and to all of our
subsidiaries' existing or future indebtedness, whether or not secured.
The notes will be redeemable, in whole or in part, at our option, at any
time on or after December 15, 2004 at the redemption prices described in this
prospectus supplement, plus accrued and unpaid interest to the date of
redemption.
We intend to apply for listing of the notes on the Luxembourg Stock
Exchange.
--------------
INVESTING IN THE NOTES INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE S-13 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 3 OF THE ACCOMPANYING
PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
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<TABLE>
<CAPTION>
PER TOTAL PER TOTAL COMBINED
DOLLAR NOTE DOLLAR NOTES EURO NOTE EURO NOTES TOTAL(1)
----------- -------------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Public Offering Price % $ % [EURO] $
Underwriting Discount % $ % [EURO] $
Proceeds to Us (before expenses) % $ % [EURO] $
</TABLE>
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(1) Based on the conversion rate of [EURO] =$1.00, which is the noon buying
rate as of , 1999 in New York City for cable transfers in foreign
currencies, as certified for customs purposes by the Federal Reserve Bank of
New York.
--------------
The underwriters are offering the notes subject to various conditions. The
underwriters expect to deliver the notes to purchasers on or about ,
1999.
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SALOMON SMITH BARNEY
CHASE SECURITIES INC.
DEUTSCHE BANC ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
, 1999
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS SUPPLEMENT.
TABLE OF CONTENTS
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PAGE
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<S> <C>
PROSPECTUS SUPPLEMENT
About this Prospectus Supplement............................ S-3
Summary..................................................... S-4
Risk Factors................................................ S-13
Special Note Regarding Forward-Looking Statements........... S-24
Use of Proceeds............................................. S-26
Capitalization.............................................. S-27
Selected Consolidated Financial Data........................ S-29
Unaudited Pro Forma Condensed Combining Financial
Information............................................... S-31
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-36
Business.................................................... S-43
Management.................................................. S-62
Certain Relationships and Related Transactions.............. S-71
Security Ownership.......................................... S-73
Description of the New Credit Facility...................... S-75
Description of Other Indebtedness........................... S-77
Recent and Proposed Transactions............................ S-78
Description of the Notes.................................... S-80
Certain United States Federal Income Tax Considerations..... S-112
Underwriting................................................ S-117
Notice to Canadian Residents................................ S-119
Validity of the Notes....................................... S-122
Experts..................................................... S-122
Where You Can Find More Information......................... S-122
Incorporation of Information We File with the SEC........... S-123
General Information......................................... S-123
Index to Consolidated Financial Statements.................. F-1
</TABLE>
PROSPECTUS
<TABLE>
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Risk Factors................................................ 3
Special Note Regarding Forward-Looking Statements........... 10
About This Prospectus....................................... 11
Business.................................................... 11
Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends................................................. 12
Use of Proceeds............................................. 12
Description of Debt Securities.............................. 13
Description of Capital Stock................................ 22
Description of Warrants..................................... 28
Selling Stockholders........................................ 29
Plan of Distribution........................................ 29
Validity of Securities...................................... 30
Experts..................................................... 30
Where You Can Find More Information......................... 31
Incorporation of Information We File with the SEC........... 31
</TABLE>
S-2
<PAGE>
------------------------
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the notes, including
overallotment, stabilizing and short-covering transactions in the notes, and the
imposition of a penalty bid, during and after the offering of the notes. Such
stabilization, if commenced, may be discontinued at any time. For a description
of these activities, please refer to the section in this prospectus supplement
entitled "Underwriting."
------------------------
We accept responsibility for the information contained in this prospectus
supplement. To our best knowledge, the information contained in this prospectus
supplement is accurate and complete in all material respects and does not omit
to state any facts necessary in order to make the statements in this prospectus
supplement not misleading in any material respect.
------------------------
ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement contains the terms of this offering. This
prospectus supplement, or the information incorporated by reference in this
prospectus supplement, may add, update or change information in the attached
prospectus. If information in this prospectus supplement, or the information
incorporated by reference in this prospectus supplement, is inconsistent with
the attached prospectus, this prospectus supplement, or the information
incorporated by reference in this prospectus supplement, will apply and will
supersede the information in the attached prospectus.
It is important for you to read and consider all information contained in
this prospectus supplement and the attached prospectus in making your investment
decision. You should also read and consider the information in the documents we
have referred you to in "Where You Can Find More Information."
This prospectus supplement and the attached prospectus do not constitute an
offer or solicitation by anyone in any jurisdiction in which an offer or
solicitation is not authorized or in which the person making an offer or
solicitation is not qualified to do so, or to anyone to whom it is unlawful to
make an offer or solicitation.
S-3
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS
SUPPLEMENT. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
THAT YOU SHOULD CONSIDER BEFORE INVESTING. YOU SHOULD READ THE ENTIRE PROSPECTUS
SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS INCORPORATED BY
REFERENCE CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS" AND THE
FINANCIAL STATEMENTS AND THE RELATED NOTES TO THOSE STATEMENTS INCLUDED IN THIS
PROSPECTUS SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS
INCORPORATED BY REFERENCE. EXCEPT AS OTHERWISE REQUIRED BY THE CONTEXT INCLUDING
WITH RESPECT TO THE DESCRIPTION OF THE NOTES, REFERENCES IN THIS PROSPECTUS
SUPPLEMENT TO "WE" OR "US" REFER TO THE COMBINED BUSINESS OF METROMEDIA FIBER
NETWORK, INC. AND ALL OF ITS SUBSIDIARIES. THE TERM "NOTES" REFERS TO THE
$ % SENIOR NOTES DUE 2009 (THE "DOLLAR NOTES") AND THE [EURO] %
SENIOR NOTES DUE 2009 (THE "EURO NOTES") THAT WE ARE OFFERING BY THIS PROSPECTUS
SUPPLEMENT. THE TERM "YOU" REFERS TO PROSPECTIVE INVESTORS IN THE NOTES.
THE COMPANY
GENERAL
We provide dedicated fiber optic infrastructure and high-bandwidth Internet
connectivity for our communications intensive customers. We are a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through our acquisition of
AboveNet Communications, Inc. (often referred to as "AboveNet"), we also provide
"one-hop" connectivity that enables mission critical Internet applications to
thrive, as well as high-bandwidth infrastructure, including managed co-location
services.
We currently have operations in, or under construction in, eleven Tier I
cities throughout the United States and seven selected international markets. We
intend to expand our presence to include approximately 50 Tier I and Tier II
markets in the United States and 17 major international markets.
RECENT EVENTS
ACQUISITION OF ABOVENET. On September 8, 1999, we completed the acquisition
of AboveNet for a total purchase price of approximately $1.8 billion. AboveNet
is a leading provider of high performance Internet connectivity solutions for
electronic commerce and other business critical Internet operations and
facilities-based, managed services for customer-owned Web servers and related
equipment, known as co-location services. AboveNet has developed a network
architecture based upon strategically located, fault-tolerant facilities, known
as Internet service exchanges. AboveNet's Internet service exchanges combine
direct access to Internet service providers, (often referred to as "ISPs"), with
co-location services for Internet content providers. As of June 30, 1999,
AboveNet had more than 270 direct public and private data exchange agreements,
known as peering arrangements, including relationships with most major network
providers. AboveNet's network architecture and extensive peering relationships
are designed to reduce the number of network connections or "hops" for data
traveling across the Internet. By having both Internet content providers and
Internet service providers at its Internet service exchanges, AboveNet enables
its Internet service provider customers to provide their users with "one-hop"
connectivity, through AboveNet's local area network, to the Web sites of the
Internet content providers that are co-located at the same facility. AboveNet's
customers include a wide range of Internet service providers, Internet content
providers and Web hosting companies.
INVESTMENT BY BELL ATLANTIC. On October 7, 1999, we entered into a
securities purchase agreement with Bell Atlantic Investments, Inc. (referred to
as "Bell Atlantic"), under which Bell Atlantic would purchase up to
approximately 25.6 million newly issued shares of our class A common stock at a
purchase price of $28.00 per share and a convertible subordinated note of
approximately $975.3 million, which is convertible into shares of our class
A common stock at a conversion price of $34.00 per share. We expect this
transaction, which is subject to customary closing conditions, to be completed
by the end of the first
S-4
<PAGE>
quarter of 2000. Assuming the issuance of the 25.6 million shares of class A
common stock and conversion of the convertible subordinated note, this
investment would represent 19.9% of our outstanding shares. Bell Atlantic has
also agreed to pay us $550 million over the next three years in exchange for
delivery of fiber optic facilities over the next five years. The proceeds from
these two transactions will be used to fund the expansion of our network.
NETWORK
Our existing intra-city networks consist of approximately 334,000 fiber
miles covering 680 route miles in six of our announced markets. Our inter-city
network consists of approximately 110,000 fiber miles covering 255 route miles
that we have built between New York City and Washington, D.C. We have also built
or acquired (primarily through fiber swaps) a nationwide dark fiber network
linking our intra-city networks.
In February 1999, we entered into an agreement with Viatel, Inc. and
Carrier 1 Holdings, Ltd. to jointly build a dark fiber inter-city network among
selected cities throughout Germany. Once completed, our German network will
consist of approximately 291,000 fiber miles covering 1,350 route miles
connecting 14 major cities. We have also swapped strands of fiber in the United
States for strands of fiber on the Circe network, which connects a number of
European markets. In addition to our inter-city networks, we are constructing 16
intra-city networks throughout Europe. Separately, we have also entered into a
contract to acquire dark fiber network facilities in Toronto, Canada.
We have designed our networks to provide high levels of reliability,
security and flexibility by virtue of a self-healing synchronous optical network
(often referred to as "SONET") architecture that prevents interruption in
service to our clients by instantaneously rerouting traffic in the event of a
fiber cut. Our advanced network architecture is also capable of supporting
state-of-the-art technologies, including dense wave division multiplexing (often
referred to as "DWDM") which significantly increases the transmission capacity
of a strand of fiber optic cable. Because DWDM can boost transmission capacity
significantly, it has greater relevance on our inter-city routes where we have,
on average, fewer strands of fiber installed than in our intra-city markets. We
install most of our fiber inside high-density polyethylene conduit to protect
the cable and, where practicable, we install additional unused conduits to cost
effectively accommodate future network expansion and eliminate the need for
future construction.
We believe that the market for our services in these areas is characterized
by significant and growing demand for, and limited supply of, fiber optic
capacity. To meet our customers' demand, we tailor the amount of fiber capacity
leased to the needs of our customers. Generally, customers lease fiber optic
capacity from us and connect their own transmission equipment to the leased
fiber, thereby obtaining a high-bandwidth, fixed-cost, secure communications
alternative to the metered communications services offered by traditional
providers. In addition, we believe that we have installation, operating and
maintenance cost advantages per fiber mile relative to our competitors because
we generally install 432 fibers, and have begun installing as many as 864 fibers
per route mile, as compared to the generally lower number of fibers per mile in
existing competitive networks.
We believe the market for our Internet service exchanges is characterized by
significant and growing demand for, and limited access to, highly reliable
Internet connectivity and co-location services. To meet our customers' demands,
we provide scalable connectivity and co-location services that drive our
customers' electronic commerce and other mission critical Internet applications.
Our customers lease bandwidth and co-location space from us to gain highly
reliable, secure and cost effective Internet connectivity. Through our existing
and planned networks, we believe we have the low cost position relative to those
competitors who lease rather than own their networks.
S-5
<PAGE>
CUSTOMERS
We are focused on providing our broadband communications infrastructure and
Internet connectivity services to two main customer groups located in Tier I and
Tier II markets: communications carriers and corporate/government customers.
Our targeted customers include a broad range of companies such as:
- incumbent local exchange carriers (often referred to as "ILECs");
- competitive local exchange carriers (often referred to as "CLECs");
- long distance companies/interexchange carriers (often referred to as
"IXCs");
- paging, cellular and PCS companies;
- cable companies;
- ISPs; and
- Web hosting and e-commerce companies.
Our dark fiber customers typically lease our fiber optic capacity with which
they develop their own communications networks. Leasing our fiber optic capacity
is a low-cost alternative to building their own infrastructure or purchasing
metered services from ILECs or CLECs. Our Internet connectivity and co-location
customers typically lease bandwidth and co-location space which allow them to
provide their Internet related services on a reliable and cost effective basis.
We believe that we are well-positioned to penetrate our target customer base
since we plan to install most of our dark fiber networks and Internet service
exchanges in major markets where these customers are concentrated. We believe
our target customers for our dark fiber and Internet connectivity services are
complementary and will provide significant cross-selling opportunities.
MARKET OPPORTUNITY
We intend to capitalize on the increasing demand for high-bandwidth
dedicated communications services and the limited supply of such transmission
capacity. Based on management experience and industry reports, we believe that
demand for the broadband communications infrastructure afforded by our network
will continue to increase as a result of the following factors:
- the rapid growth of communications traffic, such as data traffic, which
industry research indicates is growing by 35% annually;
- the large number of new carriers which will require significant
transmission capabilities in all sectors of the communications industry,
due in large part to industry deregulation facilitated by the
Telecommunications Act of 1996 (often referred to as the "1996 Telecom
Act");
- the fact that the Regional Bell Operating Companies (often referred to as
the "RBOCs") and other major ILECs will likely need to upgrade to fiber
optic networks with infrastructure similar to ours; and
- the advent of new communications services requiring large amounts of
transmission capacity, such as Internet, intranet and video services.
Based on industry sources, we estimate that the total 1998 market for
communications services in the United States was approximately $237 billion and
will grow to approximately $341 billion by the year 2002. In addition, we
believe that there will be increased demand for our infrastructure due to our
ability to offer fixed-cost pricing which is generally more economical for high
volume users than traditional usage-based pricing. Based on industry sources, we
estimate that worldwide Internet revenues for 1998 were approximately
$20 billion, and will grow to approximately $83 billion by the year 2002. We
expect continued rapid growth in Internet revenues as Internet use increases and
electronic commerce applications gain widespread acceptance.
S-6
<PAGE>
BUSINESS STRATEGY
Our objective is to become the preferred facilities-based provider of
broadband communications infrastructure and Internet connectivity solutions to
communications carriers, corporations and government agencies, in our target
markets. The following are the key elements of our strategy to achieve this
objective:
ESTABLISH OUR COMPANY AS THE PREFERRED CARRIERS' CARRIER OF BROADBAND
COMMUNICATIONS
INFRASTRUCTURE AND INTERNET CONNECTIVITY SOLUTIONS
We lease broadband communications infrastructure on a fixed-cost basis to
various communications carriers, thus enabling them to compete in markets which
were previously difficult to penetrate due to limited and/or costly access to
high-bandwidth communications infrastructure. We lease bandwidth and
co-location space to various Internet service providers enabling them to provide
reliable, high-quality Internet access services to their customers. We also
believe that carrier customers may be more likely to lease services from us,
rather than from a competitor, since we currently have no plans to offer
competing metered communications or retail Internet connectivity services.
POSITION OUR COMPANY AS THE PREFERRED PROVIDER OF BROADBAND COMMUNICATIONS
INFRASTRUCTURE AND
INTERNET CONNECTIVITY SERVICES TO CORPORATE AND GOVERNMENT CUSTOMERS
Our target customers for broadband communications infrastructure are those
with significant transmission needs or who require a high degree of security.
Our target customers for Internet connectivity services are those who require
reliable, secure and cost effective connectivity to the Internet to drive
electronic commerce and other mission critical business Internet applications.
In many cases, we believe our communications infrastructure and Internet
connectivity customer bases are complementary and will create significant cross
selling opportunities.
REPLICATE SUCCESSFUL BUSINESS MODEL IN NEW MARKETS
We seek to leverage the success we have demonstrated in our existing markets
by replicating our network architecture in a number of additional markets.
Specifically, we intend to:
- complete the construction of a total of approximately 50 intra-city
networks in Tier I and Tier II markets;
- replicate our successful domestic strategy in selected international
markets; and
- deploy Internet service exchanges in selected U.S. and international
markets.
CREATE A LOW COST POSITION
We believe that we have established a low cost position relative to other
communications carriers primarily because we install trunks with substantially
more fibers per route mile as well as spare conduits, thereby reducing the cost
per fiber mile to construct, upgrade and operate our networks. We believe that
we have established the low cost position relative to other Internet
connectivity providers who lease rather than own their networks. Our low cost
position should allow us to remain price competitive with other providers of
broadband communications infrastructure and Internet connectivity services and
to provide customers a cost effective alternative to constructing their own
networks or Internet connectivity facilities.
UTILIZE FIBER SWAPS AND STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF OUR
NETWORKS
We have completed a number of fiber swaps to date and will continue to
explore strategic opportunities to expand the reach of our networks at little
incremental cost. We also plan to enter into strategic
S-7
<PAGE>
relationships, such as our joint build arrangement with Viatel in Europe, to
cost effectively expand our network footprint.
EXPAND PRODUCT AND SERVICE OFFERINGS TO UTILIZE DARK FIBER NETWORK CAPACITY
We intend to identify additional uses for our dark fiber network that will
drive new revenue opportunities and cost synergies. We may develop these
applications internally or by acquiring them through strategic acquisitions,
although none are currently planned. As was the case with our acquisition of
AboveNet, we intend to continue to serve carriers and large corporate and
government customers with regard to their bandwidth intensive communications
needs.
INSTALL TECHNOLOGICALLY ADVANCED NETWORKS AND INTERNET SERVICE EXCHANGES
We have installed a technologically advanced network based on a self-healing
SONET architecture that we believe provides the high levels of reliability,
security, and flexibility that our target customers typically demand. Our
Internet service exchanges provide fault tolerant facilities designed to enable
the uninterrupted operations necessary for mission critical Internet business
applications. Furthermore, our proprietary software monitors network connection
for latency and packet loss, thereby allowing us to automatically reroute
traffic to avoid Internet congestion points.
BUILD ON MANAGEMENT EXPERIENCE AND METROMEDIA COMPANY RELATIONSHIP
Our management team and board of directors include individuals with
communications industry expertise and extensive experience in network design,
construction, operations and sales. Our Chief Executive Officer and founder,
Stephen A. Garofalo, has approximately 25 years of experience in the cable
installation business. Howard Finkelstein, our President and Chief Operating
Officer, served in various capacities in Metromedia Company over a period of
16 years, including 9 years as president of Metromedia Company's long distance
telephone company, until its merger with MCI/WorldCom, Inc. in 1993. We also
benefit from the communications industry expertise and corporate governance
experience of John W. Kluge, Stuart Subotnick and David Rockefeller. As the
owner of all of our class B common stock, Metromedia Company and its general
partners control our board of directors and all stockholder decisions and, in
general, determine the outcome of any corporate transaction or other matters
submitted to the stockholders for approval. Sherman Tuan and David Rand have
joined our board of directors following the acquisition of AboveNet and have
extensive experience with Internet related ventures. Please refer to the
sections in this prospectus supplement entitled "Risk Factors--Metromedia
Company Effectively Controls Our Company and Has the Power to Cause or Prevent a
Change of Control" and "Certain Relationships and Related Transactions."
------------------------
We were founded in 1993 and are a Delaware corporation. Our principal
executive offices are located at One North Lexington Avenue, White Plains, New
York 10601. Our telephone number is (914) 421-6700.
S-8
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Issuer.................................... Metromedia Fiber Network, Inc.
Notes Offered............................. We are offering $ aggregate principal amount of
% Senior Notes due 2009 (referred to as the "Dollar
notes").
In addition, we are offering [EURO] aggregate
principal amount of % Senior Notes due 2009 (referred
to as the "Euro notes").
Maturity Date............................. December 15, 2009.
Interest.................................. The Dollar notes will accrue interest from the date of
their issuance at the rate of % per year. The Euro
notes will accrue interest from the date of their
issuance at the rate of % per year. In both cases, the
interest on the notes will be payable semi-annually in
arrears on each June 15 and December 15, commencing on
June 15, 2000.
Sinking Fund.............................. None.
Optional Redemption....................... Except as set forth below and under "Change of Control,"
we may not redeem the notes prior to December 15, 2004.
After December 15, 2004, we may redeem the notes, in
whole or in part, at any time, at the redemption prices
set forth below under the section entitled "Description
of the Notes" together with accrued and unpaid interest,
if any, to the redemption date. In addition, at any time
and from time to time prior to December 15, 2002, we may
redeem up to 35% of the aggregate principal amount of
each of the Dollar notes and the Euro notes, determined
separately, at a redemption price equal to % of the
principal amount, in the case of the Dollar notes
redeemed, and % of the principal amount, in the case
of the Euro notes redeemed, in each case plus accrued
and unpaid interest, if any, through the date of
redemption, if:
- we use the net cash proceeds of any public equity
offerings resulting in gross proceeds of at least $100
million; and
- at least 65% of the aggregate principal amount of the
Dollar notes and the Euro notes, determined separately,
originally issued pursuant to the indenture remain
outstanding immediately after giving effect to such
redemption.
Change of Control......................... Upon a "Change of Control," you as a holder of notes
will have the right to require us to repurchase all of
your notes at a repurchase price equal to 101% of the
aggregate principal amount, plus accrued and unpaid
interest, if any, through the date of repurchase.
Ranking................................... The notes will be general unsecured obligations, will
rank equal in right of payment with all our other
existing and future senior unsecured indebtedness and
will be effectively subordinated to all our existing and
future secured indebtedness to the extent of the assets
that secure such indebtedness and to all of our
subsidiaries existing or future indebtedness, whether or
not secured.
</TABLE>
S-9
<PAGE>
<TABLE>
<S> <C>
Restrictive Covenants..................... The indenture under which the notes will be issued may
limit:
- the incurrence of additional indebtedness or
preferred stock by us and our subsidiaries;
- the payment of dividends on, and repurchase or
redemption of, our capital stock and our subsidiaries'
capital stock and the repurchase or redemption of our
subordinated obligations;
- investments, sales of assets and subsidiary stock;
- transactions with affiliates; and
- the incurrence of additional liens.
In addition, the indenture will limit our ability to
engage in consolidations, mergers and transfers of
substantially all of our assets and also contain
restrictions on distributions from our subsidiaries. All
of these limitations and prohibitions will be subject to
a number of important qualifications and exceptions.
Please refer to the sections of this prospectus
supplement entitled "Description of the Notes" and "Risk
Factors--Risk Factors Relating to the Notes."
Absence of a Public Market
for the Notes........................... We intend to apply for listing of the notes on the
Luxembourg Stock Exchange. However, the notes are a new
issue of securities and there is currently no
established market for them. Accordingly, there can be
no assurance as to the development or liquidity of any
market for the notes. The underwriters have advised us
that they currently intend to make a market in the notes
as permitted by applicable laws and regulations.
However, they are not obligated to do so and may
discontinue any such market making activities at any
time without notice.
Use of Proceeds........................... We estimate that the net proceeds from the offering of
the notes will be $ . We expect to use the
net proceeds for the build-out of our intra-city and
inter-city networks in the United States and Europe and
for other capital expenditures, including possible
acquisitions of other companies or assets. Please refer
to the section of this prospectus supplement entitled
"Use of Proceeds."
</TABLE>
RISK FACTORS
You should consider carefully the information set forth in the section
entitled "Risk Factors" beginning on page S-13 of this prospectus supplement and
on page 3 of the accompanying prospectus and all the other information provided
to you in this prospectus supplement, the accompanying prospectus and the
documents incorporated by reference in deciding whether to invest in the notes.
S-10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data presented below for the
years ended December 31, 1996, 1997 and 1998 have been derived from our
consolidated financial statements and the related notes included in this
prospectus supplement beginning on page F-1. Our consolidated financial
statements for the years ended December 31, 1996, 1997 and 1998 have been
audited by Ernst & Young LLP, independent auditors. The summary consolidated
financial data for the six months ended June 30, 1998 and 1999 and the summary
historical balance sheet data as of June 30, 1999 have been derived from our
unaudited consolidated financial statements, which we believe include all
adjustments necessary for a fair presentation of the financial condition and
results of operations for those periods. The results of operations for interim
periods are not necessarily indicative of the results for a full year's
operations.
The summary unaudited pro forma statements of operations for the year ended
December 31, 1998 and for the six months ended June 30, 1999 give effect to our
acquisition of AboveNet and AboveNet's acquisition of Palo Alto Internet
Exchange as if they had been consummated on January 1, 1998. The summary
unaudited pro forma balance sheet as of June 30, 1999 gives pro forma effect to
the following transactions:
- our acquisition of AboveNet as if it had been consummated on June 30,
1999;
- the transaction referred to above and the offering of the notes, as if
they had been consummated on June 30, 1999; and
- the transactions referred to above and the purchase by Bell Atlantic of
shares of our class A common stock and the convertible subordinated note,
which purchase has not yet been consummated and is subject to customary
closing conditions, as if they had been consummated on June 30, 1999.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable at the time made. The summary
unaudited pro forma financial data do not purport to present our financial
position or results of operations had the transactions occurred on the dates
specified, nor are they necessarily indicative of the financial position or
results of operations that may be achieved in the future.
As you read the summary consolidated financial data, please refer to the
following: "Risk Factors--Failure to Consummate the Bell Atlantic Transactions
May Cause Us to Seek Alternative Financing," "Unaudited Pro Forma Condensed
Combining Financial Information," "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business," the
consolidated financial statements and the related notes of our company, AboveNet
and Palo Alto Internet Exchange and the other financial data appearing in this
prospectus supplement.
S-11
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------ --------------
PRO FORMA PRO FORMA
FOR ABOVENET FOR ABOVENET
AQUISITION ACQUISITION
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- ------------ -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 236 $ 2,524 $36,436 $ 47,575 $ 9,133 $ 38,673 $ 51,366
Expenses:
Cost of sales..................... 699 3,572 13,937 24,071 4,553 14,819 30,714
Selling, general and
administrative.................. 2,070 6,303 14,712 23,005 5,914 13,786 26,396
Depreciation and amortization..... 613 757 1,532 80,105 440 5,058 45,602
Consulting and employment
incentives...................... 3,652 19,218 3,648 6,044 3,595 -- 519
-------- -------- ------- -------- ------- -------- --------
(Loss) income from operations....... (6,798) (27,326) 2,607 (85,650) (5,369) 5,010 (51,865)
Interest income (expense), net...... (3,561) 1,067 1,927 1,735 3,564 (16,895) (15,310)
(Loss) from joint venture........... -- -- (146) (146) (251) (393) (593)
Income taxes........................ -- -- 3,402 -- -- -- --
-------- -------- ------- -------- ------- -------- --------
Net (loss) income................... $(10,359) $(26,259) $ 986 $(84,061) $(2,056) $(12,278) $(67,768)
======== ======== ======= ======== ======= ======== ========
Net (loss) income applicable to
common stockholders per share..... $ (0.14) $ (0.28) $ 0.01 $ (0.37) $ (0.01) $ (0.06) $ (0.29)
======== ======== ======= ======== ======= ======== ========
Weighted average number of shares
outstanding....................... 71,716 94,894 186,990 228,584 185,616 189,098 230,692
======== ======== ======= ======== ======= ======== ========
Ratio of earnings to fixed
charges(1)........................ -- -- 1.61 -- -- -- --
EBITDA(2)........................... $ (6,185) $(26,569) $ 3,993 $ (5,691) $(5,180) $ 9,675 $ (6,856)
Adjusted EBITDA(2).................. $ (2,533) $ (7,351) $ 7,641 $ 353 $(1,585) $ 9,675 $ (6,337)
Cash dividends per share............ $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------------------------------------------------------
PRO FORMA FOR
PRO FORMA FOR PRO FORMA BELL ATLANTIC
ACTUAL ABOVENET ACQUISITION FOR THE OFFERING INVESTMENT
---------- -------------------- ---------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................. $ 341,897 $ 537,768 $ 1,117,768 $ 2,808,676
Pledged securities(3)............................ 63,142 63,142 63,142 63,142
Property and equipment, net...................... 421,712 481,208 481,208 481,208
Total assets..................................... 1,034,694 2,882,533 3,482,533 5,173,441
Long-term debt................................... 673,202 694,791 1,294,791 2,270,072
Total liabilities................................ 891,905 962,080 1,562,080 2,537,361
Stockholders' equity............................. 142,789 1,920,453 1,920,453 2,636,080
</TABLE>
(1) Earnings were insufficient to cover fixed charges in the years ended
December 31, 1996 and 1997 and for the six months ended June 30, 1998 and
1999. The deficiency was $10,359,000, $26,259,000, $2,056,000, and
$12,278,000 for the years ended December 31, 1996 and 1997 and for the six
months ended June 30, 1998 and 1999, respectively. Pro forma earnings were
insufficient to cover the pro forma fixed charges in the year ended
December 31, 1998 and for the six months ended June 30, 1999. The pro forma
deficiency was $84,061,000 and $67,768,000 for the year ended December 31,
1998 and the six months ended June 30, 1999, respectively.
(2) "EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense and all depreciation and amortization expense. "Adjusted
EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense, depreciation and amortization and non-cash employment and
consulting incentives and settlements. You should not think of EBITDA and
Adjusted EBITDA as alternative measures of operating results or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles). We have included EBITDA and Adjusted EBITDA
because they are widely used financial measures of the potential capacity of
a company to incur and service debt. Our reported EBITDA and Adjusted EBITDA
may not be comparable to similarly titled measures used by other companies.
(3) Represents amounts deposited with the security agent pursuant to a security
agreement to make payments of interest through May 15, 2000 on our 10%
Senior Notes due 2008.
S-12
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION BELOW IN ADDITION TO ALL OTHER
INFORMATION PROVIDED TO YOU IN THIS PROSPECTUS SUPPLEMENT, THE ACCOMPANYING
PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE IN DECIDING WHETHER TO
INVEST IN THE NOTES, INCLUDING INFORMATION IN THE SECTION ENTITLED "SPECIAL NOTE
REGARDING FORWARD LOOKING STATEMENTS."
RISK FACTORS RELATING TO OUR BUSINESS
WE HAVE A LIMITED HISTORY OF OPERATIONS
You will have limited historical financial information upon which to base
your evaluation of our performance. Our company was formed in April 1993 and has
a limited operating history. We currently have a limited number of customers and
are still in the process of building many of our networks. Accordingly, you must
consider our prospects in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development.
WE EXPECT TO CONTINUE TO INCUR NET LOSSES
In connection with the construction of our networks, we have incurred
substantial net losses and have not generated positive cash flow from
operations. There can be no assurance that we will generate net income or that
we will sustain positive cash flow in the future.
We cannot assure you that we will succeed in establishing an adequate
revenue base or that our services will generate profitability. In connection
with the construction of our networks, we have incurred substantial losses. We
expect to continue incurring losses while we concentrate on the development and
construction of our networks and until our networks have established a
sufficient revenue-generating customer base. We also expect to incur losses
during the initial startup phases of any services that we may provide. We expect
to continue experiencing net operating losses for the foreseeable future.
Continued losses may prevent us from pursuing our strategies for growth and
could cause us to be unable to meet our debt service obligations, capital
expenditure requirements or working capital needs.
WE HAVE SUBSTANTIAL DEBT WHICH MAY LIMIT OUR ABILITY TO BORROW, RESTRICT THE USE
OF OUR CASH FLOWS AND CONSTRAIN OUR BUSINESS STRATEGY, AND WE MAY NOT BE ABLE
TO MEET OUR DEBT OBLIGATIONS
LARGE AMOUNT OF DEBT
We have, and will continue to have after the offering of the notes,
substantial debt and debt service requirements. Following the offering of the
notes, we will have total debt of approximately $1.3 billion. In addition, the
purchase by Bell Atlantic of a convertible subordinated note will increase our
total debt to approximately $2.3 billion. As the indentures governing our debt
allow us to borrow additional amounts in certain cases to finance the
construction and improvement of our networks, we intend to explore market
conditions in order to obtain additional financing, including additional
long-term fixed-rate financing or senior revolving credit facilities.
CONSEQUENCES OF DEBT
Our substantial debt has important consequences, including:
- our ability to borrow additional amounts for working capital, capital
expenditures or other purposes is limited;
- a substantial portion of our cash flow from operations is required to make
debt service payments; and
S-13
<PAGE>
- our leverage could limit our ability to capitalize on significant business
opportunities and our flexibility to react to changes in general economic
conditions, competitive pressures and adverse changes in government
regulation.
You should be aware that our ability to repay or refinance our debt,
including the notes, depends on our successful financial and operating
performance and on our ability to successfully implement our business strategy.
Unfortunately, we cannot assure you that we will be successful in implementing
our strategy or in realizing our anticipated financial results. You should also
be aware that our financial and operational performance depends upon a number of
factors, many of which are beyond our control. These factors include:
- the economic and competitive conditions in the telecommunications network
and Internet-related industries;
- any operating difficulties, increased operating costs or pricing pressures
we may experience;
- the passage of legislation or other regulatory developments that may
adversely affect us;
- any delays in implementing any strategic projects;
- our ability to complete our networks on time and in a cost-effective
manner; and
- our ability to apply our business strategies in foreign cities.
We cannot assure you that our cash flow and capital resources will be
sufficient to repay our existing indebtedness, including the notes, and any
indebtedness we may incur in the future, or that we will be successful in
obtaining alternative financing. In the event that we are unable to repay our
debts, we may be forced to reduce or delay the completion or expansion of our
networks, sell some of our assets, obtain additional equity capital or refinance
or restructure our debt. If we are unable to meet our debt service obligations
or comply with our covenants, a default under our existing debt agreements would
result. To avoid a default, we may need waivers from third parties, which might
not be granted. You should also read the information we have included in this
prospectus supplement in the sections entitled "--Risk Factors Relating to the
Notes," "Description of Other Indebtedness," "Description of the Notes" and
"Business--Business Strategy."
RESTRICTIVE DEBT COVENANTS
The indenture will contain a number of covenants. These covenants may limit
our ability to, among other things:
- borrow additional money;
- make capital expenditures and other investments;
- pay dividends;
- merge, consolidate, or dispose of our assets; and
- enter into transactions with our affiliates.
Our failure to comply with these covenants would cause a default under the
indenture. A default, if not waived, could result in acceleration of our
indebtedness, in which case the debt would become immediately due and payable.
If this occurs, we may not be able to repay our debt or borrow sufficient funds
to refinance it. Even if new financing is available, it may not be on terms that
are acceptable to us. Complying with these covenants may cause us to take
actions that we otherwise would not take or not take actions that we otherwise
would take. Please refer to the sections in this prospectus supplement entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Description of Other
Indebtedness."
S-14
<PAGE>
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY BECAUSE WE
DEPEND ON FACTORS BEYOND OUR CONTROL, WHICH COULD ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS
Our future largely depends on our ability to implement our business strategy
and proposed expansion in order to create the new business and revenue
opportunities. Our results of operations will be adversely affected if we cannot
fully implement our business strategy. Successful implementation depends on
numerous factors beyond our control, including economic, competitive and other
conditions and uncertainties, the ability to obtain licenses, permits,
franchises and rights-of-way on reasonable terms and conditions and the ability
to hire and retain qualified management personnel.
A CHANGE IN ACCOUNTING STANDARDS MAY REQUIRE US TO CHANGE OUR TIMING OF
RECOGNIZING REVENUES
Effective June 30, 1999, the Financial Accounting Standards Board issued
FASB Interpretation No. 43 "Real Estate Sales" ("FIN 43") which requires that
sales of integral equipment be accounted for in accordance with real estate
accounting rules. We believe that the SEC may classify dark fiber cables in the
ground as integral equipment as defined in FIN 43. This change in the accounting
for dark fiber sales would not change any of the economics of the contracts. It
would require us, however, to recognize the revenue from some sales contracts as
operating leases over the term of the contract as opposed to the current method
of recognizing revenue during the period over which we deliver the fiber. As a
result, this change in accounting treatment would reduce the revenue and income
that we would recognize in the earlier years of the contract and spread it out
over the life of the contract regardless of when the cash was received or the
delivery of the fiber took place. Please refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations--General."
FAILURE TO CONSUMMATE THE BELL ATLANTIC TRANSACTIONS MAY CAUSE US TO SEEK
ALTERNATIVE FINANCING
In connection with Bell Atlantic's investment, we expect to receive
approximately $1.7 billion in net proceeds from Bell Atlantic for the purchase
of shares of our class A common stock and a convertible subordinated note. In
addition, Bell Atlantic has agreed to purchase a minimum of $550.0 million of
fiber optic facilities payable over the next three years. We plan to use the net
proceeds from the Bell Atlantic transactions to accelerate the build out of our
nationwide dark fiber infrastructure as well as to enter new markets in the
United States and internationally. If Bell Atlantic's investment, which is
subject to customary closing conditions, does not close, we would need to obtain
alternative sources of financing to complete the construction of our networks,
which may not be available on comparable terms, if at all. Locating an
alternative financing source could slow our growth and have a material adverse
affect on us.
WE CANNOT BE CERTAIN THAT WE WILL BE SUCCESSFUL IN INTEGRATING ABOVENET INTO OUR
BUSINESS
We believe that our acquisition of AboveNet will result in benefits to the
combined companies, including the expansion of our product and service offerings
and the combination of our fiber optic network with AboveNet's Internet
connectivity solutions. If we are not able to effectively integrate our
technology, operations and personnel in a timely and efficient manner, then the
benefits of our acquisition will not be realized and, as a result, our operating
results may be adversely affected. In particular, if the integration is not
successful:
- we may lose key personnel; and
- we may not be able to retain AboveNet's customers.
In addition, the attention and effort devoted to the integration of the two
companies will significantly divert management's attention from other important
issues, and could significantly harm the combined companies' business and
operating results.
S-15
<PAGE>
WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY COMPLETE THE CONSTRUCTION OF OUR
NETWORKS
The construction of future networks and the addition of Internet service
exchange facilities entail significant risks, including management's ability to
effectively control and manage these projects, shortages of materials or skilled
labor, unforeseen engineering, environmental or geological problems, work
stoppages, weather interference, floods and unanticipated cost increases. The
failure to obtain necessary licenses, permits and authorizations could prevent
or delay the completion of construction of all or part of our networks or
increase completion costs. In addition, AboveNet's establishment and maintenance
of interconnections with other network providers at various public and private
points is necessary for AboveNet to provide cost efficient services. We cannot
assure you that the budgeted costs of our current and future projects will not
be exceeded or that these projects will commence operations within the
contemplated schedules, if at all.
WE CANNOT ASSURE YOU THAT A MARKET FOR OUR CURRENT OR FUTURE SERVICES WILL
DEVELOP
The practice of leasing dark fiber, which is fiber optic cable without any
of the electronic or optronic equipment necessary to use the fiber for
transmission, is not widespread and we cannot assure you that the market will
develop or that we will be able to enter into contracts, comply with the terms
of these contracts or maintain relationships with communications carriers and
corporate and government customers. We also cannot assure you that these
contracts or relationships will be on economically favorable terms or that
communications carriers and corporate and government customers will not choose
to compete against, rather than cooperate with us. If we are unable to enter
into contracts, comply with the terms of the contracts or maintain relationships
with these constituencies, our operations would be materially and adversely
affected. We cannot predict whether providing services to governments will
evolve into a significant market because governments usually already control
existing rights-of-way and often build their own communications infrastructure.
We will need to strengthen our marketing efforts and increase our staff to
handle future marketing and sales requirements. If we fail to obtain
significant, widespread commercial and public acceptance of our networks and
access to sufficient buildings our visibility in the telecommunications market
could be jeopardized. We cannot assure you that we will be able to secure
customers for the commercial use of our proposed networks or access to such
buildings in each market. In addition, the market for co-location and Internet
services, which are offered by AboveNet, is new and evolving. We cannot assure
you that AboveNet's services will achieve widespread acceptance in this new
market. Further, AboveNet's success depends in large part on growth in the use
of the Internet. The growth of the Internet is highly uncertain and depends on a
variety of factors.
We may expand the range of services that we offer. These services may
include assisting customers with the integration of their leased dark fiber with
appropriate electronic and optronic equipment by facilitating the involvement of
third party suppliers, vendors and contractors. We cannot assure you that a
market will develop for our new services, that implementing these services will
be technically or economically feasible, that we can successfully develop or
market them or that we can operate and maintain our new services profitably.
SEVERAL OF OUR CUSTOMERS MAY TERMINATE THEIR AGREEMENTS WITH US IF WE DO NOT
PERFORM BY SPECIFIED TIMES
We currently have some contracts to supply leased fiber capacity which allow
the lessee to terminate the contracts and/or provide for liquidated damages if
we do not supply the stated fiber capacity by a specified time. Terminating any
of these contracts could adversely affect our operating results.
S-16
<PAGE>
WE MAY BE UNABLE TO RAISE THE ADDITIONAL FINANCING NECESSARY TO COMPLETE THE
CONSTRUCTION OF OUR NETWORKS, WHICH WOULD ADVERSELY AFFECT OUR LONG-TERM
BUSINESS STRATEGY
We may need significant amounts of additional capital to complete the
build-out of our planned fiber optic communications networks, to expand
AboveNet's network infrastructure and to meet our long-term business strategies,
including expanding our networks to additional cities and constructing our
networks in Europe. If we need additional funds, our inability to raise them
will have an adverse effect on our operations. If we decide to raise additional
funds by incurring debt, we may become more leveraged and subject to additional
or more restrictive financial covenants and ratios.
Our ability to arrange financing and the cost of financing depends upon many
factors, including:
- general economic and capital markets conditions generally, and in
particular the non-investment grade debt market;
- conditions in the telecommunications and Internet markets;
- regulatory developments;
- credit availability from banks or other lenders;
- investor confidence in the telecommunications and Internet industries and
in us;
- the success of our fiber optic communications network and Internet
services; and
- provisions of tax and securities laws that are conductive to raising
capital.
COMPETITORS OFFER SERVICES SIMILAR TO OURS IN OUR CURRENT OR PLANNED MARKETS
WHICH WOULD AFFECT OUR RESULTS OF OPERATIONS
The telecommunications industry and AboveNet's business are extremely
competitive, particularly with respect to price and service, which may adversely
affect our results of operations. A significant increase in industry capacity or
reduction in overall demand would adversely affect our ability to maintain or
increase prices. In the telecommunications industry, we compete against
incumbent local exchange carriers, which have historically provided local
telephone services and currently dominate their local telecommunications
markets, and competing carriers in the local services market. In addition to
these carriers, several other potential competitors, such as facilities-based
communications service providers, cable television companies, electric
utilities, microwave carriers, satellite carriers, wireless telephone system
operators and large end-users with private networks, are capable of offering,
and in some cases offer, services similar to those offered by us. Furthermore,
several of these service providers, such as wireless service providers, could
build wireless networks more rapidly and at lower cost than fiber optic
networks. Additionally, the business in which AboveNet competes is highly
competitive due to a lack of barriers to entry and high price sensitivity. Many
of our competitors have greater financial, research and development and other
resources than we do.
Some of our principal competitors already own fiber optic cables as part of
their telecommunications networks. Accordingly, any of these carriers, some of
which already have franchise and other agreements with local and state
governments and substantially greater resources and more experience than us,
could directly compete with us in the market for leasing fiber capacity, if they
are willing to offer this capacity to their customers. In addition, some
communications carriers and local cable companies have extensive networks in
place that could be upgraded to fiber optic cable, as well as numerous personnel
and substantial resources to begin construction to equip their networks. If
communications carriers and local cable companies decide to equip their networks
with fiber optic cable, they could become significant competitors. Our franchise
and other agreements with the city of New York and other local and state
governments are not exclusive. Potential competitors with greater resources and
more experience than us could enter into franchise and other agreements with
local and state governments and compete directly
S-17
<PAGE>
with us. Other companies may choose to compete with us in our current or planned
markets, including Europe, by leasing fiber capacity, including dark fiber, to
our targeted customers. This additional competition could materially and
adversely affect our operations.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS AND ARE MORE VULNERABLE TO CHANGING
ECONOMIC CONDITIONS AND CONSUMER PREFERENCES
We are particularly dependent on a limited number of customers. In addition,
AboveNet has a long sales cycle. We are, therefore, more susceptible to the
impact of poor economic conditions than our competitors with a more balanced mix
of business.
REGULATION OF THE TELECOMMUNICATIONS INDUSTRY MAY LIMIT THE DEVELOPMENT OF OUR
NETWORKS AND AFFECT OUR COMPETITIVE POSITION
Existing and future government laws and regulations may influence how we
operate our business, our business strategy and ultimately, our viability. U.S.
Federal and state telecommunications laws and the laws of foreign countries in
which we operate directly shape the telecommunications market. Consequently,
regulatory requirements and/or changes could adversely affect our operations and
also influence the market for Internet, web hosting and related services.
However, we cannot predict the future regulatory framework of our business.
U.S. LAWS MAY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS BY REGULATING
OUR OPERATIONS AND OUR CUSTOMERS' OPERATIONS
U.S. Federal telecommunications law imposes legal requirements on common
carriers who engage in interstate or foreign communication by wire or radio, and
on telecommunications carriers. Should these regulations be applied to us, they
may have a material adverse impact on our business and results of operation. If
providing dark fiber facilities or related services provided by us were deemed
to be a telecommunications service, then regulations, both Federal and state,
applicable to telecommunications carriers might apply to us. This could subject
the revenues we received from facility leases in interstate commerce to
assessment by the Federal Communications Commission Universal Service Fund and
the offering of those facilities or services would be subject to common carrier
regulation. In addition, our customers and, in the case of Bell Atlantic, one of
our potential shareholders, are local exchange carriers or long distance
carriers, subject to regulation by Federal Communications Commission. Our
business may be affected by regulations applicable to these telecommunications
carriers. For example, the Federal Communications Commission has recently taken
steps, and may take further steps, to reduce the access charges, the fees paid
by long distance carriers to local exchange carriers for originating and
terminating long distance calls on the incumbent local exchange carriers' local
networks, and to give the local exchange carriers greater flexibility in setting
these charges. While we cannot predict the precise effect reduction in access
charge will have on our operations, the reduction will likely make it more
attractive for long distance carriers to use local exchange carriers facilities,
rather than our fiber optic telecommunications network. A recent decision by the
Federal Communications Commission to require unbundling of incumbent local
exchange carriers' dark fiber could decrease the demand for our dark fiber by
allowing our potential customers to obtain dark fiber from incumbent local
exchange carriers at cost-based rates, and thereby have an adverse effect on the
results of our operations.
STATES LEGISLATION AFFECTS OUR PRICING POLICIES AND OUR COSTS
Our offering of transmission services, which is different from dark fiber
capacity, may be subject to regulation in each state to the extent that these
services are offered for intrastate use, and this regulation may have an adverse
effect on the results of our operations. We cannot assure you that these
regulations, if any, as well as future regulatory, judicial, or legislative
action will not have a material adverse effect on us. In particular, state
regulators have the authority to determine both the rates we will pay to
incumbent local
S-18
<PAGE>
exchange carriers for certain interconnection arrangements such as physical
collocation, and the prices that incumbent local exchange carriers will be able
to charge our potential customers for services and facilities that compete with
our services. We will also incur costs in order to comply with regulatory
requirements such as the filing of tariffs, submission of periodic financial and
operational reports to regulators, and payment of regulatory fees and
assessments, including contributions to state universal service funds. In some
jurisdictions, our pricing flexibility for intrastate services may be limited
because of regulation, although our direct competitors will be subject to
similar restrictions.
LOCAL GOVERNMENTS' CONTROL OVER RIGHTS-OF-WAY CAN LIMIT THE DEVELOPMENT OF
OUR NETWORKS
Local governments exercise legal authority that may have an adverse effect
on our business because of our need to obtain rights-of-way for our fiber
network. While local governments may not prohibit persons from providing
telecommunications services nor treat telecommunication service providers in a
discriminatory manner, they can affect the timing and costs associated with our
use of public rights-of-way.
THE REGULATORY FRAMEWORK FOR OUR INTERNATIONAL OPERATIONS IS EXTENSIVE AND
CONSTANTLY CHANGING, ADDING UNCERTAINTIES TO OUR PLANNED EXPANSION INTO
FOREIGN COUNTRIES
Various regulatory requirements and limitations also will influence our
business as we attempt to enter international markets. Regulation of the
international telecommunications industry is changing rapidly. We are unable to
predict how the Federal Communications Commission and foreign regulatory bodies
will resolve the various pending international policy issues and the effect of
such resolutions on us. Our US/UK undersea cable joint venture is a U.S.
international common carrier subject to U.S. regulation under Title II of the
Communications Act of 1934. We are also licensed as a U.S. international common
carrier subject to U.S. regulation under Title II of the Communications Act of
1934. Our U.K. joint venture is, and we also are, required, under Sections 214
and 203 of the Communications Act of 1934, respectively, to obtain authorization
and file an international service tariff containing rates, terms and conditions
before initiating service. International carriers are also subject to certain
annual fees and filing requirements such as the requirement to file contracts
with other carriers, including foreign carrier agreements, and reports
describing international circuit, traffic and revenue data service. So long as
our U.K. joint venture and we operate as international common carriers, they
will also be required to comply with the rules of the Federal Communications
Commission. The international services provided by our U.K. joint venture are
and our international services are also subject to regulation in the United
Kingdom and other European jurisdictions in which we may operate. National
regulations of relevant European and other foreign countries, as well as
policies and regulations on the European Union and other foreign governmental
level, impose separate licensing, service and other conditions on our foreign
joint ventures and our international service operations, and these requirements
may have a material adverse impact on us.
OUR FRANCHISES, LICENSES OR PERMITS COULD BE CANCELED OR NOT RENEWED, WHICH
WOULD IMPAIR THE DEVELOPMENT OF MAJOR MARKETS FOR OUR SERVICES
Termination or non-renewal of our franchise with the city of New York or of
certain other rights-of-way or franchises that we use for our networks would
have a material adverse effect on our business, results of operations and
financial condition. We will also need to obtain additional franchises, licenses
and permits for our planned intracity networks, intercity networks and
international networks. We cannot assure you that we will be able to maintain on
acceptable terms our existing franchises, licenses or permits or to obtain and
maintain the other franchises, licenses or permits needed to implement our
strategy.
S-19
<PAGE>
WE MAY NOT BE ABLE TO OBTAIN AND MAINTAIN THE RIGHTS-OF-WAY AND OTHER PERMITS
NECESSARY TO IMPLEMENT OUR BUSINESS STRATEGY
We must obtain additional rights-of-way and other permits from railroads,
utilities, state highway authorities, local governments and transit authorities
to install underground conduit for the expansion of our intracity networks,
intercity networks and international networks. We cannot assure you that we will
be successful in obtaining and maintaining these right-of-way agreements or
obtaining these agreements on acceptable terms. Some of these agreements may be
short-term or revocable at will, and we cannot assure you that we will continue
to have access to existing rights-of-way after they have expired or terminated.
If any of these agreements were terminated or could not be renewed and we were
forced to remove our fiberoptic cable from under the streets or abandon our
networks, the termination could have a material adverse effect on our
operations. In addition, landowners have asserted that railroad companies and
others to whom they granted easements to their properties are not entitled as a
result of these easements to grant rights of way to telecommunications
providers. If these disputes are resolved in the landowners' favor, we could be
obligated to make substantial lease payments to these landowners for the lease
of these rights of way. More specifically, our New York/New Jersey network
relies upon, and our planned expansions into Long Island and Westchester County
will rely upon, right-of-way agreements with Bell Atlantic Corporation and our
subsidiary, Empire City Subway Company (Ltd.). The current agreements may be
terminated at any time without cause with three months notice. In case of
termination, we may be required to remove our fiber optic cable from the
conduits or poles of Bell Atlantic. This termination would have a material
adverse effect on our operations.
RAPID TECHNOLOGICAL CHANGES COULD AFFECT THE CONTINUED USE OF FIBER OPTIC CABLE
AND OUR RESULTS OF OPERATIONS
The telecommunications industry is subject to rapid and significant changes
in technology that could materially affect the continued use of our services,
including our fiber optic cable and Internet connectivity services. We cannot
predict the effect of technological changes on our business. We also cannot
assure you that technological changes in the communications industry and
Internet-related industry will not have a material adverse effect on our
operations.
WE MAY EXPERIENCE RISKS AS A RESULT OF EXPANDING OUR NETWORKS INTO EUROPEAN AND
OTHER FOREIGN COUNTRIES, WHICH MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
Our strategy includes expanding our services to provide fiber optic cable
and developing regional Internet services exchange facilities in Europe,
particularly Austria, Germany and the United Kingdom. The following are risks we
may experience as a result of doing business in Germany, the United Kingdom and
other foreign countries in which we may expand our networks:
- difficulties in staffing and managing our operations in foreign countries;
- longer payment cycles;
- problems in collecting accounts receivable;
- fluctuations in currency exchange rates;
- delays from customs brokers or government agencies encountered as a result
of exporting fiber from the United States to Germany, the United Kingdom
or other countries in which we may operate; and
- potentially adverse consequences resulting from operating in multiple
countries such as Germany and the United Kingdom, each with their own laws
and regulations, including tax laws and industry related regulations.
S-20
<PAGE>
We cannot assure you that we will be successful in overcoming these risks or
any other problems arising because of expansion into Europe and other foreign
countries.
WE MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY, MANAGE AND ASSIMILATE FUTURE
ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES, WHICH WOULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS
We have in the past, and may in the future, acquire, make investments in, or
enter into strategic alliances, including joint ventures in which we hold less
than a majority interest, with companies which have customer bases, switching
capabilities, existing networks or other assets in our current markets or in
areas into which we intend to expand our networks. Any acquisitions,
investments, strategic alliances or related efforts will be accompanied by risks
such as:
- the difficulty of identifying appropriate acquisition candidates;
- the difficulty of assimilating the operations of the respective entities;
- the potential disruption of our ongoing business;
- the potential inability to control joint ventures in which we hold less
than a majority interest;
- the inability of management to capitalize on the opportunities presented
by acquisitions, investments, strategic alliances or related efforts;
- the failure to successfully incorporate licensed or acquired technology
and rights into our services,
- the inability to maintain uniform standards, controls, procedures and
policies, and
- the impairment of relationships with employees and customers as a result
of changes in management.
We cannot assure you that we would be successful in overcoming these risks
or any other problems encountered with such acquisitions, investments, strategic
alliances or related efforts.
IN THE TELECOMMUNICATIONS INDUSTRY, CONTINUED PRICING PRESSURES FROM OUR
COMPETITORS AND AN EXCESS OF NETWORK CAPACITY CONTINUE TO CAUSE PRICES FOR OUR
SERVICES TO DECLINE
We anticipate that prices for our services specifically, and transmission
services in general, will continue to decline over the next several years due
primarily to the following:
- price competition as various network providers continue to install
networks that might compete with our networks,
- recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber, and
- strategic alliances or similar transactions, such as long distance
capacity purchasing alliances among regional Bell operating companies,
that increase the parties' purchasing power.
S-21
<PAGE>
WE MAY EXPERIENCE ADDITIONAL RISKS AS A RESULT OF ABOVENET'S CO-LOCATION AND
INTERNET CONNECTIVITY SERVICES
The legal landscape that governs AboveNet has yet to be interpreted or
enforced. Regulatory issues for AboveNet's industry include property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy. AboveNet's business may be adversely affected by the
adoption and interpretation of any future or currently existing laws and
regulations. AboveNet has no patented technology and relies on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect certain proprietary rights in its
technology. AboveNet's business may be adversely affected by a claim that it is
infringing the proprietary rights of others.
Despite AboveNet's design and implementation of a variety of network
security measures, unauthorized access, computer viruses, accidental or
intentional action and other disruptions could occur. In addition, we may incur
significant costs to prevent breaches in AboveNet's security or to alleviate
problems caused by those breaches. The law relating to the liability of online
services companies and Internet access providers of information carried on or
disseminated through their networks is currently unsettled. It is possible that
claims could be made against online services companies, co-location companies
and Internet access providers. We may need to implement measures to reduce our
exposure to this potential liability which may require the expenditure of
substantial resources. The increased attention focused upon liability issues as
a result of lawsuits, new laws and legislative proposal could impede the growth
of Internet use.
In addition, some of AboveNet's customers have sent unsolicited commercial
E-mails from servers co-located at its facilities to massive numbers of people.
This practice known as "spamming" can lead to complaints against service
providers that enable such activities, such as AboveNet. In addition,
legislation has recently been passed that prohibits "spamming."
ABOVENET DEPENDS ON THE GROWTH AND PERFORMANCE OF THE INTERNET
AboveNet's success will depend in large part on growth in the use of the
Internet. Growth of the Internet depends on many factors, including security,
reliability, cost, ease of access, quality of service and bandwidth. The recent
growth of the Internet has placed strain on the Internet, necessitating upgrades
to its infrastructure. Any perceived or actual weakening in the performance of
the Internet could undermine AboveNet's services, which are dependent on third
parties. AboveNet's ability to attract new customers similarly depends on a
variety of factors, including the ability to provide continuous service. In
addition, AboveNet's customers might terminate or decide not to renew
commitments to use its services. AboveNet must continue to expand and adapt its
network infrastructure as the number of its users grows, as its users place
increasing demands on it, and as requirements change.
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL THE LOSS OF WHOM COULD
ADVERSELY AFFECT OUR BUSINESS.
Our business is managed by a small number of key management and operating
personnel. We believe that the success of our business strategy and our ability
to operate profitably depend on the continued employment of our senior
management team led by Stephen A. Garofalo, Chief Executive Officer and Chairman
of the Board of Directors. Our business and financial results could be
materially affected if Mr. Garofalo or other members of our senior management
team became unable or unwilling to continue in their present positions.
METROMEDIA COMPANY EFFECTIVELY CONTROLS OUR COMPANY AND HAS THE POWER TO CAUSE
OR PREVENT A CHANGE OF CONTROL
Metromedia Company and one of its general partners currently own 100% of our
class B common stock, which currently represents approximately 63% of the total
voting power and also is entitled to elect
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75% of the members of our board of directors. Accordingly, Metromedia Company is
able to control the board of directors and all stockholder decisions and, in
general, to determine the outcome of any corporate transaction or other matter
submitted to the stockholders for approval, including mergers, consolidations
and the sale of all or substantially all of our assets, without the consent of
our other stockholders. In addition, Metromedia Company has the power to prevent
or cause a change in control of our company.
WE ARE INVOLVED IN A LEGAL PROCEEDING WHICH COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION
We are involved in a legal proceeding in connection with the sale of 900,000
shares (not adjusted for stock splits) of our class A common stock. Please refer
to the section in this prospectus supplement entitled "Business--Legal
Proceedings."
If we are unsuccessful in defending against the allegations made in this
proceeding, an award of the magnitude being sought in this legal proceeding
could have a material adverse effect on our financial condition and results of
operations. We intend to vigorously defend this action because we believe that
we acted appropriately in connection with the matters at issue in this case.
However, we cannot assure you that we will not determine that the advantages of
entering into a settlement outweigh the risk and expense of protracted
litigation or that ultimately we will be successful in defending against these
allegations.
FAILURES TO ADDRESS THE YEAR 2000 PROBLEM MAY CAUSE DISRUPTIONS IN THE OPERATION
OF OUR NETWORKS AND OUR SERVICES TO CUSTOMERS
Many computer systems and software products will not function properly in
the year 2000 and beyond due to a once-common programming standard that
represents years using two digits. This problem is often referred to as the year
2000 problem. It is possible that our currently installed computer systems,
software products or other information technology systems, including imbedded
technology, or those of our suppliers, contractors, or major systems developers
working either alone or in conjunction with other softwares or systems, will not
properly function in the year 2000 because of the year 2000 problem. If we or
our customers, suppliers, contractors, and major systems developers are unable
to address their year 2000 issues in a timely manner, a material adverse effect
on our results of operations and financial condition could result. We are
currently working to evaluate and resolve the potential impact of the year 2000
on our processing of date-sensitive information and network systems. We have
contacted all our significant suppliers, contractors and major systems
developers to determine our vulnerability to their year 2000 situations. We
cannot assure you that the year 2000 problem will only have a minimal cost
impact or that other companies will convert their systems on a timely basis and
that their failure will not have an adverse effect on our systems.
RISK FACTORS RELATING TO THE NOTES
WE ARE A HOLDING COMPANY AND WILL BE DEPENDENT ON THE CASH FLOWS OF OUR
SUBSIDIARIES TO MEET OUR OBLIGATIONS
We are a holding company with little direct operations and little assets of
significance other than the stock of our subsidiaries. As such, we will be
dependent on the cash flows of our subsidiaries to meet our obligations,
including the payment of principal and interest on the notes. Our subsidiaries
are separate legal entities that will have no obligation to pay any amounts due
under the notes or to make any funds available therefor, whether by dividends,
loans or other payments. Our subsidiaries will not guarantee the payment of the
notes. The notes will therefore be effectively subordinated to the claims of the
creditors of our subsidiaries (including trade creditors and holders of
indebtedness of such subsidiaries). We expect that our current and future
subsidiaries will incur significant amounts of equipment financing and other
indebtedness in connection with the development of our networks. Please refer to
the sections in this prospectus supplement entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Business" and "Description of the Notes."
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<PAGE>
THE NOTES WILL BE SUBORDINATED TO ALL OF OUR EXISTING AND FUTURE SECURED AND
SUBSIDIARIES' DEBT
The notes are unsecured and therefore will be effectively subordinated to
all our existing and future secured indebtedness to the extent of the value of
the assets securing such indebtedness and to all of our foreign subsidiaries'
existing or future Indebtedness, whether or not secured. The indenture will
permit us and our subsidiaries to incur an unlimited amount of secured
indebtedness to finance the engineering, construction, installation,
acquisition, lease, development or improvement of telecommunications assets.
Please refer to the section of this prospectus supplement entitled "Description
of the Notes." Consequently, in the event of a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding of our company, our assets
will be available to satisfy obligations of such secured debt before any payment
may be made on the notes. In addition, to the extent such assets cannot satisfy
in full the secured indebtedness, the holders of such indebtedness would have a
claim for any shortfall that would rank equally in right of payment (or
effectively senior if the indebtedness were issued by a subsidiary) with the
notes. Accordingly, there might only be a limited amount of assets available to
satisfy your claims as a holder of the notes upon an acceleration of the
maturity of the notes.
THERE IS NO PUBLIC MARKET FOR THE NOTES
The Dollar notes and the Euro notes will be new securities for which
currently there is no trading market. We intend to apply to have the Dollar
notes and the Euro notes listed on the Luxembourg Stock Exchange. There is no
assurance, however, that the notes will qualify for listing on the Luxembourg
Stock Exchange. The underwriters have informed us that they currently intend to
make a market in the Dollar notes and the Euro notes. However, the underwriters
are not obligated to do so and may discontinue any such market making at any
time without notice. The liquidity of any market for the Dollar notes and the
Euro notes will depend upon the number of holders of the Dollar notes and the
Euro notes, the interest of securities dealers in making a market for the Dollar
notes and the Euro notes and other factors. Accordingly, we cannot assure you
that a market or liquidity will develop for the Dollar notes and the Euro notes.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the notes. We cannot assure you that the market for the notes, if
any, will not be subject to similar disruptions. Any such disruptions may
adversely affect you as a holder of the notes.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus supplement under the
sections entitled "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. They include
statements about our expectations, beliefs, plans, objectives, assumptions or
future events or performance. These statements are often, but not always, made
through the use of words or phrases such as "will likely result," "expect,"
"will continue," "anticipate," "estimate," "intends," "plan," "projection,"
"would," and "outlook." These forward-looking statements are based on our
expectations and are subject to a number of risks and uncertainties. Certain of
these risks and uncertainties are beyond our control. In this prospectus
supplement, we have described our current network and our anticipated program of
network expansion. However, there is no assurance that we will be able to
implement our proposed business strategy. Our actual results may differ
materially from those suggested by these forward-looking statements for various
reasons, including those discussed under the sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Some of the key factors that have a direct bearing
on our results of operations are:
- general economic and business conditions;
- competition in the telecommunications industry;
S-24
<PAGE>
- industry capacity;
- success of acquisitions and operating initiatives, including our ability
to successfully integrate our acquisitions;
- management of growth;
- dependence on senior management;
- brand awareness;
- general risks of the telecommunications industries;
- development risks;
- risks relating to the availability of financing;
- the existence or absence of adverse publicity;
- changes in business strategy or development plans;
- 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;
- costs and other effects of legal and administrative proceedings;
- changes in marketing and technology; and
- changes in political, social and economic conditions, especially with
respect to our foreign operations, and other factors referenced in this
prospectus supplement.
These factors and the risk factors referred to above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements made by us. You should not place undue reliance on
any such forward-looking statements. Further, any forward-looking statement
speaks only as of the date on which it is made and we undertake no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time, and it
is not possible for us to predict which will arise. In addition, we cannot
assess the impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
For a discussion of important risks of an investment in our securities,
including factors that could cause actual results to differ materially from
results referred to in the forward-looking statements, see "Risk Factors." You
should carefully consider the information set forth under the caption "Risk
Factors." In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in or incorporated by reference in this
prospectus supplement might not occur.
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<PAGE>
USE OF PROCEEDS
We estimate that we will receive approximately $ in net proceeds from
the sale of the notes in the offering, after we deduct the underwriters'
discounts and commissions and an estimated $ in expenses payable by us. We
intend to use the net proceeds of the offering for the build-out of our
intra-city and inter-city networks in the United States and Europe and for other
capital expenditures, including possible acquisitions of other companies or
assets. We currently intend to allocate substantial proceeds to each of these
uses. Please refer to the section in this prospectus supplement entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
Pending application of the net proceeds of the offering of the notes, we
will place the net proceeds in interest bearing bank accounts or invest the net
proceeds in United States government securities or other short-term, interest
bearing, investment grade securities.
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<PAGE>
CAPITALIZATION
The following table shows our capitalization as of June 30, 1999:
- on a historical basis;
- on a pro forma basis to reflect our acquisition of AboveNet, as if this
acquisition had been consummated on June 30, 1999;
- on a pro forma basis to reflect the transaction described above and the
offering of the notes sold by us, as if they had been consummated on
June 30, 1999; and
- on a pro forma basis to reflect the transactions described above and the
purchase by Bell Atlantic of shares of our class A common stock and the
convertible subordinated note, which has not yet been consummated and is
subject to customary closing conditions, as if they had been consummated
on June 30, 1999.
You should read this table together with the consolidated financial
statements and related notes of our company, AboveNet and Palo Alto Internet
Exchange included in this prospectus supplement beginning on page F-1 and the
information in the sections entitled "Risk Factors--Failure to Consummate the
Bell Atlantic Transactions May Cause Us to Seek Alternative Financing,"
"Unaudited Pro Forma Condensed Combining Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------------------------------------
PRO FORMA FOR
PRO FORMA FOR PRO FORMA BELL ATLANTIC
ACTUAL ABOVENET ACQUISITION FOR THE OFFERING INVESTMENT
-------- -------------------- ---------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $341,897 $ 537,768 $1,117,768 $2,808,676
======== ========== ========== ==========
Pledged securities (1)..................... $ 63,142 $ 63,142 $ 63,142 $ 63,142
======== ========== ========== ==========
Debt:
Capital lease obligations less current
portion................................ $ 23,202 $ 28,375 $ 28,375 $ 28,375
New credit facility (2).................. -- -- -- --
10% Senior Notes due 2008................ 650,000 650,000 650,000 650,000
Senior Notes due 2009 offered by this
prospectus supplement.................. -- -- 600,000 600,000
6.15% Convertible Subordinated Note to be
issued to Bell Atlantic................ -- -- -- 975,281
Other less current portion............... -- 16,416 16,416 16,416
-------- ---------- ---------- ----------
Total debt............................... 673,202 694,791 1,294,791 2,270,072
-------- ---------- ---------- ----------
Stockholders' equity
Class A common stock, $.01 par value;
2,404,031,240 shares authorized;
156,293,412 shares issued and
outstanding, actual; and 197,887,552
shares issued and outstanding, pro
forma for AboveNet acquisition and
pro forma for the offering;
223,442,661 shares issued and
outstanding, pro forma for Bell
Atlantic investment.................. 1,563 1,979 1,979 2,235
</TABLE>
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<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------------------------------------
PRO FORMA FOR
PRO FORMA FOR PRO FORMA BELL ATLANTIC
ACTUAL ABOVENET ACQUISITION FOR THE OFFERING INVESTMENT
-------- -------------------- ---------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Class B common stock, $.01 par value;
522,254,782 shares authorized;
33,769,272 shares issued and
outstanding, actual and pro forma for
AboveNet acquisition, pro forma for
the offering and pro forma for Bell
Atlantic investment.................. 338 338 338 338
Additional paid-in capital................. 200,370 1,977,618 1,977,618 2,692,989
Accumulated deficit........................ (54,515) (54,515) (54,515) (54,515)
Cumulative comprehensive loss.............. (4,967) (4,967) (4,967) (4,967)
-------- ---------- ---------- ----------
Total stockholders' equity........... 142,789 1,920,453 1,920,453 2,636,080
-------- ---------- ---------- ----------
Total capitalization....................... $815,991 $2,615,244 $3,215,244 $4,906,152
======== ========== ========== ==========
</TABLE>
- ------------------------
(1) Represents amounts deposited with the security agent pursuant to a security
agreement to make payments of interest through May 15, 2000 on our 10%
Senior Notes due 2008.
(2) We have obtained a commitment from a lender for a senior secured credit
facility which provides for a maximum amount of $150.0 million. We
anticipate that we will not consummate the new credit facility
simultaneously with the consummation of the offering of the notes. For a
description of the new credit facility, please refer to the section in this
prospectus supplement entitled "Description of the New Credit Facility."
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data presented below and for the years
ended December 31, 1996, 1997 and 1998 have been derived from our consolidated
financial statements and the related notes included in this prospectus
supplement beginning on page F-1. Our consolidated financial statements as of
and for the years ended December 31, 1996, 1997 and 1998 have been audited by
Ernst & Young LLP, independent auditors. The selected financial data presented
below as of and for the years ended December 31, 1994 and 1995 have been derived
from our audited financial statements which are not included in this prospectus
supplement. The selected consolidated financial data and balance sheet data as
of and for the six months ended June 30, 1999 and the selected consolidated
financial data for the six months ended June 30, 1998 have been derived from our
unaudited consolidated financial statements, which we believe include all
adjustments necessary for a fair presentation of the financial condition and
results of operations for such periods. The results of operations for interim
periods are not necessarily indicative of the results for a full year's
operations.
The selected unaudited pro forma balance sheet as of June 30, 1999 gives pro
forma effect to the following transactions:
- our acquisition of AboveNet, as if it had been consummated on June 30,
1999;
- the transaction referred to above and the offering of the notes, as if
they had been consummated on June 30, 1999; and
- the transactions referred to above and the purchase by Bell Atlantic of
shares of our class A common stock and the convertible subordinated note,
which purchase has not yet been consummated and is subject to customary
closing conditions, as if they had been consummated on June 30, 1999.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable at the time made. The selected
unaudited pro forma balance sheet data does not purport to present our financial
position had the transactions occurred on the dates specified, nor are they
necessarily indicative of the financial position that may be achieved in the
future.
As you read the selected consolidated financial data, please refer to the
following: "Risk Factors--Failure to Consummate the Bell Atlantic Transactions
Cause Us to Seek Alternative Financing," "Unaudited Pro Forma Condensed
Combining Financial Information," "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business," the
consolidated
S-29
<PAGE>
financial statements and the related notes of our company, AboveNet and Palo
Alto Internet Exchange and the other financial data appearing in this prospectus
supplement.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ -- $ 56 $ 236 $ 2,524 $ 36,436 $ 9,133 $ 38,673
Expenses:
Cost of sales................................ -- -- 699 3,572 13,937 4,553 14,819
Selling, general and administrative.......... 874 3,886 2,070 6,303 14,712 5,914 13,786
Depreciation and amortization................ -- 162 613 757 1,532 440 5,058
Consulting and employment incentives......... -- -- 3,652 19,218 3,648 3,595 --
------- ------- -------- -------- -------- ------- --------
(Loss) Income from operations.................. (874) (3,992) (6,798) (27,326) 2,607 (5,369) 5,010
Interest income (expense), net................. -- (327) (3,561) 1,067 1,927 3,564 (16,895)
(Loss) from joint venture...................... -- -- -- -- (146) (251) (393)
Income taxes................................... -- -- -- -- 3,402 -- --
------- ------- -------- -------- -------- ------- --------
Net (loss) income.............................. $ (874) $(4,319) $(10,359) $(26,259) $ 986 $(2,056) $(12,278)
======= ======= ======== ======== ======== ======= ========
Net (loss) income applicable to common
stockholders per share........................ $ (0.02) $ (0.09) $ (0.14) $ (0.28) $ 0.01 $ (0.01) $ (0.06)
======= ======= ======== ======== ======== ======= ========
Weighted average number of shares
outstanding................................... 46,672 49,658 71,716 94,894 186,990 185,616 189,098
======= ======= ======== ======== ======== ======= ========
Ratio of earnings to fixed charges (1)......... -- -- -- -- 1.61 -- --
EBITDA (2)..................................... $ (874) $(3,830) $ (6,185) $(26,569) $ 3,993 $(5,180) $ 9,675
Adjusted EBITDA (2)............................ $ (874) $(3,830) $ (2,533) $ (7,351) $ 7,641 $(1,585) $ 9,675
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-------------------------------------------------------------
PRO FORMA
FOR PRO FORMA FOR
ABOVENET PRO FORMA FOR BELL ATLANTIC
ACTUAL ACQUISITION THE OFFERING INVESTMENT
------------- ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................. $ 341,897 $ 537,768 $1,117,768 $2,808,676
Pledged securities (3)............................... 63,142 63,142 63,142 63,142
Property and equipment, net.......................... 421,712 481,208 481,208 481,208
Total assets......................................... 1,034,694 2,882,533 3,482,533 5,173,441
Long-term debt....................................... 673,202 694,791 1,294,791 2,270,072
Total liabilities.................................... 891,905 962,080 1,562,080 2,537,361
Stockholders' equity................................. 142,789 1,920,453 1,920,453 2,636,080
</TABLE>
(1) Earnings were insufficient to cover fixed charges in the years ended
December 31, 1994, 1995, 1996 and 1997 and for the six months ended
June 30, 1998 and 1999. The deficiency was $874,000, $4,319,000,
$10,359,000, $26,259,000, $2,056,000, and $12,278,000 for the periods ended
December 31, 1994, 1995, 1996, and 1997 and for the six months ended
June 30, 1998 and 1999, respectively.
(2) "EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense and all depreciation and amortization expense. "Adjusted
EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense, depreciation and amortization and non cash employment and
consulting incentives and settlements. You should not think of EBITDA and
Adjusted EBITDA as alternative measures of operating results or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles). We have included EBITDA and Adjusted EBITDA
because they are widely used financial measures of the potential capacity of
a company to incur and service debt. Our reported EBITDA and Adjusted EBITDA
may not be comparable to similarly titled measures used by other companies.
(3) Represents amounts deposited with the security agent pursuant to a security
agreement to make payments of interest through May 15, 2000 on our 10%
Senior Notes due 2008.
S-30
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
The following unaudited pro forma condensed combining financial information
illustrates the effect of the merger of AboveNet with our wholly-owned
subsidiary under the terms of the merger agreement, dated June 22, 1999. Under
the terms of the merger agreement, the holders of AboveNet common stock received
1.175 shares of our class A common stock for each share of AboveNet common
stock. The share price used to determine the acquisition cost was derived from
taking the average of the closing price of our class A common stock for the two
days prior to and subsequent to the announcement of the proposed merger, which
was June 23, 1999.
On June 21, 1999, AboveNet acquired the assets and assumed obligations
related to the Palo Alto Internet Exchange from Compaq Computer Corporation
("Compaq") for approximately $76.5 million, consisting of $70 million in cash,
an obligation to provide various services to Compaq with a value currently
estimated to be approximately $5 million and expenses of approximately
$1.5 million.
The unaudited pro forma condensed combining financial information presented
herein gives effect to our acquisition of AboveNet and AboveNet's acquisition of
Palo Alto Internet Exchange. The unaudited pro forma condensed combining
financial information is based on the historical financial statements of
Metromedia, AboveNet and Palo Alto Internet Exchange.
AboveNet has a fiscal year end of June 30. The unaudited historical
financial information for AboveNet for the year ended December 31, 1998 consists
of the period from January 1, 1998 to June 30, 1998 combined with the period
from July 1, 1998 to December 31, 1998 derived from AboveNet's historical
unaudited financial statements.
The unaudited pro forma condensed combining statements of operations for the
six months ended June 30, 1999 and for the year ended December 31, 1998 give
effect to the above transactions as if they had been consummated on January 1,
1998. The unaudited pro forma condensed combining balance sheets, as of
June 30, 1999, give effect to our acquisition of AboveNet as if it had been
consummated on June 30, 1999.
ACCOUNTING TREATMENT
We plan to record the acquisition of AboveNet using the purchase method of
accounting. Accordingly, the assets acquired and liabilities assumed will be
recorded at their estimated fair values, which are subject to further adjustment
based upon appraisals and other analyses.
AboveNet recorded the acquisition of Palo Alto Internet Exchange using the
purchase method of accounting. Accordingly, the assets acquired and obligations
assumed have been recorded at their estimated fair values, which are subject to
further adjustments based upon appraisals and other analyses.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable at the time made. The unaudited pro
forma condensed combining financial statements do not purport to present our
financial position or results of operations had the acquisitions occurred on the
dates specified, nor are they necessarily indicative of the financial position
or results of operations that may be achieved in the future. The unaudited pro
forma condensed combining statements of operations do not reflect any
adjustments for synergies that we expect to realize following consummation of
the acquisitions. No assurances can be made as to the amount of cost savings or
revenue enhancements, if any, that may be realized.
The unaudited pro forma condensed combining financial statements should be
read in conjunction with the consolidated financial statements and notes of our
company, AboveNet and Palo Alto Internet Exchange.
S-31
<PAGE>
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
METROMEDIA METROMEDIA
ABOVENET PAIX PRO FORMA FIBER FIBER
HISTORICAL HISTORICAL ADJUSTMENTS ABOVENET HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 9,522 $3,171 $ -- $ 12,693 $ 38,673 $ -- $ 51,366
Expenses:
Cost of sales........... 13,882 2,013 -- 15,895 14,819 -- 30,714
Selling, general and
administrative........ 12,309 301 -- 12,610 13,786 -- 26,396
Consulting and
employment
incentives............ 519 -- -- 519 -- -- 519
Depreciation and 3,485 (1) (3,485)(2)
amortization.......... 2,209 1,696 (1,696)(1) 5,694 5,058 38,335 (3) 45,602
-------- ------ ------- -------- -------- -------- --------
Income (loss) from
operations............ (19,397) (839) (1,789) (22,025) 5,010 (34,850) (51,865)
Other income (expense):
Interest income......... 2,665 -- -- 2,665 13,512 -- 16,177
Interest expense........ (1,080) -- -- (1,080) (30,407) -- (31,487)
Loss in joint venture... (200) -- -- (200) (393) -- (593)
-------- ------ ------- -------- -------- -------- --------
Net loss before income
taxes................. (18,012) (839) (1,789) (20,640) (12,278) (34,850) (67,768)
Income taxes............ -- -- -- -- -- -- --
-------- ------ ------- -------- -------- -------- --------
Net loss................ $(18,012) $ (839) $(1,789) $(20,640) $(12,278) $(34,850) $(67,768)
======== ====== ======= ======== ======== ======== ========
Net loss per
share--basic.......... $ (0.06) $ (0.29)
======== ========
Net loss per share--
diluted............... n/a n/a
======== ========
Weighted average number
of shares
outstanding--basic
(4)................... 189,098 230,692
======== ========
Weighted average number
of shares
outstanding--
diluted............... n/a n/a
======== ========
</TABLE>
(SEE THE ACCOMPANYING NOTES ON PAGE S-36)
S-32
<PAGE>
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
METROMEDIA METROMEDIA
ABOVENET PAIX PRO FORMA FIBER FIBER
HISTORICAL HISTORICAL ADJUSTMENTS ABOVENET HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................... $ 6,777 $ 4,362 $ -- $ 11,139 $36,436 $ -- $ 47,575
Expenses:
Cost of sales..................... 7,551 2,583 -- 10,134 13,937 -- 24,071
Selling, general and
administrative.................. 7,843 450 -- 8,293 14,712 -- 23,005
Consulting and employment
incentives...................... 2,396 -- -- 2,396 3,648 -- 6,044
(1,944)(1) (6,970)(2)
Depreciation and amortization..... 1,497 2,349 6,970 (1) 8,872 1,532 76,671 (3) 80,105
-------- ------- ------- -------- ------- -------- --------
Income (loss) from operations..... (12,510) (1,020) (5,026) (18,556) 2,607 (69,701) (85,650)
Other income (expense):
Interest income................... 337 -- -- 337 8,788 -- 9,125
Interest expense.................. (529) -- -- (529) (6,861) -- (7,390)
Loss in joint venture............. -- -- -- -- (146) -- (146)
-------- ------- ------- -------- ------- -------- --------
Net income (loss) before income
taxes........................... (12,702) (1,020) (5,026) (18,748) 4,388 (69,701) (84,061)
Income taxes...................... -- -- -- -- 3,402 (3,402)(5) --
-------- ------- ------- -------- ------- -------- --------
Net income (loss)................. $(12,702) $(1,020) $(5,026) $(18,748) $ 986 $(66,299) $(84,061)
======== ======= ======= ======== ======= ======== ========
Net income (loss) per share --
basic........................... $ 0.01 $ (0.37)
======= ========
Net income (loss) per share --
diluted......................... 0.01 n/a
======= ========
Weighted average number of shares
outstanding -- basic(4)......... 186,990 228,584
======= ========
Weighted average number of shares
outstanding -- diluted.......... 219,524 n/a
======= ========
</TABLE>
(SEE THE ACCOMPANYING NOTES ON PAGE S-36)
S-33
<PAGE>
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEETS
(UNAUDITED)
JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
METROMEDIA METROMEDIA
ABOVENET FIBER FIBER
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $220,871 $ 341,897 $ (25,000)(2) $ 537,768
Short-term investments..................... -- 19,716 -- 19,716
Pledged securities......................... -- 63,142 -- 63,142
Accounts receivable........................ 3,355 86,258 -- 89,613
Other current assets....................... 3,850 2,761 -- 6,611
-------- ---------- ---------- ----------
Total current assets......................... 228,076 513,774 (25,000) 716,850
Fiber optic transmission network and related
equipment, net............................. 12,905 417,803 -- 430,708
Property and equipment, net.................. 46,591 3,909 -- 50,500
Restricted cash.............................. 21,476 51,920 25,000 (2) 98,396
Other assets................................. 5,377 47,288 -- 52,665
Intangible assets............................ 69,474 -- (69,474)(2) 1,533,414
1,533,414 (2)
-------- ---------- ---------- ----------
Total assets................................. $383,899 $1,034,694 $1,463,940 $2,882,533
======== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 13,593 $ 7,276 $ -- $ 20,869
Accrued expenses........................... 2,122 134,736 20,000(2) 156,858
Current portion of deferred revenue........ 2,511 8,106 -- 10,617
Current portion of long-term obligations... 5,985 55 -- 6,040
-------- ---------- ---------- ----------
Total current liabilities.................... 24,211 150,173 20,000 194,384
Deferred revenue............................. 4,375 68,530 -- 72,905
Notes payable................................ -- 650,000 -- 650,000
Capital lease obligation, net of current
portion.................................... 5,173 23,202 -- 28,375
Long-term obligations........................ 16,416 -- -- 16,416
Total stockholders' equity................... 333,724 142,789 1,443,940 (2) 1,920,453
-------- ---------- ---------- ----------
Total liabilities and stockholders' equity... $383,899 $1,034,694 $1,463,940 $2,882,533
======== ========== ========== ==========
</TABLE>
(SEE THE ACCOMPANYING NOTES ON PAGE S-36)
S-34
<PAGE>
METROMEDIA FIBER NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
(1) Reflects adjustments related to the acquisition by AboveNet of Palo Alto
Internet Exchange at January 1, 1998 for the income statements as follows:
(i) the elimination of Palo Alto Internet Exchange historical intangible
asset amortization; and
(ii) the addition of amortization of the excess of cost over net tangible
assets acquired of Palo Alto Internet Exchange ($69.7 million) over
10 years.
(2) Reflects our acquisition of AboveNet at June 30, 1999 for the balance sheet
and January 1, 1998 for the income statements as follows:
(i) the issuance of approximately 41.6 million shares of our class A common
stock in exchange for shares of AboveNet common stock at a ratio of
1.175;
(ii) the placement of cash into a restricted account to secure AboveNet's
renegotiated credit facility;
(iii) the elimination of AboveNet's historical net tangible assets acquired;
and
(iv) issuance of shares of our class A common stock:
<TABLE>
<S> <C> <C>
Number of shares issued to acquire AboveNet..... 41,594,140
Per share price of stock........................ $ 40.36
----------
Value of shares issued.......................... $1,678,739,000
Value of our company's options and warrants
issued in exchange for AboveNet's options and
warrants....................................... 98,925,000
Transaction costs............................... 20,000,000
--------------
Total acquisition cost.......................... 1,797,664,000
AboveNet's net tangible assets acquired......... 264,250,000
--------------
Excess of cost over net tangible assets
acquired....................................... $1,533,414,000
==============
</TABLE>
We have made a preliminary allocation to intangible assets of excess cost
over estimated net tangible assets acquired as AboveNet's tangible assets
and liabilities are estimated to approximate fair value. However, there can
be no assurance that the actual allocation will not differ significantly
from the pro forma allocation.
(3) Reflects amortization of the excess of cost over net tangible assets
acquired in the merger by use of the straight-line method over 20 years.
(4) The average common shares outstanding used in calculating pro forma loss per
common share are calculated assuming that the estimated number of shares of
our class A common stock to be issued in the merger were outstanding from
the beginning of the periods presented.
(5) Reflects the adjustment of the tax provision.
S-35
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING INFORMATION TOGETHER WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED IN THIS PROSPECTUS
SUPPLEMENT BEGINNING ON PAGE F-1. CERTAIN STATEMENTS IN THIS SECTION ARE
"FORWARD-LOOKING STATEMENTS." YOU SHOULD READ THE INFORMATION UNDER "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS" FOR SPECIAL INFORMATION ABOUT OUR
PRESENTATION OF FORWARD-LOOKING INFORMATION.
GENERAL
We provide dedicated fiber optic infrastructure and high-bandwidth Internet
connectivity for our communications intensive customers. We are a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through our acquisition of
AboveNet, we also provide "one-hop" connectivity that enables mission critical
Internet applications to thrive, as well as high-bandwidth infrastructure,
including managed co-location services.
We currently have operations in, or under construction in, eleven Tier I
cities throughout the United States and seven selected international markets. We
intend to expand our presence to include approximately 50 Tier I and Tier II
markets in the United States and 17 major international markets.
Our existing intra-city networks consist of approximately 334,000 fiber
miles covering 680 route miles in six of our announced markets. Our inter-city
network consists of approximately 110,000 fiber miles covering 255 route miles
that we have built between New York City and Washington, D.C. We have also built
or acquired (primarily through fiber swaps) a nationwide dark fiber network
linking our intra-city networks.
In February 1999, we entered into an agreement with Viatel, Inc. and
Carrier 1 Holdings, Ltd. to jointly build a dark fiber inter-city network among
selected cities throughout Germany. Once completed, our German network will
consist of approximately 291,000 fiber miles covering 1,350 route miles
connecting 14 major cities. We have also swapped strands of fiber in the United
States for strands of fiber on the Circe network, which connects a number of
European markets. In addition to our inter-city networks, we are constructing 16
intra-city networks throughout Europe. Separately, we have also entered into a
contract to acquire dark fiber network facilities in Toronto, Canada.
On September 8, 1999, we consummated the merger between our wholly-owned
subsidiary and AboveNet. The holders of AboveNet common stock received 1.175
shares of our class A common stock for each share of AboveNet common stock.
AboveNet is a leading provider of facilities-based, managed services for
customer-owned Web servers and related equipment, known as co-location, and high
performance Internet connectivity solutions for electronic commerce and other
business critical Internet operations.
On October 7, 1999, we entered into a securities purchase agreement with
Bell Atlantic, under which Bell Atlantic would purchase up to approximately
25.6 million newly issued shares of our class A common stock at a purchase price
of $28.00 per share and a convertible subordinated note of approximately
$975.3 million, which is convertible into shares of our class A common stock at
a conversion price of $34.00 per share. We expect this transaction, which is
subject to customary closing conditions, to be completed by the end of the first
quarter of 2000. Assuming the issuance of the 25.6 million shares of class A
common stock and conversion of the convertible subordinated note, this
investment would represent 19.9% of our outstanding shares. Bell Atlantic has
also agreed to pay us $550 million over the next three years in exchange for
delivery of fiber optic facilities over the next five years. The proceeds from
these two transactions will be used to fund the expansion of our network.
Most of our contracts are operating leases under which we recognize
recurring monthly revenues. Under other contracts we recognize revenue from the
sale of fiber. Effective June 30, 1999, the Financial
S-36
<PAGE>
Accounting Standards Board issued FASB Interpretation No. 43 "Real Estate Sales"
("FIN 43") which requires that sales of integral equipment be accounted for in
accordance with real estate accounting rules. We believe that the SEC may
classify dark fiber cables in the ground as integral equipment as defined in
FIN 43. This change in the accounting for dark fiber sales would not change any
of the economics of the contracts. It would require us, however, to recognize
the revenue from some sales contracts as operating leases over the term of the
contract as opposed to the current method of recognizing revenue during the
period over which we deliver the fiber. As a result, this change in accounting
treatment would reduce the revenue and income that we would recognize in the
earlier years of the contract and spread it out over the life of the contract
regardless of when the cash was received or the delivery of the fiber took
place.
By way of example, if we enter into an agreement for a 25 year lease for
dark fiber with a customer who pays $100.0 million in cash when the contract is
signed, we previously would have recorded average revenues of $20.0 million over
the 5 years during which we delivered the dark fiber. By contrast, if we are
required to use real estate accounting rules in accordance with FIN 43, although
we would receive a cash payment of $100 million when the contract is signed, we
might be required to recognize revenue of $4.0 million per year over the 25 year
term of the contract.
STOCK SPLITS
On August 28, 1998, December 22, 1998, and May 19, 1999, we completed
two-for-one stock splits of our class A common stock and class B common stock in
the form of 100 percent stock dividends to all stockholders of record as of
specified dates.
All share and per share amounts presented herein give retroactive effect to
the stock dividends. As of October 26, 1999, adjusted for the effect of the
stock dividends, we had 198,999,336 shares of class A common stock outstanding
and 33,769,272 shares of class B common stock outstanding.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
(HISTORICAL)
REVENUES. Revenues for the six months ended June 30, 1999 were $38.7
million or 325% greater than revenues of $9.1 million for the same period in
1998. The increase for the six months ended June 30, 1999, compared with the six
months ended June 30, 1998, reflected higher revenues associated with
commencement of service to an increased total number of customers, as well as
revenue recognized related to capital leases of portions of our network and
sales of portions of our network through joint-build agreements.
COST OF SALES. Cost of sales for the six months ending June 30, 1999 was
$14.8 million or greater than a 222% increase over cost of sales of $4.6 million
for the same period in 1998. Cost of sales increased due to costs associated
with the commencement of service to customers, as well as higher fixed costs
associated with the build-out of our network. Cost of sales as percentages of
revenues for the first six months of 1999 and 1998 were 38% and 50%
respectively, declining as a result of the significant increase in the number of
customers and revenues associated with those customers, coupled with a slower
growth in costs associated with these revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended June 30, 1999 were $13.8
million or 134% greater than selling, general and administrative expenses of
$5.9 million for the same period in 1998. The increase in selling, general and
administrative expenses resulted primarily from increased overhead to
accommodate our network expansion. As a percentage of revenue, selling, general
and administrative expenses decreased to 36% of revenue for the six months ended
June 30, 1999, from 65% for the comparable period in 1998.
S-37
<PAGE>
SETTLEMENT AGREEMENT. We recorded $3.4 million for a settlement agreement
in the six months ended June 30, 1998. The amount represented the expense
associated with the issuance of stock options and payment of cash related to a
settlement agreement.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the six
months ended June 30, 1999 was $5.1 million or 1175% greater than depreciation
and amortization of $0.4 million for the same period ended June 30, 1998. The
increase in depreciation and amortization expense resulted from increased
investment in our completed fiber optic network and additional property and
equipment acquired.
INCOME (LOSS) FROM OPERATIONS. Income from operations for the six months
ended June 30, 1999, income from operations was $5.0 million, or a $10.4 million
improvement over the $5.4 million loss for the comparable period in 1998. The
improvement in income from operations for the six month period over the previous
year was attributable to the increase in revenue as well as a reduction, as a
percentage of sales, in cost of goods sold, selling, general and administrative
expenses and depreciation. In addition, the 1998 amount included the settlement
agreement, mentioned above.
INTEREST INCOME. Interest income for the six months ended June 30, 1999 was
$13.5 million or 275% greater than interest income of $3.6 million for the same
period in 1998. Interest income increased in the period as a result of the
investment of our excess cash received as proceeds from the issuance and sale of
our 10% senior notes in November 1998.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 1999
was $30.4 million, compared with $12,000 during the same period of 1998. The
increase in interest expense reflects the cost of additional debt acquired
related to the issuance and sale of 10% senior notes in November 1998.
LOSS FROM JOINT VENTURE. For the six months ended June 30, 1999 we recorded
a $0.4 million loss from joint venture compared to $0.3 million loss for the
same period in 1998.
NET LOSS. Net loss for the six months ended June 30, 1999 was $12.3 million
or 486% greater than a net loss of $2.1 million for the same period in 1998. For
the six months ended June 30, 1999 and 1998, the basic net loss per share, after
the stock split, was $0.06 and $0.01, respectively. The net losses were
primarily attributable to the increase in net interest expense related to the
issuance and sale of our 10% senior notes in November 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for 1998 were $36.4 million or 1,356% greater than
revenues of $2.5 million for 1997. The increase in revenue for 1998 versus 1997
reflected higher revenues associated with commencement of service to an
increased total number of customers, as well as revenue recognized related to
grants of indefeasible rights of use to portions of our network and sales of
dark fiber classified as sales type leases.
COST OF SALES. Cost of sales was $13.9 million in 1998, a 286% increase
over cost of sales of $3.6 million in 1997. Cost of sales increased for 1998 as
compared to 1997 due to costs associated with the commencement of service to
customers, higher fixed costs associated with the operation of our network in
service and the allocated costs of the network related to revenue recognized for
grants of indefeasible rights of use to portions of our network and sales type
leases of portions of our dark fiber classified as capital leases. Costs of
sales, as percentages of revenue for 1998 and 1997 were 38% and 142%,
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 for 1998 were $14.7 million or 133% greater than
selling, general and administrative expenses of $6.3 million during 1997. The
increase in selling, general and administrative expenses for 1998 as compared to
1997 resulted primarily from increased overhead to accommodate our network
expansion.
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CONSULTING AND EMPLOYMENT INCENTIVES EXPENSE. Consulting and employment
incentives expense for 1998 were $0.2 million compared with $19.2 million for
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 1998, the amount recorded reflects
amortization for the unvested component of options issued in 1997 to key
employees.
SETTLEMENT AGREEMENT. We recorded $3.4 million for a settlement agreement
in 1998. The amount was recorded in the first quarter of 1998 for the expense
associated with the issuance of stock options and payment of cash related to a
settlement agreement.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for 1998 was $1.5 million or 88% greater than depreciation and
amortization expense of $0.8 million during 1997. The increases in depreciation
and amortization expense resulted from increased investment in our completed
fiber optic network and property and equipment.
INTEREST INCOME (EXPENSE). Interest income for 1998 was $8.8 million or
389% greater than interest income of $1.8 million during 1997. Interest income
during 1998 was derived from investment of our excess cash received as proceeds
from our initial public offering in October 1997 and the additional cash
received in November 1998 from the proceeds of our $650 million note issuance.
Interest expense increased in 1998 to $6.9 million as compared to $0.7 million
for 1997. The increase in interest expense reflects interest accrued for the
senior notes issued in November 1998.
INCOME (LOSS) FROM JOINT VENTURE. We recorded a $0.1 million loss from our
50% share of the ION joint venture's loss for 1998. The loss primarily
represents startup costs and operating activities for the joint venture.
INCOME TAXES. We recorded a provision for income taxes for 1998 in the
amount of $3.4 million. This represents an estimated effective tax rate, for
federal and state taxes, of 77.5%.
NET INCOME (LOSS). Net income was $1.0 million for 1998, as compared to a
net loss of $26.3 million for 1997. For 1998, basic net income per share was
$0.01 as compared to a basic net loss per share of $0.28 for 1997. On a diluted
basis, net income per share for 1998 was $0.01.
The improvements in results for 1998 were primarily attributable to the
growth of revenues and the improvements in gross margins, as noted above, as
well as the increase in net interest income related to the investment made by
Metromedia Company and the funds raised through our initial public offering as
compared to net interest expense.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues for 1997 were $2.5 million, a 1,150% increase as
compared to 1996 revenues of $0.2 million. The revenue increase was generated by
one-time revenues associated with commencement of services to customers as well
as increased recurring lease revenues, which reflects the growth in the number
of our customers.
COST OF SALES. Cost of sales for 1997 was $3.6 million, an increase of 414%
as compared to the $0.7 million that was recorded as cost of sales in 1996. The
increase in cost of sales was associated with the increased revenues. Cost of
sales as a percentage of revenues improved to 142% in 1997 from 296% in 1996.
The improvement in cost of sales as a percentage of revenues reflects the
increases in revenue outdistancing the increases in cost, as the components of
cost were mostly of a fixed nature.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1997 was $6.3 million or 200% greater than selling,
general and administrative expenses of $2.1 million in 1996. This increase
resulted primarily from increased legal expenses as a result of our increased
business activities and the increased staffing to accommodate our anticipated
growth.
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CONSULTING AND EMPLOYMENT INCENTIVES EXPENSE. Consulting and employment
incentives expense for 1997 was $19.2 million or 419% greater than consulting
and employment incentives expenses of $3.7 million in 1996. The 1997 expense
represents the value of stock options issued to key employees, officers,
directors and consultants in order to attract or retain their services. The
amount recorded in 1996 reflects the expense associated with issuance of stock
and warrants to consultants in consideration for services rendered.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense was $0.8 million in 1997 as compared to $0.6 million in 1996. The
increase in depreciation and amortization expense resulted from increased
investment in our fiber optic network.
INTEREST INCOME (EXPENSE). We had interest income of $1.8 million in 1997
as compared to no interest income during 1996. The interest income in 1997 arose
from the investment of our excess cash during the year. In 1996, we had no
excess cash to invest and, accordingly, earned no interest income. Interest
expense (including financing costs) decreased in 1997 to $0.7 million from $3.6
million in 1996. The decrease in interest expense reflects the repayment of all
of our debt during the year with the proceeds of the investment made by
Metromedia Company, as well as lower financing costs.
NET LOSS. We recorded a net loss of $26.3 million in 1997 as compared to a
net loss of $10.4 million in 1996. The increase in the net loss was primarily
attributable to costs associated with organizing to meet our growth objectives.
In particular, such costs include the consulting and employment incentive,
described above, to attract and retain key employees, officers and directors, as
well as increased overhead to meet our growth objectives.
LIQUIDITY AND CAPITAL RESOURCES
Our initial public offering, on October 28, 1997, of 72,864,000 shares of
class A common stock generated net proceeds of $133.9 million, after deducting
the underwriters' commission and expenses relating to such initial public
offering. In addition, on November 25, 1998, we issued and sold 10% Senior Notes
due 2008 which generated net proceeds of $630.0 million, after deducting the
underwriters' commission and related expenses. On October 7, 1999, we entered
into a securities purchase agreement with Bell Atlantic, under which Bell
Atlantic would purchase shares of our class A common stock and a convertible
subordinated note. We expect that this transaction, which is subject to
customary closing conditions, will close by the end of the first quarter of 2000
and generate net proceeds of approximately $1.7 billion. In addition, Bell
Atlantic has agreed to purchase a minimum of $550 million of fiber optic
facilities payable over the next three years.
For the six months ended June 30, 1999, our operating activities generated
$21.0 million of cash, compared with $13.3 million during the comparable period
in 1998. For the six months ended June 30, 1999, we used $235.5 million of cash
for investing activities compared with $32.3 million for the same period in
1998. This increase was due primarily to investments in the expansion of our
networks and related construction in progress, the restriction of cash as
security for letters of credit in connection with our German network build, and
the acquisition of dark fiber infrastructure in certain markets in Texas. For
the six months ended June 30, 1999, we made net payments of $13.0 million of
cash from financing activities, compared to $0.8 million of net proceeds from
the issuance of common stock in 1998, which was primarily attributable to the
payment relating to the acquisition of the dark fiber infrastructure in Texas
market.
We anticipate that we will continue to incur net operating losses as we
expand and complete our existing networks, construct additional networks and
market our services to an expanding customer base. We anticipate spending
approximately $3.4 billion through the year ended December 31, 2001 on the
build-out of our fiber optic networks and Internet service exchanges in 50
Tier I and Tier II markets in the United States and in 17 major international
markets. We believe that the net proceeds from the investment
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by Bell Atlantic, the net proceeds from the issuance and sale of the notes
offered by this prospectus supplement, cash on hand, the proceeds from the new
credit facility, vendor financing and cash generated by operations (including
advance customer payments), will enable us to fully fund the planned build-out
of our networks and our other working capital needs through the year ended
December 31, 2001. The indentures governing our debt permit us to incur
additional indebtedness to finance the engineering, construction, installation,
acquisition, lease, development or improvement of telecommunications assets. As
a result, we may also consider from time to time private or public sales of
additional equity or debt securities, entering into other credit facilities and
financings, depending upon market conditions, in order to finance the continued
build-out of our network. We cannot assure you that we will be able to
successfully consummate any such financing on acceptable terms or at all.
We expect to continue to experience negative cash flows for the foreseeable
future. In addition, our acquisition of AboveNet will cause us to record
approximately $1.5 billion in goodwill and other intangible assets, to be
amortized over periods of up to twenty years. Accordingly, we expect to report
further net operating losses for the foreseeable future.
YEAR 2000 SYSTEM MODIFICATIONS
We are currently working to evaluate and resolve the potential impact of the
Year 2000 on our processing of date-sensitive information and network systems.
The Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the year 2000, which could result in
miscalculations or system failures resulting from recognition of a date using
"00" as the year 1900 rather than the year 2000.
We have delegated responsibility to a group of executives to coordinate the
identification, evaluation and implementation of changes to computer systems and
applications necessary to achieve our goal of a Year 2000 date conversion which
would minimize the effect on our customers and avoid disruption to business
operations. We are also focusing on hardware and software tools, programming and
outside forces that may affect our operations, including our vendors, banks and
utility companies. Our analysis of the Year 2000 threat is ongoing and will be
continuously updated throughout 1999 as necessary.
For Metromedia Fiber, we have developed a questionnaire and project plan to
be completed by our systems and operating personnel to identify all business and
computer applications so that we can identify potential compliance problems. We
have initiated communications with our significant customers, suppliers,
contractors and major systems developers to determine their plans to remedy any
Year 2000 issues that arise in their business with us. We have compiled a
database of information based upon these responses. To the extent problems are
identified, we will implement corrective procedures where necessary, then test
the applications for Year 2000 compliance. We expect to complete this project
prior to January 1, 2000.
Based on preliminary data, our estimate is that the Year 2000 effort will
have a nominal cost impact, although we can make no assurances as to the
ultimate cost of the Year 2000 effort or the total cost of information systems.
Such costs will be expensed as incurred, except to the extent such costs are
incurred for the purchase or lease of capital equipment. We expect to make some
of the necessary modifications through our ongoing investment in system
upgrades. We believe that our exposure to this issue, based on our internal
systems, is somewhat limited by the fact that substantially all of our existing
systems have been purchased or replaced since 1997.
As of June 30, 1999, we had incurred nominal consulting costs in respect of
our Year 2000 conversion effort. We have not deferred any other information
systems projects due to the Year 2000 efforts. We expect that the source of
funds for Year 2000 costs will be cash on hand. Accordingly, we are devoting the
necessary resources to resolve all significant Year 2000 issues.
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If our customers, suppliers, contractors or major systems developers are
unable to resolve Year 2000 processing issues in a timely manner, a material
adverse effect on our results of operations and financial condition could
result.
AboveNet's Year 2000 readiness review includes assessment, implementation,
testing and contingency planning. To date, AboveNet has evaluated its internally
developed software and believes that this software is Year 2000 compliant.
However, AboveNet utilizes software and hardware developed by third parties both
for its network and internal information systems. AboveNet has not done any
testing of such third party software to determine if such software is Year 2000
compliant. AboveNet has sought assurances from some of its vendors, and intends
to continue to seek assurances from others, that such vendors' products are or
will be Year 2000 compliant.
AboveNet expects to continue assessing and testing its internal information
technology and non-information technology systems. AboveNet is not currently
aware of any material operations issues or costs associated with preparing its
internal information technology and non-information technology systems for the
Year 2000. However, AboveNet may experience material unanticipated problems and
costs caused by undetected errors or defects in the technology used in its
internal information technology and non-information technology systems.
Based upon the public filings and press releases of AboveNet's equipment,
telecommunications and data communications providers, AboveNet is aware that all
such providers are in the process of reviewing and implementing their own Year
2000 compliance programs. Since AboveNet does not believe that it will be
afforded the opportunity to test the systems of these providers, AboveNet will
seek assurances from them that they are Year 2000 compliant. If AboveNet's
primary vendors experience business interruptions as a result of the failure to
achieve Year 2000 compliance, AboveNet's ability to provide Internet
connectivity could be impaired, which could have a material adverse effect on
AboveNet's business, results of operations and financial condition.
AboveNet does not currently have any information regarding the Year 2000
status of its customers, most of whom are private companies. However, AboveNet
is in the process of developing a plan to survey all of its customers regarding
their Year 2000 compliance. As in the case with similarly situated companies, if
its customers experience Year 2000 problems, which result in business
interruptions or otherwise impact their operations, AboveNet could experience a
decrease in the demand for its services, which could have a material adverse
impact on its business, results of operations and financial condition.
AboveNet has not incurred any significant expenses to date associated with
its Year 2000 plan and is not aware of any material costs associated with its
anticipated Year 2000 efforts. AboveNet believes that a material loss of
revenues would arise if its major customers or providers fail to achieve Year
2000 readiness. AboveNet has not yet developed a comprehensive contingency plan
to address the issues which could result from such failure.
This constitutes a Year 2000 Readiness Disclosure Statement, and the
statements are subject to the Year 2000 Information and Readiness Disclosure
Act. We hereby claim the protection of this act for this prospectus supplement
and all information contained herein.
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BUSINESS
GENERAL
We provide dedicated fiber optic infrastructure and high-bandwidth Internet
connectivity for our communications intensive customers. We are a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through our acquisition of
AboveNet, we also provide "one-hop" connectivity that enables mission critical
Internet applications to thrive, as well as high-bandwidth infrastructure,
including managed co-location services.
THE INTRA-CITY NETWORKS. Our existing intra-city networks consist of
approximately 334,000 fiber miles covering 680 route miles in six of our
announced markets. We are currently planning to expand our existing local
intra-city networks in these metropolitan areas, and to construct additional
intra-city networks in approximately 40 additional Tier I and Tier II markets in
the United States.
THE INTER-CITY NETWORKS. Our inter-city network currently consists of 255
route miles, or approximately 110,000 fiber mile network segment that we have
built between New York City and Washington, D.C. We have also obtained,
primarily through exchanges of fiber capacity or "fiber swaps" with other
carriers, a nationwide fiberoptic network.
THE INTERNATIONAL NETWORKS. In addition to our domestic build-up, we intend
to expand our international presence to include approximately 17 major markets.
In February 1999, we entered into an agreement with Viatel, Inc. and Carrier 1
Holdings, Ltd. to jointly build a dark fiber inter-city network between selected
cities throughout Germany. Once completed, the German network will consist of
approximately 291,000 fiber miles covering 1,350 route miles connecting 14 major
cities. We have also swapped strands of fiber in the United States for strands
of fiber on the Circe network, which connects a number of European markets. In
addition to our inter-city networks, we are constructing 16 intra-city networks
throughout Europe. Separately, we have also entered into a contract to acquire
dark fiber network facilities in Toronto, Canada.
INTERNET CONNECTIVITY. Through our acquisition of AboveNet, we are a
leading provider of high performance Internet connectivity services to a wide
range of Internet service providers, Internet content providers and Web hosting
companies and facilities based, managed co-location services. Our Internet
exchange server facilities provide high performance, reliable and scalable
solutions for electronic commerce and other business critical applications.
AboveNet developed a network architecture based upon strategically located,
fault-tolerant Internet exchange servers. We currently operate two Internet
service exchange campuses, located near two of the major Internet access points,
metropolitan area exchange (often referred to as "MAE") West and MAE East, using
our suite of sophisticated network management and remote monitoring tools. We
believe that our centralized network architecture provides enhanced connectivity
while eliminating the need to build numerous geographically dispersed data
centers. AboveNet's Internet service exchange model offers customers the
benefits of combining direct Internet service providers access with co-location
services for Internet content providers. As of June 30, 1999, AboveNet had more
than 270 direct public and private data exchange agreements, known as peering
arrangements, including relationships with most major network providers. The
convergence of content providers and Internet service providers at our Internet
service exchanges enables Internet service provider customers to provide their
users with "one hop" connectivity, through our local area network, to the Web
sites of the Internet content providers that are co-located at the same site.
This direct connectivity minimizes the risk of delays and data loss often
encountered in the transmission of data over the public Internet infrastructure.
CUSTOMERS. We are focused on providing our broadband communications
infrastructure and Internet connectivity services to two main customer groups
located in Tier I and Tier II markets: communications carriers and
corporate/government customers.
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Our targeted customers include a broad range of companies such as:
- ILECs;
- CLECs;
- long distance companies/IXCs;
- paging, cellular and PCS companies;
- cable companies;
- ISPs; and
- Web hosting and e-commerce companies.
Our dark fiber customers typically lease our fiber optic capacity with which
they develop their own communications networks. Leasing our fiber optic capacity
is a low-cost alternative to building their own infrastructure or purchasing
metered services from ILECs or CLECs. Our Internet connectivity and co-location
customers typically lease bandwidth and co-location space which allow them to
provide their Internet related services on a reliable and cost effective basis.
We believe that we are well-positioned to penetrate our target customer base
since we plan to continue to install most of our dark fiber networks and
Internet service exchanges in major markets where these customers are
concentrated. We believe our target customers for our dark fiber and Internet
connectivity are complementary and will provide significant cross selling
opportunities.
NETWORK INFRASTRUCTURE. We have designed our networks to provide high
levels of reliability, security and flexibility by virtue of a self-healing
SONET architecture that prevents interruption in service to our clients by
instantaneously rerouting traffic in the event of a fiber cut. Our advanced
network architecture is also capable of supporting state-of-the-art
technologies, including DWDM (dense wave division multiplexing) which
significantly increases the transmission capacity of a strand of fiber optic
cable. Because DWDM can boost transmission capacity significantly, it has
greater relevance on our inter-city routes where we have, on average, fewer
strands of fiber installed than in our intra-city markets. Where practicable, we
install additional unused conduits to cost effectively accommodate future
network expansion and eliminate the need for future construction.
MARKET OPPORTUNITY. We believe that the market for our dark fiber services
is characterized by significant and growing demand for, and limited supply of,
fiber optic capacity. To meet our customers' demand, we tailor the amount of
fiber capacity leased to the needs of our customers. Generally, customers lease
fiber optic capacity from us and connect their own transmission equipment to the
leased fiber, thereby obtaining a high-bandwidth, fixed-cost, secure
communications alternative to the metered communications services offered by
traditional providers. In addition, we believe that we have installation,
operating and maintenance cost advantages per fiber mile relative to our
competitors because we generally install 432 fibers, and have begun installing
as many as 864 fibers, per route mile, as compared to the generally lower number
of fibers per mile in existing competitive networks.
We believe the market for our Internet service exchanges is characterized by
significant and growing demand for, and limited access to, highly reliable
Internet connectivity and co-location services. To meet our customers' demands,
we provide scalable connectivity and co-location services that drive our
customers' electronic commerce and other mission critical Internet applications.
Our customers lease bandwidth and co-location space from us to gain highly
reliable, secure and cost effective Internet connectivity. Through our existing
and planned networks, we believe we have the low cost position relative to those
competitors who lease rather than own their networks.
MANAGEMENT EXPERTISE. We benefit from the support of our controlling
stockholder Metromedia Company and anticipate similar benefits from our
anticipated investment by Bell Atlantic. On April 30, 1997, Metromedia Company
and certain of its affiliates made a substantial equity investment in our
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company (the "Metromedia Investment"). As a result, Metromedia Company and its
partners own all of our outstanding shares of class B common stock, par value
$.01 per share. Our class B common stock is entitled to 10 votes per share and
to vote separately to elect at least 75% of the members of the Board of
Directors. As of September 30, 1999, Metromedia Company and its partners own and
control approximately 63% of the outstanding voting power of our company.
RECENT TRANSACTIONS. On October 7, 1999, we entered into a securities
purchase agreement with Bell Atlantic, under which Bell Atlantic Investments
would purchase up to approximately 25.6 million newly issued shares of our class
A common stock at a purchase price of $28.00 per share and a convertible
subordinated note of approximately $975.3 million, which is convertible into
shares of our class A common stock at a conversion price of $34.00 per share.
This transaction, which is subject to customary closing conditions, is expected
to be completed by the end of the first quarter of 2000. Assuming the issuance
of the 25.6 million shares of class A common stock and conversion of the
convertible subordinated note, this investment would represent 19.9% of our
outstanding shares. Bell Atlantic has also agreed to pay us $550 million over
the next three years in exchange for delivery of fiber optic facilities over the
next five years. The proceeds from these two transactions will be used to fund
the expansion of our network.
BUSINESS STRATEGY
Our objective is to become the preferred facilities-based provider of
broadband communications infrastructure and Internet connectivity solutions to
communications carriers, corporations and government agencies, in our target
markets. The following are the key elements of our strategy to achieve this
objective:
ESTABLISH THE COMPANY AS THE PREFERRED CARRIERS' CARRIER OF BROADBAND
COMMUNICATIONS INFRASTRUCTURE AND INTERNET CONNECTIVITY SOLUTIONS
- Lease broadband communications infrastructure on a fixed cost basis
- Enable carriers to penetrate markets previously too costly to build or
purchase
- Allow customers to bypass the ILECs and CLECs
- Continue to differentiate ourselves as the only company whose principal
business is providing dark fiber on a fixed cost basis
- Lease high-bandwidth long haul capacity to provide seamless connectivity
between our intra-cities
- Provide Internet connectivity services through leasing bandwidth and
co-location space to ISPs
- Enable ISPs to provide reliable, high-quality Internet access services
- Capitalize on the fact that we do not offer competing metered
communications or retail Internet connectivity solutions in competition
with our carrier and ISP customers
POSITION THE COMPANY AS THE PREFERRED PROVIDER OF BROADBAND COMMUNICATIONS
INFRASTRUCTURE AND INTERNET CONNECTIVITY SERVICES TO CORPORATE AND GOVERNMENT
CUSTOMERS
- Target broadband communications infrastructure customers with significant
transmission and high security needs
- Provide scalable services for customers seeking lower broadband
transmission capacity
- Offer our dark fiber services on a fixed cost rather than metered basis,
to provide a more economical solution to our customers
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- Target Internet connectivity customers who require reliable, secure and
cost effective connectivity to the internet to drive their electronic
commerce and other mission critical business Internet applications
- Capitalize on the complementary customer bases for our Infrastructure and
Internet connectivity services through effective cross selling
REPLICATE SUCCESSFUL BUSINESS MODEL IN NEW MARKETS
- Leverage our success in existing markets by replicating our network
architecture in a number of additional markets
- Rapidly roll out our U.S. network to a total of approximately 50
intra-city networks in Tier I and Tier II markets
- Expand our international market coverage to a total of approximately 17
markets
- Deploy Internet service exchanges in selected U.S. and international
markets, replicating the successful AboveNet design
CREATE A LOW COST POSITION
- Provide our customers a cost effective alternative to constructing their
own networks and Internet connectivity facilities
- Install trunks with up to 864 fibers per route mile, which is
substantially more fiber than our competitors, reducing our per mile cost
to construct, upgrade and operate our networks
- Capitalize on the operating and maintenance cost advantages generated by
our newly constructed networks, with advanced fiber optic technology
- Create first mover advantages for us versus new entrants by securing
rights of way and building our networks quickly
- Install spare conduit where practical to reduce expansion and upgrade
costs in the future and provide significant excess capacity
- Establish a low cost advantage for our Internet connectivity services by
utilizing our own network rather than leasing capacity like some of our
competitors
- Use our low cost position to remain price competitive with other providers
of broadband communications infrastructure and Internet connectivity
services
UTILIZE FIBER SWAPS AND STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF OUR
NETWORKS
- Opportunistically utilize fiber swaps, as we have in the past, to expand
our network reach at little incremental cost
- Enter into strategic relationships, such as our joint build arrangement
with Viatel, to cost effectively expand our network footprint
EXPAND PRODUCT AND SERVICE OFFERINGS TO UTILIZE DARK FIBER NETWORK CAPACITY.
- Vertically expand our service offering by identifying additional uses for
our dark fiber network, such as with the AboveNet acqusition, that will
drive new revenue opportunities and cost synergies
- Maintain our competitive advantage by offering services that do not
directly compete with our carrier customers
- Focus on serving our carrier and large corporate/government customers'
bandwidth intensive communications needs
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INSTALL TECHNOLOGICALLY ADVANCED NETWORKS AND INTERNET SERVICE EXCHANGES
- Continue to install a technologically advanced network based on
self-healing SONET architecture
- Use our self-healing SONET architecture to minimize the interruption to
service caused by fiber cuts
- Construct our networks to deliver the high levels of reliability, security
and flexibility that our customers demand
- Continually monitor and maintain quality control over our networks on a
24-hour basis
- Continue to ensure our network is capable of providing the highest
commercially available capacity transmission (OC-192) to support capacity
intensive data applications such as Frame Relay, ATM and Internet
applications
- Provide fault tolerant Internet service exchange facilities designed to
enable the uninterrupted operations necessary for mission critical
business applications
- Use our proprietary software to monitor our network connections for
latency and packet loss and automatically reroute Internet traffic to
avoid Internet congestion points
BUILD ON MANAGEMENT EXPERIENCE AND METROMEDIA COMPANY RELATIONSHIP
- Leverage the communications industry knowledge and sales expertise of our
management team and board of directors including:
- Stephen Garofalo, our Chief Executive Officer and founder, who has
approximately 25 years of experience in the cable installation business
- Howard M. Finkelstein, our President and Chief Operating Officer, who
served in various capacities in Metromedia Company and its affiliates over
a period of 16 years, including 9 years as President of Metromedia
Company's long distance telephone company, until its merger with MCI/
WorldCom, Inc. in 1993
- David Rand and Sherman Tuan who joined our Board of Directors following
the acquisition of AboveNet and have extensive experience with Internet
related ventures
- John W. Kluge, Stuart Subotnick and David Rockefeller, each of whom bring
extensive communications industry expertise and corporate governance
experience
BUILD-OUT OF NETWORKS
We have concentrated on developing and constructing our networks. We have
either obtained or are currently pursuing the acquisition of necessary licenses,
franchises and rights-of-way to construct these networks. In constructing our
fiber optic networks, we seek to create strategic alliances with the engineering
and construction management firms that have been engaged to develop routes,
easements and manage deployment plans. Firms with whom we are allied in this
regard have deployed local loop network infrastructure for RBOCs as well as for
CLECs. Though we anticipate to outsource much of the actual construction to
various construction firms, we maintain strict oversight of the design and
implementation of our fiber optic communications networks. We utilize only
advanced commercially available fiber. We have ordered a substantial portion of
our fiber optic cable from Lucent Technologies, Inc. However, we believe that we
could obtain advanced fiber from other suppliers on acceptable terms.
Our existing intra-city networks currently consist of approximately 334,000
fiber miles covering 680 route miles in six of our announced markets. Our
inter-city network consists of approximately 110,000 fiber miles covering 255
route miles that we have built between New York City and Washington D.C. We have
also built or acquired, primarily through fiber swaps, a nationwide dark fiber
network linking our intra-city networks.
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We have entered into a forty year agreement with a subsidiary of Racal, a
United Kingdom manufacturer of electronics and other equipment and a provider of
telecommunications services, to create ION, a joint venture in which we hold a
50% equity interest. ION has obtained transatlantic fiber optic cable rights on
Gemini and AC-1 which link our New York network to London, England. Through ION,
we are able to offer our customers seamless broadband transatlantic
communications services between New York and London. Under the ION joint venture
agreement, each party may contribute additional capital as agreed by the
parties. In May 1998, ION was awarded a 25 year term contract in excess of $25
million from a leading provider of undersea cable capacity to provide inland
capacity services from such provider's undersea cable landing stations in the
U.K. and the U.S.
We have also entered into an agreement with Carrier 1 Holdings, Ltd and
Viatel, Inc., to develop jointly approximately 291,000 fiber miles covering
1,350 route miles that will connect 14 of Germany's largest cities such as
Hamburg, Berlin, Munich, Frankfurt and Dusseldorf. We have also signed an
agreement with Viatel pursuant to which we would receive the right to use
approximately 3,880 fiber miles covering approximately 970 route miles on
Viatel's network in France, Germany, The Netherlands and the United Kingdom. Our
networks will be high-capacity broadband networks capable of supporting high-
quality voice, video, internet protocol and data traffic and built using a
self-healing SONET architecture.
THE ABOVENET INTERNET SERVICE EXCHANGE
Our Internet service exchanges provide co-location services, Internet
connectivity services, network management services and tools. Our Internet
service exchanges are designed to provide customers with the high performance,
scalability, connectivity, security, reliability and expertise they need to
enhance their business critical Internet applications. We create solutions for
our customers based on their specific business and technical requirements,
modifying the services as each customer's needs evolve. Our Internet related
services are primarily delivered through centralized campuses located near MAE
West and MAE East. Our New York facility is connected to our facility located
near MAE East by high speed, high capacity fiber optic cable. This facility is
intended to facilitate access to European Internet traffic. Our management
services and tools enable us and our customers to continuously manage their
Internet operations jointly, proactively and remotely.
INTERNET CONNECTIVITY
Our Internet connectivity services are designed to meet the requirements of
high bandwidth, business critical Internet operations by providing highly
reliable, scalable, non-stop and uncongested operations. On June 30, 1999,
AboveNet had peering relationships with more than 270 network providers,
covering over 700 peering points. Any failure by AboveNet to maintain and
increase peering relationships would have a material adverse effect on our
business, results of operations and financial condition.
Our network is designed to minimize the likelihood of service interruptions.
Each ISX has multiple physical fiber paths into the facility. We maintain
multiple network links from multiple vendors and regularly check that our
network traffic traverses physically separated paths. This network architecture
enhances the availability of a customer's site, even in the event of a link
failure. In addition, since our customers' Internet operations often experience
network traffic spikes due to promotions or events, we have a policy of
maintaining significant excess capacity. We might not be able to expand or adapt
our telecommunications infrastructure to meet additional demand or our
customers' changing requirements on a timely basis and at a commercially
reasonable cost, or at all.
Our Internet connectivity services are also designed to reduce latency and
to enhance network performance. Our engineering personnel continuously monitor
traffic patterns and congestion points throughout the Internet and dynamically
reroute traffic flows to improve end-user response times. We also enhance
network performance by maintaining what we believe is among the largest number
of direct public
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and private network peering interconnections in the industry. For customers
seeking a direct communications link to the site of another customer that is
located at the same ISX, we offer highly secure, fast and efficient
cross-connections.
CO-LOCATION SERVICES
We provide co-location services designed to meet the demands of
sophisticated, multi-vendor business critical Internet operations. We support
most leading Internet hardware and software system vendor platforms, including
those from Ascend Communications, Inc., Nortel Networks, Cisco Systems, Inc.,
Compaq Computer Corporation, Dell Computer Corporation, EMC Corporation,
Hewlett-Packard Company, International Business Machines Corporation, Lucent
Technologies Inc., Microsoft Corporation, Apple Computer, Inc., Network
Appliance, Inc., Silicon Graphics Inc., Sun Microsystems Inc. and 3Com
Corporation. This multi-vendor compatibility enables our customers to retain
control over their choice of technical solution and to integrate their Internet
operations into our existing information technology architecture. Because
business critical Internet operations are dynamic and often require timely
hardware and software upgrades to maintain targeted service levels, customers
have twenty-four hours a day, seven days a week physical and remote access to
the ISX facilities. Additional space and electrical power can be added as needed
in order to provide our customers with access to additional server co-location
services. Customers install and manage their own hardware and software at our
facilities. We do not provide any Web hosting services.
MANAGEMENT SERVICES AND TOOLS
Our management services and tools support business critical Internet
operations by providing the customer with detailed monitoring, reporting and
management tools to control their hardware, network, software and application
environments. Through our network management services and tools, customers are
able to remotely manage their business critical Internet operations housed at
our ISX facilities. We believe that this provides an important advantage to
enterprises that seek to outsource a portion of their Internet operations and to
link the management of the outsourced operations with in-house operations. Our
proactive management services and tools enable us to identify and resolve
hardware, software, network and application problems, often before the customer
is aware that a problem exists.
INTERNATIONAL INTERNET SERVICE EXCHANGES
We are seeking to create a global network by investing in joint ventures and
foreign companies that can develop regional Internet service exchanges
internationally. In March 1999, AboveNet entered into agreements with local
partners to establish regional Internet service exchanges in Austria, Germany
and the United Kingdom. We intend to continue to expand our European network
through additional investments in joint ventures in other major business centers
and countries with high levels of Internet traffic. We plan to leverage our
communications infrastructure in Europe, in a similar manner to our market
entrants in the future. We believe that participants in this market must grow
rapidly and achieve a significant presence in the market in order to compete
effectively. We believe that the principal competitive factors in our market are
uncongested connectivity, quality of facilities, level of customer service,
price, the financial stability and credibility of the provider, brand name and
the availability of network management tools. We might not have the resources or
expertise to compete successfully in the future.
TECHNOLOGY
Our networks consist of fiber optic communications networks which allow for
high speed, high quality transmission of voice, data and video. Fiber optic
systems use laser-generated light to transmit voice, data and video in digital
formats through ultra-thin strands of glass. Fiber optic systems are generally
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characterized by large circuit capacity, good sound quality, resistance to
external signal interference and direct interface to digital switching equipment
or digital microwave systems. We plan to install backbone fiber optic cables
containing up to 864 fiber optic strands, which have significantly greater
bandwidth than traditional analog copper cables. Using current electronic
transmitting devices, a single pair of glass fibers used by our network can
transmit up to 8.6 gigabits of data per second or the equivalent of
approximately 129,000 simultaneous voice conversations, which is substantially
more than traditional analog copper cable installed in many current
communications networks. We believe that continuing developments in compression
technology and multiplexing equipment will increase the capacity of each fiber
optic strand, thereby providing more bandwidth carrying capacity at relatively
low incremental costs. Our network is capable of using the highest commercially
available capacity transmission (OC-192) and thereby can handle advanced,
capacity-intensive data applications such as voice over Internet Protocol, video
teleconferencing, Frame Relay, ATM, multimedia and Internet-related
applications. In our intra-city networks, we offer end-to-end fiber optic
capacity, capable of utilizing SONET capable ring architecture, which has the
ability to route customer traffic in either direction around its ring design
thereby assuring that fiber cuts do not interrupt service to customers on our
networks. Our networks are also capable of supporting dense wave division
multiplexing (often referred to as "DWDM"). Currently, a state-of-the-art
network operating system continuously monitors and maintains quality control of
networks on a 24-hour basis, alerts us of any degradation or loss of fiber
capacity and pinpoints the location of such degradation. This network operating
system also enables us to repair or replace impaired fiber without any loss of
service. In addition, the monitoring system automatically reroutes traffic in
the event of a catastrophic break in the system, enabling us to ensure that our
customers obtain continuous service.
Our connectivity services utilize our proprietary ASAP technology to enhance
Internet connectivity by monitoring all of our direct and indirect network
connections for congestion. ASAP automatically monitors all of our major
providers' and peers' direct and indirect connections on a real-time 24-hour
basis to identify congestion. If packet loss and congestion is detected on any
of the links that directly affect customers' performance, our network engineers
are able to dynamically reroute traffic temporarily away from the problem link.
This functionality is particularly important for emerging applications such as
audio and video streaming and voice over the Internet.
FRANCHISE, LICENSE AND RELATED AGREEMENTS
When we decide to build a fiber optic communications network, our corporate
development staff seeks to obtain the necessary rights-of-way and governmental
authorizations. In some jurisdictions, a construction permit is all that is
required. In other jurisdictions, a license agreement, permit or franchise is
also required. Such licenses, permits and franchises are generally for a term of
limited duration. Where possible, rights-of-way are leased under multi-year
agreements with renewal options and are generally non-exclusive. We lease
underground conduit and pole space and other rights-of-way from entities such as
ILECs, utilities, railroads, IXCs, state highway authorities, local governments
and transit authorities. We strive to obtain rights-of-way that afford us the
opportunity to expand our communications networks as business develops.
SALES AND MARKETING
Our sales and marketing strategy includes:
- positioning ourselves as the preferred facilities based provider of
broadband communications infrastructure and Internet connectivity
services;
- focusing on high dollar volume corporate and government customers;
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- emphasizing the cost advantages which will allow us to lease our fiber
optic infrastructure at fixed prices which represent potentially
significant savings for our large volume carrier and corporate customers
relative to their present build or buy alternatives;
- achieve broad market penetration and increase brand recognition for our
Internet connectivity services among Internet service providers, Internet
content providers and Web hosting companies; and
- identify opportunities to cross sell our Internet connectivity services to
our complementary infrastructure customer base.
We also believe that communications carriers and corporate and government
customers will be attracted to our dark fiber product and our unmetered pricing
structure. Dark fiber is installed fiber optic cable which is not otherwise
carrying a signal originated by the service provider, such as our company, but
which will carry a signal generated by the customer. We intend initially to
centralize our sales and marketing efforts on carrier customers through a
national sales team and we are currently in the process of hiring additional
sales professionals to focus on these customers. As we have constructed fiber
optic networks in new cities, we have hired sales forces in these areas to
target regional corporate, government and to a lesser extent carrier customers
and we plan to continue this strategy.
For our Internet connectivity services, we have developed a two-tiered sales
strategy to target leading Internet service providers, Internet content
providers and Web hosting companies through direct sales and channel
relationships. We maintain a direct sales force of highly trained individuals in
San Jose, California and Vienna, Virginia. Our sales force is supported by our
sales engineers and, in many circumstances, by our senior management. We are
also seeking to develop relationships with potential channel partners including
hardware vendors, value added resellers, system integrators, application hosting
and Web hosting companies in order to leverage their sales organizations.
COMPETITION
Fiber optic systems are currently under construction both locally and
nationally. In New York City, for example, several franchisees have been granted
the right to install and operate a telecommunications network within the city.
Development of fiber optic networks is also continuing on a national scale. The
construction of these networks enables their owners to lease access to their
networks to other communications carriers or large corporate or government
customers seeking high bandwidth capacity, without these customers having to
incur costly expenditures associated with building networks of their own.
Alternatively, some network owners may choose to use their infrastructure to
provide switched voice and data services, competing directly with ILECs and
IXCs. Currently, we do not provide such services or plan to provide such
services.
In the cities where we plan to deploy fiber optic communications networks,
we face significant competition from the ILECs, which currently dominate their
local communications markets. We also face competition from CLECs and other
potential competitors in these markets and will face competition in the cities
in which we plan to build our networks. Many of our competitors have financial,
management and other resources substantially greater than ours, as well as other
competitive advantages over us, including established reputations in the
communications market.
Various communications carriers already own fiber optic cables as part of
their communications networks. Accordingly, each of these carriers could, and
some do, compete directly with us in the market for leasing fiber capacity. In
addition, although CLECs generally provide a wider array of services to their
customers than we presently provide to our customers, CLECs nevertheless
represent an alternative means by which our potential customer could obtain
direct access to an IXC POP or other site of the customer's choosing. Thus,
CLECs could compete with us.
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Some communications carriers and local cable companies have extensive
networks in place that could be upgraded to fiber optic cable, as well as
numerous personnel and substantial resources to undertake the requisite
construction to so equip their networks. To the extent that communications
carriers and local cable companies decide to equip their networks with fiber
optic cable, they are potential direct competitors provided that these
competitors are willing to offer this capacity to all of their customers.
We believe that as competition in the local exchange market develops, a
fundamental division between the needs of corporate, governmental and
institutional end users and residential end users will drive the creation of
differentiated communications services and service providers. We believe that
the CLECs, IXCs, ISPs, wireless carriers and corporate and government customers
on which we focus will have distinct requirements, including maximum
reliability, consistent high quality transmissions, capacity for high-speed data
transmissions, diverse routing and responsive customer service. We believe that
we will be able to satisfy the needs of such customers.
Our Internet connectivity services business is intensely competitive. There
are few substantial barriers to entering the co-location service business, and
we expect that we will face additional competition from existing competitors and
new market entrants in the future. We believe that participants in this market
must grow rapidly and achieve a significant presence in the market in order to
compete effectively. We believe that the principal competitive factors in this
market are uncongested connectivity, quality of facilities, level of customer
service, price, the financial stability and credibility of the provider, brand
name and the availability of network management tools. AboveNet might not have
the resources or expertise to compete successfully in the future. Our current
and potential competitors in this market include:
- providers of co-location services, such as Exodus Communications, Inc.,
Frontier Corporation, which has entered into an agreement to be acquired
by Global Crossing Ltd., Hiway Technologies, Inc., which was acquired by
Verio Inc., and Globix Corporation;
- national and regional ISPs, such as Concentric Network Corporation,
PSINet, Inc., MCI WorldCom and certain subsidiaries of GTE Corporation;
- global, regional and local telecommunications companies, such as Sprint,
MCI WorldCom and Regional Bell Operating Companies, some of whom supply
capacity to AboveNet; and
- large information technology outsourcing firms, such as International
Business Machines Corporation and Electronic Data Systems.
REGULATION
As a provider of communications facilities, we are subject to varying
degrees of regulation in each of the jurisdictions in which we operate. In the
United States, some aspects of our services are regulated by the Federal
Communications Commission (the "FCC") and various state regulatory bodies. In
some local jurisdictions, we must obtain approval to operate or construct our
networks. In other countries where we operate we may also be subject to
regulations by the agencies having jurisdiction over the provision of
telecommunications services.
FEDERAL
In the United States, federal telecommunications law directly shapes the
market in which we compete. We offer two types of services--the leasing of dark
fiber and the provision of telecommunications transmission services--that are
subject to varying degrees of regulation by the FCC pursuant to the provisions
of the Communications Act of 1934, as amended, including by the
Telecommunications Act of
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1996 (the "Communications Act"), and the FCC regulations implementing and
interpreting the Communications Act.
The Communications Act imposes legal requirements on "common carriers" who
engage in "interstate or foreign communication by wire or radio" and on
"telecommunications carriers." Telecommunications carriers, or common carriers,
are providers of telecommunications services, which is defined by the
Communications Act as the offering of telecommunications for a fee "directly to
the public" or to all potential users of an indiscriminate basis subject to
standardized rates, terms, and conditions.
DARK FIBER LEASING. We believe that we are not a "telecommunications
carrier" or "common carrier" with respect to our leasing of dark fiber
facilities, and therefore that our dark fiber activities are not subject to
special legal requirements applicable to such carriers. First, we do not believe
that the leasing of dark fiber is a "telecommunications service" that is subject
to FCC regulation. The FCC generally regulates "communication by wire or radio"
or the "transmission" of "information of the users' choosing," neither of which
describes the leasing of dark fiber facilities. Second, we do not offer dark
fiber facilities as a common carrier, I.E., to all potential users on an
indiscriminate basis. Instead, we enter into individualized negotiations on a
selective basis with prospective lessees of our dark fiber facilities to
determine whether and on what terms to serve each potential lessee. Our dark
fiber offerings should therefore not be subject to the common carrier
jurisdiction of the FCC or to the common carrier provisions of the
Communications Act.
If our offering of dark fiber facilities were deemed to constitute
"telecommunications," then our revenues from such leases to end users (but not
to other telecommunication carriers), whether or not provided on a common
carrier basis, would become subject to assessment for the FCC's Universal
Service Fund, a fund that was established by the FCC pursuant to the
Telecommunications Act of 1996 (the "1996 Act") to assist in ensuring the
universal availability of basic telecommunications services at affordable
prices, and other FCC assessments. The FCC announced that the rate of assessment
will be approximately 3.9% of gross interstate and 1% of gross intra-state
end-user revenues for the third quarter of 1999. On July 30, 1999, the U.S.
Court of Appeals for the Fifth Circuit upheld in part the FCC's order but
determined that assessments must be limited to interstate revenues. We cannot
predict the effect of this ruling on the rate of assessment, or what rates of
assessment will apply in future years. We may also be liable for assessments by
state commissions for state universal service programs.
TRANSMISSION SERVICES. With respect to our offering of telecommunications
services, however, we will likely operate as a common carrier, offering such
transmission services to all potential users indiscriminately, and therefore
will be subject to the regulatory requirements applicable to common carriers and
to telecommunications carriers. For example, we will be required, with respect
to our transmission services, to (1) provide such services indiscriminately upon
any reasonable request; (2) charge rates and adopt practices, classifications
and regulations that are just and reasonable; and (3) avoid unreasonable
discrimination in charges, practices, regulations, facilities and services. We
may also be required to file tariffs setting forth the rates for our services.
Under current FCC policies, these regulatory requirements should not impose any
substantial burdens on us. The FCC has recently determined, for example, that
providers of "access" services (intracity transmission services used to
originate and/or terminate interstate and foreign communications) need not file
tariffs and may offer such services to customers on a private, contractual
basis. Our revenues from transmission services will also be subject to FCC
Universal Service Fund assessments as discussed above, to the extent that these
services are purchased by end users. Since the revenues of our competitors will
be subject to comparable assessments, this should not reduce our
competitiveness. Also, being regulated as a "telecommunications carrier" will
give us certain legal benefits. In particular, we will be entitled, like other
competitive local exchange carriers (often referred to as "CLECs"), to insist
upon access to the existing telecommunications infrastructure by interconnecting
our fiber-optic networks with incumbent local exchange carriers (often referred
to as "ILECs") central offices
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and other facilities. Under the 1996 Telecom Act, ILECs must, among other
things: (i) allow interconnection at any technically feasible point and provide
service equal in quality to that provided to others, (ii) provide unbundled
access to network elements, and (iii) provide access to their poles, ducts,
conduits and other rights-of-way. Our rights as a CLEC may not extend to cover
our dark fiber business (unless our dark fiber business is considered a
telecommunications service). Accordingly, an ILEC may refuse to interconnect
with (or provide the collocation described below) us other than in connection
with our transmission services business.
ILECs must also provide "physical collocation" for other telecommunications
carriers. Physical collocation is an offering by an ILEC that enables another
telecommunications carrier to enter the ILEC's premises to install, maintain and
repair its own equipment that is necessary for interconnection or access to the
ILEC's network elements. An ILEC is required to allocate reasonable amounts of
space to carriers on a first-come first-served basis. If space limitations or
practical or technical reasons prohibit physical collocation, an ILEC must offer
"virtual collocation," by which the other carrier may specify ILEC equipment to
be dedicated to its use and electronically monitor and control communications
terminating in such equipment. We intend, in some instances, to collocate
portions of our network on the premises of certain ILECs. Our ability to do this
on a cost-effective basis will depend on the rates, terms and conditions
established for collocation, which will be established by state regulators in
arbitration proceedings and therefore may vary from one state to the next.
The FCC has responsibility under the 1996 Telecom Act's interconnection
provisions to determine what elements of an ILEC's network must be provided to
competitors on an unbundled basis. The FCC declared dark fiber an unbundled
network element under these provisions. The FCC's requirements for unbundling
were overturned by the Supreme Court, which ordered the FCC to re-evaluate the
standard it uses to determine which network elements need to be unbundled. In
response, the FCC recently issued an order affirming all but one of the network
elements and also stating for the first time that ILECs must provide access to
dark fiber as a separate element. In addition, federal district courts in a
number of jurisdictions have interpreted the 1996 Telecom Act to include dark
fiber as a network element, which must be unbundled. The FCC decision to treat
dark fiber as an unbundled element, as well as these court rulings, could
decrease the demand for dark fiber provided by us because our potential
customers will be able to obtain dark fiber from ILECs at cost-based rates. In
addition, the FCC has announced that state commissions may decide to add network
elements to the FCC's list of elements that are required to be unbundled by
carriers.
ILECs, CLECs and inter-exchange carriers (often referred to as "IXCs") are
subject to other requirements under the Communications Act, the FCC regulations
and additional federal telecommunications laws. These requirements may affect
our business by virtue of the inter-relationships that exist among us and many
of these regulated telecommunications carriers. For example, the FCC recently
issued an order requiring, among other things, that access charges (fees charged
by ILECs to IXCs for use of local telephone facilities for the origination and
termination of long-distance calls) shift in part from being usage driven to a
fixed flat cost-based structure. The FCC recently issued an order granting ILECs
greater pricing flexibility for their access services (both switched and
non-switched), which may permit the ILECs to compete more effectively against
some of our service offerings. While it is not possible to predict the precise
effect the access charge changes will have on our business or financial
condition, the reforms will reduce access charges paid by IXCs, likely making
the use of ILEC facilities by IXCs more attractive, which could have a material
adverse effect on the use of our fiber optic telecommunications networks by
IXCs. Bell Atlantic's proposed investment could subject us to additional
regulation by the FCC. Bell Atlantic is an ILEC and pursuant to the
Communications Act may not provide long distance service within its geographic
region until certain conditions are met. Companies in which an ILEC owns greater
than a ten percent ownership interest are subject to the same prohibitions. If
such prohibitions applied to us it would have a material adverse effect on our
business. For that reason, our agreement with Bell Atlantic
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prohibits it from owning more than ten percent of us until the long-distance
prohibitions no longer apply to Bell Atlantic and its affiliates.
STATE
The 1996 Telecom Act prohibits state and local governments from enforcing
any law, rule or legal requirement that prohibits, or has the effect of
prohibiting, any person from providing any interstate or intrastate
telecommunications service. Nonetheless, this provision of the 1996 Telecom Act
should enable us and our customers to provide telecommunications services in
states that previously prohibited competitive entry.
However, states retain jurisdiction, under the 1996 Telecom Act to, adopt
regulations necessary to preserve universal service, protect public safety and
welfare, manage public rights of way, ensure the continued quality of
communications services and safeguard the rights of consumers.
States continue to determine the rates that ILECs can charge for most of
their intrastate services. They are also responsible for mediating and
arbitrating ILEC interconnection arrangements with other carriers if voluntary
agreements are not reached. Accordingly, state involvement in local
telecommunications services is substantial.
Each state (and the District of Columbia, which is treated as a state for
the purpose of regulation of telecommunications services) has its own statutory
scheme for regulating providers of telecommunications services of they are
"common carriers" or "public utilities". As with the federal regulatory scheme,
we believe that the offering of dark fiber facilities does not make us of common
carrier or public utility so we would not be subject to this type of regulation
in most jurisdictions in which we currently have or plan to construct
facilities. Our offering of transmission services (as distinct from dark fiber
capacity), however, will likely be subject to regulation in each of these
jurisdictions to the extent that these services are offered for intra-state use.
Even though our facilities will be physically located in individual states, we
anticipate that most customers will use our facilities and services for the
purpose of originating and/or terminating interstate and foreign communications.
Under current FCC policies, any dedicated transmission service or facility that
is used more than 10% of the time for the purpose of inter-state or foreign
communication is subject to FCC jurisdiction to the exclusion of any state
regulation.
State regulation of the telecommunications industry is changing rapidly, and
the regulatory environment varies substantially from state to state. Our
subsidiaries are currently authorized to provide intrastate telecommunications
services in California, Colorado, Connecticut, Delaware, District of Columbia,
Florida, Georgia, Illinois, Maryland, Massachusetts, Missouri, New Jersey, New
York, Oregon, Pennsylvania, Rhode Island, Texas, Virginia, Washington and have
applications pending in Arizona, Minnesota and Ohio. At present, we do not
anticipate that the regulatory requirements to which we will be subject in the
states in which we currently intend to operate will have any material adverse
effect on our operations. These regulations may require, among other things,
that we obtain certification to operate, and that we provide notification of, or
obtain authorization for, certain corporate transactions, such as the
transaction with Bell Atlantic. In any event, we will incur certain costs to
comply with these and other regulatory requirements such as the filing of
tariffs, submission of periodic financial and operational reports to regulators,
and payment of regulatory fees and assessments, including contributions to state
universal service programs. In some jurisdictions, our pricing flexibility for
intra-state services may be limited because of regulation, although our direct
competitors will be subject to similar restrictions. However, we make no
assurances that future regulatory, judicial, or legislative action will not
materially adversely affect us.
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Bell Atlantic recently filed an application with the FCC to provide long
distance service in New York on the grounds that it provides access and
interconnection to its network facilities for the network facilities of one or
more unaffiliated competing providers of telecommunications services. The FCC
has until the end of 1999 to approve the application. We hope that Bell Atlantic
will be a significant customer of ours when it enters the long distance market.
LOCAL
In addition to federal and state laws, local governments exercise legal
authority that affect our business. For example, local governments, such as the
City of New York, typically retain the ability to manage public rights-of-way,
subject to the limitation that local governments may not prohibit persons from
providing telecommunications services and local governments may not treat
telecommunication service providers in a discriminatory manner. Because of the
need to obtain approvals, local authorities affect the timing and costs
associated with our use of public rights-of-way. In addition, some local
authorities must approve or be notified of certain corporate transactions, such
as the Bell Atlantic transaction. These regulations may have an adverse effect
on our business.
FEDERAL REGULATION OF INTERNATIONAL SERVICE
Various regulatory requirements and limitations also will influence our
business as we enter the market for international telecommunications service. We
have entered into a 50/50 joint venture, ION, with a subsidiary of Racal that
contemplates jointly acquiring and selling international, facilities-based
telecommunications capacity between the U.S. and the United Kingdom and possibly
between the U.S. and other markets. ION is a U.S. international common carrier
subject to U.S. regulation under Title II of the Communications Act, and, we are
also a U.S. international common carrier subject to the same regulations. Under
current FCC rules, international carriers that do not exercise market power and
that are not affiliated with dominant foreign carriers (carriers possessing
market power in their local markets) are subject to relatively relaxed U.S.
regulation as nondominant international carriers. As a non-dominant common
carrier, ION and we are subject to, among other policies, the common carrier
obligation of nondiscrimination. In addition, FCC rules prohibit U.S. carriers
from bargaining for special concessions from certain foreign partners. ION and
we are required, under Sections 214 and 203 of the Communications Act to obtain
authorization and file an international service tariff containing rates, terms
and conditions prior to initiating service. As a nondominant carrier, ION and we
are eligible to seek "global" authorization under Section 214 to operate as
facilities-based and/or resale carrier. International carriers are also subject
to certain annual fees and filing requirements, such as the requirement to file
contracts with other carriers, including foreign carrier agreements, and reports
setting forth international circuit, traffic and revenue data. Failure to obtain
an appropriate U.S. license for international service or the revocation of a
license could materially adversely affect our future operations.
Until recently, international common carriers were also required to comply
with the FCC's International Settlements Policy which defines the permissible
boundaries for U.S. carriers and their foreign correspondents to settle the cost
of terminating each other's traffic over their respective networks. The FCC,
however, recently decided that it is no longer necessary to apply the
International Settlement Policy rules to U.S. carrier arrangements with
non-dominant foreign carriers and with arrangements with all foreign carriers in
competitive foreign markets. Since the U.S.-UK route has been declared
competitive by the FCC, we and ION will not have to comply with the
International Settlement Policy.
The FCC has also made significant changes to other aspects of its
international regulatory regime that facilitate our international operations.
For example, it has approved the provisions of switched services over private
lines ("ISR") interconnected with the public switched network between the United
States and 22 other countries, including the UK and Germany. Recently, the FCC
took steps to streamline the application process for authority to provide
international services, relaxing further the rules for almost all international
services to almost all countries (with China, Taiwan, Russia, Saudi Arabia, the
notable
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exceptions). The FCC continues to refine its international service rules to
promote competition, reflect and encourage liberalization in foreign countries,
and reduce accounting rates toward cost. We are unable to predict how the FCC
will resolve the various pending international policy issues and the effect of
such resolutions on us.
REGULATION OF INTERNATIONAL OPERATIONS
Our international services are also subject to regulation in other countries
where we operate. Such regulation, as well as policies and regulations on the
European Union level, may impose separate licensing, service and other
conditions on our international service operations, and these requirements may
have a material adverse effect on our ability to operate. In addition to our
joint venture, ION, we have entered into a joint venture with Carrier 1 and
Viatel to develop a fiber network linking Germany's main cities. We also have an
agreement with Viatel to use Viatel's network in France, Germany, the UK and the
Netherlands. The following discussion is intended to provide a general outline
of certain regulations and current regulatory posture in certain foreign
jurisdictions in which we currently operate or intend to operate, and is not
intended as a comprehensive discussion of such regulations or regulatory
posture. Local laws and regulations differ significantly among these
jurisdictions, and, within such jurisdictions, the interpretation and
enforcement of such laws and regulations can be unpredictable.
THE EUROPEAN UNION
The European Union (the "EU") was established by the Treaty of Rome and
subsequent treaties. EU member states are required to implement directives
issued by the European Commission (the "EC") and the European Council by passing
national legislation. The EC and European Council have issued a number of key
directives establishing basic principles for the liberalization of the EU
telecommunications market. This basic framework has been advanced by a series of
harmonization directives, which include the so-called Open Network Provision
directives and the Licensing Directive of April 1997 and the Interconnection
Directive of June 1997, which address the procedures for granting license
authorizations and conditions applicable to such licenses and the
interconnection of networks and the interoperability of services as well as the
achievement of universal service. The Licensing Directive sets out framework
rules for the procedures associated with the granting of national authorizations
for the provision of telecommunications services and for the establishment or
operation of any infrastructure for the provision of telecommunications
services. It distinguishes between "general authorizations," which should
normally be easier to obtain since they do not require an explicit decision by
the national regulatory authority, and "individual licenses." EU member states
may impose individual license requirements for the establishment and operation
of public telecommunications networks and for the provision of voice telephony,
among other things. Consequently, ION's operations in the U.K., our operation
with respect to the German Network and European Network and our proposed
operations may require that ION or the Company, respectively, be subject to an
individual licensing system rather than to a general authorization in the
majority of EU member states. In some countries where we operate, we may also be
required to contribute to a fund for the provision of universal service. The
United Kingdom and each other EU member state in which ION currently conducts or
we conduct our business has a different regulatory regime and such differences
are expected to continue. The requirement that ION, our former joint venture, or
we obtain necessary approvals varies considerably from country to country.
UNITED KINGDOM
The Telecommunications Act of 1984 (the "U.K. Act") provides a licensing and
regulatory framework for telecommunications activities in the United Kingdom.
The Secretary of State for Trade and Industry at the Department of Trade and
Industry (the "Secretary of Trade") is responsible for granting licenses under
the U.K. Act and for overseeing telecommunications policy, while the Director
General of Telecommunications (the "Director General") and his office (the
Office of Telecommunications ("OFTEL")) are
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responsible, among other things, for enforcing the terms of such licenses.
Operators wishing to use their own facilities to provide international services
were until recently required to obtain an International Facilities License
("IFL"). An IFL authorized the running of telecommunication systems within the
U.K. and permitted the licensee to connect U.K. systems to overseas systems, and
to offer international services. ION obtained an IFL on December 9, 1998.
On September 27, 1999, the Telecommunications (licence Modification) (Fixed
Voice Telephony and International Facilities Operator Licences) Regulations 1999
(the "Regulations") came into force. The Regulations implemented the
requirements of the Licensing Directive and converted existing IFLs, into Public
Telecommunications Operator Licenses ("PTO Licenses") which now include an
authorization for the provision of international facilities. Under its new PTO
License, ION is also entitled to offer domestic telecommunications services.
Metromedia Fiber Network UK Limited ("MFN UK"), which was incorporated by us in
the United Kingdom on March 4, 1999 was awarded a PTO license on October 7,
1999. MFN UK will be used as the operating company in the United Kingdom and has
been granted code powers which gives it statutory rights of way over land which
overide private rights.
With effect from June 30, 1999, it is no longer necessary to hold an
individual telecommunications license to have interconnection rights. Similarly,
it is no longer necessary for an operator to build its own infrastructure to be
included within the "Annex II list" of operators with rights and obligations to
interconnect pursuant to the Interconnection Directive. Any operator who appears
on the Annex II list on the OFTEL web-site (www.oftel.gov.uk) has the right to
negotiate interconnection as well as a corresponding obligation to negotiate
interconnection with any other operator in Annex II. The terms, conditions and
charges to be applied to interconnection between operators who do not have
significant market power are not specifically regulated and are therefore
subject to commercial agreement. All Annex II operators are eligible to benefit
from the terms and conditions and charges which fixed-line operators with
significant market power are obliged to offer by the Interconnection Directive.
In the United Kingdom, British Telecommunications and Kingston Communications
have significant market power for the provision of fixed networks and services
and leased lines. ION is included in the Annex II list of operators on OFTEL's
web-site and therefore has a right coupled with a corresponding obligation to
negotiate interconnection with any other operator on the Annex II list. MFN UK
is not currently included in the Annex II list but may apply to OFTEL to be
included in the list.
The U.K. Government passed a Competition Act in November 1998 which grants
concurrent powers to the industry specific regulators and the Director General
of Fair Trading for the enforcement of prohibitions against anti-trust behavior
modeled on Articles 81 and 82 of the Treaty of Rome. The Act introduces into
U.K. legislation prohibitions on the abuse of a dominant position and
anti-competitive agreements, and provides for third party rights of action,
stronger investigative powers, interim measures and effective enforcement
powers. The prohibitions are expected to come into force on March 1, 2000. The
Act gives the Director General power to exercise concurrent powers with the
Director General of Fair Trading in relation to "commercial activities connected
with telecommunications." The Act enables third parties to bring enforcement
actions directly against telecommunications operators who are in breach of the
prohibitions contained in the Act and seek damages rather than have to wait for
the Director General to issue an enforcement order. Depending on how these
provisions of the Act are implemented, it may give us and our competitors
greater ability to challenge anti-competitive behavior in the U.K.
telecommunications market.
GERMANY
The German Telecommunications Act of July 25, 1996 (the "German
Telecommunications Act") liberalized all telecommunications activities. Under
the German Telecommunications Act, voice telephony was liberalized as of January
1, 1998. The German Telecommunications Act has been complemented by several
Ordinances. The most significant Ordinances concern license fees, rate
regulation, interconnection, universal service, frequencies and customer
protection. Under the German regulatory scheme, licenses can
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be granted within four license classes. A license is required for operation of
transmission lines that extend beyond the limits of a property and that are used
to provide telecommunications services for the general public. The licenses
required for the operation of transmission lines are divided into 3
infrastructure license classes: mobile telecommunications (license class 1);
satellite (license class 2); and telecommunications services for the general
public (license class 3). The provision of dark fiber does not require a
license. Beside the infrastructure licenses, an additional license is required
for provision of voice telephony services on the basis of self-operated
telecommunications networks (license class 4). A class 4 license does not
include the right to operate transmission lines. According to the License Fees
Ordinance, a nationwide class 4 license costs a one-time fee of DM 3,000,000.
The costs for a territorial class 3 license will be determined by the
Regulierungsbehorde fur Telekommunikation und Post (the "RegTP") and is
dependent on the population and the geographical area covered by the territorial
class 3 license. A nationwide territorial class 3 license costs DM 10,600,000.
The Administrative Court of Cologne held in a preliminary ruling that there is a
high probability that the license fees are excessive and that therefore the
Ordinance might be void. The RegTP does not invoice any license fees at the
present time in view of the pending administrative court procedure. Since we
have not yet received a license fee order, it is presently unclear what the
amount of our license fee will be. Licensees that operate transmission lines
crossing the boundary of a property have the right to install transmission lines
on, in and above public roads, squares, bridges and public waterways without
payment; however, when installing transmission lines a planning agreement must
be obtained from the relevant authorities.
A company which operates a public telecommunications network has the right
to receive favorable interconnection rates from Deutsche Telekom, as a dominant
carrier. If the company does not agree with the offered rates or Deutsche
Telekom refuses to interconnect for whatever reason, the company can refer the
case to the RegTP which shall decide upon the request for interconnection within
a period of six weeks; if the RegTP decides to extend this deadline, it must at
the latest decide within ten weeks of the request. Whether, and under which
conditions, carrier to carrier operators will receive favorable interconnection
rates or less favorable "special network access rates" from Deutsche Telekom
depends on whether they operate a "public telecommunications network."
According to the regulatory authority, a public telecommunication network
consists of at least one switch and three transmission lines. Therefore, a
carrier with this minimal network configuration has the right to interconnect
with Deutsche Telekom or other operators of public telecommunications networks.
Deutsche Telekom has terminated its Interconnection Agreements with most of the
carriers and is now imposing, in its new standard interconnection contracts,
additional interconnection conditions. Deutsche Telekom demands inter alia, that
carriers which do not meet certain minimum traffic requirements must pay a
stipulated penalty. In addition, Deutsche Telekom requests a minimum lease
period for interconnection access points (often referred to as "ICA") of
24 months. If traffic at one point of interconnection exceeds 48.8 Erlang,
Deutsche Telekom requests the establishment of additional points of
interconnection up to a maximum of 23 points of interconnection. It is presently
unclear whether or not these and other interconnection conditions will be upheld
by the regulatory authority or the courts.
The rates of Deutsche Telekom's services in conjunction with interconnection
and special network access are subject to regulatory approval; this approval is
typically granted for a limited period of time. The current approval expires on
December 31, 1999. It is uncertain which interconnection rates will apply to the
next year.
Licensed operators are under an obligation to present their standard terms
and conditions (with regard to the provision of telecommunications services for
the public) to the RegTP. The RegTP may, based upon certain criteria decide not
to accept these terms and conditions. We may become subject to universal service
financing obligations. Currently, it is unlikely that the universal service
financing system will be implemented in Germany in the foreseeable future. These
obligations do not apply as far as the provision of mere dark fiber is
concerned.
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Metromedia Fiber Network GmbH has obtained a class 3 license for the whole
territory of Germany. In addition, Metromedia Fiber Network GmbH has concluded
frameworks agreements with the cities of Frankfurt, Stuttgard and Cologne on the
conditions and procedures for obtaining the necessary planning agreements with
the city authorities.
OTHER EUROPEAN COUNTRIES
In addition to our United Kingdom and German operations, we have
incorporated local subsidiaries in Belgium, France and The Netherlands. We are
currently in the process of incorporating local subsidiaries in Austria, The
Czech Republic, France, Hungary, Ireland, Italy, Japan, Spain and Switzerland.
In the Netherlands, the local subsidiary has registered with the Dutch
regulator. We are in the process of applying, through our local subsidiaries,
for necessary licenses and registrations in the other above mentioned countries
to enable us to provide dark fiber and DWDM services.
EMPLOYEES
As of September 30, 1999, we employed 529 people, including 262 in
engineering and construction, 168 in sales and marketing and 99 in
administration. Our employees are not represented by any labor union. We
consider our relationship with employees to be good.
PROPERTIES
Our principal properties currently are the NY Network and its component
assets. We own substantially all of the communications equipment required for
our business. Our installed fiber optic cable is laid under the various
rights-of-way held by us. Please refer to the section of this prospectus
supplement entitled "--Build-out of Networks--Rights-of-Way." Our other fixed
assets are located at various leased locations in the geographic areas that we
serve. Our executive and administrative offices are located at our principal
office at One North Lexington Avenue, White Plains, New York. We lease this
space (currently approximately 21,000 square feet) under an agreement that
expires in March 2003. Our sales offices are located at 685 Third Avenue, New
York, New York. We lease this space (approximately 9,670 square feet) under an
agreement that expires in September 2003. We lease additional space (currently
8,710 square feet) at 60 Hudson Street, New York, New York, from Hudson
Telegraph Associates under an agreement that expires in March 2010.
AboveNet's executive and administrative offices are located at 50 West San
Fernando Street, San Jose, California. We lease this space (approximately 19,850
square feet) under an agreement that expires in February 2008. Palo Alto
Internet Exchange's executive and administrative offices are located at 285
Hamilton Avenue, Palo Alto, California (approximately 5,130 square feet) under
an agreement that expires in January 2007. In addition, AboveNet and Palo Alto
Internet Exchange lease various co-location facilities in California, Virginia
and New York that range from 10,000 to 29,000 square feet under agreements that
expire within the next 10 to 20 years.
LEGAL PROCEEDINGS
On or about October 20, 1997, VCNY commenced an action against us, 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, VCNY filed an amended
complaint. On or about July 2, 1999, VCNY filed a second amended complaint. In
its complaint, as amended, VCNY alleges seven causes of action in connection
with its sale of 900,000 shares (not adjusted for subsequent stock splits) of
class A common stock to Peter Sahagen and the Kramer
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Defendants on January 13, 1997. The seven causes of action include:
(i) violation of Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated under such Act; (ii) fraud and fraudulent concealment;
(iii) breach of fiduciary duty; (iv) negligent misrepresentation and omission;
and (v) breach of contract. VCNY is seeking, among other things, rescission of
the VCNY Sale, or alternatively, damages in an amount which cannot currently be
ascertained but VCNY contends to be in excess of $460 million, together with
interest. VCNY is also seeking unspecified punitive damages, reasonable legal
fees and the cost of this action. All the defendants, including us and Stephen
A. Garofalo, have moved for summary judgment on VCNY's second amended complaint.
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).
Mr. Contardi alleges a cause of action for, among other things, breach of a
finder's fee agreement entered into between Mr. Sahagen and Mr. Contardi 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. Mr. Contardi is seeking, among
other things, a number of shares of the Company which we cannot currently
ascertain but believe to be approximately 112,500 shares (calculated as of the
date on which the complaint was filed) or damages in an amount which we cannot
currently ascertain but believe to be approximately $4.9 million (calculated as
of the date on which the complaint was filed) and all costs and expenses
incurred by him in this action. We have filed an answer to the complaint and
have raised affirmative defenses. We have moved for summary judgment on the
complaint.
We intend to vigorously defend both these actions because we believe that we
acted appropriately in connection with the matters at issue in these two cases.
However, we can make no assurances that we will not determine that the
advantages of entering into a settlement outweigh the risk and expense of
protracted litigation or that ultimately we will be successful in defending
against these allegations. If we are unsuccessful in defending against these
allegations, an award of the magnitude being sought in the VCNY Litigation would
have a material adverse effect on our financial condition or results of
operations.
We were a defendant in Howard Katz, et al. v. Metromedia Fiber Network,
Inc., et al., No. 97 Civ. 2764 (the "Katz Litigation"). In their second amended
complaint, Howard Katz, Realprop Capital Corporation and Evelyn Katz
(collectively, the "Katz Entities") alleged causes of action against our
company, Stephen A. Garofalo, Peter Sahagen, Peter Silverman, Silverman,
Collura, Chernis & Balzano, P.C. and Metromedia Company, in connection with the
repurchase of the Katz Securities, as defined, for, among other things, common
law fraud, violations of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated under such Act, breach of fiduciary duty and
negligent misrepresentation. In March 1998, we entered into a settlement
agreement with the Katz Entities which, among others, settled and resulted in
the dismissal of the Katz Litigation.
In addition, we are subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, we
believe that none of such current claims, or proceedings, individually or in the
aggregate, including the VCNY Litigation and the Contardi litigation, will have
a material adverse effect on our financial condition or results of operations,
although we can make no assurances in this regard.
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MANAGEMENT
The directors and executive officers of our company and their ages as of the
date of this prospectus supplement are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- -------- -------------
<S> <C> <C>
Stephen A. Garofalo........ 48 Chairman of the Board and Chief Executive Officer
Howard M. Finkelstein...... 46 President, Chief Operating Officer and Director
Vincent A. Galluccio....... 53 Senior Vice President and Director
Gerard Benedetto........... 42 Senior Vice President--Chief Financial Officer
Nicholas M. Tanzi.......... 40 Senior Vice President--Sales and Marketing
Silvia Kessel.............. 49 Executive Vice President and Director
John W. Kluge.............. 85 Director
David Rand................. 36 Director; Chief Technology Officer of AboveNet
David Rockefeller.......... 83 Director
Stuart Subotnick........... 56 Director
Sherman Tuan............... 45 Director; Chief Executive Officer of AboveNet
Arnold L. Wadler........... 56 Executive Vice President, General Counsel, Secretary and
Director
Leonard White.............. 60 Director
</TABLE>
STEPHEN A. GAROFALO founded our company in April 1993. Mr. Garofalo has been
serving as Chairman of the Board of Directors since our inception and as Chief
Executive Officer since October 1996. Mr. Garofalo served as President from 1993
to 1996 and as Secretary from 1993 to 1997. From 1979 to 1993 Mr. Garofalo
served as president and chief executive officer of F. Garofalo Electric Co.,
Inc., an electrical contractor.
HOWARD M. FINKELSTEIN has been President, Chief Operating Officer and a
Director of our company since April 1997. Prior to joining our company,
Mr. Finkelstein was employed by various affiliates of Metromedia Company for 16
years. His most recent position was as executive vice president and chief
operating officer of Metromedia International Telecommunications, Inc. From 1984
to 1993, Mr. Finkelstein served as president of Metromedia Communications
Corporation, a national long distance telecommunications carrier. In addition,
Mr. Finkelstein served as executive vice president and chief operating officer
of Metromedia Restaurant Group from 1993 to 1995. Mr. Finkelstein is a director
of Multimedia Medical Systems, Incorporated, a privately held company.
VINCENT A. GALLUCCIO has been a Director of our company since
February 1997. Prior to joining our company, Mr. Galluccio served as president
of ION since February 1998 and as a senior vice president since December 1995.
From January 1992 to October 1994, Mr. Galluccio was employed by British
Telecommunications plc, as a global sales manager for network outsourcing
operations. Prior to joining British Telecommunications plc, Mr. Galluccio spent
25 years with International Business Machines Corporation in various sales,
marketing and business development positions and was involved in both domestic
and world trade assignments.
GERARD BENEDETTO has been Senior Vice President--Chief Financial Officer
since February 1998. From July 1995 to January 1998, he was vice
president--chief accounting officer at Metromedia International
Telecommunications, Inc. From October 1993 to July 1995, he was vice
president--chief financial officer at Metromedia Restaurant Group. From
February 1985 to October 1993, he was vice president--chief financial officer at
Metromedia Communications Corporation.
NICHOLAS M. TANZI has been Senior Vice President--Sales and Marketing since
August 1997. From March 1995 to July 1997, he served as vice
president--enterprise networks division at Fujitsu Business Communications
Systems. From April 1993 to February 1995, Mr. Tanzi was director of sales,
Eastern
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Region at Asante Technologies Inc. Mr. Tanzi was employed in various capacities
from November 1979 through October 1993 at Digital Equipment Corporation.
SILVIA KESSEL has served as a Director of our company since July 1997 and as
Executive Vice President since October 1997. Ms. Kessel has served as chief
financial officer and treasurer of Metromedia International Group, Inc. since
1995 and executive vice president of Metromedia International Group, Inc. since
1996. In addition, Ms. Kessel served as executive vice president of Orion
Pictures Corporation, a motion picture production and distribution company, from
January 1993 through July 1997, senior vice president of Metromedia Company
since 1994 and president of Kluge & Company since January 1994. Prior to that
time, Ms. Kessel served as senior vice president and a director of Orion
Pictures Corporation from June 1991 to November 1992 and managing director of
Kluge & Company from April 1990 to January 1994. Ms. Kessel is executive vice
president and a member of the Board of Directors of Big City Radio, Inc. and of
Metromedia International Group, Inc. In addition, Ms. Kessel is a director of
Liquid Audio, Inc.
JOHN W. KLUGE has been a Director of our company since July 1997. Mr. Kluge
has been the president and chairman of Metromedia Company and its
predecessor-in-interest, Metromedia, Inc., for over five years. Mr. Kluge has
been the chairman of the Board of Metromedia International Group, Inc. since
1995. In addition, Mr. Kluge has been chairman of the Board of Directors and a
director of Orion Pictures Corporation from 1992 until July 1997. He also serves
as a director of Conair Corporation and Occidental Petroleum Corporation.
DAVID RAND has served as a Director of our company since September 1999. Mr.
Rand has served as AboveNet's Chief Technology Officer since March 1996,
initially as a consultant, and since May 1998 as an employee. Mr. Rand has
served as a member of the Internet Engineering Task Force for the past seven
years. Mr. Rand authored rfc 1962 and rfc 1663, developed the EtherValve
technology, ASAP and APS, as well as co-developed MRTG. From September 1995 to
May 1998, Mr. Rand was an engineer at Cisco Systems, Inc., a router
manufacturer. From February 1994 to August 1995, Mr. Rand was an engineer at
Innovative Systems and Technologies, a video compression company. From
October 1993 to February 1994, Mr. Rand was a software engineer at
Novell, Inc., a network server company.
DAVID ROCKEFELLER has served as a Director of our company since
October 1997. Mr. Rockefeller currently serves as chairman of The Chase
Manhattan Bank's International Advisory Committee, as chairman of Rockefeller
Center Properties, Inc. (since 1995) and as a director of Rockefeller & Co.,
Inc. (since 1994), a privately owned investment management firm and its parent
corporation, Rockefeller Financial Services. From 1961 to 1981, Mr. Rockefeller
served as chairman of The Chase Manhattan Corporation and The Chase Manhattan
Bank, N.A. From 1981 to 1995, he served as chairman of Rockefeller Group, Inc.
STUART SUBOTNICK has served as a Director of our Company since July 1997.
Mr. Subotnick has been the vice chairman of the Board of Directors of Metromedia
International Group, Inc. since 1995 and president and chief executive officer
of Metromedia International Group, Inc. since December 1996. In addition,
Mr. Subotnick served as vice chairman of the Board of Directors of Orion
Pictures Corporation from 1992 until July 1997. Mr. Subotnick has served as
executive vice president of Metromedia Company and its predecessor-in-interest,
Metromedia, Inc., for over five years. Mr. Subotnick has served as vice chairman
of Metromedia International Group, Inc. since November 1995 and president and
chief executive officer of Metromedia International Group, Inc. since November
1996. Mr. Subotnick is also a director of Carnival Cruise Lines, Inc. and
chairman of the Board of Directors of Big City Radio, Inc.
SHERMAN TUAN, the founder of AboveNet, has served as a Director of our
company since September 1999. Mr. Tuan has served as Chief Executive Officer and
a Director of AboveNet since 1996, and President until January 1998. Mr. Tuan
served as chairman of the board of AboveNet from August 1998 to September 1999.
Mr. Tuan was president of InterNex Information Services, Inc., an Internet
infrastructure provider, from November 1994 to October 1995 and from
February 1994 to November 1995, was president
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of Tiara Computer, Inc., a network equipment manufacturer, which merged with
InterNex Information Services, Inc. in November 1994. From January 1992 to
June 1993, Mr. Tuan was vice president of worldwide sales and marketing of
Primus Technologies, Inc., a provider of problem resolution and knowledge
management software, and president of Celerite Graphics, Inc., a manufacturer of
video chips. Mr. Tuan received an electrical engineering degree from Feng-Chia
University in Taiwan.
ARNOLD L. WADLER has served as our Executive Vice President, General Counsel
and Secretary since October 1997 and has served as a Director of our company
since July 1997. Mr. Wadler has served as executive vice president, general
counsel and secretary of Metromedia International Group, Inc. since August 29,
1996 and, from November 1, 1995 until that date, as senior vice president,
general counsel and secretary of Metromedia International Group, Inc. and as the
executive vice president, general counsel, secretary and director of Big City
Radio, Inc. since December 1997. In addition, Mr. Wadler serves as a director of
Metromedia International Group, Inc. and has served as a director of Orion
Pictures Corporation from 1991 until July 1997 and as senior vice president,
secretary and general counsel of Metromedia Company, and its
predecessor-in-interest, Metromedia, Inc., for over five years.
LEONARD WHITE has served as a Director of our company since October 1997.
Mr. White has served as president and chief executive officer of Rigel
Enterprises since July 1997. Mr. White served as president and chief executive
officer of Orion Pictures Corporation from 1992 until 1997 and as president and
chief executive officer of Orion Home Entertainment Corporation from 1987 to
1992. Mr. White also serves as a director of Metromedia International Group,
Inc., Big City Radio, Inc. and American Film Technologies, Inc.
BOARD OF DIRECTORS
There are presently eleven members on the Board of Directors of our company.
Holders of the class B common stock are entitled to elect 75% of the Board of
Directors and holders of the class A common stock are entitled to vote as a
separate class to elect the remaining directors. Currently, eight of the eleven
directors are nominees of the holders of class B common stock and as a result
holders of the class A common stock are entitled to fill three vacancies on the
Board of Directors. Members of each class of directors will hold office until
their successors are elected and qualified. The directors are elected by a
plurality vote of all votes cast at each annual meeting of the stockholders
entitled to vote for such directors and hold office for a one-year term.
COMPENSATION OF DIRECTORS
During 1999, each director of our company who was not an officer, employee
or affiliate of our company (the "Non-Employee Directors") will be entitled to
receive a $20,000 annual retainer plus a separate attendance fee of $1,200 for
each meeting of the Board of Directors attended by a Non-Employee Director in
person or $500 for each meeting of the Board of Directors in which a
Non-Employee Director participated by conference telephone call. Members of
committees of the Board of Directors are paid $500 for each meeting attended. In
addition, our 1998 Incentive Stock Plan entitles any Non-Employee Director who
meets the criteria for "outside director" under Section 162(m) of the Internal
Revenue Code and who first serves on the Board of Directors subsequent to the
adoption of the 1998 Incentive Stock Plan to receive awards under such plan of
40,000 shares of class A common stock, each having an exercise price equal to
the fair market value of a share of class A common stock on the date of grant.
Awards to Non-Employee Directors under the 1998 Incentive Stock Plan will be
aggregated with awards under the 1997 Incentive Stock Plan so that total awards
under each plan will not exceed 40,000 shares of class A common stock.
Non-Employee Directors are entitled to receive options to purchase 40,000
shares of our class A common stock under our 1997 Incentive Stock Plan. Options
to purchase 40,000 shares of class A common stock will be granted annually on
the day of each annual stockholder meeting. Each outside director is eligible to
receive options to purchase a maximum of 100,000 shares of class A common stock
under the plan. Under the 1997 Incentive Stock Plan, each Non-Employee Director
who was a director of our
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company on October 28, 1997 was granted an option to purchase 40,000 shares of
our common stock at an exercise price of $2.00, the price of the class A common
stock on the date of the Initial Public Offering.
In addition, on August 20, 1997, we granted to each of Mr. Kluge and
Mr. Subotnick options to purchase 2,028,000 shares of class A common stock at an
exercise price of $.245 per share, and to each of Mr. Wadler and Ms. Kessel
options to purchase 405,600 shares of class A common stock at an exercise price
of $.245 per share, in each case.
EXECUTIVE COMPENSATION
The following table provides you with information on the compensation
awarded to, earned by or paid to the Chief Executive Officer and the four other
most highly compensated executive officers of our company whose individual
compensation exceeded $100,000 during the fiscal years ended December 31, 1998,
1997 and 1996 for services rendered in all capacities to us and our
subsidiaries. The persons listed in the table below are referred to as the
"Named Executive Officers."
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------ ---------------------------
OTHER NUMBER OF ALL
ANNUAL SECURITIES OTHER
COMPENSATION UNDERLYING STOCK COMPENS.
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS ($) ($)(1) OPTIONS (2) ($)
- --------------------------- -------- --------- --------- ------------ ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Garofalo.................. 1998 328,385 100,000 23,301 -- -- -- --
Chairman and Chief Executive 1997 295,000 50,000 14,157 3,042,000(3)
Officer 1996 225,960 -- --
Howard M. Finkelstein................ 1998 321,462 100,000 24,074 -- -- -- --
President and Chief Operating 1997 196,756 50,000 11,769 12,168,000(5)
Officer(4) 1996 -- -- --
Vincent A. Galluccio................. 1998 183,400 15,000 1,673 300,000(6) -- --
Senior Vice President 1997 181,522 -- -- 2,481,840(7) --
1996 127,087 -- --
Gerard Benedetto..................... 1998 181,423 -- 3,355 1,100,000(9) -- -- --
Senior Vice President--Chief 1997 -- -- -- --
Financial Officer(8) 1996 -- -- --
Nicholas M. Tanzi.................... 1998 158,000 65,000 2,819 300,000(6) -- --
Senior Vice President--Sales and 1997 -- -- -- 721,680(11)
Marketing(10) 1996 -- -- -- --
</TABLE>
- ------------------------
(1) Includes amounts paid as automobile allowance, insurance premiums and 401(k)
matching funds.
(2) This information gives effect to our stock splits.
(3) Includes presently exercisable options to purchase 3,043,000 shares of
class A common stock at an exercise price of $.245 per share.
(4) Since Mr. Finkelstein was hired by us during 1997, the preceding year's
compensation is not applicable.
(5) Includes presently exercisable options to purchase 12,168,000 shares of
class A common stock at an exercise price of $.245 per share.
(6) Includes options to purchase 300,000 shares of class A common stock at an
exercise price of $5.25 per share that will become exercisable ratably over
a four year period commencing August 31, 1999.
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(7) Includes presently exercisable options to purchase 1,281,840 shares of
class A common stock at an exercise price of $.245 per share, and options to
purchase 300,000 shares of class A common stock, which Mr. Galluccio
exercised during 1998. Also includes options to purchase 600,000 shares of
class A common stock at an exercise price of $2.00 per share that will
become exercisable ratably over a four year period commencing October 28,
1998.
(8) Since Mr. Benedetto was hired by us during 1998, the preceding year's
compensation is not applicable.
(9) Includes options to purchase 800,000 and 300,000 shares of class A common
stock at an exercise price of $1.94 and $5.25 per share that will become
exercisable ratably over a four year period commencing January 6, 1999 and
August 31, 1999, respectively.
(10) Since Mr. Tanzi was hired by Metromedia Fiber Network during 1997, the
preceding year's compensation is not applicable. Compensation information
for 1997 is omitted because aggregate compensation during such fiscal year
was less than $100,000.
(11) Includes presently exercisable options to purchase 121,680 shares of
class A common stock at an exercise price of $.96 per share and options to
purchase 600,000 shares of class A common stock at an exercise price of
$2.00 per share that will become exercisable ratably over a four year
period commencing October 28, 1998.
During 1998 and 1997, Mr. Wadler and Ms. Kessel, each of whom serves as an
executive officer of our company, were employed and paid by Metromedia Company,
pursuant to a management agreement with Metromedia Company, dated as of
January 2, 1998, as amended (the "Management Agreement"). Please refer to the
section in this prospectus supplement entitled "Certain Relationships and
Related Transactions--Recent Transactions--Management Agreement." We did not pay
any other amounts to the Named Executive Officers during 1997 or 1998.
During 1999, certain of our executive officers were granted stock options to
purchase 150,000 shares of class A common stock at an exercise price of $26.375
per share.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of our Named Executive
Officers.
GAROFALO EMPLOYMENT AGREEMENT. Mr. Garofalo's employment agreement, dated
as of February 26, 1997, has a five year term. It provides Mr. Garofalo a base
salary of $295,000 for the first year, $335,000 for the second year, $375,000
for the third year, $415,000 for the fourth year and $455,000 for the fifth
year. Mr. Garofalo is also entitled to receive an annual incentive bonus to be
determined by the Compensation Committee of the Board of Directors. The
incentive bonus will not be less than $100,000 per year. Mr. Garofalo's
employment agreement also provides for other employee benefits such as a car
allowance, life insurance, health care and certain disability and death
benefits. In addition, Mr. Garofalo was granted options to purchase 3,042,000
shares of class A common stock at an exercise price of $.245 per share after
giving effect to the recent stock splits. These options are immediately
exercisable and expire 10 years from their grant. We registered the shares of
class A common stock underlying the options under the Securities Act upon the
consummation of the initial public offering.
Except in the case of disability, we may terminate Mr. Garofalo's employment
only for cause, upon which termination Mr. Garofalo will have no right to
receive any compensation or benefit from us. If the agreement is terminated
without cause, or if Mr. Garofalo terminates employment for good reason, we will
be obligated to pay Mr. Garofalo an amount equal to the greater of (i) his
monthly base salary as then in effect multiplied by the number of months
remaining in term of his employment as of such termination date and (ii)
$1,000,000. "Good reason" includes:
- a reduction in the nature or scope of Mr. Garofalo's titles, authorities,
powers, duties or responsibilities;
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- a change in the method or formula for determining the bonus, which results
in a decrease in the amount of bonus payable to Mr. Garofalo;
- the removal of Mr. Garofalo as a member of the Board of Directors, unless
such removal occurs after termination of Mr. Garofalo's employment for
cause;
- a sale of all or substantially all of the ownership interests or assets of
our company, or a merger or consolidation of our company with any other
corporation or entity;
- a change in control of our company, defined as any person or entity, other
than Mr. Garafalo, becoming a beneficial owner, as defined in Rule 13d-3
of the Securities Exchange Act of 1934, directly or indirectly, of
securities of our company representing 50% or more of the combined voting
power of our then outstanding securities; or
- a material breach by our company of our affirmative or negative covenants
or undertakings in the employment agreement, and a failure to remedy such
breach within 15 days.
Pursuant to the agreement, Mr. Garofalo has agreed not to compete with us
for a period of one year following termination of the agreement. During such
non-compete period, Mr. Garofalo will be entitled to receive an amount equal to
his base salary as in effect on the date of termination, so long as the
agreement was not terminated prior to the expiration of the term by either
party.
FINKELSTEIN EMPLOYMENT AGREEMENT. Mr. Finkelstein's employment agreement,
dated as of April 30, 1997, has a three year term. It provides Mr. Finkelstein
with a base salary of $295,000 for the first year, $335,000 for the second year
and $375,000 for the third year. Mr. Finkelstein is also entitled to receive an
annual incentive bonus to be determined by the Compensation Committee of the
Board of Directors. The incentive bonus will not be less than $100,000 for each
year. Mr. Finkelstein's employment agreement also provides for other employee
benefits such as a car allowance, life insurance, health care, and certain
disability and death benefits. In addition, Mr. Finkelstein was granted options
to purchase 12,168,000 shares of class A common stock at an exercise price of
$.245 per share after giving effect to the recent stock splits, which options
are immediately exercisable and expire 10 years from their grant. We registered
these shares of class A common stock under the Securities Act upon the
consummation of our initial public offering.
Except in the case of disability, we may terminate Mr. Finkelstein's
employment only for cause, upon which termination Mr. Finkelstein will have no
right to receive any compensation or benefit from us. If the agreement is
terminated without cause, or if Mr. Finkelstein terminates employment for good
reason, we will be obligated to pay to Mr. Finkelstein his base salary, bonus
and benefits that are accrued and unpaid as of the date of termination, as well
as an amount equal to one and a half time his base salary as then in effect.
"Good reason" includes
- a reduction in the nature or scope of Mr. Finkelstein's titles,
authorities, powers, duties or responsibilities;
- a change in the method or formula for determining the bonus, which results
in a decrease in the amount of bonus payable to Mr. Finkelstein;
- the removal of Mr. Finkelstein as a member of the Board of Directors,
unless such removal occurs after termination of Mr. Finkelstein's
employment for cause;
- a sale of all or substantially all of the ownership interests or assets of
our company, or a merger or consolidation of our company with any other
corporation or entity;
- a change in control of our company, defined as any person or entity, other
than Mr. Garofalo, becoming a beneficial owner, as defined in Rule 13d-3
of the Securities Exchange Act of 1934, directly or indirectly, of
securities of our company representing 50% or more of the combined voting
power of our then outstanding securities; or
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- a material breach by us of our affirmative or negative covenants or
undertakings in the employment agreement, and a failure to remedy such
breach within 15 days.
Pursuant to the agreement, Mr. Finkelstein has agreed not to compete with us
for a period of one year following termination of the agreement. During such
non-compete period, Mr. Finkelstein will be entitled to receive an amount equal
to his base salary as in effect on the date of termination, so long as the
agreement was not terminated prior to the expiration of the term by either
party.
GALLUCCIO EMPLOYMENT AGREEMENT. Mr. Galluccio's employment agreement, dated
as of August 31, 1998, has a one year term and contains a one-year renewal
option which was exercised by the Company. It provides Mr. Galluccio with an
annual base salary of $225,000 for the current year. Mr. Galluccio is also
entitled to receive an annual incentive bonus, which is dependent upon our
performance, to be determined by the Compensation Committee of the Board of
Directors. If approved by the Compensation Committee, the incentive bonus has an
initial target of 20% of Mr. Galluccio's base salary. Mr. Galluccio's employment
agreement also provides for other employee benefits such as the right to
participate in all group health and insurance programs. In addition,
Mr. Galluccio was granted options to purchase 300,000 shares of class A common
stock at an exercise price of $5.25 per share. These shares have been registered
under the Securities Act on Form S-8.
Except in the case of disability or a change of control, we may terminate
Mr. Galluccio's employment only for cause, upon which termination Mr. Galluccio
will have no right to receive any compensation or benefit from us. If
Mr. Galluccio's employment is terminated for any reason other than for cause, or
in the event that there is a change of control of our company and Mr. Galluccio
is requested, in connection with such change of control, to perform his duties
under this agreement on a regular, full-time basis at a location further than 75
miles from Mr. Galluccio's current principal office location, Mr. Galluccio, in
his sole and absolute discretion, may deem this agreement to be terminated by us
without cause. Upon such termination, Mr. Galluccio will be entitled to receive
his base salary for the remaining term of his employment agreement, all
previously earned and accrued entitlements and benefits from us and our employee
benefit plans, and an amount equal to 25% of Mr. Galluccio's base salary.
Mr. Galluccio has agreed not to compete with us or any affiliated company
for a period of two years following the termination of his employment agreement.
BENEDETTO EMPLOYMENT AGREEMENT. Mr. Benedetto's employment agreement, dated
as of August 31, 1998, has a three and one-half year term. It provides
Mr. Benedetto with an annual base salary of $225,000 for the current year.
Mr. Benedetto is also entitled to receive an annual incentive bonus, which is
dependent upon our performance, to be determined by the Compensation Committee
of the Board of Directors. If approved by the Compensation Committee, the
incentive bonus has an initial target of 20% of Mr. Benedetto's base salary.
Mr. Benedetto's employment agreement also provides for other employee benefits
such as the right to participate in all group health and insurance programs. In
addition, Mr. Benedetto was granted options to purchase 300,000 shares of
class A common stock at an exercise price of $5.25 per share. These shares have
been registered under the Securities Act on Form S-8.
Except in the case of disability or a change of control, we may terminate
Mr. Benedetto's employment only for cause, upon which termination Mr. Benedetto
will have no right to receive any compensation or benefit from us. If
Mr. Benedetto's employment is terminated for any reason other than for cause, or
in the event that there is a change of control of our company and Mr. Benedetto
is requested, in connection with such change of control, to perform his duties
under this agreement on a regular, full-time basis at a location further than 75
miles from Mr. Benedetto's current principal office location, Mr. Benedetto, in
his sole and absolute discretion, may deem this agreement to be terminated by us
without cause. Upon such termination, Mr. Benedetto will be entitled to receive
his base salary for the remaining term of his employment agreement, all
previously earned and accrued entitlements and benefits from us and our employee
benefit plans, and an amount equal to 25% of Mr. Benedetto's base salary.
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Mr. Benedetto has agreed not to compete with us or any affiliated company
for a period of two years following termination of his employment agreement.
TANZI EMPLOYMENT AGREEMENT. Mr. Tanzi's employment agreement, dated as of
August 31, 1998, has a two year term. It provides Mr. Tanzi with an annual base
salary of $225,000 for the current year. Mr. Tanzi is also entitled to receive
an annual incentive bonus, which is dependent upon our performance, to be
determined by the Compensation Committee of the Board of Directors. If approved
by the Compensation Committee, the incentive bonus has an initial target of 40%
of Mr. Tanzi's base salary. Mr. Tanzi's employment agreement also provides for
other employee benefits such as the right to participate in all group health and
insurance programs. In addition, Mr. Tanzi was granted options to purchase
300,000 shares of class A common stock at an exercise price of $5.25 per share.
These shares have been registered under the Securities Act on Form S-8.
Except in the case of disability or change of control, we may terminate
Mr. Tanzi's employment only for cause, upon which termination Mr. Tanzi will
have no right to receive any compensation or benefit from us. If Mr. Tanzi's
employment is terminated for any reason other than for cause, or in the event
that there is a change of control of our company and Mr. Tanzi is requested, in
connection with such change of control, to perform his duties under this
agreement on a regular, full-time basis at a location further than 75 miles from
Mr. Tanzi's current principal office location, Mr. Tanzi, in his sole and
absolute discretion, may deem this agreement to be terminated by us without
cause. Upon such termination, Mr. Tanzi will be entitled to receive his base
salary for the remaining term of his employment agreement, all previously earned
and accrued entitlements and benefits from us and our employee benefit plans,
and an amount equal to 25% of Mr. Tanzi's base salary.
Mr. Tanzi has agreed not to compete with us or any affiliated company for a
period of two years following termination of his employment agreement.
1997 AND 1998 INCENTIVE STOCK PLANS
We have adopted the 1997 Incentive Stock Plan and the 1998 Incentive Stock
Plan pursuant to which key employees, officers and directors (including
independent directors and members of the Compensation Committee) of our company
and its subsidiaries who have substantial responsibility in the direction of our
company and its subsidiaries, and others whom the option committee determines
provide substantial and important services to our company, may be granted
(i) incentive stock options ("ISOs") and/or (ii) non-qualified stock options
("NQSOs" and, together with ISOs, "Stock Options"). The aggregate number of
shares of the class A common stock that may be the subject of Stock Options
under the Incentive Stock Plans is 28,000,000 (8,000,000 under the 1997
Incentive Stock Plan and 20,000,000 under the 1998 Incentive Stock Plan), and
the maximum number of shares of class A common stock available with respect to
Stock Options granted to any one grantee is 2,000,000 (800,000 under the 1997
Incentive Stock Plan and 1,200,000 under the 1998 Incentive Stock Plan) shares.
The exercise price of all ISOs is the fair market value of the class A
common stock on the date of grant (or 110% of such fair market value with
respect to ISOs granted to persons who own stock possessing more than 10% of the
voting rights of our company's capital stock), and the exercise price of all
NQSOs is determined by the Compensation Committee, although the initial awards
will be made at fair market value of the class A common stock on the date of
grant. Stock Options vest and become exercisable over a period of years, as
determined by the Compensation Committee, and have a term not to exceed ten
years.
If a grantee's employment with us is terminated because of the grantee's
death, or the grantee's retirement on or after attaining the age which the
company may from time to time establish as the retirement age for any class of
its employees, or the age specified in the employment agreement with such
grantee, prior to the date when the Stock Option is by its terms exercisable,
the Stock Option will be immediately exercisable as of the date of the
termination of the grantee's employment, subject to the other terms of the
Incentive Stock Plans. Upon a "change in control" of our company (as defined in
the
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Incentive Stock Plans), each holder of a Stock Option will have the right to
exercise the Stock Option in full without regard to any waiting period,
installment period or other limitation or restriction thereon, and the right,
exercisable by written notice within 60 days after the change in control, to
receive in exchange for the surrender of an option an amount of cash equal to
the difference between the fair market value of the class A common stock on the
date of exercise and the exercise price of the Stock Option. For options granted
under the 1998 Incentive Stock Plan on or after November 13, 1998, in the event
of a change in control, the Board of Directors may in its sole discretion
determine (i) that each holder of such a Stock Option will have the right to
exercise the Stock Option in full without regard to any waiting period,
installment period or other limitation or restriction thereon, and/or (ii) each
holder of such a Stock Option will have the right, exercisable by written notice
within 60 days after the change of control, to receive, in exchange for the
surrender of a Stock Option, an amount of cash equal to the difference between
the fair market value of the class A common stock on the date of exercise and
the exercise price of the Stock Option. Alternatively, the board of directors
may in its sole discretion determine to take neither action. Upon a grantee's
termination of employment from our company or a subsidiary on account of
disability, the grantee or the legal representative of the grantee will have the
right, for a period of one year following the date of such termination, to
exercise a Stock Option, to the extent such award is exercisable and to the
extent such Stock Option has not yet expired. In the event the grantee's
employment with us is terminated for any reason other than disability, death or
retirement, the grantee may exercise a Stock Option within three months after
his or her termination of employment.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with certain officers and
directors. The indemnification agreements provide for indemnification of such
directors and officers to the fullest extent authorized or permitted by law. The
indemnification agreements also provide that:
- we will advance all expenses incurred by the director or officer in
defending certain litigation,
- we will appoint in certain circumstances an independent legal counsel to
determine whether the director or officer is entitled to indemnification,
and
- we will continue to maintain a directors' and officers' liability
insurance (which currently consists of $25.0 million of primary coverage).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Rockefeller and White.
Neither member of the Compensation Committee served as an officer or employee of
our company or any of its subsidiaries during fiscal 1998. There were no
material transactions between us and any of the members of the Compensation
Committee during fiscal 1998.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRADEMARK LICENSE AGREEMENT. We are a party to a ten year royalty free
license agreement with Metromedia Company, pursuant to which Metromedia Company
has granted us a nonexclusive, nontransferable and nonassignable right and
license, without the right to grant sublicenses and to use the trade name,
trademark and corporate name Metromedia in the United States and worldwide. The
license agreement with Metromedia Company can be terminated by Metromedia
Company upon one month's prior written notice in the event that:
- Metromedia Company or its affiliates own less than 20% of the common
stock;
- a change in control of our company occurs; or
- any of the stock or all or substantially all of the assets of any of our
subsidiaries are sold or transferred, in which case, the license agreement
with Metromedia Company will terminate with respect to such subsidiary.
A change in control of our company for purpose of the trademark license
agreement is defined as:
- a transaction in which a person or group, within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934, not in existence
at the time of the execution of the Metromedia license agreement becomes
the beneficial owner of stock entitling such person or group to exercise
50% or more of the combined voting power of all classes of our stock;
- a change in the composition of our Board of Directors whereby a majority
of the members are not directors serving on the Board of Directors at the
time of the license agreement with Metromedia Company, or any person
succeeding such director who was recommended or elected by such directors;
- a reorganization, merger or consolidation where following consummation
thereof, Metromedia Company would hold less than 20% of the combined
voting power of all classes of our stock;
- a sale or other disposition of all or substantially all of our assets; or
- any transaction the result of which would be that the common stock would
not be required to be registered under the Securities Exchange Act of
1934, and the holders of common stock would not receive common stock of
the survivor to the transaction which is required to be registered under
the Securities Exchange Act of 1934.
In addition, Metromedia Company has reserved the right to terminate this
trademark license agreement in its entirety immediately upon written notice to
us if, in Metromedia Company's sole judgment, our continued use of Metromedia as
a trade name would jeopardize or be detrimental to the good will and reputation
of Metromedia Company.
We have agreed to indemnify Metromedia Company and hold it harmless against
any and all losses, claims, suits, actions, proceedings, investigations,
judgments, deficiencies, damages, settlements, liabilities and reasonable legal
expenses, and other related expenses, arising in connection with the license
agreement with Metromedia Company.
MANAGEMENT AGREEMENT. We are a party to the management agreement under
which Metromedia Company provides us with consultation and advisory services
relating to legal matters, insurance, personnel and other corporate policies,
cash management, internal audit and finance, taxes, benefit plans and other
services as we may reasonably request. The management agreement terminates on
December 31 of each year, and is automatically renewed for successive one year
terms unless either party terminates upon 60 days prior written notice. We are
also obligated to reimburse Metromedia Company all its out-of-pocket costs and
expenses incurred and advances paid by Metromedia Company in connection with the
management agreement. In this agreement, we have agreed to indemnify Metromedia
Company and hold it
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harmless from and against any and all damages, liabilities, losses, claims,
actions, suits, proceedings, fees, costs or expenses, including reasonable
attorneys' fees and other costs and expenses incident to any suit, proceeding or
investigation of any kind imposed on, incurred by or asserted against Metromedia
Company in connection with the management agreement. In 1997, Metromedia Company
received no money for its out-of-pocket costs and expenses or for interest on
advances extended by it to us under the management agreement. For the year ended
December 31, 1998, we incurred $500,000 to Metromedia Company under this
agreement. The management fee for 1999 under the agreement is $1,000,000,
payable quarterly at a rate of $250,000.
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SECURITY OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides you with certain information, as of
September 30, 1999, regarding the beneficial ownership of our voting stock after
giving effect to the stock split by (i) each of our directors and director
nominees, (ii) each person whom we believe beneficially owns more than 5% of our
outstanding voting stock, (iii) each Named Executive Officer and (iv) all our
executive officers and directors as a group. In accordance with the
rules promulgated by the Securities and Exchange Commission, the ownership
includes shares currently owned as well as shares which the named person has the
right to acquire beneficial ownership of within 60 days, including through the
exercise of options, warrants or other rights, or through the conversion of a
security. Accordingly, more than one more person may be deemed to be a
beneficial owner of the same securities. Except as otherwise indicated, each
stockholder listed below has sole voting and investment power of the shares
beneficially owned by that person. Some of the stockholders listed below intend
to dispose of a portion of their shares in a concurrent offering. See "Recent
and Proposed Transactions."
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK(1)
------------------------- ------------------------
NUMBER PERCENT NUMBER PERCENT PERCENT OF
OF SHARES OF CLASS OF SHARES OF CLASS TOTAL VOTING POWER
---------- -------- ---------- -------- ------------------
<S> <C> <C> <C> <C> <C>
Stephen A. Garofalo.............. 45,495,512(2) 22.5% -- -- 8.4%
Metromedia Company(3)............ -- -- 31,462,048 93.2% 58.6%
Putnam Investments, Inc.......... 29,056,060(4) 14.6% -- -- 5.4%
FMR Corp......................... 13,344,000(5) 6.7% -- -- 2.4%
Howard M. Finkelstein............ 12,218,000(6) 5.8% -- -- 2.2%
Vincent A. Galluccio............. 1,524,015(7) * % -- -- *
Gerard Benedetto................. 475,000(8) * -- -- *
Nicholas M. Tanzi................ 366,880(9) * -- -- *
Silvia Kessel.................... 510,472(10) * -- -- *
John W. Kluge.................... 2,028,000(11) 1% 31,462,048(12) 93.2% 59.0%
David Rockefeller................ 2,829,104(13) 1.4% -- -- *
Stuart Subotnick................. 2,028,000(11) 1% 33,769,272(12) 100.0% 62.9%
Arnold L. Wadler................. 615,344(10) * -- -- *
Leonard White.................... 46,000(14) * -- -- *
Sherman Tuan..................... 1,074,889(15) * -- -- *
David Rand....................... 455,175(16) * -- -- *
All Directors and Executive
Officers as a Group............ 69,626,391(17) 31.5% 33,769,272 100.0% 75.9%
</TABLE>
- ------------------------
* less than 1.0%
(1) The shares of class B common stock are convertible into shares of class A
common stock at the rate of one share of class A common stock for each share
of class B common stock, and the holders of shares of class B common stock
are entitled to 10 votes per share.
(2) Includes presently exercisable options to purchase 3,042,000 shares of
class A common stock at an exercise price of $.245 per share of which
2,882,000 are held by the Stephen A. Garofalo 1999 Annuity Trust No. 1 and
160,000 are held by the Stephen A. Garofalo 1999 Annuity Trust No. 2.
Mr. Garofalo is the trustee of both trusts. Mr. Garofalo's address is One
North Lexington Avenue, White Plains, New York, New York 10601.
(3) Metromedia Company's address is One Meadowlands Plaza, East Rutherford, NJ
07073.
(4) Based solely upon the Schedule 13G, dated February 2, 1999 filed by Putnam
Investments, Inc. Putnam Investments, Inc's address is One Post Office
Square, Boston, Massachusetts, 02109.
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(5) Based solely on the Schedule 13G, dated February 16, 1999 filed by FMR
Corp., Edward C. Johnson III and Abigail P. Johnson. FMR's address is 82
Devonshire Street, Boston, Massachusetts 02109.
(6) Includes presently exercisable options to purchase 12,168,000 shares of
class A common stock at an exercise price of $.245 per share and 50,000
shares of class A common stock owned by members of Mr. Finkelstein's family.
Mr. Finkelstein's address is One North Lexington Avenue, White Plains, New
York, New York 10601.
(7) Includes presently exercisable options to purchase 1,131,840 and 325,000
shares of class A common stock at an exercise price of $.245 and $2.00 per
share, respectively and 17,175 shares owned by his spouse.
(8) Includes presently exercisable options to purchase 350,000 and 75,000 shares
of class A common stock at an exercise price of $1.9375 and $5.25 per share,
respectively.
(9) Includes presently exercisable options to purchase 285,000, 75,000 and 880
shares of class A common stock at an exercise price of $2.00, $5.25 and
$.95375 per share, respectively. Also includes 5,200 shares of class A
common stock owned by members of Mr. Tanzi's family, with respect to which
Mr. Tanzi has been granted a proxy to vote. Mr. Tanzi's address is One North
Lexington Avenue, White Plains, New York 10601.
(10) Includes 405,600 presently exercisable options to acquire shares of
class A common stock at an exercise price of $.245 per share held by each of
Ms. Kessel and Mr. Wadler. Does not include shares owned by Metromedia
Company. Ms. Kessel and Mr. Wadler are employed by Metromedia Company and
disclaim beneficial ownership of the shares owned by Metromedia Company.
(11) Consists of 2,028,000 presently exercisable options to acquire shares of
class A common stock at an exercise price of $.245 per share held by each of
Mr. Kluge and Mr. Subotnick. Mr. Kluge's address is 215 East 67th Street,
New York, NY 10021 and Mr. Subotnick's address is 215 East 67th Street, New
York, NY 10021.
(12) Includes 31,462,048 shares owned by Metromedia Company. Messrs. Kluge and
Subotnick, directors of our company, are general partners of Metromedia
Company.
(13) Represents 2,789,104 shares owned by DR & Descendants Partnership, of which
Mr. Rockefeller is a partner and for which he exercises voting and
investment power and presently exercisable options to purchase 40,000 shares
of class A common stock at an exercise price of $2.00 per share.
Mr. Rockefeller disclaims actual beneficial ownership of shares owned by DR
& Descendants Partnership except as to shares attributable to his
proportionate interest in the partnership.
(14) Includes 40,000 presently exercisable options to acquire shares of class A
common stock at an exercise price of $2.00 per share.
(15) Includes presently exercisable options to purchase
205,625, 146,875, 11,750, 284,025, 5,875 and 35,250 shares of class A common
stock at an exercise price of $.018, $.171,, $.511, $4.25, $5.16 and
$33.192, respectively.
(16) Includes presently exercisable options to purchase
10,260, 58,750, 11,750, 237,937, 15,875, 58,750 and 35,250 shares of
class A common stock at an exercise price of $.052, $.171, $.171, $.511,
$4,256, $5.16, $22.208 and $33.192, respectively.
(17) Includes presently exercisable options to acquire 21,209,040, 880, 350,000,
690,800, 150,000, 10,260, 205,625, 23,500, 521,962, 11,750, 58,750 and
70,500 shares of class A common stock at an exercise price of $.245,
$.95375, $1.9375, $2.00, $5.25, $.052, $.511, $4.256, $5.16, $22.208 and
$33.192, respectively.
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DESCRIPTION OF THE NEW CREDIT FACILITY
The description provided below does not purport to be complete and is
qualified in its entirety by reference to certain agreements setting forth the
principal terms and conditions of the new credit facility.
We have entered into a commitment letter with an affiliate of one of the
underwriters that provides us with a senior secured reducing revolving credit
facility of up to $150.0 million from the lender. We do not intend to consummate
the new credit facility simultaneously with consummation of the offering of the
notes. The indenture for the notes permits us to incur certain additional
indebtedness and, depending upon market conditions, we may incur such additional
indebtedness in place of the new credit facility. We can use the new credit
facility to help finance the cost of building out networks and for other general
corporate purposes.
The new credit facility will mature on the fifth anniversary of the closing
of the new credit facility. Amounts outstanding under the new credit facility
will bear interest at an applicable margin plus, at our option, the lender's
base rate (in which case the applicable margin will initially be 2.25%, subject
to reductions upon obtaining performance criteria based on our leverage ratio)
or LIBOR (in which case the applicable margin will initially be 3.25%, subject
to reductions upon obtaining performance criteria based on our leverage ratio).
Our obligations under the new credit facility will be unconditionally and
irrevocably guaranteed by each of our subsidiaries (other than certain foreign
subsidiaries or ION) and secured by a pledge of substantially all of our assets
and our restricted subsidiaries' assets. We will pay an annual commitment fee of
1.25% when less than 33 1/3% of the new credit facility has been utilized, 1.00%
when at least 33 1/3%, but not less than 66 2/3%, of the new credit facility has
been utilized and 0.75% thereafter. We will also pay certain upfront commitment
and other fees to the lender and their affiliate.
The new credit facility will contain certain financial and operational
covenants and ratios and other restrictions with which we must comply,
including, among others:
- limitations on the incurrence of additional indebtedness,
- limitations on paying dividends and other payments,
- restrictions on mergers, consolidations and dispositions of assets,
- restrictions on sale-leaseback transactions and lease payments,
- restrictions on transactions with affiliates,
- restrictions on capital expenditures, investments, acquisitions, joint
ventures and partnerships,
- restrictions on liens,
- maximum net total debt to net property, plant and equipment,
- minimum annualized revenue, number of fiber miles, interest coverage ratio
and fixed charge coverage, and
- maximum leverage ratios and (total debt to annualized EBITDA).
The new credit facility will contain the following customary events of
default:
- material misrepresentations,
- payment defaults,
- breach of performance of covenants,
- bankruptcy default,
- failure to make payments to the FCC,
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- default under material contracts,
- judgment and cross defaults, and
- change in control.
Commitments and amounts outstanding under the new credit facility will
automatically reduce in equal quarterly amounts, commencing on the first quarter
following the third anniversary of the closing date under the new credit
facility, pursuant to a schedule to be agreed. Commitments under the new credit
facility will be permanently reduced (and loans under the facility prepaid to
the extent the loans exceed the amount of the commitments under the facility as
so reduced) from (i) 100% of the net proceeds from all non-ordinary course asset
dispositions, subject to customary reinvestment provisions, and (ii) 100% of the
net proceeds from insurance recovery and condemnation event, in each case with
customary baskets and exceptions. We may make voluntary prepayments and
commitment reductions at any time without premium or penalty.
The lender may syndicate the amounts to be provided to us under the new
credit facility. Our commitment letter with the lender allows the lender to
change most of the terms (including the interest rate and other fees payable to
the lender) of their commitment letter with us (other than the amount of the
proposed loan), if the lender believes that these changes are needed to
syndicate successfully the new credit facility. In addition, the lender's
obligation to enter into a definitive agreement and lend us monies under the new
credit facility remains subject to a number of significant conditions and we
therefore can not assure you that we will be able to enter into binding
agreements and borrow money from the lender. These conditions include:
- we must negotiate and enter into definitive documents and provide the
lender with a number of certificates and legal opinions,
- there not occurring certain material changes in the loan syndication,
financial or capital markets or any material adverse change in our
business and operations,
- satisfaction by the lender with certain due diligence matters and
financial statements relating to us, and
- other customary conditions.
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DESCRIPTION OF OTHER INDEBTEDNESS
DESCRIPTION OF OUR 10% SENIOR NOTES DUE 2008
GENERAL. On November 25, 1998 we issued $650 million of 10% Senior Notes
due 2008 pursuant to an indenture between us and IBJ Schroeder Bank and Trust
Company, as trustee. On May 26, 1999, we consummated an offer to exchange those
notes for $650 million of 10% Senior Notes due 2008 that had been registered
under the Securities Act.
PRINCIPAL, MATURITY AND INTEREST. The 10% Senior Notes due 2008 are limited
in aggregate principal amount to $650 million and will mature on November 15,
2008. Interest on the 10% Senior Notes due 2008 accrues at 10% per annum and is
payable semiannually in arrears on May 15 and November 15 of each year.
RANKING The 10% Senior Notes due 2008 are our unsecured senior obligations,
that rank equally in right of payment with all of our existing and future senior
unsecured obligations and rank senior in right of payment to all of our future
subordinated obligations. The 10% Senior Notes due 2008, however, are
effectively subordinated to all of our existing and future secured indebtedness
to the extent of the assets that secure that indebtedness and to all of our
subsidiaries existing and future obligations, whether or not secured.
REDEMPTION. The 10% Senior Notes due 2008 are redeemable on or after
November 15, 2003, at our option, in whole or in part, at the following
redemption prices (expressed as percentages of principal amount) described below
plus accrued interest, if redeemed during the twelve-month period beginning on
November 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003........................................................ 105.000%
2004........................................................ 103.333%
2005........................................................ 101.667%
2006 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time on or before November 15, 2001, we may redeem up to
35% of the original aggregate principal amount of the 10% Senior Notes due 2008
with the net proceeds of a sale of common equity at a redemption price equal to
110% of the principal amount thereof, plus accrued interest, provided that at
least 65% of the original aggregate principal amount of 10% Senior Notes due
2008 remains outstanding after such redemption and provided further, that we use
the net cash proceeds of any public equity offering resulting in gross proceeds
of at least $100 million. Except in connection with a change of control or an
asset sale, as defined in the indenture relating to the 10% Senior Notes due
2008, of our company, we are not required to make mandatory redemption or
sinking fund payments with respect to the 10% Senior Notes due 2008.
COVENANTS. The indenture relating to the 10% Senior Notes due 2008
restricts, among other things, our ability to incur additional indebtedness, pay
dividends or make certain other restricted payments, incur certain liens, sell,
assign, transfer, lease, convey or otherwise dispose of substantially all of our
assets, enter into certain transactions with affiliates, or incur certain
indebtedness. The indenture relating to the 10% Senior Notes due 2008 permits,
under certain circumstances, our subsidiaries to be deemed unrestricted
subsidiaries and thus not subject to the restrictions of the indenture.
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EVENTS OF DEFAULT. The indenture relating to the 10% Senior Notes due 2008
contains standard events of default, including:
- defaults in the payment of principal, premium or interest;
- defaults in the compliance with covenants contained in the indenture;
- cross defaults on more than $15 million of other indebtedness;
- failure to pay more than $15 million of judgements; and
- certain events of our subsidiaries.
RECENT AND PROPOSED TRANSACTIONS
OFFERING OF DECS SECURITIES
Concurrently with the offering described in this prospectus supplement, some
of our stockholders intend to enter into prepaid forward contracts with DECS
Trust VI, under which DECS Trust VI will agree to purchase from those
stockholders on , 2002 (which date may be extended to ,
2003) an aggregate of up to 10,000,000 (excluding the over-allotment option)
shares of class A common stock beneficially owned by those stockholders subject
to the terms and conditions set forth in those contracts. Stockholders who enter
into these prepaid forward contracts will continue to beneficially own and vote
these shares until such future date. We understand that DECS Trust VI will
concurrently sell an aggregate of 10,000,000 (excluding the over-allotment
option) DECS securities. We will receive no portion of the proceeds from these
transactions.
SALE OF CLASS A COMMON STOCK BY THE SELLING STOCKHOLDERS
Concurrently with the offering described in this prospectus supplement, some
of our stockholders intend to sell 4,671,000 (excluding the over-allotment
option) shares of class A common stock. Each share of class A common stock will
be sold at $ per share resulting in $ aggregate gross proceeds to those
stockholders. We will receive no portion of the proceeds from this sale.
Neither of the transactions described above nor the offering described in
this prospectus supplement is conditioned upon any of the other transactions.
PROPOSED INVESTMENT BY BELL ATLANTIC
On October 7, 1999, Bell Atlantic entered into a securities purchase
agreement with us, under which Bell Atlantic has agreed to purchase
approximately 25.6 million newly issued shares of our class A common stock at a
price of $28.00 per share and a convertible subordinated note of approximately
$975.3 million, which note is convertible into shares of our class A common
stock at a conversion price of $34.00 per share. The closing of these
transactions under the securities purchase agreement is subject to:
- the expiration of the waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended;
- approvals from various regulatory authorities;
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- with respect to that portion of the issuance of the shares and the
convertible subordinated note in the aggregate in excess of 19.9% of the
number of shares of our common stock outstanding at the closing (assuming
conversion of the note to be acquired by Bell Atlantic), the approval of
our stockholders; and
- other customary closing conditions.
At the closing of the issuance and sale of the shares and the convertible
subordinated note, we will enter into an indenture with U.S. Bank Trust National
Association, as trustee, governing the terms of the convertible subordinated
note. In addition, we will enter into registration rights agreements giving Bell
Atlantic registration rights with respect to the shares and the convertible
subordinated note at the closing of the issuance and sale of the shares and the
convertible subordinated note.
As a condition to closing, we have agreed to enter into a stockholders'
agreement with Bell Atlantic, together with Metromedia Company, Mr. John W.
Kluge and Mr. Stuart Subotnick. Under the stockholders agreement, except under
certain circumstances, Bell Atlantic will agree to a "standstill" provision
under which it will agree not to acquire more that 22% of our common stock and
will not participate in certain acquisition proposals, tender offers, proxy
solicitations or similar transactions with respect to us without the consent of
our board of directors for a period of ten years. The parties to the
stockholders agreement will also agree to a number of restrictions on their
respective abilities to sell the shares of our common stock which they own
during a period of two years following closing of the transactions contemplated
by the securities purchase agreement. In addition, the stockholders agreement
will provide for certain tag-along rights and rights of first refusal among the
parties. Metromedia Company and Messrs. Kluge and Subotnick will agree to vote
all of their shares of class B common stock (which constitute approximately 63%
of the voting power of our common stock) in favor of the issuance of the shares
and the convertible subordinated note in the aggregate in excess of 19.9% of the
number of shares of our common stock outstanding at the closing. Bell Atlantic
will also have the right to have an observer at meetings of our board of
directors, and after converting the convertible subordinated note into shares of
class A common stock, Bell Atlantic will have the right to appoint two directors
to our board of directors.
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DESCRIPTION OF THE NOTES
THIS DESCRIPTION OF THE TERMS OF THE % SENIOR NOTES DUE 2009 (THE "DOLLAR
NOTES") AND THE % SENIOR NOTES DUE 2009 (THE "EURO NOTES" AND, TOGETHER WITH
THE DOLLAR NOTES, THE "NOTES") SUPPLEMENTS AND, TO THE EXTENT INCONSISTENT,
MODIFIES THE DESCRIPTION OF THE GENERAL TERMS AND PROVISIONS OF THE DEBT
SECURITIES SET FORTH IN THE ACCOMPANYING PROSPECTUS, TO WHICH REFERENCE IS MADE.
The following description of material terms of the Notes does not purport to
be complete and is qualified in its entirety by reference to the Indenture to be
dated , 1999 (the "Indenture"), between Metromedia Fiber Network,
Inc. and The Bank of New York, as trustee (the "Trustee") and to those terms
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). We have filed the proposed form of the
Indenture as Exhibit 4.3 to the Registration Statement, of which this prospectus
supplement and the accompanying prospectus form a part. References in this
"Description of the Notes" to the "Company" or the "Issuer" refer to Metromedia
Fiber Network, Inc. only and not its subsidiaries. Terms (whether or not
capitalized) used but not defined herein have the meanings given to them in the
Indenture.
GENERAL
The Dollar Notes and the Euro Notes are each to be issued pursuant to the
Indenture. The terms of the Notes will include those stated in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act. The
Notes will be subject to all such terms, and Holders of Notes are referred to
the Indenture and the Trust Indenture Act for a statement thereof. The following
summary of the material provisions of the Indenture does not purport to be
complete and is qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. The definitions
of certain terms used in the following summary are set forth below under
"--Certain Definitions." For purposes of this summary, the term "Company" refers
only to Metromedia Fiber Network, Inc. and not to any of its Subsidiaries.
As of the Issue Date, all of the Subsidiaries will be Restricted
Subsidiaries. Under certain circumstances, the Company will be able to designate
existing or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted
Subsidiaries will not be subject to many of the restrictive covenants contained
in the Indenture. Neither the Company's investment in ION nor its investment in
the joint venture constructing the German Network will be considered
Subsidiaries for purposes of the Indenture.
TERMS OF NOTES
The Notes will be general obligations of the Company and will rank equal in
right of payment with all existing and future unsecured senior Indebtedness of
the Company. The Notes will rank senior in right of payment to all subordinated
Indebtedness of the Company that may be issued in the future, if any. The Notes
will not be secured by any assets and, therefore, will be effectively
subordinated to any existing and future secured Indebtedness of the Company and
its Subsidiaries, including the Credit Agreement, to the extent of the value of
the assets securing such Indebtedness.
The Company conducts substantially all of its operations through its
Subsidiaries and, therefore, the Company is dependent on the cash flow of its
Subsidiaries to meet its obligations, including its obligations with respect to
the Notes. The Notes will be effectively subordinated to all Indebtedness and
other liabilities and commitments (including trade payables and lease
obligations) of the Company's Subsidiaries, including any Guarantees of such
Subsidiaries with respect to the Credit Agreement. Any right of the Company to
receive assets of any of its Subsidiaries upon the latter's liquidation or
reorganization (and the consequent right of the Holders of the Notes to
participate in those assets) will be effectively subordinated to the claims of
that Subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company would still be subordinate to any
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security in the assets of such Subsidiary and any indebtedness of such
Subsidiary that is senior to that held by the Company. See "Risk Factors
Relating to the Notes."
PRINCIPAL, MATURITY AND INTEREST
The Dollar Notes will be limited in aggregate principal amount to $ and
the Euro Notes will be limited in aggregate principal amount to [EURO] .
The Notes will mature on December 15, 2009. Interest on the Dollar Notes and the
Euro Notes will accrue at the rate of % and % per annum, respectively, and
will be payable semi-annually in arrears on June 15 and December 15, commencing
June 15, 2000, to Holders of record on the immediately preceding June 1 and
December 1. Interest on the Notes will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from the date of
original issuance. Interest will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Interest on overdue principal and (to the
extent permitted by law) on overdue installments of interest will accrue at a
rate equal 1% per annum in excess of the rate borne by the Notes. For additional
information concerning payments on the Notes. See "--Book Entry, Delivery and
Form--Payment on the Notes."
We have appointed The Bank of New York to serve as register and principal
paying agent for the Notes. We intend to apply to list the Notes on the
Luxembourg Stock Exchange. As long as the Notes are listed on the Luxembourg
Stock Exchange and as long as the rules of this exchange require, we will also
maintain a paying agent and a transfer agent in Luxembourg. The Dollar Notes
will be issued in denominations of $1,000 and integral multiples thereof. The
Euro Notes will be issued in denominations of [EURO]1,000 and integral multiples
thereof. The Trustee initially will be Paying Agent and Registrar under the
Indenture, and the Company may act as Paying Agent or Registrar under the
Indenture. No service will be made for any registration of transfer or exchange
of the Senior Notes, but we may require payment to cover any transfer tax or
similar governmental charge.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the Company's
option prior to December 15, 2004. Thereafter, the Notes will be subject to
redemption at any time at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below, plus accrued and
unpaid interest thereon to the applicable redemption date (subject to the right
of Holders of record on the relevant record date to receive interest due on the
relevant interest payment date), if redeemed during the twelve-month period
beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
YEAR FOR DOLLAR NOTES FOR EURO NOTES
- ---- ---------------- --------------
<S> <C> <C>
2004............................. % %
2005............................. % %
2006............................. % %
2007 and thereafter.............. % %
</TABLE>
Notwithstanding the foregoing, at any time prior to December 15, 2002, the
Company may, on any one or more occasions, redeem up to 35% of the aggregate
principal amount of each of the Dollar Notes and the Euro Notes (determined
separately) originally issued pursuant to the Indenture at a redemption price of
% of the principal amount of the Dollar Notes and % of the principal amount
of the Euro Notes, in each case plus accrued and unpaid interest thereon to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), with
the Net Cash Proceeds received from any Public Equity Offering made by the
Company resulting in gross proceeds to the Company of at least $100 million;
PROVIDED that at least 65% of the
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aggregate principal amount of the Dollar Notes and the Euro Notes (determined
separately) originally issued pursuant to the Indenture remain outstanding
immediately after the occurrence of any such redemption. The Company may make
any such redemption upon not less than 30 nor more than 60 days' notice (but in
no event more than 90 days after the closing of the related Public Equity
Offering).
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Notes are then listed, or, if the Notes are not so then listed, on a pro rata
basis, by lot or by such method as the Company shall deem fair and appropriate;
PROVIDED that no Notes of $1,000 or [EURO]1,000, as the case may be, or less
shall be redeemed in part. Notices of redemption shall be mailed by first class
mail at least 30 but not more than 60 days prior to the redemption date to each
Holder of Notes to be redeemed at its registered address. Notices of redemption
may not be conditional. If any Note is to be redeemed in part only, the notice
of redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption will become due
on the date fixed for redemption. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption unless
the Company defaults in the payment thereof.
MANDATORY REDEMPTION
The Company will not be required to make mandatory redemption or sinking
fund payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have
the right to require the Company to purchase all or any part (equal to $1,000 or
[EURO]1,000, as the case may be, or an integral multiple thereof) of such
Holder's Notes pursuant to the offer described below (the "Change of Control
Offer") at a purchase price in cash equal to 101% of the aggregate principal
amount thereof (the "Change of Control Payment"), plus accrued and unpaid
interest (and Liquidated Damages, if any) thereon to the date of purchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date); provided, that, the
Company shall not be obligated to repurchase Notes pursuant to a Change of
Control Offer in the event that it has exercised its rights to redeem all of the
Notes pursuant to the Indenture. Within 30 days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to purchase
Notes on the date specified in such notice, which date shall be no earlier than
30 and no later than 60 days from the date such notice is mailed (the "Change of
Control Payment Date"), in accordance with the procedures required by the
Indenture and described in such notice.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations to the extent such
laws and regulations are applicable in connection with the purchase of Notes as
a result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with any of the provisions of this
covenant, the Company will comply with the applicable securities laws and
regulations and will be deemed not to have breached its obligations under this
covenant by virtue thereof.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (2) deposit with the Paying Agent an
amount equal to the Change of Control Payment plus accrued and unpaid interest
thereon in respect of all Notes or portions thereof so tendered and (3) deliver
or cause to
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be delivered to the Trustee Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail or deliver
to each Holder of Notes so tendered the Change of Control Payment plus accrued
and unpaid interest thereon for such Notes, and the Trustee will promptly
authenticate and mail or deliver (or cause to be transferred by book entry) to
each Holder a new Note equal in principal amount to any unpurchased portion of
Notes surrendered, if any; PROVIDED that each such new Note will be in a
principal amount of $1,000 or [EURO]1,000, as the case may be or an integral
multiple thereof. The Company will publicly announce the results of the Change
of Control Offer on or as soon as practicable after the Change of Control
Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture will not contain
provisions that permit the Holders of the Notes to require that the Company
purchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction. The Company's ability to purchase Notes upon a Change of
Control may be limited by the Company's then existing financial resources. There
can be no assurance that sufficient funds will be available when necessary to
make any such required purchases. See "Risk Factors--Purchase of Notes Upon a
Change of Control." The Company shall not be required to make a Change of
Control Offer if a third party makes the Change of Control Offer in the manner,
at the times and otherwise in compliance with the requirements set forth in the
Indenture and purchases all Notes validly tendered and not withdrawn.
ASSET SALES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, consummate any Asset Sale, unless (i) the Company
(or such Restricted Subsidiary, as the case may be) receives consideration at
the time of such Asset Sale at least equal to the fair market value (as
determined in good faith by the Board of Directors (including as to the value of
all noncash consideration) and set forth in an Officer's Certificate delivered
to the Trustee) of the assets or Equity Interests issued or sold or otherwise
disposed of and (ii) at least 75% of the consideration therefor is in the form
of cash and/or Cash Equivalents or Telecommunications Assets, and (iii) the Net
Cash Proceeds received by the Company (or such Restricted Subsidiary, as the
case may be) from such Asset Sale are applied within 360 days following the
receipt of such Net Cash Proceeds, to the extent the Company (or such Restricted
Subsidiary, as the case may be) elects, (a) to the permanent redemption or
repurchase of outstanding Indebtedness (other than Subordinated Indebtedness)
that is secured Indebtedness (including that in the case of a revolver or
similar arrangement that makes credit available, such commitment is so
permanently reduced by such amount) or Indebtedness of the Company or such
Restricted Subsidiary that ranks equally with the Notes but has a maturity date
that is prior to the maturity date of the Notes and/or (b) to reinvest such Net
Cash Proceeds (or any portion thereof) in Telecommunications Assets.
Notwithstanding anything herein to the contrary, with respect to the
reinvestment of Net Cash Proceeds, only proceeds from an Asset Sale of assets,
or Equity Interests, of a Foreign Subsidiary may be used to retire Indebtedness
of a Foreign Subsidiary or reinvest in assets or Equity Interests of a Foreign
Subsidiary. The balance of such Net Cash Proceeds, after the application of such
Net Cash Proceeds as described in the immediately preceding clauses (a) and (b),
shall constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds equals or exceeds
$15.0 million (taking into account income earned on such Excess Proceeds), the
Company will be required to make a pro rata offer to all Holders of Notes and
PARI PASSU Indebtedness with comparable provisions requiring such Indebtedness
to be purchased with the proceeds of such Asset Sale (an "Asset Sale Offer") to
purchase the maximum principal amount or accreted value in the case of
Indebtedness issued with an original issue discount of Notes and PARI PASSU
Indebtedness that may be purchased out of the Excess Proceeds, at a purchase
price in cash in an amount equal to 100% of the principal amount thereof or the
accreted value thereof, as applicable, plus accrued and unpaid interest thereon
to the date of purchase (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
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date), in accordance with the procedures set forth in the Indenture and the
agreements governing such PARI PASSU Indebtedness. To the extent that any Excess
Proceeds remain after consummation of an Asset Sale Offer, the Company may use
such Excess Proceeds for any purpose not otherwise prohibited by the Indenture.
If the aggregate principal amount of Notes and PARI PASSU Indebtedness tendered
into such Asset Sale Offer surrendered by Holders thereof exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes and PARI PASSU Indebtedness
to be purchased on a pro rata basis in proportion to the respective principal
amounts (or accreted values in the case of Indebtedness issued with an original
issue discount) of the Notes and such other Indebtedness. Upon completion, of
such Asset Sale Offer, the amount of Excess Proceeds shall be reset at zero for
purposes of the first sentence of this paragraph.
The amount of (x) any liabilities (as shown on the Company's (or such
Restricted Subsidiary's, as the case may be), most recent balance sheet), other
than Subordinated Indebtedness, of the Company or any Restricted Subsidiary,
that are assumed by the transferee of any such assets pursuant to an agreement
that immediately releases the Company and all of its Restricted Subsidiaries
from all liability in respect thereof, (y) Indebtedness of any Restricted
Subsidiary that is no longer a Restricted Subsidiary as a result of such Asset
Sale, if the Company and all of its Restricted Subsidiaries immediately are
released from all Guarantees of payment of such Indebtedness and such
Indebtedness is no longer the liability of the Company or any of its Restricted
Subsidiaries, and (z) any securities, notes or other obligations received by the
Company (or such Restricted Subsidiary, as the case may be) from such transferee
that are contemporaneously (subject to ordinary settlement periods) converted by
the Company (or such Restricted Subsidiary, as the case may be) into cash and/or
Cash Equivalents (to the extent of the cash and/or Cash Equivalents received),
will be deemed to be cash and/or Cash Equivalents for purposes of this
provision.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly: (i) declare or pay any dividend or make any other
payment or distribution on account of the Company's or any of its Restricted
Subsidiaries' Equity Interests or to the direct or indirect holders of the
Company's or any of its Restricted Subsidiaries' Equity Interests in their
capacity as stockholders (other than dividends or distributions payable in
Equity Interests (other than Disqualified Stock) of the Company or to the
Company or a Restricted Subsidiary of the Company); (ii) purchase, redeem or
otherwise acquire or retire for value any Equity Interests of the Company or any
of its Restricted Subsidiaries or any direct or indirect parent of the Company
(other than any such Equity Interests owned by the Company or any Consolidated
Subsidiary of the Company); (iii) make any payment on or with respect to, or
purchase, redeem, defease or otherwise acquire or retire for value any
Subordinated Indebtedness, except a payment of interest or principal at Stated
Maturity; or (iv) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (iv) above being collectively referred
to as "Restricted Payments"), unless:
(a) at the time of and after giving effect to such Restricted Payment, no
Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof,
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable period, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to either
clause (i) or (ii) of the first paragraph of the covenant described below
under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(c) such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
on and after the Issue Date (excluding Restricted Payments permitted by,
and made pursuant to, clauses (ii), (iii) and (viii) of the next
succeeding paragraph), is less than the sum, without duplication and
except as credited in the next succeeding paragraph, of (i) 50% of the
Consolidated Net Income of the Company for the
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period (taken as one accounting period) beginning on the last day of the
fiscal quarter immediately preceding the Issue Date and ending on the
last day of the fiscal quarter immediately preceding the date of such
Restricted Payment (or, if such Consolidated Net Income for such period
is a deficit, less 100% of such deficit), plus (ii) 100% of the aggregate
Net Cash Proceeds received by the Company on and after November 25, 1998
as a Capital Contribution or from the issue or sale of Equity Interests
of the Company (other than Disqualified Stock) or from the issue or sale
of Disqualified Stock or debt securities of the Company that have been
converted or exchanged into such Equity Interests (other than Equity
Interests (or Disqualified Stock or converted debt securities) sold to a
Subsidiary of the Company), plus the amount of Net Cash Proceeds received
by the Company upon such conversion or exchange, plus (iii) the aggregate
amount equal to the net reduction in Investments in Unrestricted
Subsidiaries on and after the Issue Date resulting from (x) dividends,
distributions, interest payments, return of capital, repayments of
Investments or other transfers of assets to the Company or any Restricted
Subsidiary from any Unrestricted Subsidiary, (y) proceeds realized by the
Company or any Restricted Subsidiary upon the sale of such Investment to
a Person other than the Company or any Subsidiary of the Company, or
(z) the redesignation of any Unrestricted Subsidiary as a Restricted
Subsidiary, not to exceed in the case of any of the immediately preceding
clauses (x), (y) or (z) the aggregate amount of Restricted Investments
made by the Company or any Restricted Subsidiary in such Unrestricted
Subsidiary on and after the Issue Date, plus (iv) to the extent that any
Restricted Investment that was made on and after the Issue Date is sold
for cash or otherwise liquidated or repaid for cash, the lesser of, to
the extent paid to the Company or a Restricted Subsidiary, (A) the cash
return of capital with respect to such Restricted Investment (less the
cost of disposition, if any) and (B) the initial amount of such
Restricted Investment.
The foregoing provisions will not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment would have complied with the foregoing provisions;
(ii) the redemption, repurchase, retirement, defeasance or other acquisition of
any Subordinated Indebtedness or Equity Interests of the Company in exchange
for, or out of the Net Cash Proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of, Equity Interests of the Company (other
than any Disqualified Stock); PROVIDED that the amount of any such Net Cash
Proceeds that are utilized for, and the Equity Interests issued or exchanged
for, any such redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (c) of the preceding paragraph and
each other clause of this paragraph; (iii) the defeasance, redemption,
retirement, repurchase or other acquisition of Subordinated Indebtedness with
the Net Cash Proceeds from, or issued in exchange for, a substantially
concurrent incurrence of Permitted Refinancing Indebtedness; PROVIDED that the
amount of any such Net Cash Proceeds that are utilized for any such redemption,
repurchase, retirement, defeasance or other acquisition shall be excluded from
clause (c) of the preceding paragraph and each other clause of this paragraph;
(iv) the payment of any dividend or other distribution by a Restricted
Subsidiary of the Company to the holders of its Equity Interests on a pro rata
basis; (v) the repurchase, redemption or other acquisition or retirement for
value of any Equity Interests of the Company or any of its Restricted
Subsidiaries held by any member of the Company's or such Restricted Subsidiary's
management; PROVIDED that the aggregate price paid for all such repurchased,
redeemed, acquired or retired Equity Interests shall not exceed $1.0 million in
any fiscal year; (vi) retiring any Equity Interests of the Company to the extent
necessary (as determined in good faith by a majority of the disinterested
members of the Board of Directors, whose determination shall be evidenced by a
resolution thereof) to prevent the loss, or to secure the renewal or
reinstatement, of any license or franchise held by the Company or any Restricted
Subsidiary from any governmental agency; (vii) Investments in Telecommunications
Assets, PROVIDED that the aggregate fair market value (measured on the date each
such Investment was made or returned, as applicable), when taken together with
all other Investments made pursuant to this clause (vii) that are at the time
outstanding, does not exceed the sum of (y) $15.0 million, plus (z) the
aggregate amount equal to the net reduction in Investments made pursuant to this
clause (vii) on and after the Issue Date resulting from dividends,
distributions, interest payments, return of capital,
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repayments of such Investments or Net Cash Proceeds realized by the Company or
any Restricted Subsidiary upon the sale of such Investment to a Person other
than the Company or any Subsidiary of the Company, except to the extent any such
net reduction amount is included in the amount calculated pursuant to
clause (c) of the preceding paragraph or any other clause of this paragraph;
(viii) Investments in Telecommunications Assets made after November 25, 1998
with the Net Cash Proceeds, the fair market value of Telecommunications Assets
or Equity Interests of a Person that becomes a Restricted Subsidiary (PROVIDED
the assets of such Person consist entirely or substantially entirely of
Telecommunications Assets) received from the sale (other than to a Subsidiary of
the Company) of Equity Interests of the Company (other than any Disqualified
Stock) and, PROVIDED, FURTHER, that the amount of any such Net Cash Proceeds
that are utilized for any such Investment shall be excluded from clause (c) of
the preceding paragraph and each other clause of this paragraph;
(ix) Investments in ION, PROVIDED that the aggregate fair market value thereof
(measured on the date each such Investment was made or returned, as applicable),
when taken together with all other Investments made pursuant to this
clause (ix) does not exceed the sum of (I) $15.0 million, plus, (II) for each
fiscal year, an amount equal to the amount of cash received by the Company or
any of its Restricted Subsidiaries from ION or any of its Subsidiaries during
such fiscal year except to the extent any such amount is included in the amount
calculated pursuant to clause (c) of the preceding paragraph or any other clause
of this paragraph during such fiscal year plus, (III) to the extent necessary to
pay reasonable and necessary operating expenses of ION, an amount not to exceed
$1.0 million in each fiscal year; and (x) Investments in the German Joint
Venture, PROVIDED that the aggregate fair market value (measured on the date
each such Investment was made or returned, as applicable), when taken together
with all other Investments made pursuant to this clause (x) that are at the time
outstanding, does not exceed the sum of (y) $100.0 million, plus (z) the
aggregate amount equal to the net reduction in Investments made pursuant to this
clause (x) on and after the Issue Date resulting from dividends, distributions,
interest payments, return of capital, repayments of such Investments or Net Cash
Proceeds realized by the Company or any Restricted Subsidiary upon the sale of
such Investment to a Person other than the Company or any Subsidiary of the
Company, except to the extent such amount is included in the amount calculated
pursuant to clause (c) of the preceding paragraph or any other clause of this
paragraph.
The Board of Directors may not designate any Subsidiary of the Company
(other than a newly created Subsidiary in which no Investment has previously
been made (other than any de minimus amount required to capitalize such
Subsidiary in connection with its organization)) as an Unrestricted Subsidiary
(a "Designation") unless: (i) no Default or Event of Default shall have occurred
and be continuing at the time of or after giving effect to such Designation;
(ii) the Company would, immediately after giving effect to such Designation,
have been permitted to incur at least $1.00 of additional Indebtedness pursuant
to either clause (i) or (ii) of the first paragraph of the covenant described
below under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock" and (iii) the Company would not be prohibited under the Indenture from
making an Investment at the time of such Designation (assuming the effectiveness
of such Designation for purposes of this covenant) in an amount equal to the
fair market value of the net Investment of the Company and all Restricted
Subsidiaries in such Subsidiary on such date.
In the event of any such Designation, all outstanding Investments owned by
the Company and its Restricted Subsidiaries in the Subsidiary so designated will
be deemed to be an Investment made as of the time of such Designation and will
reduce the amount available for Restricted Payments under the first or second
paragraph of this covenant or Investments, as applicable. All such outstanding
Investments will be deemed to constitute Restricted Payments in an amount equal
to the fair market value of such Investments at the time of such Designation.
The Indenture will further provide that a Designation may be revoked and an
Unrestricted Subsidiary may thus be redesignated as a Restricted Subsidiary (a
"Revocation") by a resolution of the Board of Directors delivered to the
Trustee; PROVIDED that the Company will not make any Revocation unless: (i) no
Default or Event of Default shall have occurred and be continuing at the time of
or after giving effect to such Designation; and (ii) all Liens and Indebtedness
of such Unrestricted Subsidiary outstanding
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immediately following such Revocation would, if incurred at such time, have been
permitted to be incurred at such time for all purposes under the Indenture.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company (or such Restricted
Subsidiary, as the case may be) pursuant to the Restricted Payment. The fair
market value of any asset(s) or securities that are required to be valued by
this covenant shall be determined in good faith by the Board of Directors (such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $15.0 million).
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise (including by
way of merger, consolidation or acquisition), with respect to (collectively,
"incur") any Indebtedness and the Company will not issue or incur any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue or incur any shares of Preferred Stock; PROVIDED, HOWEVER, that the
Company may incur Indebtedness or issue or incur shares of Disqualified Stock
and its Restricted Subsidiaries may incur Acquired Debt or Acquired Preferred
Stock if either:
(i) the Consolidated Leverage Ratio at the end of the Company's most
recently ended fiscal quarter (the "Reference Period") for which a
consolidated balance sheet of the Company is available immediately
preceding the date on which such additional Indebtedness is incurred or
such Preferred Stock is issued or incurred would have been less than 5.5
to 1.0 (if the Reference Period ends on or prior to December 31, 2001),
or 5.0 to 1.0 (if the Reference Period ends subsequent to December 31,
2001), determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Preferred Stock had been issued,
as the case may be, at the beginning of the Reference Period; or
(ii) the Consolidated Capital Ratio at the end of the Reference Period would
have been less than 2.0 to 1.0, determined after giving effect to the
incurrence or issuance of such Indebtedness or Preferred Stock and, to
the extent set forth in the definitions used herein, on a pro forma
basis (including a pro forma application of the net proceeds
therefrom).
Notwithstanding the foregoing, the provisions of the paragraph set forth
immediately above will not prohibit the incurrence of any of the following items
of Indebtedness (collectively, "Permitted Indebtedness"):
(a) the incurrence by the Company of Indebtedness represented by the Notes
and the Exchange Notes;
(b) the incurrence by the Company or any of its Restricted Subsidiaries of
Existing Indebtedness;
(c) the incurrence of Indebtedness by the Company to any Consolidated
Subsidiary or Indebtedness of any Restricted Subsidiary to the Company or
any Consolidated Subsidiary (but such Indebtedness shall be deemed to be
incurred upon such Indebtedness being held by any person other than the
Company or such Consolidated Subsidiary including upon Designation and
upon such Restricted Subsidiary otherwise no longer being a Consolidated
Subsidiary); PROVIDED that in the case of Indebtedness of the Company,
such obligations shall be unsecured and subordinated in all respects to
the Company's obligations pursuant to the Notes;
(d) the incurrence by the Company of Indebtedness in an aggregate amount
incurred and outstanding at any time pursuant to this clause (d) (plus
any Permitted Refinancing Indebtedness and any other Indebtedness
incurred to retire, defease, refinance, replace or refund such
Indebtedness) of up to $25.0 million;
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(e) the incurrence by the Company, or any Guarantee thereof by any
Restricted Subsidiary (other than any Foreign Subsidiary), of
Indebtedness pursuant to the Credit Agreement in an aggregate amount
incurred and outstanding at any time pursuant to this clause (e) (plus
any Permitted Refinancing Indebtedness and any other Indebtedness
incurred to retire, defease, refinance, replace or refund such
Indebtedness) of up to $300.0 million, minus the amount of any such
Indebtedness (i) retired with the Net Cash Proceeds from any Asset Sale
applied to permanently reduce the outstanding amounts or the commitments
with respect to such Indebtedness pursuant to the covenant "Asset Sales"
or (ii) assumed by a transferee in an Asset Sale;
(f) the incurrence by the Company or any Foreign Subsidiaries of Purchase
Money Indebtedness; PROVIDED that in each case, such Indebtedness shall
not constitute more than 100% of the cost (determined in accordance with
GAAP in good faith by the Board of Directors of the Company) to the
Company or such Foreign Subsidiary, as applicable, of the property so
purchased, developed, acquired, constructed, improved or leased;
(g) the incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or
hedging interest or foreign currency exchange rate risk with respect to
any floating rate Indebtedness or foreign currency based Indebtedness,
respectively, that is permitted by the terms of the Indenture to be
outstanding; PROVIDEDthat the notional amount of any such Hedging
Obligation does not exceed the amount of Indebtedness or other liability
to which such Hedging Obligation relates;
(h) the incurrence by a Foreign Subsidiary of Indebtedness pursuant to a
Foreign Subsidiary Credit Agreement (or any Guarantee thereof by any
other Foreign Subsidiary) in an aggregate principal amount incurred and
outstanding at any time pursuant to this clause (h) (plus any Permitted
Refinancing Indebtedness and any other Indebtedness incurred to retire,
defease, refinance, replace or refund such Indebtedness) of up to
$150.0 million (or the equivalent thereof at the time of incurrence in
the applicable foreign currencies), minus the amount of any such
Indebtedness (i) retired with the Net Cash Proceeds from any Asset Sale
applied to permanently reduce the outstanding amounts or the commitments
with respect to such Indebtedness pursuant to the covenant "Asset Sales"
or (ii) assumed by a transferee of an Asset Sale;
(i) the Company and its Restricted Subsidiaries may incur Indebtedness
solely in respect of bankers acceptances, letters of credit and
performance bonds, all in the ordinary course of business in accordance
with customary industry practices, in amounts and for the purposes
customary in the Company's industry (other than to the extent not
supporting Indebtedness); and
(j) the incurrence by the Company or any of its Restricted Subsidiaries, as
applicable, of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to, refund, refinance or replace
Indebtedness that was incurred pursuant to the first paragraph hereof or
clauses (a), (b), (d), (e), (f), (h) or this clause (j) of this
paragraph.
Indebtedness or Preferred Stock of any Person which is outstanding at the
time such Person becomes a Restricted Subsidiary of the Company (including upon
designation of any Subsidiary or other Person as a Restricted Subsidiary or upon
a Revocation such that such Subsidiary becomes a Restricted Subsidiary) or is
merged with or into or consolidated with the Company or a Restricted Subsidiary
of the Company shall be deemed to have been incurred at the time such Person
becomes such a Restricted Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Restricted Subsidiary of the Company, as
applicable.
Upon each incurrence, the Company may designate pursuant to which provision
of this covenant such Indebtedness is being incurred and such Indebtedness shall
not be deemed to have been incurred by the Company under any other provision of
this covenant, except as stated otherwise in the foregoing provisions.
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The Company will not, and will not permit any of its Restricted Subsidiaries
to, incur any Indebtedness (including Permitted Indebtedness) that is
contractually subordinated in right of payment to any other Indebtedness of the
Company unless such Indebtedness is also contractually subordinated in right of
payment to the Notes on substantially identical terms; PROVIDED, HOWEVER, that
no Indebtedness of the Company shall be deemed to be contractually subordinated
in right of payment to any other Indebtedness of the Company solely by virtue of
being unsecured.
LIENS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, assume or otherwise cause or suffer
to exist or become effective any Lien of any kind (other than Permitted Liens)
upon any of their property or assets, now owned or hereafter acquired, or upon
any income or profits therefrom unless all payments due under the Indenture and
the Notes are secured (except as provided in the next clause) on an equal and
ratable basis with the obligations so secured and no Lien shall be granted or be
allowed to exist which secures Subordinated Indebtedness except with respect to
Acquired Debt, in which case, however, such Liens must be made junior and
subordinate to the Liens granted to the Holders of the Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to (i)(a) pay dividends or make any other distributions to the
Company or any of its Restricted Subsidiaries (1) on its Capital Stock or
(2) with respect to any other interest or participation in, or measured by, its
profits, or (b) pay any indebtedness owed to the Company or any of its
Restricted Subsidiaries, (ii) make loans or advances to the Company or any of
its Restricted Subsidiaries or (iii) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries. However, the foregoing
restrictions will not apply to encumbrances or restrictions existing under or by
reason of (a) Existing Indebtedness as in effect on the Issue Date, (b) the
Indenture, the Notes and the Exchange Notes, and Indebtedness ranking PARI PASSU
with the Notes provided such provisions are no more restrictive than the Notes,
(c) the Credit Agreement, any Foreign Subsidiary Credit Agreement, PROVIDED that
the restrictions contained in the Credit Agreement are no more restrictive,
taken as a whole, than those contained in a credit agreement with terms that are
commercially reasonable for a borrower that has substantially comparable
Indebtedness, and PROVIDED, FURTHER, that no such provision shall prohibit or
restrict the ability of any Restricted Subsidiary to pay dividends or make other
upstream distributions or other payments to the Company or any of its Restricted
Subsidiaries, (d) applicable law, (e) any instrument governing Indebtedness or
Capital Stock of a Person or assets acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in contemplation
of such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or the
property or assets of the Person, so acquired; PROVIDED, that in the case of
Indebtedness, such Indebtedness was permitted by the terms of the Indenture to
be incurred, (f) customary non-assignment provisions in leases entered into in
the ordinary course of business and consistent with past practices,
(g) purchase money obligations (including pursuant to Purchase Money
Indebtedness obligations) for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii) above
on the property so acquired, constructed, leased or improved, (h) any agreement
for the sale or other disposition of a Restricted Subsidiary that restricts
distributions by that Restricted Subsidiary pending its sale or other
disposition, provided that the consummation of such transaction would not result
in an Event of Default or an event that, with the passing of time or giving of
notice or both, would constitute an Event of Default, that such restriction
terminates if such transaction is not consummated and that the consummation or
abandonment of such transaction occurs within one year of the date such
agreement was entered into, (i) Permitted Refinancing Indebtedness, PROVIDED
that the restrictions contained in the agreements
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governing such Permitted Refinancing Indebtedness are no more restrictive, taken
as a whole, than those contained in the agreements governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded, (j) Liens
securing Indebtedness otherwise permitted to be incurred pursuant to the
provisions of the covenant described above under the caption "--Liens" that
limit the right of the Company or any of its Restricted Subsidiaries to dispose
of the assets subject to such Lien, (k) provisions with respect to the
disposition or distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course of business,
and (l) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Company may not, directly or indirectly, consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, convey or otherwise dispose of all or substantially all of its
properties or assets, in one or more related transactions, to another Person
unless: (i) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, conveyance or other disposition shall
have been made is a corporation organized or existing under the laws of the
United States, any state thereof or the District of Columbia; (ii) the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or the Person to which such sale, assignment, transfer, conveyance or
other disposition shall have been made assumes all the obligations of the
Company under the Registration Agreement, the Notes, the Exchange Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee; (iii) no Default or Event of Default (or an event that, with the
passing of time or giving of notice or both, would constitute an Event of
Default) shall exist or shall occur immediately after giving effect on a pro
forma basis to such transaction; (iv) except in the case of a merger of the
Company with or into a Wholly Owned Restricted Subsidiary of the Company, the
Company or the Person formed by or surviving any such consolidation or merger
(if other than the Company), or to which such sale, assignment, transfer,
conveyance or other disposition shall have been made will immediately after such
transaction and after giving pro forma effect thereto and any related financing
transactions as if the same had occurred at the beginning of the applicable
period, be permitted to incur at least $1.00 of additional Indebtedness pursuant
to either clause (i) or (ii) of the first paragraph of the covenant described
above under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock"; (v) if, as a result of any such transaction, property or assets of the
Company would become subject to a Lien subject to the provisions of the
Indenture described under "--Liens" above, the Company or the successor entity
to the Company shall have secured the Notes as required by said covenant; and
(vi) the Company shall have delivered to the Trustee an Officers' Certificate
and an opinion of counsel, each stating that such consolidation, merger or
transfer and such supplemental indenture (if any) comply with the Indenture. The
Indenture will also provide that the Company may not, directly or indirectly,
lease all or substantially all of its properties or assets, in one or more
related transactions, to any other Person. The provisions of this covenant will
not be applicable to a sale, assignment, transfer, conveyance or other
disposition of assets solely between or among the Company and its Wholly Owned
Restricted Subsidiaries.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged or
to which such transfer is made shall succeed to and (except in the case of a
lease) be substituted for, and may exercise every right and power of, the
Company under the Indenture with the same effect as if such successor
corporation had been named therein as the Company, and (except in the case of a
lease) the Company shall be released from the obligations under the Notes and
the Indenture except with respect to any obligations that arise from, or are
related to, such transaction.
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For purposes of the foregoing, the transfer (by assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing, an "Affiliate Transaction"), unless (i) such Affiliate Transaction is
on terms that are not materially less favorable to the Company or the relevant
Restricted Subsidiary than those that would have been obtained in a comparable
transaction by the Company or such Restricted Subsidiary with an unrelated
Person and (ii) with respect to any Affiliate Transaction or series of related
Affiliate Transactions (A) involving aggregate consideration in excess of
$5.0 million, the Company delivers to the Trustee a resolution of the Board of
Directors set forth in an Officers' Certificate that such Affiliate Transaction
is approved by a majority of the disinterested members of the Board of Directors
and that, except with respect to matters governed by the Management Agreement,
certifying that such Affiliate Transaction complies with clause (i) above and is
in the best interests of the Company or such Restricted Subsidiary and (B) if
involving aggregate consideration in excess of $15.0 million, a favorable
written opinion as to the fairness to the Company of such Affiliate Transaction
from a financial point of view is also obtained by the Company from an
accounting, appraisal or investment banking firm of national standing.
Notwithstanding the foregoing, the following items shall not be deemed to be
Affiliate Transactions: (i) (a) the entering into, maintaining or performance of
any employment contract, collective bargaining agreement, benefit plan, program
or arrangement, related trust agreement or any other similar arrangement for or
with any employee, officer or director heretofore or hereafter entered into in
the ordinary course of business, including vacation, health, insurance, deferred
compensation, retirement, savings or other similar plans, (b) the payment of
compensation, performance of indemnification or contribution obligations, or an
issuance, grant or award of stock, options, or other equity-related interests or
other securities, to employees, officers or directors in the ordinary course of
business, (c) any transaction with an officer or director in the ordinary course
of business not involving more than $100,000 in any one case, or (d) Management
Advances and payments in respect thereof, (ii) transactions between or among the
Company and/or its Restricted Subsidiaries, (iii) payment of reasonable
directors fees, (iv) any sale or other issuance of Equity Interests (other than
Disqualified Stock) of the Company, (v) Affiliate Transactions in effect or
approved by the Board of Directors on the Issue Date, including any amendments
thereto (PROVIDED that the terms of such amendments are not materially less
favorable to the Company than the terms of such agreement prior to such
amendment), (vi) transactions with respect to capacity between the Company or
any Restricted Subsidiary and any Unrestricted Subsidiary or another Affiliate
and joint sales and marketing pursuant to an agreement or agreements between the
Company or any Restricted Subsidiary and any Unrestricted Subsidiary or another
Affiliate (PROVIDED that in the case of this clause (vi), such agreements are on
terms that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that could have been obtained at the time of such
transaction in an arm's-length transaction with an unrelated third party or, in
the case of a transaction with an Unrestricted Subsidiary, ION or an other
Affiliate, are either (x) entered into in connection with a transaction
involving the selection by a customer of cable system capacity entered into in
the ordinary course of business or (y) involve the provision by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary, ION or an other Affiliate
of sales and marketing services, operations, administration and maintenance
services or development services for which the Company or such Restricted
Subsidiary receives a fair rate of return (as determined by the Board of
Directors and set forth in an Officers' Certificate delivered to the Trustee)
above its expenses of providing such services), and
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(vii) Restricted Payments that are permitted by the covenant described above
under the caption "--Restricted Payments."
BUSINESS ACTIVITIES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, engage, to more than a de minimus extent, in any business other than a
Telecommunications Business.
PAYMENTS FOR CONSENT
Neither the Company nor any of its Restricted Subsidiaries will, directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or is
paid to all Holders of the Notes that consent, waive or agree to amend such
terms or provisions of the Indenture or the Notes in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
REPORTS
Whether or not required by the rules and regulations of the Commission, so
long as any Notes are outstanding, the Company will furnish to the Trustee and
the Holders of the Notes (i) all quarterly and annual financial information that
would be required to be contained in a filing with the Commission on Forms 10-Q
and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations of
the Company and its consolidated Subsidiaries and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants, and (ii) all current reports that would be required to be filed
with the Commission on Form 8-K if the Company were required to file such
reports, in each case within the time periods specified in the Commission's
rules and regulations.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following will constitute an
Event of Default: (i) default for 30 days in the payment when due of interest on
the Notes; (ii) default in the payment when due of the principal of, or premium,
if any, on, the Notes; (iii) failure by the Company or any of its Restricted
Subsidiaries to comply with the provisions described above under the captions
"--Change of Control," or "--Asset Sales"; (iv) failure by the Company or any of
its Restricted Subsidiaries for 60 days after notice to comply with any of its
other agreements in the Indenture or the Notes; (v) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company or any
of its Restricted Subsidiaries (or the payment of which is Guaranteed by the
Company or any of its Restricted Subsidiaries) whether such Indebtedness or
Guarantee now exists, or is created after the Issue Date, which default results
in the acceleration of such Indebtedness prior to its express maturity and, in
each case, the amount of any such Indebtedness, together with the amount of any
other such Indebtedness or the maturity of which has been so accelerated,
aggregates $15 million or more; (vi) failure by the Company or any of its
Restricted Subsidiaries to pay final judgments not subject to appeal aggregating
in excess of $15 million (net of applicable insurance coverage which is
acknowledged in writing by the insurer), which judgments are not paid, vacated,
discharged or stayed for a period of 60 days; and (vii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Restricted
Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events
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of bankruptcy or insolvency, with respect to the Company, any Restricted
Subsidiary that is a Significant Subsidiary or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant Subsidiary,
all outstanding Notes will become due and payable without further action or
notice. Holders of the Notes may not enforce the Indenture or the Notes except
as provided in the Indenture. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
Trustee in its exercise of any trust or power. The Trustee may withhold from
Holders of the Notes notice of any continuing Default or Event of Default
(except a Default or Event of Default relating to the payment of principal of,
premium, if any, or interest on, the Notes) if it determines that withholding
notice is in their interest.
The Holders of a majority (or super majority of at least 66 2/3% in the case
of any covenant requiring 66 2/3% to amend) in aggregate principal amount of the
then outstanding Notes by notice to the Trustee may on behalf of the Holders of
all of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture, except a continuing Default or Event of
Default in the payment of principal of, premium, if any, or interest on the
Notes.
The Company will be required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company will be required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS OR
SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company,
as such, will have any liability for any obligations of the Company with respect
to the Notes or the Indenture, or for any claim based on, or in respect or by
reason of, such obligations or their creation. Each Holder of Notes by accepting
a Note will waive and release any and all such liability. Such waiver and
release are part of the consideration for issuance of the Notes. Such waiver may
not be effective to waive liabilities under federal securities laws and it is
the view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture will be discharged and cancelled upon the delivery by the
Company to the Trustee for cancellation of all the Notes or upon irrevocable
deposit with the Trustee, within not more than one year prior to the final
stated maturity of the Notes, or when the Notes are to be called for redemption
within one year under arrangements satisfactory to the Trustee, of funds
sufficient for the payment or redemption of all the Notes. In addition, the
Indenture will provide that the Company may, at its option and at any time,
elect to have all of its obligations discharged with respect to the outstanding
Notes ("Legal Defeasance"), except for: (i) the rights of Holders of outstanding
Notes to receive payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due from the trust referred to
below; (ii) the Company's obligations with respect to the Notes concerning
issuing temporary Notes, registration of Notes, mutilated, destroyed, lost or
stolen Notes and the maintenance of an office or agency for payment and money
for security payments held in trust; (iii) the rights, powers, trusts, duties
and immunities of the Trustee, and the Company's obligations in connection
therewith; and (iv) the Legal Defeasance provisions of the Indenture. In
addition, the Company may, at its option and at any time, elect to have its
obligations released with respect to certain covenants that are contained in the
Indenture ("Covenant Defeasance") and, thereafter, any omission to comply with
such obligations will not constitute a Default or Event of Default. In the event
Covenant Defeasance occurs, certain events (but not including non-payment,
bankruptcy, receivership, rehabilitation or insolvency events) described under
"--Events of Default and Remedies" will no longer constitute an Event of
Default.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(i) the Company must irrevocably deposit, or cause to be deposited, with the
Trustee, in trust, for the benefit of the Holders of the Notes, (a) cash in U.S.
dollars, non-callable Government Securities, or a combination thereof (with
respect
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to the Dollar Notes) and (b) legal tender in the countries constituting the
European Monetary Union, EEA Government Obligations, or a combination thereof
(with respect to the Euro Notes), in all cases in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Notes on the stated maturity thereof or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date; (ii) in the case
of Legal Defeasance, the Company must deliver to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that, since the Issue Date, the Company has received from, or there has been
published by, the Internal Revenue Service a ruling, or there has been a change
in the applicable United States federal income tax law, in either case to the
effect that, and based thereon such opinion of counsel shall confirm that, the
Holders of the outstanding Notes will not recognize income, gain or loss for
United States federal income tax purposes as a result of such Legal Defeasance,
and will be subject to United States federal income tax on the same amounts, in
the same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred; (iii) in the case of Covenant Defeasance, the
Company must deliver to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders of the
outstanding Notes will not recognize income, gain or loss for United States
federal income tax purposes as a result of such Covenant Defeasance, and such
Holders will be subject to United States federal income tax on the same amounts,
in the same manner and at the same times as would have been the case if such
Covenant Defeasance had not occurred; (iv) no Default or Event of Default shall
have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after the
date of deposit; (v) such Legal Defeasance or Covenant Defeasance will not
result in a breach or violation of, or constitute a default under, any material
agreement or instrument (other than the Indenture) to which the Company or any
of its Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound; (vi) the Company must deliver to the Trustee
an Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of the Notes over other creditors of
the Company, or with the intent of defeating, hindering, delaying or defrauding
creditors of the Company or others; and (vii) the Company must deliver to the
Trustee an Officers' Certificate and an opinion of counsel in the United States
reasonably acceptable to the Trustee, each stating that the conditions precedent
provided for or relating to Legal Defeasance or Covenant Defeasance, as
applicable, in the case of the Officers' Certificate, in clauses
(i) through (vi) and, in the case of the opinion of counsel, in clauses
(i) (with respect to the validity and perfection of the security interest) and
clauses (ii) and (iii) of this paragraph, have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the procedures
set forth in the Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents,
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Indenture. The Company will not be required to transfer or
exchange any Note selected for redemption. Also, the Company will not be
required to transfer or exchange any Note for a period of 15 days before (i) a
selection of Notes to be redeemed, (ii) an interest payment date or (iii) the
mailing of notice of a Change of Control Offer or Asset Sale Offer. The
registered Holder of a Note will be treated as the owner of it for all purposes
under the Indenture.
AMENDMENT, SUPPLEMENT AND WAIVER
The Indenture will contain provisions permitting the Company and the Trustee
to enter into a supplemental indenture for certain limited purposes without the
consent of the Holders. With the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding, the
Company and the Trustee are permitted to amend or supplement the Indenture or
any
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supplemental indenture or modify the rights of the Holders; PROVIDED that no
such modification may, without the consent of Holders of at least 66 2/3% in
aggregate principal amount of Notes at the time outstanding, modify the
provisions (including the defined terms used therein) of the covenant
"Repurchase at the Option of the Holders--Change of Control" in a manner adverse
to the Holders or, except with respect to the Lien on the Security Account,
release or modify a Lien granted to the Holders of the Notes; and PROVIDED that
no such modification may, without the consent of each Holder affected thereby:
(i) change the Stated Maturity on any Note, or reduce the principal amount
thereof or the rate (or extend the time for payment) of interest thereon or any
premium payable upon the redemption at the option of the Company thereof, or
change the place of payment where, or the coin or currency in which, any Note or
any premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption at the option of the Company, on or after
the Redemption Date), or reduce the Change of Control Payment or the Asset Sale
Offer Price after the corresponding Asset Sale or Change of Control has
occurred, or (ii) alter the provisions (including the defined terms used
therein) regarding the right of the Company to redeem the Notes as a right, or
at the option, of the Company in a manner adverse to the Holders, or
(iii) reduce the percentage in principal amount of the outstanding Notes, the
consent of whose Holders is required for any such amendment, supplemental
indenture or waiver provided for in the Indenture, or (iv) modify any of the
waiver provisions, except to increase any required percentage or to provide that
certain other provisions of the Indenture cannot be modified or waived without
the consent of the Holder of each outstanding Note affected thereby, or
(v) cause the Notes to become subordinate in right of payment to any other
Indebtedness.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes
to cure any ambiguity, defect or inconsistency, to provide for uncertificated
Notes in addition to or in place of certificated Notes, to provide for the
assumption of the Company's obligations to Holders of Notes in the case of a
merger or consolidation or sale of all or substantially all of the Company's
assets in accordance with the terms of the Indenture, to make any change that
would provide any additional rights or benefits to the Holders of Notes or that
does not adversely affect the legal rights under the Indenture of any such
Holder, or to comply with the requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest, it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue, or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. In case an Event of Default shall occur (which shall not be
cured), the Trustee will be required, in the exercise of its power, to use the
degree of care of a prudent person in the conduct of their own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
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GOVERNING LAW
The Indenture and the Notes will be governed by and construed in accordance
with the laws of the State of New York.
The Company will submit to the jurisdiction of the U.S. federal and New York
state courts located in the Borough of Manhattan, City and State of New York for
purposes of all legal actions and proceedings instituted in connection with the
Notes and the Indenture.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED DEBT" or "ACQUIRED PREFERRED STOCK" means, with respect to any
specified Person, Indebtedness or Preferred Stock of any other Person existing
at the time such other Person is merged with or into or became a Subsidiary of
such specified Person (including by Designation or Revocation), provided such
Indebtedness or Preferred Stock is not incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"ASSET SALE" means (i) the sale, lease, transfer, conveyance or other
disposition of any assets or rights (including, without limitation, by way of a
sale and leaseback) other than sales of inventory in the ordinary course of
business and other than any sale, lease, transfer, conveyance or other
disposition in the ordinary course of business of capacity on any fiber optic or
cable system owned, controlled or operated by the Company or any Restricted
Subsidiary or of telecommunications capacity, transmission rights, conduit or
rights-of-way acquired by the Company or any Restricted Subsidiary for use in a
Telecommunications Business of the Company or any Restricted Subsidiary
(PROVIDED that the sale, lease, transfer, conveyance or other disposition of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of the
Indenture described above under the caption "--Repurchase at the Option of
Holders--Change of Control" and/or the provisions described above under the
caption "--Certain Covenants--Merger, Consolidation or Sale of Assets" and not
by the provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company or any of its Restricted Subsidiaries of Equity Interests of any
Subsidiary. Notwithstanding the foregoing, the following items shall not be
deemed to be Asset Sales: (i) a transfer of assets by the Company to a
Consolidated Subsidiary or by a Subsidiary to the Company or to a Consolidated
Subsidiary, (ii) an issuance of Equity Interests by a Subsidiary to the Company
or to a Consolidated Subsidiary, (iii) a Restricted Payment that is permitted by
the covenant described above under the caption "--Certain Covenants--Restricted
Payments," (iv) Permitted Investments made in accordance with clause (a) or
(c) of the definition thereof, (v) a disposition of obsolete or worn out
equipment or equipment that is no longer useful in the conduct of a
Telecommunications Business of the Company and its Restricted Subsidiaries and
that is disposed of in the ordinary course of business, (vi) the surrender or
waiver by the Company or any of its Restricted Subsidiaries of contract rights
or the settlement, release or surrender of contract, tort or other claims of any
kind by the Company or any of its Restricted Subsidiaries or the grant by the
Company or any of its Restricted Subsidiaries of a Lien not prohibited by the
Indenture, (vii) the sale of Cash Equivalents in the ordinary course of
business; and (viii) sales, transfers, assignments and other dispositions of
assets (or
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related assets in related transactions) in the ordinary course of business with
an aggregate fair market value of less than $1.0 million.
"BOARD OF DIRECTORS" means the board of directors or other governing body of
the Company or, if the Company is owned or managed by a single entity, the board
of directors or other governing body of such entity, or, in either case, any
committee thereof duly authorized to act on behalf of such board or governing
body.
"BOARD RESOLUTION" means a duly authorized resolution of the Board of
Directors.
"CAPITAL CONTRIBUTION" means any contribution to the equity of the Company
from a direct or indirect parent of the Company for which no consideration other
than the issuance of common stock with no redemption rights and no special
preferences, privileges or voting rights is given.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars and Euros,
(ii) securities issued or directly and fully guaranteed or insured by (a) the
United States government or any agency or instrumentality thereof (provided that
the full faith and credit of the United States is pledged in support thereof) or
(b) any member of the European Economic Area or Switzerland or any agency or
instrumentality thereof provided that such country, agency or instrumentality
has a credit rating at least equal to that of the United States of America
(provided, further, that the full faith and credit of such respective nation is
pledged in support thereof), in each case having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500 million and a Thompson Bank Watch Rating
of "B" or better, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (ii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having the highest rating obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Ratings Group and in
each case maturing within six months after the date of acquisition and
(vi) money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i)-(v) of this definition,
PROVIDED that with respect to any Foreign Subsidiary, Cash Equivalents shall
also mean those investments that are comparable to clauses (iii) through
(vi) above in such Foreign Subsidiary's country of organization or country where
it conducts business operations.
"CHANGE OF CONTROL" means the occurrence of any of the following: (i) any
"person" or "group" (as such terms are used in Section 13(d)(3) of the Exchange
Act), other than a Permitted Holder, is or becomes the beneficial owner,
directly or indirectly, of 35% or more of the Voting Stock (measured by voting
power rather than number of shares) of the Company and the Permitted Holders
own, in the aggregate, a lesser percentage of the total Voting Stock (measured
by voting power rather than by number of shares) of the Company than such person
and do not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the board of directors of the
Company (for the purposes of this clause, such other person shall be deemed to
"beneficially own" any Voting Stock of a specified corporation held by a parent
corporation if such other person beneficially owns, directly or
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indirectly, more than 35% of the Voting Stock (measured by voting power rather
than by number of shares) of such parent corporation and the Permitted Holders
beneficially own, directly or indirectly, in the aggregate a lesser percentage
of Voting Stock (measured by voting power rather than by number of shares) of
such parent corporation and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of the board
of directors of such parent corporation), (ii) during any period of two
consecutive years, Continuing Directors cease for any reason to constitute a
majority of the Board of Directors of the Company, (iii) the Company
consolidates or merges with or into any other Person, other than a consolidation
or merger (a) of the Company into a Wholly Owned Restricted Subsidiary of the
Company or (b) pursuant to a transaction in which the outstanding Voting Stock
of the Company is changed into or exchanged for cash, securities or other
property with the effect that the beneficial owners of the outstanding Voting
Stock of the Company immediately prior to such transaction, beneficially own,
directly or indirectly, at least a majority of the Voting Stock (measured by
voting power rather than number of shares) of the surviving corporation
immediately following such transaction or (iv) the sale, transfer, conveyance or
other disposition (other than by way of merger or consolidation), in one or a
series of related transactions, of all or substantially all of the assets of the
Company and its Restricted Subsidiaries taken as a whole to any person other
than a Wholly Owned Restricted Subsidiary of the Company or a Permitted Holder
or a person more than 50% of the Voting Stock (measured by voting power rather
than by number of shares) of which is owned, directly or indirectly, following
such transaction or transactions by the Permitted Holders; PROVIDED, HOWEVER,
that sales, transfers, conveyances or other dispositions in the ordinary course
of business of capacity on cable systems owned, controlled or operated by the
Company or any Restricted Subsidiary or fiber optic or of telecommunications
capacity or transmission rights, rights-of-way or conduit acquired by the
Company or any Restricted Subsidiary for use in the Telecommunications Business
of the Company or a Restricted Subsidiary, including, without limitation, for
sale, lease, transfer, conveyance or other disposition to any customer of the
Company or any Restricted Subsidiary shall not be deemed a disposition of assets
for purposes of this clause (iv).
The definition of a Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of the Company and its Restricted Subsidiaries taken as a
whole. The Indenture will be governed by New York law, and there is no clearly
established meaning under New York law of the phrase "substantially all" of the
assets of a corporation. Accordingly, the ability of a Holder of Notes to
require the Company to purchase such Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Restricted Subsidiaries taken as a whole to another Person or
group may be uncertain.
"CONSOLIDATED CAPITAL RATIO" means, with respect to the Company as of any
date, the ratio of (i) the aggregate consolidated amount of Indebtedness of the
Company and its Restricted Subsidiaries then outstanding to (ii) the
Consolidated Net Worth of the Company and its Consolidated Subsidiaries as of
such date.
"CONSOLIDATED CASH FLOW" means, with respect to the Company for any period,
the Consolidated Net Income of the Company and its Consolidated Subsidiaries for
such period plus (A), to the extent that any of the following items were
deducted in computing such Consolidated Net Income, but without duplication,
(i) provision for taxes based on income or profits of the Company and its
Consolidated Subsidiaries for such period, plus (ii) consolidated interest
expense of the Company and its Consolidated Subsidiaries for such period,
whether paid or accrued and whether or not capitalized (including, without
limitation, amortization of debt issuance costs and original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations), plus (iii) depreciation, amortization
(including amortization of goodwill and other intangibles and the amount of
capacity available for sale (other than for backhaul capacity) charged to cost
of sales), but excluding amortization of prepaid cash expenses that were paid in
a prior period), and other non-cash
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expenses (excluding any such non-cash expense to the extent that it represents
an accrual of or reserve for cash expenses in any future period or amortization
of a prepaid cash expense that was paid in a prior period) of the Company and
its Consolidated Subsidiaries for such period, minus (B) non-cash items
increasing such Consolidated Net Income for such period (other than items that
were accrued in the ordinary course of business), in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation and amortization and other non-cash expenses of, a Restricted
Subsidiary of the Company shall be added to Consolidated Net Income to compute
Consolidated Cash Flow of the Company only to the extent that a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Restricted Subsidiary without prior governmental approval (that
has not been obtained), and without direct or indirect restriction pursuant to
the terms of its charter and all agreements, instruments, judgments, decrees,
orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its shareholders.
"CONSOLIDATED LEVERAGE RATIO" means, with respect to the Company, as of any
date, the ratio of (i) the aggregate consolidated amount of Indebtedness of the
Company and its Restricted Subsidiaries then outstanding to (ii) the annualized
Consolidated Cash Flow of the Company and its Consolidated Subsidiaries for the
most recently ended fiscal quarter.
"CONSOLIDATED NET INCOME" means, with respect to the Company for any period,
the aggregate of the Net Income of the Company and its Consolidated Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that (i) the Net Income (but not loss) of any Person that is accounted
for by the equity method of accounting shall be included only to the extent of
the amount of dividends or distributions paid in cash to the Company or a
Consolidated Subsidiary thereof by such Person but not in excess of the
Company's Equity Interests in such Person, (ii) the Net Income of any Restricted
Subsidiary shall be excluded to the extent that the declaration or payment of
dividends or similar distributions by that Restricted Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulation applicable to that
Restricted Subsidiary or its shareholders, except that the Company's equity in
the net income of any such Restricted Subsidiary for such period may be included
in such Consolidated Net Income up to the aggregate amount of cash that could
have been distributed by such Restricted Subsidiary during such period to the
Company as a dividend, (iii) the Net Income of any Person acquired in a pooling
of interests transaction for any period prior to the date of such acquisition
shall be excluded, (iv) the equity of the Company or any Restricted Subsidiary
in the net income (if positive) of any Unrestricted Subsidiary shall be included
in such Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Unrestricted Subsidiary during such period to the Company or
a Consolidated Subsidiary as a dividend or other distribution (but not in excess
of the amount of the Net Income of such Unrestricted Subsidiary for such period)
and (v) the cumulative effect of a change in accounting principles shall be
excluded.
"CONSOLIDATED NET WORTH" means, with respect to the Company as of any date,
the sum of (i) the consolidated equity of the common shareholders of the Company
and its Consolidated Subsidiaries that are Consolidated Subsidiaries as of such
date plus (ii) the respective amounts reported on the Company's balance sheet as
of such date with respect to any series of Preferred Stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only to the
extent of any cash received by the Company upon issuance of such Preferred
Stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the Issue Date in the book value of any asset owned by the Company
or a Restricted Subsidiary that is a Consolidated Subsidiary of the Company,
(y) all outstanding net Investments as of such date in unconsolidated Restricted
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Subsidiaries and in Persons that are not Restricted Subsidiaries (except, in
each such case, Permitted Investments), and (z) all unamortized debt discount
and expense and unamortized deferred charges as of such date, all of the
foregoing determined in accordance with GAAP.
"CONSOLIDATED SUBSIDIARY" means, for any Person, each Restricted Subsidiary
of such Person (whether now existing or hereafter created or acquired) the
financial statements of which are consolidated for financial statement reporting
purposes with the financial statements of such Person in accordance with GAAP.
"CONTINUING DIRECTORS" means individuals who at the beginning of the period
of determination constituted the Board of Directors of the Company, together
with any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved or is the designee of any one of the
Permitted Holders or any combination thereof or was nominated or elected by any
such Permitted Holder(s) or any of their designees.
"CREDIT AGREEMENT" means one or more credit agreements, loan agreements or
similar facilities, secured or unsecured, entered into from time to time by the
Company and its Restricted Subsidiaries, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified,
restated or replaced from time to time.
"CURRENCY AGREEMENT" means, with respect to any Person, any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or beneficiary.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the Holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the Notes mature; PROVIDED, HOWEVER, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "--Certain Covenants--Restricted Payments."
"EEA GOVERNMENT OBLIGATION" means direct non-callable obligations of, or
non-callable obligations permitted by, any member nation of the European Union
of the payment of such obligation or guarantee the full faith and credit of the
respective nation is pledged, PROVIDED that such nation has a credit rating at
least equal to that of the highest rated member nation of the European Economic
Area.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EURO" OR "[EURO]" means the currency adopted by those countries
participating in the third stage of European Monetary Union.
"EUROPEAN ECONOMIC AREA" means the member nations of the European Economic
Area pursuant to the Oporto Agreement on the European Economic Area dated
May 2, 1992 as amended.
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"EUROPEAN UNION" means the member nations to the third stage of economic and
monetary union pursuant to the Treaty of Rome establishing the European
Community, as amended by the Treaty on European Union, signed at Maastricht on
February 7, 1992.
"EXISTING ASSETS" means property, plant and equipment and other tangible
business assets existing as of the Issue Date used in a Telecommunications
Business of the Company, but does not include cash or Cash Equivalents existing
on the Issue Date, and the proceeds from the sale, disposition or other transfer
of any Existing Assets outside the ordinary course of business.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its Restricted
Subsidiaries in existence on the Issue Date, until such amounts are repaid.
"FOREIGN SUBSIDIARY" means any Restricted Subsidiary of the Company which
(i) is not organized under the laws of the United States, any state thereof or
the District of Columbia, and (ii) conducts substantially all of its business
operations outside the United States of America.
"FOREIGN SUBSIDIARY CREDIT AGREEMENT" means one or more credit agreements,
loan agreements or similar facilities, secured or unsecured, entered into from
time to time by one or more of the Company's Foreign Subsidiaries, and including
any related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified, restated or replaced from time to time.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date.
"GERMAN JOINT VENTURE" means the Person(s) formed or organized to engineer,
develop, construct and own the German Network.
"GOVERNMENT SECURITIES" means securities that are (a) direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentally thereof) of the
payment of which the full faith and credit of the United States of America is
pledged, (b) obligations of a Person controlled or supervised by and acting as
an agency or instrumentality of the United States of America the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or (c) obligations of a Person the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or services, to take-or-pay, or to maintain financial statement
conditions or otherwise) or (ii) entered into for purposes of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under any Interest Rate Agreement or Currency Agreement.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance of the deferred and unpaid
of the purchase price of any
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property or representing any Hedging Obligations, except any such balance that
constitutes an accrued expense or trade payable, if and to the extent any of the
foregoing (other than letters of credit (or reimbursement agreements in respect
thereof), banker's acceptances and Hedging Obligations) would appear as a
liability upon a balance sheet of such Person prepared in accordance with GAAP,
as well as all Indebtedness of others secured by a Lien on any asset of such
Person (whether or not such Indebtedness is assumed by such Person),
Disqualified Stock of such Person and Preferred Stock of such Person's
Restricted Subsidiaries and, to the extent not otherwise included, the Guarantee
by such Person of any Indebtedness of any other Person. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, but the
accretion of original issue discount in accordance with the original terms of
Indebtedness issued with an original issue discount will not be deemed to be an
incurrence, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"INTEREST RATE AGREEMENT" means, with respect to any Person, any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement to which such Person is a party or beneficiary.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to directors, officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, together with all items that are or would
be classified as investments on a balance sheet prepared in accordance with
GAAP. If the Company or any of its Restricted Subsidiaries sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary such that,
after giving effect to any such sale or disposition, such Person is no longer a
Subsidiary of the Company or such Restricted Subsidiary, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Subsidiary not
sold or disposed of in an amount determined as provided in the final paragraph
of the covenant described above under the caption "--Certain
Covenants--Restricted Payments."
"ION" means International Optical Network, L.L.C., a Delaware limited
liability company.
"ISSUE DATE" means the date of first issuance of the Notes under the
Indenture.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in,
and any filing of or agreement to give any financing statement under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"MANAGEMENT ADVANCES" means loans or advances made to directors, officers or
employees of the Company or any Restricted Subsidiary (i) in respect of travel,
entertainment or moving-related expenses incurred in the ordinary course of
business, (ii) in respect of moving-related expenses incurred in connection with
any closing or consolidation of any facility, or (iii) otherwise in the ordinary
course of business not exceeding $3.0 million in the aggregate at any time
outstanding.
"MANAGEMENT AGREEMENT" means the Metromedia Management Agreement as the same
may be amended, supplemented, modified, restated or replaced from time to time
with the approval of a majority of the disinterested members of the Board of
Directors.
"NET CASH PROCEEDS" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale, or Capital Contribution in
respect, of Capital Stock and by the Company
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and its Restricted Subsidiaries in respect of an Asset Sale plus, in the case of
an issuance of Capital Stock upon any exercise, exchange or conversion of
securities (including options, warrants, rights and convertible or exchangeable
debt) of the Company that were issued for cash on or after the Issue Date, the
amount of cash originally received by the Company upon the issuance of such
securities (including options, warrants, rights and convertible or exchangeable
debt) less, in each case, the sum of all payments, fees, commissions and
reasonable and customary expenses (including, without limitation, the fees and
expenses of legal counsel and investment banking fees and expenses) incurred in
connection with such Asset Sale or sale of Capital Stock, and, in the case of an
Asset Sale only, less the amount (estimated reasonably and in good faith by the
Company) of income, franchise, sales and other applicable federal, state,
provincial, foreign and local taxes required to be paid or accrued as a
liability by the Company or any of its respective Restricted Subsidiaries in
connection with such Asset Sale in the taxable year that such sale is
consummated or in the immediately succeeding taxable year, the computation of
which shall take into account the reduction in tax liability resulting from any
available operating losses and net operating loss carryovers, tax credits and
tax credit carryforwards, and similar tax attributes.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale or (b) the disposition of
any securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and (ii) any extraordinary gain or loss, together with any related
provision for taxes on such extraordinary gain or loss.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor an Restricted Subsidiary (a) provides any Guarantee or credit support of any
kind (including any undertaking, guarantee, indemnity, agreement or instrument
that would constitute Indebtedness) or (b) is directly or indirectly liable (as
a guarantor or otherwise) and (ii) no default with respect to which (including
any rights that the holders thereof may have to take enforcement action against
an Unrestricted Subsidiary) would permit (upon notice, lapse of time or both)
any holder of any other Indebtedness of the Company or any Restricted Subsidiary
to declare a default under such other Indebtedness or cause the payment thereof
to be accelerated or payable prior to its Stated Maturity.
"OFFICER" means the President, the Chief Executive Officer, any Executive
Vice President, and the Chief Financial Officer of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers.
"PARI PASSU INDEBTEDNESS" means Indebtedness of the Company ranking equal in
right of payment with the Notes.
"PERMITTED HOLDER" means Metromedia Company, its general partners and their
respective Related Persons and Persons that would constitute a Class B Permitted
Holder as defined in the Company's Amended and Restated Certificate of
Incorporation.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Consolidated Subsidiary of the Company that is engaged entirely or substantially
entirely in a Telecommunications Business; (b) any Investment in Cash
Equivalents; and (c) any Investment by the Company or any of its Restricted
Subsidiaries in a Person, if as a result of such Investment (i) such Person
becomes a Consolidated Subsidiary of the Company that is engaged entirely or
substantially entirely in a Telecommunications Business or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Consolidated Subsidiary of the Company that is engaged entirely or substantially
entirely in a Telecommunications Business.
"PERMITTED LIENS" means (i) Liens to secure Indebtedness permitted by
clauses (e), (f), (g) and (h) of the second paragraph of the covenant described
above under the caption "--Incurrence of Indebtedness
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and Issuance of Preferred Stock", PROVIDED that with respect to Liens to secure
Indebtedness permitted by clause (f) thereof or any Permitted Refinancing
Indebtedness of such Indebtedness, such Lien must cover only the assets acquired
with such Indebtedness; (ii) Liens in favor of the Company or any Restricted
Subsidiary; (iii) Liens on property of a Person existing at the time such Person
is merged with or into or consolidated with the Company or any of its Restricted
Subsidiaries, PROVIDED that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with the Company or
such Restricted Subsidiary; (iv) Liens on property existing at the time of
acquisition thereof by the Company or any of its Restricted Subsidiaries,
PROVIDED that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vi) Liens existing on the Issue
Date; (vii) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, PROVIDED that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (viii) zoning restrictions, rights-of-way,
easements and similar charges or encumbrances incurred in the ordinary course
which in the aggregate do not detract from the value of the property thereof,
and (ix) Liens incurred in the ordinary course of business of the Company or any
of its Restricted Subsidiaries with respect to obligations that do not exceed
$5.0 million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); PROVIDED that: (i) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of such
Indebtedness or otherwise reasonably determined by the Company to be necessary
and reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is expressly subordinated in right of payment to, the Notes on terms at
least as favorable to the Holders of the Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iv) such Indebtedness is incurred solely by the
Company or the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and
(v) such Indebtedness is secured only by the assets, if any, that secured the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
limited liability company, incorporated or unincorporated association,
joint-stock company, trust, unincorporated organization or government or other
agency or political subdivision thereof or other entity of any kind.
"PREFERRED STOCK" means any Equity Interest of any class or classes of a
Person (however designated) which is preferred as to payments of dividends, or
as to distributions upon any liquidation or dissolution, over Equity Interests
of any other class of such Person.
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"PUBLIC EQUITY OFFERING" means an underwritten offering of common stock of
the Company for cash pursuant to an effective registration statement under the
Securities Act.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness (including Acquired Debt,
in the case of leases, Capital Lease Obligations, mortgage financings and
purchase money obligations) incurred for the purpose of financing all or any
part of the cost of the engineering, construction, installation, acquisition,
lease (other than pursuant to a sale and leaseback of Existing Assets),
development or improvement of any Telecommunications Assets used by the Company
or any Restricted Subsidiary, in the case of Indebtedness incurred by the
Company, or any Foreign Subsidiary, in the case of Indebtedness incurred by any
Foreign Subsidiary, including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"RELATED PERSON" means any Person who controls, is controlled by or is under
common control with a Permitted Holder; PROVIDED, that for purposes of this
definition "control" means the beneficial ownership of more than 50% of the
total voting power of a Person normally entitled to vote in the election of
directors, managers or trustees, as applicable, of a Person.
"RESTRICTED INVESTMENT" means any Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary. Unless the context specifically
requires otherwise, Restricted Subsidiary means a direct or indirect Restricted
Subsidiary of the Company.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Act, as such Regulation is in effect on the date
hereof.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company that is
subordinated in right of payment by its terms or the terms of any document or
instrument or instrument relating thereto to the Notes, in any respect.
"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or
(b) the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"TELECOMMUNICATIONS ASSETS" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business and the Equity Interests of
a Person engaged entirely or substantially entirely in a Telecommunications
Business.
"TELECOMMUNICATIONS BUSINESS" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) constructing, creating, developing
or marketing communications related network equipment, software and other
devices for use in a telecommunications business or (iii) evaluating,
participating or pursuing any other activity or
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opportunity that is primarily related to those identified in (i) or (ii) above;
PROVIDED, THAT, the determination of what constitutes a Telecommunications
Business shall be made in good faith by the Board of Directors of the Company.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution; but only to the extent that such Subsidiary at the time of
such designation: (a) has no Indebtedness other than Non-Recourse Debt; (b) is a
Person with respect to which neither the Company nor any of its Restricted
Subsidiaries has any direct or indirect obligation to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (c) has not Guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries. Any such designation by the Board of Directors
shall be evidenced by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption "--Certain
Covenants--Restricted Payments." The Board of Directors of the Company may at
any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary;
provided that such designation shall be deemed to be an incurrence of
Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall only be
permitted if (i) such Indebtedness is permitted under the covenant described
under the caption "--Certain Covenants--Incurrence of Indebtedness and Issuance
of Preferred Stock," calculated on a pro forma basis as if such designation had
occurred at the beginning of the applicable reference period, and (ii) no
Default or Event of Default would be in existence following such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
Subsidiaries of such Person and one or more Wholly Owned Restricted Subsidiaries
of such Person.
TRANSFER AND EXCHANGE
A holder may transfer or exchange the Notes in accordance with the
Indenture. The Company, the Registrar and the Trustee may require a holder,
among other things, to furnish appropriate endorsements and transfer documents
and may require a holder to pay any taxes and fees required by law or permitted
by the Indenture.
BOOK-ENTRY, DELIVERY AND FORM
DENOMINATION
Except as set forth below, the Notes will be issued in registered, global
form in minimum denominations of $1,000 or [EURO]1,000, as applicable, and
integral multiples of $1,000 or [EURO]1,000, as applicable, in excess thereof.
The Notes will be issued at the closing of the offering only against payment in
immediately available funds.
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FORM
The Dollar Notes will be represented by one or more Global Notes in
definitive, fully registered form without interest coupons (the "Dollar Global
Notes") and will be deposited with or on behalf of The Depository Trust Company
("DTC") and registered in the name of a nominee of DTC.
The Euro Notes will be represented by one or more Global Notes in
definitive, fully registered form without interest coupons (the "Euro Global
Notes" and, together with the Dollar Global Notes, the "Global Notes") and will
be deposited with a common depositary for Morgan Guarantee Trust Company of New
York as operator of the Euroclear System ("Euroclear") and Cedelbank (the
"Common Depositary") and registered in the name of a nominee of the Common
Depositary.
TRANSFER PROCEDURE
Except in the limited circumstances described below, owners of beneficial
interests in Global Notes will not be entitled to receive physical delivery of
certificated notes. Transfers of beneficial interests in the Global Notes will
be subject to the applicable rules and procedures of DTC, Euroclear and
Cedelbank and their respective direct or indirect participants which rules and
procedures may change from time to time.
BOOK-ENTRY PROCEDURES
GLOBAL NOTES. The following description of the operations and procedures of
DTC, Euroclear and Cedelbank are provided solely as a matter of convenience.
These operations and procedures are solely within the control of the respective
settlement systems and are subject to changes by them from time to time. We take
no responsibility for these operations and procedures and we urge investors to
contact the system or their participants directly to discuss these matters.
DOLLAR GLOBAL NOTES. Upon the issuance of the Dollar Global Notes, DTC will
credit, on its internal system, the respective principal amount of the
individual beneficial interests represented by such Global Notes to the accounts
of persons who have accounts with such depositary. Such accounts initially will
be designated by or on behalf of the Underwriters. Ownership of beneficial
interests in a Dollar Global Note will be limited to participants or persons who
hold interests through its participants. Ownership of beneficial interests in
the Dollar Global Notes will be shown on, and the transfer of that ownership
will be effected only through, records maintained by DTC or its nominee (with
respect to interests of participants) and the records of participants (with
respect to interests of persons other than participants).
EURO GLOBAL NOTES. Upon the issuance of the Euro Global Notes, the Common
Depositary will credit, on its internal system, the respective principal amount
of the beneficial interests represented by such Global Notes to the accounts of
Euroclear and Cedelbank. Euroclear and Cedelbank will credit, on their internal
systems, the respective principal amounts of the individual beneficial interests
in such Global Notes to the accounts of persons who have accounts with Euroclear
and Cedelbank.
Such accounts initially will be designated by or on behalf of the
Underwriters. Ownership of beneficial interests in a Euro Global Note will be
limited to participants or persons who hold interests through participants in
Euroclear or Cedelbank. Ownership of beneficial interests in the Euro Global
Notes will be shown on, and the transfer of that ownership will be effected only
through, records maintained by Euroclear and Cedelbank or their respective
nominees (with respect to interests of participants) and the records of
participants (with respect to interests of persons other than participants).
AS LONG AS DTC OR THE COMMON DEPOSITARY, OR ITS RESPECTIVE NOMINEE, IS THE
REGISTERED HOLDER OF A GLOBAL NOTE, DTC OR THE COMMON DEPOSITARY OR SUCH
NOMINEE, AS THE CASE MAY BE, WILL BE CONSIDERED THE SOLE OWNER AND HOLDER OF THE
NOTES REPRESENTED BY SUCH GLOBAL NOTE FOR ALL PURPOSES UNDER THE INDENTURE AND
THE NOTES.
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Unless:
(1) in the case of a Dollar Global Note DTC notifies us that it is unwilling
or unable to continue as depositary for a Global Note or ceases to be a
"Clearing Agency" registered under the Exchange Act;
(2) in the case of a Euro Global Note, Euroclear and Cedelbank notify us
that they are unwilling or unable to continue as clearing agency;
(3) in the case of a Euro Global Note, the Common Depositary notifies us
that they are unwilling or unable to continue as Common Depositary and a
successor Common Depositary is not appointed within 120 days of such
notice; or
(4) in the case of any Note, an event of default has occurred and is
continuing with respect to such Note,
owners of beneficial interests in a Global Note will not be entitled to have any
portions of such Global Note registered in their names, will not receive or be
entitled to receive physical delivery of Notes in certificated form and will not
be considered the owners or holders of the Global Note (or any Notes represented
thereby) under the Indenture or the Notes. In addition, no beneficial owner of
an interest in a Global Note will be able to transfer that interest except in
accordance with DTC's and/or Euroclear's and Cedelbank's applicable procedures
(in addition to those under the Indenture referred to herein).
Investors may hold their interests in the Euro Global Notes through
Cedelbank or Euroclear, if they are participants in such systems, or indirectly
through organizations which are participants in such systems. Cedelbank and
Euroclear will hold interests in the Euro Global Notes on behalf of their
participants through customers' securities accounts in their respective names on
the books of the Common Depositary. Investors may hold their interests in the
Dollar Global Notes directly through DTC, if they are participants in such
system, or indirectly through organizations (including Euroclear and Cedelbank)
which are participants in such system. All interests in a Global Note may be
subject to the procedures and requirements of DTC and/or Euroclear and
Cedelbank.
PAYMENTS ON THE NOTES
Payments of the principal of and interest on Dollar Global Notes will be
made to DTC or its nominee as the registered owner thereof. Payments of the
principal of and interest on Euro Global Notes will be made to the order of the
Common Depositary or its nominee as the registered owner thereof. Neither we,
the Trustee, the Common Depositary nor any of their respective agents will have
any responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global Notes
or for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
We expect that DTC or its nominee, upon receipt of any payment of principal
or interest in respect of a Global Note representing any Notes held by it or its
nominee, will immediately credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Note for such Notes as shown on the records of DTC or its
nominee.
We expect that the Common Depositary, in its capacity as paying agent, upon
receipt of any payment of principal or interest in respect of a Global Note
representing any Notes held by it or its nominee, will immediately credit the
accounts of Euroclear and Cedelbank which in turn will immediately credit
accounts of participants in Euroclear and Cedelbank with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Note for such Notes as shown on the records of Euroclear and
Cedelbank.
We also expect that payments by participants to owners of beneficial
interests in such Global Note held through such participants will be governed by
standing instructions and customary practices, as is now the case with
securities held for the accounts of customers registered in "street name." Such
payments will be the responsibility of such participants.
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Because DTC, Euroclear and Cedelbank can only act on behalf of their
respective participants, who in turn act on behalf of indirect participants and
certain banks, the ability of a holder of a beneficial interest in Global Notes
to pledge such interest to persons or entities that do not participate in the
DTC, Euroclear or Cedelbank systems, or otherwise take actions in respect of
such interest, may be limited by the lack of a definitive certificate for such
interest. The laws of some countries and some U.S. states require that certain
persons take physical delivery of securities in certificated form. Consequently,
the ability to transfer beneficial interests in a Global Note to such persons
may be limited. Because DTC, Euroclear and Cedelbank can act only on behalf of
participants, which, in turn, act on behalf of indirect participants and certain
banks, the ability of a person having a beneficial interest in a Global Note to
pledge such interest to persons or entities that do not participate in the DTC
system or in Euroclear and Cedelbank, as the case may be, or otherwise take
actions in respect of such interest, may be affected by the lack of a physical
certificate evidencing such interest.
Except for trades involving only Euroclear and Cedelbank participants,
interests in the Dollar Global Notes will trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will
therefore settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its participants. Transfers of interests in
Dollar Global Notes between participants in DTC will be effected in accordance
with DTC's procedures, and will be settled in same-day funds. Transfers of
interests in Euro Global Notes and Dollar Global Notes between participants in
Euroclear and Cedelbank will be effected in the ordinary way in accordance with
their respective rules and operating procedures.
Cross-market transfers of dollar notes between DTC participants, on the one
hand, and Euroclear or Cedelbank participants, on the other hand, will be
effected in DTC in accordance with DTC's rules on behalf of Euroclear or
Cedelbank, as the case may be, by its respective depositary; however, such
cross-market transactions will require delivery of instructions to Euroclear or
Cedelbank, as the case may be, by the counterparty in such system in accordance
with the rules and procedures and within the established deadlines (Brussels
time) of such system. Euroclear or Cedelbank, as the case may be, will, if the
transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Notes in DTC, and
making or receiving payments in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Cedelbank
participants may not deliver instructions directly to the depositories for
Euroclear or Cedelbank.
Because of time zone differences, the securities account of a Euroclear or
Cedelbank participant purchasing an interest in a Dollar Global Note from a DTC
participant will be credited, and any such crediting will be reported to the
relevant Euroclear or Cedelbank participant, during the securities settlement
processing day (which must be a business day for Euroclear and Cedelbank
immediately following the DTC settlement date). Cash received in Euroclear or
Cedelbank as a result of sales of interests in a Global Note by or through a
Euroclear or Cedelbank participant to a DTC participant will be received with
value on the DTC settlement date but will be available in the relevant Euroclear
or Cedelbank cash account only as of the business day for Euroclear or Cedelbank
following the DTC settlement date.
DTC, Euroclear and Cedelbank have advised us that they will take any action
permitted to be taken by a holder of Notes (including the presentation of Notes
for exchange as described below) only at the direction of one or more
participants to whose account with DTC or Euroclear or Cedelbank, as the case
may be, interests in the Global Notes are credited and only in respect of such
portion of the aggregate principal amount of the Notes as to which such
participant or participants has or have given such direction. However, if there
is an event of default under the Notes, DTC, Euroclear and Cedelbank reserve the
right to exchange the Global Notes for Notes in certificated form, and to
distribute such Notes to their respective participants.
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DEPOSITARY PROCEDURES
DTC. DTC has advised us as follows: DTC is a limited purpose trust company
organized under the laws of the State of New York, a member of the Federal
Reserve System, a "clearing corporation" within the meaning of the Uniform
Commercial Code and a "Clearing Agency" registered pursuant to the provisions of
Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical transfer
and delivery of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and may include
certain other organizations. Indirect access to the DTC system is available to
other entities such as banks, brokers, dealers and trust companies that clear
through or maintain a custodial relationship with a participant, either directly
or indirectly ("indirect participants").
EUROCLEAR AND CEDELBANK. Euroclear and Cedelbank have advised us as
follows: Euroclear and Cedelbank each hold securities for their account holders
and facilitate the clearance and settlement of securities transactions by
electronic book-entry transfer between their respective account holders, thereby
eliminating the need for physical movements of certificates and any risk from
lack of simultaneous transfers of securities.
Euroclear and Cedelbank each provide various services including safekeeping,
administration, clearance and settlement of internationally traded securities
and securities lending and borrowing. Euroclear and Cedelbank each also deal
with domestic securities markets in several countries through established
depository and custodial relationships. The respective systems of Euroclear and
Cedelbank have established an electronic bridge between their two systems across
which their respective account holders may settle trades with each other.
Account holders in both Euroclear and Cedelbank are world-wide financial
institutions including underwriters, securities brokers and dealers, trust
companies and clearing corporations. Indirect access to both Euroclear and
Cedelbank is available to other institutions that clear through or maintain a
custodial relationship with an account holder of either system.
An account holder's overall contractual relations with either Euroclear or
Cedelbank are governed by the respective rules and operating procedures of
Euroclear or Cedelbank and any applicable laws. Both Euroclear and Cedelbank act
under such rules and operating procedures only on behalf of their respective
account holders, and have no record of or relationship with persons holding
through their respective account holders.
Although DTC, Euroclear and Cedelbank currently follow the foregoing
procedures to facilitate transfers of interests in Global Notes among
participants of DTC, Euroclear and Cedelbank, they are under no obligation to do
so, and such procedures may be discontinued or modified at any time. Neither we
nor the Trustee will have any responsibility for the performance by DTC,
Euroclear or Cedelbank or their respective participants or indirect participants
of their respective obligations under the rules and procedures governing their
operations.
CERTIFICATED NOTES
If any depositary is at any time unwilling or unable to continue as a
depositary for the Notes for the reasons set forth above under "Book Entry
Procedures," we will issue certificates for such Notes in definitive, fully
registered, non-global form without interest coupons in exchange for the Global
Notes. Certificates for Notes delivered in exchange for any Global Note or
beneficial interests therein will be registered in the names, and issued in any
approved denominations, requested by DTC, Euroclear, Cedelbank or the Common
Depositary (in accordance with their customary procedures).
In the event definitive Notes are issued, the holders of definitive Notes
will be able to receive payments of principal and interest on their Notes at the
office of the Company's paying agent maintained in the Borough of Manhattan,
and, if the definitive Notes are listed on the Luxembourg Stock Exchange, at the
offices of the paying agent in Luxembourg. All payments of interest may be
received at the offices of a
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paying agent upon presentation of certificated Notes and all payments of
principal may be received at such offices upon surrender of the Notes. The
Company also has the option of mailing checks to the registered holders of the
Notes.
The Company's paying agent with respect to the Dollar Notes in the Borough
of Manhattan is currently the corporate trust office of The Bank of New York,
located at 101 Barclay Street, Floor 21 West, New York, New York. The Company's
paying agent with respect to the Euro Notes in London, United Kingdom is
currently the corporate trust office of The Bank of New York, London Branch, at
1 Canada Square, London E14 5AL, United Kingdom. The Company's paying agent and
transfer agent in Luxembourg is Kredietbank S.A. Luxembourgeoise, currently
located at 43 boulevard Royal, L-2955 Luxembourg. As long as the Notes are
listed on the Luxembourg Stock Exchange, the Company will maintain a paying
agent and transfer agent in Luxembourg. Any change in the Luxembourg paying
agent and transfer agent will be published in Luxembourg. See "--Notices."
In the event definitive Notes are issued, the holders of definitive Notes
will be able to transfer their Notes, in whole or in part, by surrendering the
Notes for registration of transfer at the office of The Bank of New York and, so
long as definitive Notes are listed on the Luxembourg Stock Exchange, at the
offices of the paying agent in Luxembourg, duly endorsed by or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
securities registrar. Upon surrender, the Company will execute, and the trustee
will authenticate and deliver new Notes to the designated transferee in the
amount being transferred, and a new Note for any amount not being transferred
will be issued to the transferor. The Company will not charge any fee for the
registration of transfer or exchange, except that the Company may require the
payment of a sum sufficient to cover any applicable tax or other governmental
charge payable in connection with the transfer. Notwithstanding any statement
herein, we and the Trustees reserve the right to impose such transfer,
certification, exchange or other requirements, if any, as they may determine are
necessary to ensure compliance with applicable laws or as DTC, Euroclear or
Cedelbank may require.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payment in respect of the Notes represented
by the Global Notes, including principal, and premium, if any, be made by wire
transfer of immediately available funds to the accounts specified by the Global
Note holder. With respect to Notes in certificated form, we will make all
payments of principal, and premium, if any, by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address. The Notes represented by the Global Notes will be eligible to trade in
DTC's Same-Day Firm Settlement System, and any permitted secondary market
trading activity in such Notes will, therefore, be required by DTC to be settled
in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedelbank participant purchasing an interest in a Global Note from a participant
in DTC will be credited, and any such crediting will be reported to the relevant
Euroclear or Cedelbank participant, during the securities settlement processing
day (which must be a business day for Euroclear and Cedelbank) immediately
following the settlement date of DTC. Cash received in Euroclear or Cedelbank as
a result of sales of interests in a Global Note by or through a Euroclear or
Cedelbank participant to a participant in DTC will be received with value on the
settlement date of DTC but will be available in the relevant Euroclear or
Cedelbank cash account only as of the business day for Euroclear or Cedelbank
following DTC's settlement date.
NOTICES
Notices to holders of the Notes will be made by first class mail, postage
prepaid, to the addresses that appear on the register of the Company. So long as
the Notes are listed on the Luxembourg Stock Exchange, notices to non-United
States residents will be made by publication in authorized newspapers in
Luxembourg. It is expected that publication will be made in Luxembourg in the
LUXEMBURGER WORT. Any notice will be deemed to have been given on the date of
publication or, if published more than once, on the date of the first
publication.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of certain United States federal
income tax considerations that may be relevant to the purchase, ownership and
disposition of the notes. This summary does not purport to be a complete
analysis of all of the potential United States federal income tax considerations
relating to the purchase, ownership and disposition of the notes and generally
does not address any other taxes that might be applicable to a holder of the
notes. We cannot assure you that the United States Internal Revenue Service (the
"IRS") will take a similar view of such consequences. Further, the discussion
does not address all aspects of taxation that may be relevant to particular
purchasers in light of their individual circumstances (including the effect of
any foreign, state or local laws) or to certain types of purchasers subject to
special treatment under United States federal income tax laws (including dealers
in securities, insurance companies, financial institutions, persons that hold
notes that are a hedge or that are hedged against currency risks or that are
part of a straddle or conversion transaction or a constructive sale, persons
whose functional currency is not the U.S. dollar and tax-exempt entities). The
discussion below assumes that the notes are held as capital assets within the
meaning of section 1221 of the Internal Revenue Code of 1986, as amended (the
"Code").
The discussion of the United States federal income tax considerations below
is based on currently existing provisions of the Code, the applicable Treasury
regulations promulgated and proposed thereunder (the "Treasury Regulations"),
judicial decisions, and administrative interpretations, all of which are subject
to change, possibly on a retroactive basis. Because individual circumstances may
differ, as a prospective purchaser of the notes, you are strongly urged to
consult your tax advisor with respect to your particular tax situation and the
particular tax effects of any state, local, non-United States or other tax laws
and possible changes in the tax laws.
As used in this section, the term "U.S. Holder" means a beneficial owner of
a note who or which is for United States federal income tax purposes (i) an
individual who is a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any political subdivision thereof, (iii) an
estate the income of which is subject to United States federal income taxation
regardless of its source, (iv) a trust if a court within the United States is
able to exercise primary supervision over the administration of the trust and
one or more United States persons have the authority to control all substantial
decisions of the trust, or (v) otherwise subject to United States federal income
tax on a net income basis in respect of the notes. The term also includes
certain former citizens of the United States whose income and gain on the notes
will be subject to United States taxation. As used herein, the term "Non-U.S.
Holder" means a beneficial owner of a note that is not a U.S. Holder.
TAX CONSIDERATIONS FOR U.S. HOLDERS
PAYMENTS OF INTEREST
Interest on a note generally will be taxable to a U.S. Holder as ordinary
interest income at the time it accrues or is received in accordance with the
U.S. Holder's method of accounting for United States federal income tax
purposes.
FOREIGN CURRENCY ASPECTS OF INTEREST. The amount of interest required to be
included in income by a cash-basis U.S. Holder upon receipt of a payment on a
Euro note will be the U.S. dollar value of the Euro amount paid (determined
using the "spot rate" on the date such payment is received), regardless of
whether the payment is in fact converted into U.S. dollars. A spot rate is a
rate that is demonstrated to reflect a fair market rate of exchange available to
the public for currency under a spot contract in a free market and involving
representative amounts. The tax basis of Euros received by a U.S. Holder
generally will equal the U.S. dollar value of such Euros (as described) when
paid. Upon any subsequent exchange of such Euros for U.S. dollars or for another
foreign currency, or upon the use of such Euros to purchase property, a U.S.
Holder will generally recognize exchange gain or loss equal to the difference
between the U.S. Holder's tax basis for the Euros and the amount of U.S. dollars
received (or, where another foreign
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currency is received, the U.S. dollar value of such foreign currency based on
the U.S. dollar spot rate on the date of the exchange) or, if property is
purchased, the U.S. dollar value of the Euros exchanged for such property based
on the U.S. dollar spot rate on the date of the exchange. Generally, no exchange
gain or loss should be realized if a U.S. Holder receives Euros and exchanges
such Euros for U.S. dollars on the same day.
Except in the case of a Spot Rate Convention Election (as defined below),
interest (including OID) on a Euro note held by a U.S. Holder that is required
to accrue interest on a note prior to receipt of such interest will be
determined for any accrual period in Euros and then translated into U.S. dollars
using the average exchange rate for the accrual period or, with respect to an
accrual period that spans two taxable years, using the average rate for the
partial period within each taxable year. The average rate of exchange for an
interest accrual period is the simple average of the exchange rates for each
business day of such period (or such other average that is reasonably derived
and consistently applied by the holder).
Applicable Treasury Regulations allow accrual basis taxpayers to elect (a
"Spot Rate Convention Election") to translate interest income at the spot rate
on the last day of the interest accrual period (and in the case of a partial
accrual period, the spot rate on the last day of the taxable year). In addition,
a holder may elect to use the spot rate in effect on the date of receipt (or
payment) for such purpose if such date is within five business days of the last
date of an interest accrual period. A holder that makes such an election must
apply it consistently to all debt instruments from year to year and may not
revoke the election without the consent of the IRS.
Upon receipt of an interest payment on a Euro note, an accrual basis U.S.
Holder will recognize ordinary gain or loss with respect to accrued interest
income in an amount equal to the difference between the U.S. dollar value of the
payment received (determined using the spot rate in effect on the date such
payment is received) in respect of such interest accrual period and the U.S.
dollar value of the interest income that has accrued during such interest
accrual period (as determined above)). Any such gain or loss will be treated as
ordinary income or loss but generally will not be treated as interest income or
expense, except to the extent provided by future regulations or administrative
pronouncements of the IRS.
For purposes of computing exchange gain and loss, payments received on a
Euro note shall be treated first as payments of interest, and second as payments
of principal.
MARKET DISCOUNT AND BOND PREMIUM
If a U.S. Holder purchases a note for an amount that is less than its
principal amount, the difference generally will be treated as "market discount".
In such case, any partial principal payment on and gain realized on the sale,
exchange or retirement of the note and unrealized appreciation on certain
nontaxable dispositions of the note will be treated as ordinary income to the
extent of the market discount that has not previously been included in income
and that is treated as having accrued on the note prior to such payment or
disposition and the U.S. Holder might be required to defer all or a portion of
the interest expense on any indebtedness incurred or continued to purchase or
carry such note (in each case, unless the U.S. Holder has made an election to
include such market discount in income as it accrues). Unless the U.S. Holder
elects to treat market discount as accruing on a constant yield method, market
discount will be treated as accruing on a straight-line basis over the remaining
term of the note. An election made to include market discount in income as it
accrues will apply to all debt instruments acquired by the U.S. Holder on or
after the first day of the taxable year to which such election applies and may
be revoked only with the consent of the IRS. In the case of Euro notes, market
discount will be determined in Euros. If the U.S. Holder elects to include
market discount in income as it accrues, the amount included for any accrual
period will be translated into U.S. dollars at the average exchange rate for
that period. If the U.S. Holder has not elected to include market discount in
income as it accrues, the amount of the discount will be translated into U.S.
dollars at the spot rate on the date the Euro note is disposed of.
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If a U.S. Holder purchases a note for an amount in excess of all amounts
payable on the note after the purchase date, other than payments of stated
interest, such excess will be treated as "bond premium." In general, a U.S.
Holder may elect to amortize bond premium over the remaining term of the note on
a constant yield method. The amount of bond premium allocable to any accrual
period is offset against the stated interest allocable to such accrual period
(and any excess may be deducted, subject to certain limitations). An election to
amortize bond premium applies to all taxable debt instruments held at the
beginning of the first taxable year to which such election applies and
thereafter acquired by the U.S. Holder and may be revoked only with the consent
of the IRS. In the case of Euro notes, bond premium will be determined in Euros
and will offset stated interest in Euros. A U.S. Holder will recognize exchange
gain or loss with respect to any such bond premium on a Euro note, calculated by
treating the portion of the premium amortized with respect to any period as if
it were a return of principal.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Upon the sale, exchange or retirement of a note, a U.S. Holder will
recognize taxable gain or loss equal to the difference between the amount of
cash plus the fair market value of any property received (not including any
amount attributable to accrued but unpaid interest) and such holder's adjusted
tax basis in the note. A U.S. Holder's adjusted tax basis in a note will be its
cost, increased by any accrued market discount included in income and reduced by
any amortized bond premium and any principal payment on the note received by
such holder.
Subject to the discussions of market discount and foreign currency gain or
loss, gain or loss realized on the sale, exchange or retirement of a note by a
U.S. Holder generally will be capital gain or loss if the note is held as a
capital asset by the U.S. Holder. Net capital gains of individuals are subject
to tax at lower rates than items of ordinary income. The deductibility of
capital losses is subject to limitations.
In general, a U.S. Holder will realize exchange gain or loss with respect to
payments of principal on a Euro note, determined by translating the
Euro-denominated principal amount paid at the spot rate on the date of payment
and subtracting from that the Euro-denominated principal amount at the spot rate
on the date the U.S. Holder acquired the Euro note. Any such exchange gain or
loss will be treated as ordinary income or loss.
TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
Generally, payments of principal or interest on the notes by the Company or
any paying agent to a beneficial owner of a note that is a Non-U.S. Holder will
not be subject to U.S. federal income or income withholding tax, provided that,
in the case of interest, (i) such Non-U.S. Holder does not own, actually or
constructively, 10% or more of the combined voting power of all classes of stock
of the Company entitled to vote, (ii) such Non-U.S. Holder is not, for U.S.
federal income tax purposes, a controlled foreign corporation related to the
Company actually or constructively through stock ownership, (iii) such Non-U.S.
Holder is not a bank receiving interest described in section 881(c)(3)(A) of the
Code and (iv) either (a) the Non-U.S. Holder provides the Company or its agent
with an IRS Form W-8 (or a suitable substitute form) signed under penalties of
perjury that includes its name and address and certifies as to its non-United
States status in compliance with applicable law and Treasury Regulations or
(b) a securities clearing organization, bank or other financial institution that
holds customers' securities in the ordinary course of its trade or business
holds the note and provides a statement to the Company or its agent signed under
penalties of perjury in which such organization, bank or financial institution
certifies that such a Form W-8 (or a suitable substitute form) has been received
by it from the Non-U.S. Holder or from another financial institution acting on
behalf of the Non-U.S. Holder and furnishes the Company or its agent with a copy
thereof. If these requirements cannot be met, a Non-U.S. Holder generally will
be subject to United States federal income withholding tax at a rate of 30% (or
such lower rate provided by an applicable treaty) with respect to payments of
interest on the notes. The Non-U.S. Holder must inform the Company or its agent
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or the financial institution to which the Non-U.S. Holder provided the Form W-8
(or suitable substitute) within 30 days of any change in the information
provided in such form.
Treasury Regulations generally effective for payments made after
December 31, 2000 (the "New Regulations") provide alternative methods for
satisfying the certification requirements described in clause (iv) above. The
New Regulations also will require, in the case of notes held by a foreign
partnership, that (i) the certification be provided by the partners rather than
by the foreign partnership and (ii) the partnership provide certain information,
including a U.S. taxpayer identification number.
A Non-U.S. Holder of a note generally will not be subject to United States
federal income or income withholding tax on gain realized on the sale, exchange,
redemption, retirement or other disposition of such Note, unless (i) such
Non-U.S. Holder is an individual who is present in the United States for 183
days or more in the taxable year of the disposition, and certain other
conditions are met or (ii) such gain is effectively connected with the conduct
by such Non-U.S. Holder of a trade or business in the United States.
Notwithstanding the above, if a Non-U.S. Holder of a note is engaged in a
trade or business in the United States and if interest on the note, or gain
realized on the disposition of the note, is effectively connected with the
conduct of such trade or business, the Non-U.S. Holder generally will be subject
to regular United States federal income tax on such interest or gain in the same
manner as if it were a U.S. Holder, unless an applicable treaty provides
otherwise. In addition, if such Non-U.S. Holder is a foreign corporation, it may
be subject to a branch profits tax equal to 30% (or such lower rate provided by
an applicable treaty) of its effectively connected earnings and profits for the
taxable year, subject to certain adjustments. Even though such effectively
connected income is subject to income tax, and may be subject to the branch
profits tax, it generally is not subject to income withholding if the Non-U.S.
Holder delivers a properly executed IRS Form 4224 (or other form applicable
under the New Regulations) to the payor.
TAX CONSIDERATIONS APPLICABLE TO BOTH U.S. HOLDERS AND NON-U.S. HOLDERS
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current United States federal income tax law, a 31% backup withholding
tax might apply to certain payments on, and the proceeds from a sale, exchange
or redemption of, the notes, unless the holder of the note (i) is a corporation
or comes within certain other exempt categories and, when required, demonstrates
that fact or (ii) provides a correct taxpayer identification number, certifies
as to its exemption from backup withholding and otherwise complies with
applicable requirements of the backup withholding rules.
Backup withholding and information reporting generally will not apply to
payments made by the Company or a paying agent on a note to a Non-U.S. Holder if
the certification described under "Tax Considerations for Non-U.S. Holders" is
duly provided or the Non-U.S. Holder otherwise establishes an exemption and the
payor does not have actual knowledge that the holder is a U.S. Holder or that
the conditions of any other exemption are not, in fact, satisfied. The payments
of proceeds from the disposition of a note to or through a non-United States
office of a broker that is (i) a United States person, (ii) a controlled foreign
corporation for United States federal income tax purposes, (iii) a foreign
person, 50% or more of whose gross income from all sources for certain periods
is from activities effectively connected with the conduct of a United States
trade or business or (iv) after December 31, 2000, a foreign partnership if
either (A) more than 50% of the income or capital interest is owned by U.S.
Holders or (B) such partnership has certain connections to the United States,
will be subject to information reporting requirements unless such broker has
documentary evidence in its files of the holder's Non-U.S. Holder status and has
no actual knowledge to the contrary or otherwise establishes an exemption.
Before January 1, 2001, backup withholding will not apply to any payment of the
proceeds from the sale of a note made to or through a foreign office of a
"broker" (as defined in applicable Treasury Regulations). However, after
December 31, 2000, backup withholding might apply if the broker has actual
knowledge
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that the payee is a U.S. Holder. Payments of the proceeds from the sale of a
note to or through the United States office of a broker are subject to
information reporting and possible backup withholding unless the holder
certifies, under penalties of perjury, that it is not a U.S. Holder and that
certain other conditions are met or otherwise establishes an exemption, provided
that the broker does not have actual knowledge that the holder is a U.S. Holder
or that the conditions of any other exemption are not, in fact, satisfied.
Holders of notes should consult their tax advisors regarding the application
of backup withholding in their particular situations, the availability of an
exemption therefrom, and the procedure for obtaining such an exemption, if
available. Any amounts withheld from payment under the backup withholding rules
will be allowed as a credit against the holder's United States federal income
tax liability and may entitle the holder to a refund if the required information
is furnished to the IRS.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX
ADVICE. ACCORDINGLY, AS A PROSPECTIVE HOLDER OF A NOTE, YOU SHOULD CONSULT YOUR
TAX ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF PURCHASING, HOLDING
AND DISPOSING OF THE NOTES, INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE,
LOCAL, OR NON-UNITED STATES TAX LAWS AND ANY RECENT OR PROSPECTIVE CHANGES IN
APPLICABLE TAX LAWS AND THE EFFECT OF THE NEW REGULATIONS WITH RESPECT TO
PAYMENTS MADE AFTER DECEMBER 31, 2000.
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UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
dated , 1999, each underwriter named below has severally agreed to
purchase from us, and we have agreed to sell to such underwriter, the principal
amount of notes set forth opposite the name of such underwriter.
<TABLE>
<CAPTION>
PRINCIPAL AMOUNT PRINCIPAL AMOUNT
UNDERWRITER OF DOLLAR NOTES OF EURO NOTES
- ----------- ---------------- ----------------
<S> <C> <C>
Salomon Smith Barney Inc....................................
Chase Securities Inc........................................
Deutsche Bank Securities Inc................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Goldman, Sachs & Co.........................................
Morgan Stanley & Co. Incorporated...........................
------ ------
Total................................................... $ $
====== ======
</TABLE>
The underwriting agreement provides that the obligations of the underwriters
to purchase the notes included in this offering are subject to the approval of
legal matters by counsel and to other conditions. The underwriters are obligated
to purchase all of the notes if they purchase any of the notes.
The underwriters propose to offer some of the notes directly to the public
at the public offering prices set forth on the cover page of this prospectus
supplement and some of the notes to certain dealers at the public offering price
less a concession not in excess of:
- % of the principal amount in the case of the Dollar notes; and
- % of the principal amount in the case of the Euro notes.
The underwriters may allow, and such dealers may reallow, a concession to
certain other dealers not in excess of:
- % of the principal amount in the case of the Dollar notes; and
- % of the principal amount in the case of the Euro notes.
After the initial offering of the notes to the public, the public offering
prices and the concessions to dealers may be changed by the underwriters.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering (expressed as a
percentage of the principal amount of the notes).
<TABLE>
<CAPTION>
PAID BY US
----------
<S> <C> <C>
Per note............................................... %
</TABLE>
The underwriters are offering the notes subject to prior sale and their
acceptance of the notes from us. The underwriters may reject any order in whole
or in part.
The underwriters may over-allot or effect transactions that stabilize or
cover, each of which is described below.
- Over-allotment involves syndicate sales of notes in excess of the
principal amount of notes to be purchased by the underwriters, which
creates a short position for the underwriters.
- Stabilizing transactions involve bids or purchases of notes made for the
purpose of preventing or retarding a decline in the market price of the
notes while the offering is in progress.
- Syndicate covering transactions involve purchases of the notes in the open
market after the distribution has been completed in order to cover
syndicate short positions.
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These transactions may cause the price of the notes to be higher than it
would otherwise be in the absence of such transactions. The underwriters are not
required to engage in any of these activities and may end any of these
activities at any time. The underwriters may also impose a penalty bid. Penalty
bids permit an underwriter to reclaim a selling concession from a syndicate
member when that underwriter, in covering syndicate short positions or making
stabilizing purchases, purchases notes originally sold by that syndicate member.
We estimate that our total expenses of this offering will be $ .
The notes are new issues of securities with no established trading market.
We intend to apply for listing of the notes on the Luxembourg Stock Exchange. We
have been advised by the underwriters that they presently intend to make a
market in the notes, as permitted by applicable laws and regulations. The
underwriters are not obligated, however, to make a market in the notes and may
discontinue any market making at any time at their sole discretion. Accordingly,
we can make no assurance as to the liquidity of, or trading markets for, the
notes.
Purchasers of the notes may be required to pay stamp taxes and other charges
in accordance with the laws and practices of the country of purchase in addition
to the issue price set forth on the cover page of this document.
We have agreed with the underwriters not to offer, sell, contract to sell,
grant any other option to purchase or otherwise dispose of, directly or
indirectly, any notes or similar securities, or enter into any agreement to do
any of the foregoing, for a period of 180 days after the date of issuance of the
notes without the prior written consent of Salomon Smith Barney Inc., except for
the convertible subordinated note to be issued to Bell Atlantic.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act, and to contribute to payments in
respect thereto.
Each underwriter has represented and agreed in the underwriting agreement
that:
- it has not offered or sold and will not offer or sell, any notes to
persons in the United Kingdom, except to persons whose ordinary activities
involve them in acquiring, holding, managing or disposing of investments
(as principal or agent) for the purposes of their businesses or otherwise
in circumstances which shall not result in an offer to the public in the
United Kingdom within the meaning of the Public Offers of Securities
Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 (the "FSA") with respect to anything done by
it in relation to the notes in, from or otherwise involving the United
Kingdom; and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue or
sale of the notes to a person who is of a kind described in Article 11(3)
of the FSA 1986 (Investment Advertisements) (Exemptions) Order 1996, as
amended, or is a person to whom the document may otherwise lawfully be
issued or passed on.
Certain of the underwriters, their affiliates or predecessors are providing,
have provided and may in the future provide investment banking or other
financial services to us and our affiliates in the ordinary course of business
and will receive customary compensation in connection therewith. Certain of the
underwriters in this offering are acting as underwriters in the sale of class A
common stock by certain of our stockholders and in an offering by DECS
Trust VI, both of which are expected to be completed concurrently with the
offering of the notes and none of which are conditioned on the other. See
"Recent and Proposed Transactions." An affiliate of one of the underwriters has
entered into a commitment letter with us for the provision of the new credit
facility. See "Description of the New Credit Facility."
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NOTICE TO CANADIAN RESIDENTS
THE OFFERING
The distribution of notes in Canada is being made on a private placement
basis solely in the Provinces of Quebec, Ontario, Manitoba, Saskatchewan,
Alberta and British Columbia.
RESALE RESTRICTIONS
Any resale of the notes must be made in accordance with an exemption from
the registration and prospectus requirements of applicable securities laws,
which vary depending on the province. Purchasers of notes are advised to seek
legal advice prior to any resale of the notes.
REPRESENTATION BY PURCHASERS
Confirmations of the acceptance of offers to purchase the notes will be sent
to purchasers in Canada who have not withdrawn their offers to purchase prior to
the issuance of such confirmations. Each purchaser who receives a purchase
confirmation will, by the purchaser's receipt thereof, be deemed to represent to
us and the dealer from whom such purchase confirmation is received that such
purchaser is entitled under applicable provincial securities laws to purchase
the notes without the benefit of a prospectus qualified under such securities
laws.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
The following summary fairly describes the principal Canadian federal tax
considerations generally applicable to a person who acquires notes pursuant to
this offering memorandum and who, at all relevant times and for purposes of the
INCOME TAX ACT (Canada) and any applicable tax treaty or convention, is or is
deemed to be resident in Canada, deals at arm's length with us and holds the
notes as capital property. Generally, the notes will constitute capital property
to a holder of notes provided that the holder of notes does not hold the notes
in the course of carrying on a business and does not acquire them as part of an
adventure in the nature of trade. Certain holders of notes who might not
otherwise be considered to hold their notes as capital property may, in certain
circumstances, be entitled to have them treated as capital property by making
the one time election permitted by subsection 39(4) of the INCOME TAX ACT
(Canada). This summary is not applicable to a holder of notes that is a
"financial institution" as defined in the INCOME TAX ACT (Canada) for purposes
of certain rules applicable to any income, gain or loss arising from a
"mark-to-market property". Holders of notes that are "financial institutions"
for the purposes of these rules should consult their own tax advisors.
This summary is based upon the current provisions of the INCOME TAX ACT
(Canada) and the regulations thereunder, all specific proposals to amend the
INCOME TAX ACT (Canada) and regulations publicly announced by or on behalf of
the Minister of Finance (Canada) prior to the date hereof and counsel's
understanding of the current published administrative and assessing policies and
practices of Revenue Canada, Customs, Excise and Taxation. This summary is not
exhaustive of all possible Canadian federal income tax considerations and,
except for the proposed amendments described above, does not take into account
or anticipate any changes in the law or administrative practice, whether by
judicial, governmental or legislative decision or action, nor does it take into
account tax legislation or considerations of any province, territory or foreign
jurisdiction, which may differ significantly from those discussed herein.
This summary is of a general nature only and is not intended to be and
should not be construed to be, legal or tax advice to any particular holder of
notes, and no representations with respect to the income tax consequences to any
particular holder of notes are made. ACCORDINGLY, PROSPECTIVE PURCHASERS OF
NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS FOR ADVICE WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF ACQUIRING, HOLDING AND DISPOSING OF NOTES.
For the purposes of the INCOME TAX ACT (Canada), all amounts relating to the
acquisition, holding or disposition of notes, including interest, adjusted cost
base and proceeds of disposition, must be converted
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into Canadian dollars based on the prevailing United States dollar or Euro
exchange rate, as the case may be, at the time such amounts arise.
INTEREST
A holder of notes that is a corporation, partnership, unit trust or a trust
of which a corporation or partnership is a beneficiary will be required to
include in computing its income for a taxation year all interest that accrues to
such holder on the notes to the end of that year or that becomes receivable or
is received by it before the end of that year, to the extent that such interest
was not included in computing the holder's income for a preceding taxation year.
Any other holder of notes, including an individual, will be required to include
in computing its income for a taxation year all interest on the notes that is
received or receivable by such holder of notes in that year (depending on the
method regularly followed by the holder of notes in computing income) to the
extent that such interest was not included in computing the holder's income for
a preceding taxation year.
Any premium paid by us because of the exercise of the right to redeem the
notes before the maturity thereof will be deemed to be interest received at that
time by a holder to the extent that such premium can reasonably be considered to
relate to, and does not exceed the value at the time of redemption of, the
interest that would have been paid or payable by us on those notes for a
taxation year ending after the redemption.
DISPOSITION
On a disposition or a deemed disposition (which will include a redemption or
repayment at maturity) of a note, a holder of notes will generally be required
to include in computing its income for the taxation year in which the
disposition occurs all interest that accrued on the note from the date of the
last interest payment to the date of disposition except to the extent that such
interest has otherwise been included in the holder's income for that year or a
preceding taxation year. In general, a disposition or a deemed disposition of a
note will result in a capital gain (or a capital loss) equal to the amount by
which the proceeds of disposition, net of any amount included in the holder's
income as interest and any reasonable costs of disposition, exceed (or are
exceeded by) the adjusted cost base of the note to the holder immediately before
the disposition.
Generally, three-quarters of any capital gain (a "taxable capital gain")
realized by a holder of notes in a taxation year must be included in computing
such holder's income for that taxation year, and three-quarters of any capital
loss (an "allowable capital loss") realized by a holder of notes in a taxation
year may be deducted from any taxable capital gains realized by the holder in
the year. Allowable capital losses in excess of taxable capital gains may be
carried back and deducted in any of the three preceding taxation years or
carried forward and deducted in any following taxation year against taxable
capital gains realized in such years, subject to and in accordance with the
provisions of the INCOME TAX ACT (Canada).
REFUNDABLE TAX
A holder of notes that is a "Canadian-controlled private corporation" (as
defined in the INCOME TAX ACT (Canada)) may be liable for a refundable tax of
6 2/3% on investment income, including interest and taxable capital gains earned
or realized in respect of the notes.
FOREIGN TAX CREDIT
Subject to certain limitations, a holder may be entitled to claim a credit
or a deduction in computing such holder's Canadian tax liability for any United
States withholding or other income tax payable by the holder in respect of
interest received on, or any gain realized on a disposition of, the notes.
FOREIGN PROPERTY
The notes will be "foreign property" for the purpose of the tax imposed on
certain deferred income plans under Part XI of the INCOME TAX ACT (Canada).
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ENFORCEMENT OF LEGAL RIGHTS
ONTARIO
The notes being offered are those of a foreign issuer and Ontario purchasers
will not receive the contractual right of action prescribed by section 32 of the
Regulation under the SECURITIES ACT (Ontario). As a result, Ontario purchasers
must rely on other remedies that may be available, including common law rights
of action for damages or rescission or rights of action under the civil
liability provisions of the U.S. federal securities laws.
All of our directors and officers, and the experts named herein may be
located outside Canada and, as a result, it may not be possible for Canadian
purchasers to effect service of process within Canada upon Metromedia or such
persons. All or a substantial portion of our assets and such persons may be
located outside of Canada and, as a result, it may not be possible to satisfy a
judgment against us or such persons in Canada or to enforce a judgment obtained
in Canadian courts against us or such persons outside of Canada.
SASKATCHEWAN
THE SECURITIES ACT, 1988 (Saskatchewan) provides purchasers with certain
statutory rights of action, including: (a) if the prospectus or any amendment
thereto contains a misrepresentation, which was a misrepresentation at the time
of purchase (i) a right of action for damages or rescission against us, (ii) a
right of action for damages against every promoter and director of ours who was
a promoter or director at the time the prospectus or any amendment thereto was
sent or delivered, and (iii) a right of action for damages against the dealer
from whom the notes were purchased; (b) a right of action for damages against
any individual who makes a verbal misrepresentation to such Saskatchewan
purchaser prior to or contemporaneously with the purchase of the notes; (c) a
right to void the agreement to purchase the notes and recover the purchase price
if the notes are sold in contravention of the Act, the regulations under the Act
or a decision of the Saskatchewan Securities Commission; and (d) a right of
action for damages or rescission if a copy of this notice, the attached
prospectus or any amendment thereto was not delivered to such purchaser before
the notes were subscribed for.
An action for damages must be started by the earlier of (a) one year after
the investor first had knowledge of the facts giving rise to the action or
(b) six years after the date of the transaction that gave rise to the action. An
action for rescission must be commenced by 180 days after the date of the
transaction that gave rise to the action.
The rights available to Saskatchewan purchasers are in addition to and
without derogation from any other right or remedy which such purchasers may have
at law, are intended to correspond to the provisions of the Act and are subject
to the defences contained therein.
ALBERTA
Securities legislation in Alberta provides that every purchaser of
securities pursuant to this offering memorandum shall have, in addition to any
other rights they may have at law, a right of action for damages or recession,
or both, against the issuer on whose behalf the distribution is made if the
offering memorandum or any amendment thereto contains a misrepresentation.
However such rights must be exercised within prescribed time limits. Purchasers
should refer to the applicable provisions of the Alberta securities legislation
for particulars of these rights or consult with a lawyer.
The SECURITIES ACT (Alberta) provides that no action may be commenced to
enforce such right of action unless the right is exercised: (a) in the case of
an action for rescission, 180 days from the day of the transaction that gave
rise to the cause of action; or (b) in the case of any action, other than an
action for rescission, the earlier of: (i) 180 days from the day that the
purchaser first had knowledge of the facts giving rise to the cause of action;
or (ii) one year from the day of the transaction that gave rise to the cause of
action.
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VALIDITY OF THE NOTES
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, will pass upon
certain legal matters for us in connection with the offering of the notes.
Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California, will pass
upon certain legal matters for the underwriters in connection with the offering
of the notes. Skadden, Arps, Slate, Meagher & Flom LLP has represented us on
other unrelated matters.
EXPERTS
The consolidated financial statements of Metromedia Fiber Network, Inc. at
December 31, 1997 and 1998 and for each of the years in the three-year period
ended December 31, 1998, appearing in this prospectus supplement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere in this prospectus supplement and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
AboveNet's financial statements as of June 30, 1998 and 1999 and for each of
the three years in the period ended June 30, 1999 included and incorporated by
reference in this prospectus supplement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report, which is included and
incorporated by reference herein, and have been so included and incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The Combined Statement of Assets to be Acquired and Liabilities to be
Assumed of Palo Alto Internet Exchange as of December 26, 1998 and December 27,
1997 and the related Combined Statement of Revenues and Direct Expenses for the
period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 12, 1998 and the fiscal years ended December 27, 1997 and
December 29, 1996 appearing in this prospectus supplement, have been included in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounts.
WHERE YOU CAN FIND MORE INFORMATION
We are currently subject to the periodic reporting and other informational
requirements of the Exchange Act. The reports and other information that we
filed with the Securities and Exchange Commission can be inspected and copied at
prescribed rates at the public reference facilities maintained by the Securities
and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and will also be available for inspection and copying at
the regional offices of the Securities and Exchange Commission located at 7
World Trade Center, Suite 1300, New York, New York 10048 and the Citicorp Center
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may
obtain information on the operation of the public reference facilities by
calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities
and Exchange Commission also maintains an Internet Web Site at
http://www.sec.gov that contains reports, proxy and information statements and
other information. You can also obtain copies of such materials from us upon
request. We have agreed that, whether or not we are required to do so by the
rules and regulations of the Securities and Exchange Commission, for so long as
any of the notes remain outstanding, we will furnish you as a holder of the
notes and will, if permitted, file with the Securities and Exchange Commission
(i) all quarterly and annual financial information that would be required to be
contained in a filing with the Securities and Exchange Commission on Forms 10-Q
and 10-K if we were required to file such forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by our certified
independent accountants, and (ii) all reports that would be required to be filed
with the Securities and Exchange Commission on Form 8-K if we were required to
file such reports.
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INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The following documents and other materials, which have been filed by us
with the Securities and Exchange Commission, are incorporated herein and
specifically made a part of this prospectus supplement by this reference:
- our Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
- our Quarterly Report on Form 10-Q for the three months ended March 31,
1999;
- our Quarterly Report on Form 10-Q for the six months ended June 30, 1999;
- our Current Report on Form 8-K dated June 30, 1999;
- our Current Report on Form 8-K dated September 10, 1999, as amended by our
Current Report on Form 8-K/A dated October 14, 1999 as further amended by
our Current Report on Form 8-K/A dated October 26, 1999;
- the "Risk Factors--Risk Factors Applicable to AboveNet" and "Business of
AboveNet" sections contained in our Registration Statement on Form S-4
dated August 5, 1999 (File No. 333-84541); and
- our Current Report on Form 8-K filed on October 18, 1999.
In addition, all documents filed with the Securities and Exchange Commission
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act
of 1934 by us subsequent to the date of this prospectus supplement shall be
deemed to be incorporated by reference into this prospectus supplement and to be
a part hereof from the date of filing of such documents with the Securities and
Exchange Commission. Any statement contained in this prospectus supplement or in
a document incorporated or deemed to be incorporated by reference in this
prospectus supplement shall be deemed to be modified or superseded for purposes
of this prospectus supplement to the extent that a statement contained in this
prospectus supplement or in any other subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus
supplement.
Statements contained in this prospectus supplement or in any document
incorporated by reference in this prospectus supplement as to the contents of
any contract or other document referred to herein or therein are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the documents incorporated by
reference, each such statement being qualified in all respects by such
reference.
This prospectus supplement incorporates documents by reference that are not
presented herein or delivered herewith. Copies of such documents, other than
exhibits to such documents that are not specifically incorporated by reference
herein, are available without charge to any person to whom this prospectus
supplement is delivered, upon written or oral request to: Metromedia Fiber
Network, Inc., c/o Metromedia Company, One Meadowlands Plaza, East Rutherford,
NJ 07073; Attention: General Counsel; tel: (201) 531-8000.
GENERAL INFORMATION
LISTING
A notice relating to the issue of the notes and the charter of our company
have been filed with the Chief Registrar of the District Court of Luxembourg
(GREFFLER EN CHEF DU TRIBUNAL D'ARRONDISSEMENT DE ET A LUXEMBOURG) where such
documents are available for inspection and where copies of such documents will
be obtainable upon request.
CLEARING SYSTEMS
The notes have been accepted for clearance by Cedelbank, SOCIETE anonyme and
by Morgan Guaranty Trust Company of New York, Brussels office as operator of the
Euroclear System. The Common Code and
S-123
<PAGE>
the International Security Identification Number (ISIN) for the Dollar notes are
and , respectively. The Common Code and the ISIN for the
Euro notes are and , respectively.
AUTHORIZATION
The issue of the notes was authorized by our Board of Directors on
, 1999.
DOCUMENTS
Copies of our charter and by-laws will be available for inspection so long
as any notes are outstanding at the specified office of the paying agent in
Luxembourg.
Copies of our latest annual report and interim financial statements will be
available at the specified office of the paying agent in Luxembourg, so long as
any notes are outstanding.
Copies of the indenture will be available at the specified office of the
Paying Agent in Luxembourg, so long as any notes are outstanding.
MATERIAL ADVERSE CHANGE
Except as disclosed in this prospectus supplement, the accompanying
prospectus and the documents incorporated by reference, there has been no
material adverse change in our financial position since December 31, 1998.
LITIGATION
Except as disclosed in this prospectus supplement, the accompanying
prospectus and the documents incorporated by reference, we are not involved in
any litigation or arbitration proceedings relating to claims or amounts which
are material in the context of the issue of the notes nor, so far as we are
aware, is any such litigation or arbitration pending or threatened.
S-124
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
METROMEDIA FIBER NETWORK, INC. AND SUBSIDIARIES:
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................ F-5
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) for the years ended December 31, 1998, 1997 and
1996........................................................ F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Statements of Operations for the six months
ended
June 30, 1998 and 1999 (unaudited).......................... F-24
Consolidated Balance Sheet as of June 30, 1999
(unaudited)............................................... F-25
Consolidated Statements of Cash Flows for the six months
ended
June 30, 1998 and 1999 (unaudited).......................... F-26
Notes to Consolidated Financial Statements.................. F-27
ABOVENET COMMUNICATIONS INC.:
Independent Auditors' Report................................ F-36
Consolidated Balance Sheets as of June 30, 1998 and 1999.... F-37
Consolidated Statements of Operations for the Years Ended
June 30, 1997, 1998 and 1999.............................. F-38
Consolidated Statements of Stockholders' Equity for the
Years Ended
June 30, 1997, 1998 and 1999.............................. F-39
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1998 and 1999.............................. F-40
Notes to Consolidated Financial Statements.................. F-41
PALO ALTO INTERNET EXCHANGE:
Independent Accountants' Reports............................ F-57
Combined Statements of Assets to be Acquired and Liabilities
to be Assumed as of March 27, 1999 (unaudited), December
26, 1998 and December 27, 1997............................ F-59
Combined Statement of Revenues and Direct Expenses for the
Quarters Ended March 27, 1999 and March 26, 1998
(unaudited), period from June 12, 1998 through December
26, 1998, period from December 28, 1997 through June 11,
1998 and the Fiscal Years Ended December 27, 1997 and
December 29, 1996......................................... F-60
Notes to Combined Statements of Assets to be Acquired and
Liabilities to be Assumed and Combined Statements of
Revenues and Direct Expenses.............................. F-61
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Metromedia Fiber Network, Inc.
We have audited the accompanying consolidated balance sheets of Metromedia
Fiber Network, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedule listed in
the index at Item 14(a). These consolidated financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Metromedia Fiber Network, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
<TABLE>
<S> <C> <C>
/s/ ERNST & YOUNG LLP
</TABLE>
New York, New York
March 4, 1999, except for paragraph 16 of note 2,
as to which the date is May 19, 1999
F-2
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $569,319 $138,846
Pledged securities, current portion....................... 61,384 --
Accounts receivable....................................... 30,910 837
Prepaid expenses and other current assets................... 4,210 874
-------- --------
Total current assets.................................. 665,823 140,557
Fiber optic transmission network and related equipment,
net....................................................... 244,276 24,934
Property and equipment, net................................. 2,716 759
Pledged securities.......................................... 30,512 --
Investment in/advance to joint venture...................... 4,156 56
Other assets................................................ 26,934 1,072
-------- --------
Total assets.......................................... $974,417 $167,378
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,106 $ 3,072
Accrued liabilities....................................... 96,512 3,271
Deferred revenue, current portion......................... 8,100 1,184
Capital lease obligations, current portion................ 55 --
-------- --------
Total current liabilities............................. 110,773 7,527
Senior notes payable........................................ 650,000 --
Capital lease obligations................................... 22,675 --
Deferred revenue............................................ 33,455 10,311
Commitments and contingencies (see notes)
Stockholders' equity:
Class A common stock, $.01 par value; 360,000,000 shares
authorized; 155,210,220 and 149,793,136 shares issued
and outstanding, respectively........................... 1,552 1,498
Class B common stock, $.01 par value; 40,000,000 shares
authorized; 33,769,272 shares issued and outstanding.... 338 338
Additional paid-in capital................................ 197,861 190,927
Accumulated deficit....................................... (42,237) (43,223)
-------- --------
Total stockholders' equity............................ 157,514 149,540
-------- --------
Total liabilities and stockholders' equity............ $974,417 $167,378
======== ========
</TABLE>
See accompanying notes
F-3
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenue..................................................... $36,436 $ 2,524 $ 236
Expenses:
Cost of sales............................................. 13,937 3,572 699
Selling, general and administrative....................... 14,712 6,303 2,070
Consulting and employment incentives...................... 248 19,218 3,652
Settlement agreement...................................... 3,400 -- --
Depreciation and amortization............................. 1,532 757 613
------- -------- --------
Income (loss) from operations............................... 2,607 (27,326) (6,798)
Interest income........................................... 8,788 1,808 --
Interest expense (including financing costs).............. (6,861) (741) (3,561)
Loss from joint venture................................... (146) -- --
------- -------- --------
Income (loss) before income taxes........................... 4,388 (26,259) (10,359)
Income taxes.............................................. 3,402 -- --
------- -------- --------
Net income (loss)........................................... $ 986 $(26,259) $(10,359)
======= ======== ========
Net income (loss) per share, basic.......................... $ 0.01 $ (0.28) $ (0.14)
======= ======== ========
Net income per share, diluted............................... $ 0.01 N/A N/A
======= ======== ========
Weighted average number of shares outstanding, basic........ 186,990 94,894 71,716
======= ======== ========
Weighted average number of shares outstanding, diluted...... 219,524 N/A N/A
======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 986 $(26,259) $(10,359)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 1,532 757 613
Stock options and warrants issued for services.......... 248 19,439 5,395
Warrants issued for settlement agreement................ 3,000 -- --
Deferred taxes.......................................... 2,707
Reserve for note receivable............................. -- 338 --
Loss from joint venture................................. 146 -- --
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable..................................... (30,073) (656) 2
Accounts payable and accrued expenses................... 13,449 (12) 758
Deferred revenue........................................ 30,060 10,387 833
Other................................................... (4,070) (1,806) 12
-------- -------- --------
Net cash provided by (used in) operating activities......... 17,985 2,188 (2,746)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures on fiber optic transmission network and
related equipment......................................... (114,849) (19,206) (974)
Deposit payments............................................ (4,675) (87) --
Investment in / advance to joint venture.................... (4,246) (56) --
Purchase of pledged securities.............................. (91,896) -- --
Capital expenditures on property and equipment.............. (2,305) (318) (95)
-------- -------- --------
Net cash used in investing activities..................... (217,971) (19,667) (1,069)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 1,038 133,975 123
Proceeds from issuance of preferred stock and warrants...... -- 32,500 2,025
Dividends paid on preferred stock........................... -- (77) --
Repayments of notes payable- private placement.............. -- (1,408) 25
Repayments of notes payable................................. -- (5,950) (3,350)
Proceeds from notes payables, net........................... 630,000 -- 5,450
Payments of capital lease obligations....................... (579) -- --
Purchase of common stock.................................... -- (1,140) --
Purchase of preferred stock................................. -- (2,039) --
-------- -------- --------
Net cash provided by financing activities................. 630,459 155,861 4,273
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 430,473 138,382 458
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD............... 138,846 464 6
CASH AND CASH EQUIVALENTS-END OF PERIOD..................... $569,319 $138,846 $ 464
Supplemental information:
Interest paid........................................... $ 219 $ 1,145 $ 996
======== ======== ========
Income taxes paid....................................... $ 3,760 $ -- $ --
======== ======== ========
Supplemental disclosure of significant non-cash investing
activities:
Capital lease obligations............................... $ 23,309 $ -- $ --
======== ======== ========
Accrued capital expenditures............................ $ 82,916 $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes
F-5
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
SERIES A & B ------------------- -------------------
PREFERRED STOCK COMMON STOCK CLASS CLASS
------------------- ------------------- A B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... -- -- 49,920 $ 499 -- $ -- -- $ --
Issuance of common stock and
warrants for services rendered... -- -- 21,305 213 -- -- -- --
Issuance of common stock and
warrants related to debt
financing activities............. -- -- 6,870 69 -- -- -- --
Issuance of common stock in
connection with the exercise of
warrants......................... -- -- 1,525 15 -- -- -- --
Sale of common stock and
warrants......................... -- -- 392 4 -- -- -- --
Sale of preferred stock with
warrants......................... 300 30 -- -- -- -- -- --
Net loss for the year.............. -- -- -- -- -- -- -- --
---- --- ------- ----- ------- ------ ------ ----
Balance at December 31, 1996....... 300 30 80,012 800 -- -- -- --
Issuance of common stock in
connection with the exercise of
warrants......................... -- -- 1,216 12 -- -- -- --
Issuance of options to employees... -- -- -- -- -- -- -- --
Issuance of warrants in connection
with debt extension.............. -- -- -- -- -- -- -- --
Dividends on preferred stock....... -- -- -- -- -- -- -- --
Repurchase and retirement of Series
A preferred stock and warrants... (300) (30) -- -- -- -- -- --
Repurchase and retirement of common
stock and warrants............... -- -- (4,707) (47) -- -- -- --
Sale of Series B preferred stock... 16 -- -- -- -- -- -- --
Net proceeds from initial Public
Offering......................... -- -- -- -- 72,863 729 -- --
Conversion of Common Stock to
Series A Common Stock............ -- -- (76,521) (765) 76,520 765 -- --
Conversion of Series B Preferred
Stock to Series A & B Common
Stock............................ (16) -- -- -- 314 3 33,769 338
Sale of Series A Common Stock for
warrant.......................... -- -- -- -- 96 1 -- --
Net loss for the year.............. -- -- -- -- -- -- -- --
---- --- ------- ----- ------- ------ ------ ----
Balance at December 31, 1997....... -- -- -- -- 149,793 1,498 33,769 338
Issuance of options to employees... -- -- -- -- -- -- -- --
Issuance of warrants in connection
with settlement agreement........ -- -- -- -- -- -- -- --
Issuance of common stock in
connection with the exercise of
warrants......................... -- -- -- -- 4,317 43 -- --
Issuance of common stock in
connection with the exercise of
stock options.................... -- -- -- -- 1,100 11 -- --
Net income for the year............ -- -- -- -- -- -- -- --
Income tax benefit from exercises
of employee stock options........ -- -- -- -- -- -- -- --
---- --- ------- ----- ------- ------ ------ ----
Balance at December 31, 1998....... -- -- -- $ -- 155,210 $1,552 33,769 $338
==== === ======= ===== ======= ====== ====== ====
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ------------ --------
<S> <C> <C> <C>
Balance at December 31, 1995....... $ (454) $ (5,381) (5,336)
Issuance of common stock and
warrants for services rendered... 4,702 -- 4,915
Issuance of common stock and
warrants related to debt
financing activities............. 1,703 -- 1,772
Issuance of common stock in
connection with the exercise of
warrants......................... (15) -- --
Sale of common stock and
warrants......................... 120 -- 124
Sale of preferred stock with
warrants......................... 1,995 -- 2,025
Net loss for the year.............. -- (10,359) (10,359)
-------- -------- --------
Balance at December 31, 1996....... 8,051 (15,740) (6,859)
Issuance of common stock in
connection with the exercise of
warrants......................... (2) -- 10
Issuance of options to employees... 19,218 -- 19,218
Issuance of warrants in connection
with debt extension.............. 220 -- 220
Dividends on preferred stock....... -- (77) (77)
Repurchase and retirement of Series
A preferred stock and warrants... (1,996) (13) (2,039)
Repurchase and retirement of common
stock and warrants............... 42 (1,134) (1,139)
Sale of Series B preferred stock... 32,500 -- 32,500
Net proceeds from initial Public
Offering......................... 133,150 -- 133,879
Conversion of Common Stock to
Series A Common Stock............ -- -- --
Conversion of Series B Preferred
Stock to Series A & B Common
Stock............................ (341) -- --
Sale of Series A Common Stock for
warrant.......................... 85 -- 86
Net loss for the year.............. -- (26,259) (26,259)
-------- -------- --------
Balance at December 31, 1997....... 190,927 (43,223) 149,540
Issuance of options to employees... 248 -- 248
Issuance of warrants in connection
with settlement agreement........ 3,000 -- 3,000
Issuance of common stock in
connection with the exercise of
warrants......................... 118 -- 161
Issuance of common stock in
connection with the exercise of
stock options.................... 861 -- 872
Net income for the year............ -- 986 986
Income tax benefit from exercises
of employee stock options........ 2,707 -- 2,707
-------- -------- --------
Balance at December 31, 1998....... $197,861 $(42,237) $157,514
======== ======== ========
</TABLE>
F-6
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS OPERATIONS AND LINE OF BUSINESS
The Company is a facilities-based provider of a technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate/government customers in the United States. The Company
focuses its operations on domestic intracity fiber optic networks in clusters of
the 15 largest cities, based on population, throughout the United States.
The Company operates high-bandwidth fiber optic communications networks in
New York and Philadelphia. The Company also is engineering and constructing
networks in Washington, D.C., Chicago, San Francisco and Boston. The Company is
designing networks in Atlanta, Dallas, Houston, Seattle and Los Angeles.
The Company has also built or obtained intercity fiber optic capacity that
links certain of its intracity networks. The Company has under construction a
250-route mile network from New York to Washington, D.C. The Company has also
obtained rights for fiber optic capacity with other facilities-providers and
obtained fiber optic capacity linking certain of the metropolitan areas (New
York-Chicago, New York-Boston, Chicago-Seattle-Portland) in which it plans to
construct intracity networks, except in Portland.
In addition, the Company has entered into a joint venture with a United
Kingdom telecommunications company to connect its New York network to London.
The Company has formed a joint venture to construct a high-bandwidth fiber optic
network connecting 13 major cities in Germany and obtain certain additional
fiber optic capacity in Western Europe.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant inter-company balances and transactions
have been eliminated in consolidation. The investment in a 50% owned joint
venture with a United Kingdom telecommunications company is accounted for by the
equity method. Certain balances in the consolidated financial statements have
been restated to conform to the current period presentation.
MANAGEMENT ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value. The fair value of long-term
debt is determined based on quoted market rates or the cash flows from such
financial instruments discounted at the Company's estimated current interest
rate to enter similar financial instruments. At December 31, 1998, the fair
value of the Company's fixed rate long-term debt for the 10% Senior Notes due in
2008, was $650 million. The recorded amounts for all other long-term debt of the
Company approximates fair values.
F-7
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company considers
all highly liquid investments with an original maturity of three months or less
when purchased to be cash equivalents.
PLEDGED SECURITIES
In connection with the sale of 10% Senior Notes (see Note 9), a portion of
the net proceeds was utilized to purchase a portfolio consisting of U.S.
government securities, which mature at dates sufficient to provide for payment
in full of interest on the 10% Senior Notes through May 15, 2000. The pledged
securities are stated at cost, adjusted for premium amortization and accrued
interest. The fair value of the pledged securities approximates the carrying
value.
ACCOUNTS RECEIVABLE
Accounts receivable includes trade receivables and costs and estimated
earnings in excess of billings for those contracts where the Company utilizes
the percentage of completion method for recognizing revenue.
FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
The fiber optic transmission network and related equipment are stated at
cost. Costs in connection with the installation and expansion of the network are
capitalized. Depreciation is computed using the straight-line method through the
life of either the franchise agreement or right of way for the related network.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
OTHER ASSETS
Other assets include debt issuance costs, franchise agreements and deposits.
Those costs, which are amortizable, are amortized on a straight-line basis over
a period ranging from ten to fifteen years.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company has
identified no such impairment indicators.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
for the tax consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year end,
based on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when necessary to reduce deferred
F-8
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
tax assets to the amount that is "more likely than not" to be realized. The
provision for income taxes is the tax payable for the period and the change,
during the period, in deferred tax assets and liabilities.
RECAPITALIZATIONS
In April 1997, the Company increased its authorized common stock of $.01 par
value to 60,000,000 shares; in addition, authorized preferred stock with a par
value of $.01 was increased to 2,000,000 shares. On April 29, 1997, the Company
effected a 3-for-one stock split of its outstanding shares of common stock.
In September 1997, the Company effected a .507-for-one reverse stock split
of its common stock.
On October 28, 1997, the total authorized number of shares of common stock
of the Company was increased to 200 million shares, par value $0.01 per share,
of which 180 million shares were designated Class A common stock and 20 million
shares were designated Class B common stock.
On August 28, 1998, the Company completed a two-for-one stock split of the
Company's Class A and Class B Common Stock in the form of a 100 percent stock
dividend to all shareholders of record as of the close of business on August 7,
1998. In addition, on December 22, 1998, the Company completed another
two-for-one stock split of the Company's Class A and Class B Common Stock in the
form of a 100 percent stock dividend to all shareholders of record as of the
close of business on December 8, 1998.
On May 19, 1999, the Company completed a two-for-one stock split of the
Company's Class A Common Stock and Class B Common Stock in the form of a 100
percent stock dividend.
The accompanying financial statements give retroactive effect to the above
recapitalizations.
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.
STOCK OPTIONS
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock options.
F-9
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 24,762,600 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 at
the date of grant.
EARNINGS PER SHARE
In accordance with the Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," basic earnings per share is computed based upon the weighted average
number of common shares outstanding during the periods. Diluted earnings per
share is computed based upon the weighted average number of common shares
outstanding plus the assumed issuance of common stock equivalents computed in
accordance with the treasury stock method.
DEFERRED REVENUE
Deferred revenue represents prepayments received from customers for future
use of the Company's fiber optic network as well as prepayment for installation
services, which have not yet been provided. Lease payments are structured as
either prepayments or monthly recurring charges. Prepayments are accounted for
as deferred revenues and recognized over the term of the respective customer
lease agreement. At December 31, 1998, the Company had received prepaid lease
payments in excess of revenue recognized totaling $41.6 million.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB released SFAS No. 130 "Reporting Comprehensive
Income," governing the reporting and display of comprehensive income and its
components. This statement is effective for financial statements issued for
periods beginning after December 15, 1997. The Company adopted this standard as
required in fiscal 1998 in its Statement of Changes in Stockholders' Equity
(Deficiency).
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. In 1998 the
Company adopted SFAS No. 131. The Company currently operates in one business
segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments and hedging activities. This standard is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The Company
does not expect the adoption of SFAS No. 133 to have an impact on its results of
operations, financial position or cash flows.
F-10
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3: ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Trade accounts receivable................................... $ 560 $837
Costs and earnings in excess of billings.................... 30,134 --
Other....................................................... 216 --
------- ----
$30,910 $837
======= ====
</TABLE>
At December 31, 1998, three customers accounted for 43%, 40% and 14%,
respectively, of the Company's combined accounts receivable.
NOTE 4: FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
Fiber optic transmission network and related equipment consists of the
following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Material-fiber optic cable............................... $ 23,436 $ 1,133
Engineering and layout costs............................. 7,101 3,322
Fiber optic cable installation costs..................... 16,639 1,869
Other.................................................... 4,242 2,019
Construction in progress................................. 195,256 17,835
-------- -------
246,674 26,178
Less: accumulated depreciation........................... (2,398) (1,244)
-------- -------
$244,276 $24,934
======== =======
</TABLE>
Construction in progress includes amounts incurred in the Company's
expansion of its network. These amounts include fiber optic cable and other
materials, engineering and other layout costs, fiber optic cable installation
costs and other network assets held under capital leases. Construction in
progress also includes payments for rights of way for the underlying sections of
the network build.
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997 USEFUL LIFE
-------- -------- -----------
<S> <C> <C> <C>
Leasehold improvements........................... $ 614 $538 174 months
Furniture, equipment and software................ 2,581 352 5 years
------ ----
3,195 890
Less: accumulated depreciation and
amortization................................... (479) (131)
------ ----
$2,716 $759
====== ====
</TABLE>
F-11
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6: INVESTMENT IN/ADVANCES TO JOINT VENTURE
The Company has a joint venture agreement with Racal Telecommunications,
Inc. ("Racal"), that provides broad-based transatlantic communication services
between New York and London. As of December 31, 1997, neither party had made a
capital contribution. The balance of the investment at December 31, 1997
represents advances made to the joint venture by the Company. During 1998, each
party made capital contributions of $4.3 million. The Company and Racal may each
be required to contribute additional capital as needed for their respective 50%
interests. The Company accounts for its investment using the equity method. For
1998, the Company recorded a $146,000 loss from the joint venture based on its
50% interest in the joint venture. Included within the Company's accounts
receivable is $70,000 for administrative services provided to the joint venture
which were not reimbursed as of December 31, 1998.
NOTE 7: GERMAN NETWORK BUILD
In February, 1999, the Company entered into a joint venture with Viatel,
Inc. and Carrier 1 Holdings, Ltd. to jointly build a national fiber optic
telecommunications network in Germany. Upon completion of construction, the
joint venture will be dissolved and the Company will own its own separate German
broadband network. In connection with the terms of this agreement, the Company
made a deposit payment of $4.7 million, during the third quarter of 1998. Upon
signing a definitive agreement, the Company provided an irrevocable standby
letter of credit in the amount of $64 million as security for the construction
costs of the network, which, in addition to the deposit payment made, covers the
Company's portion of the estimated construction costs.
NOTE 8: RELATED PARTY TRANSACTIONS
The Company is a party to a management agreement under which the Company's
controlling shareholder, Metromedia Company, provides consultation and advisory
services relating to legal matters, insurance, personnel and other corporate
policies, cash management, internal audit and finance, taxes, benefit plans and
other services as are reasonably requested. The management agreement terminates
on December 31, of each year, and is automatically renewed for successive
one-year terms unless either party terminates upon 60 days prior written notice.
The 1998 management fee under the agreement was $500,000 per year, payable
quarterly at a rate of $125,000. The Company is also obligated to reimburse
Metromedia Company for all its out-of-pocket costs and expenses incurred and
advances paid by Metromedia Company in connection with the management agreement.
In 1997, Metromedia Company received no money for its out-of-pocket costs and
expenses or for interest on advances extended by it to the Company under the
management agreement.
In March and June 1997, the Company entered into two one-year leases for
office space with an affiliate. Subsequent to June 1997, the affiliate sold this
property. For the year ended December 31, 1997, office rent expenses for these
leases amounted to approximately $110,000.
NOTE 9: SETTLEMENT AGREEMENTS
In February 1996, the Company entered into a settlement agreement with a
former officer regarding the termination of his employment. This agreement
provided for the Company to make payments to the officer totaling $1,003,000,
including interest. The former officer's services effectively terminated prior
to December 31, 1995. Accordingly, as of December 31, 1995, the Company recorded
$876,146 as a liability in accordance with the terms of the settlement
agreement. The settlement agreement also reaffirmed an option previously issued
to this former officer on May 1, 1995, which entitles the holder to purchase
F-12
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 9: SETTLEMENT AGREEMENTS (CONTINUED)
415,766 shares of the Company's common stock at $0.003 per share through
February 1, 1999. In 1997 the Company repurchased and retired the warrants held
by this former officer. On November 14, 1996, the Company amended the above
referenced settlement agreement with the former officer, whereby a consultant to
the Company agreed to purchase common stock of the company from the former
officer and certain of his affiliates in exchange for $640,000 and the complete
satisfaction of the aforementioned liability.
On February 11, 1997, the Company entered into an agreement with a
consultant/director. Pursuant to the agreement the Company agreed to pay the
consultant/director a fee of $250,000 in full and complete payment for all
services provided to the Company by the consultant/director and for any fees or
compensation due to the consultant/director resulting from any prior agreements
with the Company, and the consultant/director agreed to release the Company from
any claims against the Company.
In March 1998, the Company entered into a settlement agreement with Howard
Katz, Realprop Capital Corporation and Evelyn Katz, among others, which settled
and resulted in the dismissal of litigation for which the Company was a
defendant in KATZ, ET AL. V. NATIONAL FIBER NETWORK, INC., ET AL., No. 97 Civ.
2764 (JGK) (the "Katz Litigation").
NOTE 10: NOTES PAYABLE
On November 25, 1998, the Company issued and sold $650.0 million of 10%
Senior Notes due November 15, 2008. The net proceeds of the 10% Senior Notes
were approximately $630.0 million, after deducting offering costs, which are
included in other long-term assets. Interest on the 10% Senior Notes is payable
semi-annually in arrears on May 15 and November 15 of each year, commencing May
15, 1999. Approximately $91.5 million of the net proceeds was utilized to
purchase certain pledged securities, the proceeds of which, together with
interest earned on such securities, will be used to satisfy the Company's
semi-annual interest obligations through May 15, 2000. The 10% Senior Notes are
subject to redemption at the option of the Company, in whole or in part, at any
time on or after November 15, 2003, at specified redemption prices. In addition,
prior to November 15, 2001, the Company may use the net cash proceeds from
certain specified equity transactions to redeem up to 35% of the 10% Senior
Notes at specified redemption prices.
F-13
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: NOTES PAYABLE (CONTINUED)
The indentures pursuant to which the 10% Senior Notes are issued contain
certain covenants that, among other matters, limit the ability of the Company
and its subsidiaries to incur additional indebtedness, issue stock in
subsidiaries, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets, and enter into certain mergers and consolidations.
In the event of a change in control of the Company as defined in the
indentures, holders of the 10% Senior Notes will have the right to require the
Company to purchase their Notes, in whole or in part, at a price equal to 101%
of the stated principal amount thereof, plus accrued and unpaid interest, if
any, thereon to the date of purchase. The 10% Senior Notes are senior unsecured
obligations of the Company, and are subordinated to all current and future
indebtedness of the Company's subsidiaries, including trade payables.
NOTE 11: EQUITY TRANSACTIONS
COMMON STOCK
On November 3, 1997, the Company completed the initial public offering (the
"IPO") of 72,864,000 shares of its Class A common stock, at an offering price of
$2 per share. The net proceeds to the Company from the IPO, after deducting
expenses of the IPO, were approximately $133.9 million.
In addition, on October 28, 1997, a total of 76,519,520 shares of the common
stock of the Company owned by stockholders prior to the IPO were exchanged for
an equal number of shares of Class A common stock. The Company also reserved for
issuance 34,083,888 shares of Class A common stock for conversion of the
Class B common stock.
On October 28, 1996, a shareholder granted to the Company's Chairman of the
Board an option to purchase 3,199,112 shares of common stock of the company for
an aggregate exercise price of $500,000. By letter dated December 3, 1996, the
option was amended to reduce the number of option shares to 2,590,712 shares.
The Chairman thereafter assigned the option to the Company. On February 11,
1997, the Company exercised the option by payment of $500,000.
On April 15, 1996, the Company entered into a stock purchase agreement with
Vento & Company of New York, LLC ("VCNY"). Pursuant to this agreement, the
Company issued 12,168,000 shares of common stock to VCNY as consideration for
services provided by VCNY. The Company estimated the value of the stock issued
approximated $2,760,000.
Concurrent with the execution of the aforementioned stock purchase
agreement, the parties entered into a consulting agreement. The term of the
agreement was from April 15, 1996 to April 15, 2001. Under the terms of the
agreement, VCNY was to provide guidance and advice with respect to the
management of the day-to-day operations of the Company's fiber optic
transmission network. In consideration for such services, the Company reimbursed
VCNY for all reasonable personnel and travel costs incurred by VCNY with respect
to the performance of these services. On October 9, 1996, the Company entered
into a settlement agreement with the Company's former chief executive officer
and VCNY regarding the termination of such officer's employment and services
provided by VCNY. The agreement provided for VCNY to deliver a total of
12,168,000 shares of common stock in exchange for payments made by the Company.
The payments were not made and the sale of the shares and the Company's
obligation to buy the shares was deemed null and void.
F-14
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
In September 1996, the Company sold 87,472 shares of common stock to three
individuals for total proceeds of $23,500.
In August 1996, the Company issued 1,460,160 shares of common stock for
consulting services. The Company recorded a non-cash charge of $334,800 for such
issuance.
In July 1996, the Company issued 97,344 shares of common stock as
consideration for consulting services. The Company recorded a non-cash charge of
$21,200 for such issuance. In addition, the Company issued 1,204,632 shares to
three employees for services rendered. The transaction was later rescinded and
the shares were returned to the Company.
In June 1996, the Company sold a total of 304,200 shares of common stock to
two individuals for total proceeds of $100,000. Concurrent with the issuance of
these shares, the Company issued warrants to these shareholders entitling the
holders to purchase a total of 304,200 shares at $0.33 per share for a
three-year period.
On January 12, 1996, the Company entered into an agreement with its legal
counsel to issue common stock as additional consideration for legal services
provided. Pursuant to this agreement, as amended, the Company issued a total of
3,928,840 shares of its common stock. Management has estimated the value of the
3,928,840 shares issued to be $907,301 and has recorded a non-cash charge in
connection with such issuance.
PREFERRED STOCK
On April 30, 1997, the Company sold an aggregate of 67,226,600 shares of
Series B convertible preferred stock, par value $0.01 per share (the "Series B
preferred stock"), to Metromedia Company and affiliates ("Metromedia") for an
aggregate purchase price of $32.5 million (the "Metromedia Investment"). Each
share of the Series B preferred stock was convertible into 507 shares of the
Company's common stock. On October 28, 1997, the Series B convertible preferred
shares were converted into 34,083,888 shares of Class B common stock. Further,
on October 28,1997, a total of 314,616 shares of Class B common stock
outstanding were converted into an equivalent number of shares of Class A common
stock.
A portion of the proceeds from the Metromedia Investment was used to repay
the Metromedia Loan, discussed below, and accrued interest thereon ($4,058,127),
repay other short-term indebtedness ($3,485,000), and redeem (for $2,115,000)
all of the outstanding shares of the Company's preferred stock (the "Series A
preferred stock") and related warrants.
Through April 30, 1997, Metromedia loaned the Company an aggregate of
$4,000,000 (the "Metromedia Loan"). A portion of the proceeds from the
Metromedia Loan was used to purchase 4,707,760 shares of the Company's common
stock and warrants to purchase 1,663,064 shares of its common stock.
No shares of the Company's Series A preferred stock or Series B preferred
stock remained outstanding at December 31, 1997. Both the Series A and Series B
preferred stock of the Company have been eliminated pursuant to actions by the
Board of Directors.
F-15
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
STOCK WARRANTS
A. In 1996, the Company entered into an agreement with a Customer for
exclusive usage rights for fibers on portions of its network. In connection with
this agreement, the Company borrowed $4.9 million from the customer. On
April 30, 1997, the Company amended this agreement to satisfy the obligations of
the above-referenced note by providing (i) additional leased fiber miles,
(ii) a cash payment of $1,370,000 and (iii) a warrant to purchase common stock
of the Company. In July 1998, the agreement was amended to include additional
fiber miles on the Company's network and for cancellation of the warrants.
B. From October 1995 through February 1996, the Company issued and sold a
private offering of $858,000 of convertible subordinated notes. Concurrent with
the issuance of these notes, warrants were issued by the Company to the
noteholders to purchase 1,044,016 shares of common stock at $1.00 per share
through November 2000. In 1996 and 1997, in exchange for the extension of the
due dates of the notes, the Company issued warrants to purchase 1,318,084 shares
of its common stock at $1.00 per share and recorded a charge of $111,306 and
$220,036 in 1996 an 1997, respectively. In 1997, the Company repaid the
outstanding balance of these notes plus all accrued interest. As of
December 31, 1998, 1,564,032 of such warrants have been exercised.
C. In September 1996, the Company entered into a loan agreement with a
finance company for $550,000. The loan bore interest at 10% per annum and was
repaid in 1997. As an incentive for the loan, the Company issued to the finance
company warrants to purchase 754,416 shares of common stock at an exercise price
of $0.74. The warrants are exercisable through September 1999. In 1996, the
Company recorded a non-cash charge of $13,640 in connection with the issuance of
the warrants. All of the warrants have been exercised.
D. In August 1995, the Company initiated a $600,000 private offering of
subordinated notes which bore interest at an annual rate of 15% and were repaid
in 1997. With the issuance of the notes, warrants were issued to the
noteholders. In April 1996, the Company issued a total of 474,872 shares of the
Company's common stock in exchange for the surrender and cancellation of the
warrants and a three-month extension of the maturity date of the notes. In 1996,
the Company recorded a non-cash charge of $107,322 in connection with such
issuance.
E. In April 1995, the Company entered into a loan agreement with a customer
for $500,000 bearing interest at 11% per annum. In July 1997, the note was
repaid in full. In connection with this loan, the Company issued the customer a
warrant entitling the holder to purchase a total of 5,353,336 shares of the
Company's common stock. In February 1997, this warrant was exchanged for a new
warrant to purchase 3,650,400 shares of the Company's common stock at $0.61 per
share. The new warrant expires on February 13, 2000. As of December 31, 1998,
none of the warrants have been exercised.
F. On December 13, 1996, the Company issued and sold to a private investor,
for an aggregate cash consideration of $2,025,000, (i) 1,200,000 shares of 10%
cumulative convertible preferred stock (the "Series A preferred stock") bearing
dividends at a rate of $.17 per share per annum, (ii) warrants to purchase
912,600 shares of Class A common stock at an exercise price of $0.62 per share
and (iii) a contingent stock subscription warrant to purchase a number of shares
of Class A common stock (such number to be determined based on certain future
events) at an exercise price of $0.005 per share. In connection with the
Metromedia Investment, the private investor allowed the Series A preferred stock
and the contingent warrants to be redeemed at an aggregate redemption price of
$2,115,000 (which includes
F-16
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
accrued but unpaid dividends on the Series A preferred stock) and the number of
shares underlying the private investor's warrants to be increased from 912,600
to 1,825,200. In January 1998, the private investor made a cashless exercise of
all its warrants and the number of its shares issuable upon exercise was reduced
by the number of shares at the closing on the day of exercise having a value
equal to the aggregate exercise price. Accordingly, the Company issued the
private investor 1,382,120 common shares for all its warrants.
G. In June 1996, the Company granted 1,216,800 common stock purchase
warrants to the Company's legal counsel exercisable at $.01 per share for a
period of four years as additional consideration for legal services provided.
The Company recorded a non-cash charge of $200,000 for such issuance. As of
December 31, 1998, all of the warrants have been exercised.
As of December 31, 1998, in the aggregate, the Company had reserved
approximately 4,456,100 shares of its Class A common stock for exercise of
outstanding warrants.
STOCK OPTIONS
In 1997, the Company granted to certain officers, employees and directors
options to purchase up to 24,761,888 shares of its Class A common stock. The
options have exercise prices between $0.25 and $0.96 per share and expire in
2007. The Company recorded a non-cash charge of $19,218,591 for such issuance.
On October 28, 1997, the Stockholders of the Company approved the Metromedia
Fiber Network, Inc. 1997 Incentive Stock Plan ("1997 Option Plan"). The 1997
Option Plan authorized the award of up to 8,000,000 options to acquire Class A
common stock of the Company to directors, officers and employees of the Company
and others who are deemed to provide substantial and important services to the
Company. In 1997, options to purchase 4,900,000 shares of the Company's Class A
common stock were granted at an exercise price of $2.00 per share, the market
price at the date of grant. In 1998, options to purchase 3,400,000 shares of the
Company's Class A common stock were granted at exercise prices ranging from
$1.94 to $4.30 per share, the market price at the date of grant. Of these
grants, 1,115,000 were canceled and 235,000 were exercised as of December 31,
1998.
On May 18, 1998, the Stockholders of the Company approved the Metromedia
Fiber Network, Inc. 1998 Incentive Stock Plan ("1998 Option Plan"). The 1998
Option Plan authorized the award of up to 20,000,000 options to acquire Class A
common stock of the Company to directors, officers and employees of the Company
and others who are deemed to provide substantial and important services to the
Company. Options to purchase 6,918,000 shares of the Company's Class A common
stock were granted at exercise prices ranging from $3.64 to $13.25 per share,
the market prices at the dates of grant.
The compensation committee of the Company's Board of Directors is
responsible for determining the type of award, when and to whom awards are
granted, the number of shares and terms of the awards and the exercise price.
The options are exercisable for a period not to exceed ten years from the date
of the grant. Vesting periods range from immediate vesting to four years.
F-17
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
The following table summarizes the stock option transactions for the two
years ended December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS EXERCISE PPRICES
-------------- ----------------
<S> <C> <C>
Granted prior to December 31, 1997.......................... 29,661,888 $0.25 to $ 2.00
----------
Balance outstanding at December 31, 1997.................... 29,661,888 0.25 to 2.00
----------
Granted..................................................... 10,318,000 1.94 to 13.25
Excercised.................................................. 1,100,048 0.25 to 3.74
Cancelled................................................... 1,135,000 0.25 to 4.30
----------
Balance outstanding at December 31, 1998.................... 37,744,840 0.25 to 13.25
==========
Exercisable at:
December 31, 1997........................................... 24,482,344 0.25 to 0.96
==========
December 31, 1998........................................... 24,881,840 0.25 to 2.00
==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS GRANTED OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED WEIGHTED
RANGES OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
YEAR OF GRANT PRICES AT 12/31/98 LIFE (YEARS) PRICE AT 12/31/98 PRICE
- ------------- --------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
1997.................. $0.25 to $ 2.00 27,596,840 8.40 $0.49 24,881,840 $0.33
1998.................. 1.94 to 13.25 10,148,000 9.42 4.88 -- --
---------- ---- ----- ---------- -----
37,744,840 8.67 $1.67 24,881,840 $0.33
========== ==== ===== ========== =====
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Standards No. 123, "Accounting for
Stock-Based Compensation", and has been determined as if the Company had
accounted for its employees' stock options under the fair value method provided
by that Statement. The fair value of the options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions for vested and non-vested options:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Risk-free interest yield............................ 5.53-6.56% 5.73-6.56%
Volatility factor................................... .499 .369
Dividend yield...................................... -- --
Average life........................................ 5 years 5 years
</TABLE>
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility.
F-18
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma information is as follows (000's):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Pro forma net loss applicable to common stock............. $ (864) $(28,043)
Pro forma net loss per share applicable to common stock,
basic................................................... $(0.01) $ (0.30)
</TABLE>
NOTE 12: SIGNIFICANT CUSTOMERS
During the years ended December 31, 1998 and 1997 one customer accounted for
40% and 21%, respectively of the Company's total revenue. During the years ended
December 31, 1998 and 1997 another customer accounted for 35% and 15%,
respectively of the Company's total revenue. During the years ended
December 31, 1998 a third customer accounted for 12% of the Company's total
revenue.
NOTE 13: INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998, 1997 and
1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CURRENT
Federal.............................................. $4,513 $ -- $ --
State and local...................................... 2,720 -- --
------ ---- ----
7,233 -- --
------ ---- ----
DEFERRED
Federal.............................................. (2,375) -- --
State and local...................................... (1,456) -- --
------ ---- ----
(3,831) -- --
------ ---- ----
$3,402 $ -- $ --
====== ==== ====
</TABLE>
F-19
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: INCOME TAXES (CONTINUED)
Total income tax expense (benefit) differed from the amounts computed by
applying the federal statutory income tax rate (35%) to earnings (loss) before
income tax expense (benefit) as a result of the following items for the years
ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. statutory rate applied to pre-tax income (loss)... $1,492 $ -- $ --
State and local taxes, net of federal tax benefit...... 834 -- --
Non deductible expenses................................ 1,118 -- --
Valuation allowance.................................... -- -- --
Others, net............................................ (42) -- --
------ ---- ----
$3,402 $ -- $ --
====== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Deferred revenue.............................. $ 19,923 $ 5,173 $ 499
Employee benefits............................. 9,893 10,074 1,425
Cost of sales of IRU's and sales type
leases...................................... 5,599 573 --
Net operating losses.......................... -- 1,125 3,668
Others........................................ 2,522 1,465 1,047
-------- -------- -------
$ 37,937 $ 18,410 $ 6,639
-------- -------- -------
Valuation allowance........................... (18,309) (18,309) (6,579)
-------- -------- -------
19,628 101 60
DEFERRED TAX (LIABILITIES)
Capitalized leases............................ (14,782) -- --
Depreciation and amortization................. (1,003) (89) (48)
Other......................................... (12) (12) (12)
-------- -------- -------
(15,797) (101) (60)
-------- -------- -------
Net deferred asset............................ $ 3,831 $ -- $ --
======== ======== =======
</TABLE>
A portion of the deferred tax asset has been reserved since it is not
certain that future taxable income will be realized in the carryforward period
or in year of asset turnaround.
There was no provision for federal or state income taxes for the years ended
December 31, 1997 and 1996. At December 31, 1998, the Company expects to have
fully utilized its net operating losses
NOTE 14: 401(K) PLAN
In 1998, the Company implemented a 401(k) Plan (the "Plan") which permits
employees to make contributions to the Plan on a pre-tax salary reduction basis
in accordance with the Internal Revenue Code. All full-time employees are
eligible to participate at the beginning of the quarter following three
F-20
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: 401(K) PLAN (CONTINUED)
months of service. Eligible employees may contribute up to 15% of their annual
compensation. The Company matches 50% of the employees first 6% of
contributions. The Company contributed $78,000 for 1998 as these matching
contributions. The company bore the nominal administrative cost of the plan
during 1998.
NOTE 15: RECONCILIATION OF EARNINGS PER SHARE (IN THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)............................. $ 986 $(26,259) $(10,359)
Deduct dividend on preferred shares........... -- 77 --
-------- -------- --------
Net loss applicable to common stock........... 986 (26,336) (10,359)
======== ======== ========
Shares
Weighted average number of common shares
outstanding--basic.......................... 186,990 94,894 71,716
Net income (loss) per common share--basic..... $ 0.01 $ (0.28) $ (0.14)
======== ======== ========
Weighted average number of common shares
outstanding--basic.......................... 186,990 94,894 71,716
Assuming conversion of warrants and options
outstanding................................. 32,534 -- --
-------- -------- --------
Weighted average number of common shares
outstanding--diluted........................ 219,524 94,894 71,716
======== ======== ========
Net income (loss) per common share--diluted... $ 0.01 N/A N/A
======== ======== ========
</TABLE>
NOTE 16: COMMITMENTS AND CONTINGENCIES
NETWORK CONSTRUCTION PROJECTS
In 1998, the Company commenced construction of various networks outside of
the New York Metropolitan area. The Company's commitment to purchase materials
and contracts for the construction of fiber optic network systems was
approximately $70 million as of December 31, 1998.
FRANCHISE, LICENSE, RIGHT-OF WAY AGREEMENTS AND OPERATING AND CAPITAL LEASES
The Company has entered into various franchise and license agreements with
municipalities and utility-related companies to, in most instances, install,
operate, repair, maintain and replace cable, wire, fiber or other transmission
media and the related equipment and facilities. The terms for these agreements
vary in length, with various renewal and termination provisions. The Company
charges the portions of these agreements incurred to construction-in-progress
until the related portion of the network is completed. The fees charged to
operations in connection with these agreements were approximately $1,673,000,
$607,000 and $459,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
F-21
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition, the company leases office and operation facilities and various
equipment, which expire at various times through March 31, 2010. Rent expense
charged to operations was approximately $958,000, $268,000 and $158,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
The Company has entered into capital lease agreements for certain network
assets and for certain rights-of-ways. Total assets acquired under capital
leases were approximately $27,876,000 at December 31, 1998. The capital leases
are held as construction-in-progress until the related portion of the network is
completed.
Approximate minimum payments under the aforementioned agreements are (in
thousands):
<TABLE>
<CAPTION>
FRANCHISE,
LICENSE AND
RIGHT-OF-WAY CAPITAL OPERATING
AGREEMENTS LEASES LEASES
------------ -------- ---------
<S> <C> <C> <C>
For the year ended December 31,
1999.......................................... $ 1,018 $ 1,551 $ 1,994
2000.......................................... 1,121 1,797 2,032
2001.......................................... 1,121 1,859 2,054
2002.......................................... 971 1,923 2,050
2003.......................................... 661 1,991 1,532
Thereafter.................................... 7,922 42,972 7,339
------- ------- -------
Total minimum lease payments.................. $12,814 52,093 $17,001
======= =======
Less amounts representing interest............ 29,363
-------
Present value of future minimum lease
payments.................................... 22,730
Less amounts due in one year.................. 55
-------
$22,675
=======
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has executed employment contracts for future services, for up to
five years, with certain senior executives for whom the Company has a minimum
commitment aggregating approximately $3.4 million at December 31, 1998. This
amount is not included in the consolidated financial statements at December 31,
1998.
LITIGATION
On or about October 20, 1997, Vento & Company of New York, LLC commenced an
action against Metromedia Fiber Network, 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). On or about May 29, 1998, Vento
& Company filed an amended complaint. In its complaint, as amended, Vento &
Company alleges four causes of action in connection with its sale of 900,000
shares (not adjusted for
F-22
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: COMMITMENTS AND CONTINGENCIES (CONTINUED)
subsequent stock splits) of Class A Common Stock to Peter Sahagen and the Kramer
Defendants on January 13, 1997. The four causes of action include: (i) violation
of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated under such Act; (ii) fraud and fraudulent concealment; (iii) breach
of fiduciary duty; and (iv) negligent misrepresentation and omission. On the
first and second causes of action, Vento & Company is seeking, among other
things, rescission of the Vento & Company sale, or alternatively, damages in an
amount which we cannot currently ascertain but believe to be in excess of $36
million, together with interest. On the third and fourth causes of action, Vento
& Company is seeking damages in an amount which we cannot currently ascertain
but believe to be in excess of $36 million, together with interest. Vento &
Company is also seeking punitive damages in the amount of $50 million,
reasonable legal fees and the cost of this action. All the defendants, including
Metromedia Fiber Network and Stephen A. Garofalo, have moved to dismiss Vento
and Company's amended complaint.
On or about June 12, 1998, Claudio E. Contardi commenced an action against
Peter Sahagen, Sahagen Consulting Group of Florida and Metromedia Fiber Network
in the United States District Court for the Southern District of New York (No.
98 CIV 4140). Mr. Contardi alleges a cause of action for, among other things,
breach of a finder's fee agreement entered into between Mr. Sahagen and
Mr. Contardi 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.
Mr. Contardi is seeking, among other things, a number of shares of Metromedia
Fiber Network which we cannot currently ascertain but believe to be
approximately 225,000 shares (calculated as of the date on which the complaint
was filed and not adjusted for subsequent stock splits) or damages in an amount
which we cannot currently ascertain but believe to be approximately $4.9 million
(calculated as of the date on which the complaint was filed) and all costs and
expenses incurred by him in this action. We have filed an answer to the
complaint and has raised affirmative defenses.
We intend to vigorously defend both these actions because we believe that we
acted appropriately in connection with the matters at issue in these two cases.
However, we cannot assure you that we will not determine that the advantages of
entering into a settlement outweigh the risk and expense of protracted
litigation or that ultimately we will be successful in defending against these
allegations. If we are unsuccessful in defending against these allegations, an
award of the magnitude being sought in the Vento & Company litigation would have
a material adverse effect on our financial condition or results of operations.
In addition, we are subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, we
believe that none of such current claims, or proceedings, individually, or in
the aggregate, including the Vento & Company litigation and the Contardi
litigation, will have a material adverse effect on our financial condition or
results of operations, although we can make no assurances in this regard.
F-23
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue..................................................... $ 38,673 $ 9,133
Expenses:
Cost of sales............................................. 14,819 4,553
Selling, general and administrative....................... 13,786 5,914
Consulting and employment incentives...................... -- 195
Settlement agreement...................................... -- 3,400
Depreciation and amortization............................. 5,058 440
-------- --------
Income (loss) from operations............................... 5,010 (5,369)
Other income (expenses):
Interest income........................................... 13,512 3,576
Interest expense.......................................... (30,407) (12)
Loss from joint venture................................... (393) (251)
-------- --------
Net income (loss)........................................... $(12,278) $ (2,056)
======== ========
Net income (loss) per share, basic.......................... $ (0.06) $ (0.01)
======== ========
Net income (loss) per share, diluted........................ N/A N/A
======== ========
Weighted average number of shares outstanding, basic........ 189,098 185,616
======== ========
Weighted average number of shares outstanding, diluted...... N/A N/A
======== ========
</TABLE>
SEE ACCOMPANYING NOTES
F-24
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
1999
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 341,897
Marketable securities..................................... 19,716
Pledged securities, current portion....................... 63,142
Accounts receivable....................................... 86,258
Prepaid expenses and other current assets................. 2,761
----------
Total current assets.................................. 513,774
Fiber optic transmission network and related equipment,
net....................................................... 417,803
Property and equipment, net................................. 3,909
Pledged securities.......................................... --
Restricted cash............................................. 51,920
Investment in/advances to joint venture..................... 6,763
Other assets................................................ 40,525
----------
Total assets.......................................... $1,034,694
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,276
Accrued liabilities....................................... 134,736
Deferred revenue, current portion......................... 8,106
Capital lease obligations, current portion................ 55
----------
Total current liabilities............................. 150,173
Senior notes payable........................................ 650,000
Capital lease obligations................................... 23,202
Deferred revenue............................................ 68,530
Commitments and contingencies (see notes) Stockholders'
equity:
Preferred stock, $.01 par value; 20,000,000 shares
authorized; none issued and outstanding................. --
Class A common stock, $.01 par value; 2,404,031,240 shares
authorized; 156,293,412 shares issued and outstanding... 1,563
Class B common stock, $.01 par value; 522,254,782 shares
authorized; 33,769,272 shares issued and outstanding.... 338
Additional paid-in capital................................ 200,370
Accumulated deficit....................................... (54,515)
Cumulative comprehensive loss............................. (4,967)
----------
Total stockholders' equity............................ 142,789
----------
Total liabilities and stockholders' equity............ $1,034,694
==========
</TABLE>
See accompanying notes
F-25
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(12,278) $ (2,056)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 5,057 440
Amortization of deferred financing costs.................. 1,000 --
Options issued for settlement agreement................... -- 3,000
Stocks, options and warrants issued for services.......... 395 195
Loss from joint venture................................... 393 251
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable....................................... (48,985) (6,676)
Accounts payable and accrued liabilities.................. 37,990 1,532
Deferred revenue.......................................... 35,081 16,802
Other..................................................... 2,391 (149)
-------- --------
Net cash provided by operating activities................. 21,044 13,339
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities........................... (19,716) --
Capital expenditures on fiber optic transmission network and
related equipment......................................... (122,823) (28,779)
Restricted cash secured by letter of credit................. (63,313) --
Investment in / advances to joint venture................... (3,000) (2,745)
Capital expenditures on property and equiptment............. (1,676) (770)
Business acquisition (net of cash acquired)................. (24,966) --
-------- --------
Net cash used in investing activities....................... (235,494) (32,294)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 2,056 754
Payments of business acquisition's pre-acquisition's debt... (15,028) --
-------- --------
Net cash used in financing activities..................... (12,972) 754
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (227,422) (18,201)
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD............... 569,319 138,846
-------- --------
CASH AND CASH EQUIVALENTS-END OF PERIOD..................... $341,897 $120,645
======== ========
Supplemental information:
Interest paid............................................. $ 31,152 $ 12
======== ========
Income taxes paid......................................... $ 2,736 $ 473
======== ========
Interest capitalized...................................... $ 3,072 $ --
======== ========
Supplemental disclosure of significant non-cash investing
activites: Capital lease obligations...................... $ 527 $ 19,401
======== ========
Accrued capital expenditures.............................. $ 30,092 $ 20,543
======== ========
</TABLE>
See accompanying notes
F-26
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS AND LINE OF BUSINESS
Metromedia Fiber Network, Inc. and its subsidiaries (collectively, the
"Company") is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate and government customers in the United States and Europe.
The Company focuses its operations on domestic, intra-city fiber optic networks
in clusters of the 15 largest cities throughout the United States based on
population. The Company leases or otherwise makes available for use its
broadband communications infrastructure to two main customer groups:
communications carriers and corporate/government customers located in selected
top 15 cities in the United States based on population. The Company currently
operates high-bandwidth fiber optic communications networks in the New York
metropolitan area, the greater Philadelphia area and parts of the Dallas
Metroplex, Washington D.C. and Chicago areas. The Company has also begun
engineering and constructing networks in Boston, Los Angeles, Seattle, Houston
and Atlanta. The Company expects that its domestic intra-city networks will
ultimately encompass approximately 810,000 fiber miles, covering approximately
1,896 route miles. Fiber miles means the number of strands of fiber contained in
a length of fiber optic cable multiplied by the length of cable in miles. Route
miles means the number of miles spanned by fiber optic cable calculated without
including physically overlapping segments of cable.
The Company has also built or obtained inter-city fiber optic capacity that
links certain of its intra-city networks. The Company built a 250 route-mile
network from New York to Washington D.C., which was put into operation at the
end of the first quarter of 1999. When complete, as currently planned, this
network will cover approximately 180,000 net fiber miles. The Company has also
obtained rights for fiber optic capacity with other facilities-providers,
obtained fiber optic capacity linking New York to Chicago, New York to Boston,
Chicago to Seattle and Seattle to Portland and plans to construct intra-city
networks in all of these metropolitan areas except Portland.
In addition, the Company has entered into a joint venture with a U.K.
telecommunications company to connect its New York network to London. The
Company has also formed a joint venture to construct a high-bandwidth fiber
optic network connecting 13 cities in Germany and obtained certain additional
fiber optic capacity in Western Europe. In addition, the Company plans to
engineer and construct networks in the European cities of London, Amsterdam,
Frankfurt, Stuttgart, and Cologne.
The Company has entered into letters of intent with a Canadian
telecommunications company, providing the Company with access to intra-city
fiber optic network facilities in Toronto, Canada.
The Company expects that the entire network when completed, as currently
planned, will ultimately consist of approximately 1.2 million fiber miles
covering approximately 9,250 route miles.
On June 22, 1999, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with AboveNet Communications, Inc. Pursuant to the Merger
Agreement, each share of AboveNet common stock will convert into the right to
receive 1.175 shares of the Company's class A common stock. Following
consummation of the merger, AboveNet will become a wholly-owned subsidiary of
the Company. AboveNet is a leading provider of facilities-based, managed
services for customer-owned Web servers and related equipment, known as
co-location, and high performance Internet connectivity solutions for electronic
commerce and other business critical Internet operations.
F-27
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The interim unaudited consolidated financial statements in this Report have
been prepared in accordance with the United States Securities and Exchange
Commission's Regulation S-X and consequently do not include all disclosures
required under generally accepted accounting principles. The interim unaudited
consolidated financial statements should be read in conjunction with the audited
Consolidated Financial Statements of the Company and accompanying Notes for the
year ended December 31, 1998, contained in the Company's Annual Report on Form
10-K. 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 report have been made. Certain balances have been
reclassified to conform to the current period presentation.
STOCK SPLITS
On August 28, 1998, December 22, 1998 and May 19, 1999, the Company
completed two-for-one stock splits of the Company's class A and class B common
stock in the form of 100 percent stock dividends to all stockholders of record
as of certain specified dates.
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. In addition,
the Company occasionally enters into sales of portions of its network. For those
sales occurring prior to completion of the portion of the network, the Company
recognizes revenue 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. The Company also provides installation services
for its customers, and as these services typically are completed within a short
time period, the Company records the revenues and related costs for these
services under the completed contract method.
FOREIGN CURRENCY TRANSLATION
For translation of the financial statements of its newly formed German
operations, the Company has determined that the local currency is the functional
currency. Assets and liabilities of foreign operations are translated at the
period-end exchange rates and income statement items are translated at average
exchange rates for the period. The resulting adjustments are made directly to
the Cumulative Translation Adjustment component of Stockholders' Equity. Foreign
currency transactions are recorded at the exchange rate prevailing on the
transaction date.
F-28
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
For purposes of the consolidated financial statements, the Company considers
all highly liquid investments with a maturity of greater than three months from
the financial statement date to be marketable securities.
COMPREHENSIVE INCOME (LOSS)
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, ("SFAS 130") Reporting Comprehensive Income (Loss). This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income (loss) consists of net income (loss) and foreign currency
translation adjustments. The comprehensive loss for the three and six months
ended June 30, 1999 was $8.5 million and $17.2 million, respectively, compared
with comprehensive income of $2.2 million and comprehensive loss of $2.1
million, respectively, for the comparable periods in 1998.
2. FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
Fiber optic transmission network and related equipment consist of the
following (in 000's):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Material-fiber optic cable.................................. $76,273 $23,436
Engineering and layout costs................................ 7,515 7,101
Fiber optic cable installation costs........................ 101,714 16,639
Other....................................................... 34,525 4,242
Construction in progress.................................... 204,563 195,256
------- -------
424,590 246,674
Less: accumulated depreciation.............................. (6,787) (2,398)
------- -------
417,803 244,276
======= =======
</TABLE>
Construction in progress includes amounts incurred in the Company's
expansion of its network. These amounts include fiber optic cable and other
materials, engineering and other layout costs, fiber optic cable installation
costs and other network assets held under capital leases. Construction in
progress also includes payments for rights of way for the underlying sections of
the network build.
3. INVESTMENT IN/ADVANCES TO JOINT VENTURE
The Company has a joint venture agreement with Racal Telecommunications,
Inc. ("Racal") that provides broad-based transatlantic communication services
between New York and London. During 1998, each party made capital contributions
of $4.3 million. The Company and Racal may each be required to contribute
additional capital as needed for their respective 50% interests. The Company
accounts for its investment using the equity method. For the three and six
months ended June 30, 1999, the Company recorded losses of $193,000 and
$393,000, respectively, from the joint venture based on its 50% interest in the
joint venture compared with $0 and $251,000, respectively, for the comparable
periods in 1998.
F-29
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. ACQUISITION OF COMMUNICATION SYSTEMS DEVELOPMENT, INC.
On March 11, 1999, the Company acquired all the outstanding common stock of
Communication Systems Development, Inc. ("CSD") for $25 million in cash. CSD has
its primary operations in Dallas, Texas and is engaged in the engineering and
construction of fiber optic networks. The acquisition has been accounted for by
the purchase method and, accordingly, the results of operations of CSD have been
included in the Company's consolidated financial statements from March 11, 1999.
The purchase price has been preliminarily allocated based on estimated fair
values as of the date of acquisition pending final determination of certain
tangible and intangible assets.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and CSD as if the acquisition had
occurred as of the beginning of 1999 and 1998, after giving effect to certain
adjustments, including amortization of goodwill, additional depreciation expense
and related income tax effects. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the
Company and CSD constituted a single entity during such periods. The amounts are
presented in thousands, except per share amounts.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue............................................. $ 41,940 $ 9,985
======== =======
Net Loss............................................ $(12,263) $(1,779)
======== =======
Loss per share, basic............................... $ (0.06) $ (0.01)
======== =======
</TABLE>
5. GERMAN NETWORK BUILD
In February 1999, the Company entered into a joint venture with Viatel, Inc.
and Carrier 1 Holdings, Ltd. to jointly build a national fiber optic
telecommunications network in Germany. Upon completion of construction, the
joint venture will be dissolved and the Company will own its own separate German
broadband network. In connection with the terms of this agreement, the Company
made a deposit payment of $4.7 million during the third quarter of 1998. Upon
signing a definitive agreement, the Company provided irrevocable standby letters
of credit in the amount of approximately DM110 million (approximately $63
million) as security for the construction costs of the network, which, in
addition to the deposit payment made, covers the Company's portion of the
estimated construction costs of the network. As of June 30, 1999, the Company
had restricted cash of approximately $52 million to secure the remaining value
of the irrevocable standby letters of credit.
6. ACQUISITION OF ABOVENET COMMUNICATIONS, INC.
On June 22, 1999, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with AboveNet Communications, Inc. ("AboveNet"). Pursuant
to the Merger Agreement, each share of AboveNet common stock was converted into
the right to receive 1.175 shares of the Company's class A common stock.
Following consummation of the merger, AboveNet became a wholly-owned subsidiary
of the Company. In connection with the execution of the Merger Agreement, the
Company and AboveNet entered into an Option Agreement pursuant to which the
Company was granted an option to
F-30
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. ACQUISITION OF ABOVENET COMMUNICATIONS, INC. (CONTINUED)
acquire up to 19.9% of AboveNet's common stock at a price of $49.9375 per share.
The transaction closed on September 8, 1999.
7. RELATED PARTY TRANSACTIONS
The Company is party to a management agreement under which the Company's
controlling shareholder, Metromedia Company, provides consultation and advisory
services relating to legal matters, insurance, personnel and other corporate
policies, cash management, internal audit and finance, taxes, benefit plans and
other services as are reasonably requested. The management agreement terminates
on December 31 of each year, and is automatically renewed for successive
one-year terms unless either party terminates upon 60 days prior written notice.
The 1998 management fee under the agreement was $500,000 per year, payable
quarterly at a rate of $125,000. The 1999 management fee under the agreement is
$1,000,000 per year, payable quarterly at a rate of $250,000. The Company is
also obligated to reimburse Metromedia Company for all its out-of-pocket costs,
expenses incurred and advances paid by Metromedia Company in connection with the
management agreement.
8. SETTLEMENT AGREEMENT
In March 1998, the Company entered into a settlement agreement with Howard
Katz, Realprop Capital Corporation and Evelyn Katz, among others, which settled
and resulted in the dismissal of litigation for which the Company was a
defendant in KATZ, ET AL. V. NATIONAL FIBER NETWORK, INC., ET AL., No. 97 Civ.
2764 (JGK).
9. NOTES PAYABLE
On November 25, 1998, the Company issued and sold $650.0 million of 10%
Senior Notes due November 15, 2008. The net proceeds of the 10% Senior Notes
were approximately $630.0 million, after deducting offering costs, which are
included in other long-term assets. Interest on the 10% Senior Notes is payable
semi-annually in arrears on May 15 and November 15 of each year, commencing May
15, 1999. Approximately $91.5 million of the net proceeds was utilized to
purchase certain pledged securities the proceeds of which, together with
interest earned on such securities, will be used to satisfy the Company's
semi-annual interest obligations through May 15, 2000. The 10% Senior Notes are
subject to redemption at the option of the Company, in whole or in part, at any
time on or after November 15, 2003, at specified redemption prices. In addition,
prior to November 15, 2001, the Company may use the net cash proceeds from
certain specified equity transactions to redeem up to 35% of the 10% Senior
Notes at specified redemption prices.
The indenture pursuant to which the 10% Senior Notes are issued contains
certain covenants that, among other matters, limit the ability of the Company
and its subsidiaries to incur additional indebtedness, issue stock in
subsidiaries, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, engage in sale and leaseback
transactions, create liens, enter into transactions with affiliates, sell
assets, and enter into mergers and consolidations.
In the event of a change in control of the Company as defined in the
indentures, holders of the 10% Senior Notes will have the right to require the
Company to purchase their Notes, in whole or in part, at a price equal to 101%
of the stated principal amount thereof, plus accrued and unpaid interest, if
any,
F-31
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. NOTES PAYABLE (CONTINUED)
thereon to the date of purchase. The 10% Senior Notes are senior unsecured
obligations of the Company, and are subordinated to all current and future
indebtedness of the Company's subsidiaries, including trade payables.
The Company made an interest payment on May 15, 1999. As a result, the value
of pledged securities to satisfy the Company's semi-annual interest obligation
through May 15, 1999 was reduced to approximately $63 million.
10. EQUITY TRANSACTIONS
AUTHORIZED CAPITAL
On May 18, 1999, the stockholders of the Company approved an amendment to
its Certificate of Incorporation to increase the authorized number of shares of
its capital stock to 2,946,286,022 shares consisting of (a) 2,404,031,240 shares
of class A common stock, (b) 522,254,782 shares of class B common stock, and (c)
20,000,000 shares of preferred stock.
STOCK SPLITS
As discussed in Note 1, on August 28, 1998, December 22, 1998 and May 19,
1999 the Company completed two-for-one stock splits of the Company's class A and
class B common stock in the form of 100 percent stock dividends to all
stockholders of record as of certain specified dates. The accompanying financial
statements give retroactive effect to the stock dividends.
As of June 30, 1999, adjusted for the effect of the stock dividends, the
Company had 156,293,412 class A common shares outstanding and 33,769,272 class B
common shares outstanding.
STOCK WARRANTS
(a) On December 13, 1996, the Company issued and sold to a private investor,
for an aggregate cash consideration of $2,025,000, (i) 1,200,000 shares of 10%
cumulative convertible preferred stock (the "Series A preferred stock") bearing
dividends at a rate of $.17 per share per annum, (ii) warrants to purchase
912,600 shares of class A common stock at an exercise price of $.62 per share
and (iii) a contingent stock subscription warrant to purchase a number of shares
of class A common stock (such number to be determined based on certain future
events) at an exercise price of $0.01 per share. In connection with the
investment in the Company by Metromedia Company, the private investor allowed
the Series A preferred stock and the contingent warrants to be redeemed at an
aggregate redemption price of $2,115,000 (which includes accrued but unpaid
dividends on the Series A preferred stock) and the number of shares underlying
the private investor's warrants to be increased from 912,600 to 1,825,200. In
January 1998, the private investor made a cashless exercise of all its warrants
and the number of its shares issuable upon exercise was reduced by the number of
shares at the closing on the day of exercise having a value equal to the
aggregate exercise price. Accordingly, the Company issued the private investor
1,382,120 shares of class A common stock for all its warrants.
(b) In April 1995, the Company entered into a loan agreement with a
customer for $500,000 bearing interest at 11% per annum. In July 1997, the
note was repaid in full. In connection with this loan, the Company issued
the customer a warrant entitling the holder to purchase a total of 5,353,336
F-32
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. EQUITY TRANSACTIONS (CONTINUED)
shares of the Company's common stock. In February 1997, this warrant was
exchanged for a new warrant to purchase 3,650,400 shares of the Company's
common stock at $.60 per share. In February 1999, in accordance with an
anti-dilution provision in the warrant, the Company increased the warrant to
include the right to purchase an additional 331,882 shares of the Company's
class A common stock at $.56 per share and repriced the existing warrant to
the same $.56 per share. As of March 31, 1999, none of the warrants have
been exercised. The warrant expires on February 13, 2000.
11. CONTINGENCIES
(a) On or about October 20, 1997, Vento & Company of New York, LLC 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, Robert Kramer, Birdie Capital Corp., Lawrence
Black, Sterling Capital LLC, Penrush Limited, Needham Capital Group, Arthur
Asch, Michael Asch and Ronald Kuzon in the United States District Court for the
Southern District of New York, No. 97 CIV 7751(JGK). On or about May 29, 1998,
Vento & Company filed an amended complaint. In its complaint, as amended, Vento
& Company alleges four causes of action in connection with its sale of 900,000
shares, not adjusted for subsequent stock splits, of the Company's class A
common stock to Mr. Sahagen and some of the defendants on January 13, 1997. The
four causes of action include:
(i) violation of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated under such Act;
(ii) fraud and fraudulent concealment;
(iii) breach of fiduciary duty; and
(iv) negligent misrepresentation and omission.
On the first and second causes of action, Vento & Company is seeking,
among other things, rescission of the Vento & Company sale, or
alternatively, damages in an amount which the Company cannot currently
ascertain but believe to be in excess of $36 million, together with
interest. On the third and fourth causes of action, Vento & Company is
seeking damages in an amount, which the Company cannot currently ascertain
but believe to be in excess of $36 million, together with interest. Vento &
Company is also seeking punitive damages in the amount of $50 million,
reasonable legal fees and the cost of this action. All the defendants,
including Metromedia Fiber Network and Stephen A. Garofalo, have moved to
dismiss Vento & Company's amended complaint. On or about March 17, 1999 the
defendant's motions to dismiss were denied in part and granted in part. The
Company filed an answer to the amended complaint and raised affirmative
defenses.
On or about July 1, 1999, Vento & Company filed a second amended
complaint. In its complaint, as amended, Vento & Company alleges seven
causes of action in connection with its sale of 900,000 shares, not adjusted
for subsequent stock splits, of the Company's class A common stock to
Mr. Sahagen and some of the defendants on January 13, 1997, including
(i) violation of Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated under such Act; (ii) fraud and fraudulent
concealment; (iii) breach of fiduciary duty (but not against the Company);
(iv) negligent misrepresentation and omission; and (v) breach of contract.
F-33
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. CONTINGENCIES (CONTINUED)
Vento & Company is seeking, among other things, recission of the Vento &
Company sale, or alternatively, damages in an amount not currently
ascertainable but believed to be in excess of $460 million, together with
interest thereon. Vento & Company is also seeking punitive damages in an
amount not yet determined, reasonable legal fees and the costs of this
action.
The Company has filed an answer to the second amended complaint and has
raised affirmative defenses. All the defendants, including the Company and
its Chairman, served motions for summary judgment to dismiss the action.
(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(JGK). Mr. Contardi alleges a cause of action for, among
other things, breach of a finder's fee agreement entered into between
Mr. Sahagen and Mr. Contardi 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. Mr. Contardi is seeking, among other things, a number of our
shares of class A common stock which we cannot currently ascertain but
believe to be approximately 112,500 shares (calculated as of the date on
which the complaint was filed without taking into account subsequent stock
splits) or damages in an amount which we cannot currently ascertain but
believe to be approximately $4.9 million (calculated as of the date on which
the complaint was filed) and all costs and expenses incurred by him in this
action. The Company has filed an answer to the complaint and has raised
affirmative defenses.
The Company intends to vigorously defend both these actions because the
Company believes that it acted appropriately in connection with the matters
at issue in these two cases. However, the Company cannot assure you that it
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 defending against these allegations. If
the Company is unsuccessful in defending against these allegations, an award
of the magnitude being sought in the Vento & Company litigation would have a
material adverse effect on our financial condition and results of
operations.
(c) On June 29, 1999, an alleged stockholder of AboveNet filed a
lawsuit, captioned KAUFMAN V. TUAN, et al, Del. Ch. C.A. No. 17259NC, in the
Court of Chancery of the State of Delaware in and for the New Castle County.
The plaintiff, who purports to represent a class of all AboveNet
stockholders, challenges the terms of the proposed merger between the
Company and AboveNet. The complaint names, as defendants, AboveNet, the
directors of AboveNet, and the Company (as an aider and abettor). The
complaint alleges generally that AboveNet's directors breached their
fiduciary duty to stockholders of AboveNet, and seeks an injunction against
the merger, or, in the alternative, rescission and the recovery of
unspecified damages, fees and expenses. AboveNet, the Company and the
individual defendants believe the lawsuit is without merit and intend to
defend themselves vigorously. AboveNet and the individual director
defendants' responses were filed on July 22, 1999. In connection with these
responses, a motion to dismiss the complaint in its entirety and a motion to
stay discovery pending the outcome of the motion to dismiss were filed by
the AboveNet and the individual directors of AboveNet on July 22, 1999.
Similar motions to dismiss the complaint and stay discovery were filed by
the Company on July 26, 1999.
F-34
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. CONTINGENCIES (CONTINUED)
Four other complaints, which are virtually identical to the complaint in
KAUFMAN V. TUAN, have also been filed in the Delaware Court of the Chancery.
None of these four complaints have been served. The four actions are
captioned BROSIOUS V. TUAN, et al, Del. Ch. C.A. No. 17271NC, CHONG V. TUAN,
et al, Del. Ch. C.A. No. 17281NC, EHLERT V. TUAN, et al, Del. Ch. C.A. No.
17284NC, HORN V. TUAN, et al, Del. Ch. C.A. No. 17300NC.
In addition, the Company is subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, the
Company believes that none of such current claims, or proceedings, individually,
or in the aggregate, including the Vento & Company litigation and the Contardi
litigation, will have a material adverse effect on our financial condition or
results of operations, although the Company can make no assurances in this
regard.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AboveNet Communications Inc.:
We have audited the accompanying consolidated balance sheets of AboveNet
Communications Inc. as of June 30, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AboveNet Communications Inc. as of
June 30, 1998 and 1999 and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1999 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
July 28, 1999
(September 8, 1999 as to Note 17)
F-36
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 8,141,200 $209,126,300
Short-term investments.................................... -- 11,744,200
Accounts receivable, net of reserve for doubtful accounts
of $60,000 and $388,300, respectively................... 357,000 3,355,000
Prepaid expenses and other current assets................. 269,600 3,850,400
----------- ------------
Total current assets.................................. 8,767,800 228,075,900
Property and equipment, net................................. 4,436,100 46,590,900
Rights to use fiber optic capacity.......................... -- 12,904,500
Intangible assets........................................... -- 69,474,100
Restricted cash............................................. 300,000 21,475,900
Deposits and other assets................................... 189,400 5,377,400
----------- ------------
Total assets................................................ $13,693,300 $383,898,700
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,301,300 $ 13,593,300
Remaining obligation for rights to use fiber optic
capacity................................................ -- 800,000
Accrued liabilities....................................... 619,900 1,322,600
Unearned revenue.......................................... 309,400 2,510,700
Current portion of long-term obligations.................. 476,000 5,984,800
----------- ------------
Total current liabilities............................. 3,706,600 24,211,400
Convertible notes payable and advances...................... 8,000,000 --
Unearned revenue............................................ -- 4,375,000
Other long-term obligations................................. 1,325,300 21,588,600
Commitments and contingencies (Notes 4, 5 and 12)
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized;
shares issued and outstanding--none..................... -- --
Convertible preferred stock, $0.001 par value:
Series A; shares issued and outstanding: 2,050,000 and
none, respectively.................................... 410,000 --
Series B; shares issued and outstanding: 3,263,792 and
none, respectively.................................... 2,323,100 --
Series C; shares issued and outstanding: 4,006,000 and
none, respectively.................................... 3,873,400 --
Series D; no shares issued and outstanding.............. -- --
Series E; no shares issued and outstanding.............. -- --
Common stock, $0.001 par value, 60,000,000 shares
authorized; shares issued and outstanding: 728,696 and
34,548,308, respectively................................ 38,900 363,218,000
Common stock options...................................... 1,861,500 4,413,800
Deferred stock compensation............................... (540,100) (47,800)
Accumulated deficit....................................... (7,305,400) (33,860,300)
----------- ------------
Total stockholders' equity............................ 661,400 333,723,700
----------- ------------
Total liabilities and stockholders' equity.................. $13,693,300 $383,898,700
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenues.............................................. $ 551,600 $ 3,436,400 $ 13,967,800
----------- ----------- ------------
Costs and expenses:
Data communications and telecommunications.......... 558,600 2,199,800 12,649,700
Network operations.................................. 416,700 1,571,800 6,084,300
Sales and marketing................................. 382,600 1,618,700 11,251,300
General and administrative.......................... 433,700 1,621,500 6,610,900
Depreciation and amortization....................... 132,700 475,500 3,412,600
Stock-based compensation expense.................... -- 1,276,400 1,688,700
Joint venture termination fee....................... 431,100 -- --
----------- ----------- ------------
Total costs and expenses.......................... 2,355,400 8,763,700 41,697,500
Loss from operations.................................. (1,803,800) (5,327,300) (27,729,700)
Interest expense...................................... (7,400) (160,800) (1,573,100)
Interest and other income............................. 8,400 63,100 2,947,900
----------- ----------- ------------
Loss before equity interest in affiliates............. (1,802,800) (5,425,000) (26,354,900)
Equity interest in losses of affiliates............... -- -- (200,000)
----------- ----------- ------------
Net loss.............................................. $(1,802,800) $(5,425,000) $(26,554,900)
=========== =========== ============
Basic and diluted loss per share...................... $ (4.58) $ (10.34) $ (1.60)
=========== =========== ============
Shares used in basic and diluted loss per share....... 393,236 524,608 16,643,027
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK COMMON DEFERRED
-------------------------- ------------------------- STOCK STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT OPTIONS COMPENSATION DEFICIT
----------- ------------ ---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, July 1, 1996.......... -- $ -- 250,000 $ 5,000 $ -- $ -- $ (77,600)
Issuance of common stock........ 125,000 2,500
Issuance of Series A convertible
preferred stock............... 2,050,000 410,000
Exercise of common stock
options....................... 31,250 600
Issuance of Series B convertible
preferred stock............... 1,000,000 600,000
Issuance of Series B convertible
preferred stock in conjunction
with acquisition of DSK, Inc.
(Note 11)..................... 1,000,000 600,000
Net loss........................ (1,802,800)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1997......... 4,050,000 1,610,000 406,250 8,100 -- -- (1,880,400)
Exercise of common stock
options....................... 322,446 30,800
Issuance of warrants in
connection with issuance of
debt.......................... 112,000 45,000
Issuance of Series B convertible
preferred stock............... 1,263,792 1,011,100
Issuance of Series C convertible
preferred stock............... 4,006,000 3,873,400
Compensatory stock
arrangements.................. 1,816,500 (1,816,500)
Amortization of deferred stock
compensation.................. 1,276,400
Net loss........................ (5,425,000)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1998......... 9,319,792 6,606,500 728,696 38,900 1,861,500 (540,100) (7,305,400)
Issuance of Series D convertible
preferred stock............... 4,230,756 10,771,000
Issuance of Series E convertible
preferred stock............... 817,550 3,846,400
Exercise of Series B warrants... 209,400 --
Conversion of convertible
preferred stock to common
stock......................... (14,577,498) (21,223,900) 14,577,498 21,223,900
Issuance of common stock upon
initial public offering....... 11,500,000 67,822,000
Issuance of common stock upon
public offering............... 6,850,356 273,421,500
Exercise of common stock options
and warrants.................. 842,440 439,200
Issuance of common stock under
employee stock purchase
plan.......................... 49,318 272,500
Issuance of warrants in
connection with issuance of
debt and leases............... 1,355,900
Compensatory stock
arrangements.................. 1,196,400 (1,196,400)
Amortization of deferred stock
compensation.................. 1,688,700
Net loss........................ (26,554,900)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1999......... -- $ -- 34,548,308 $363,218,000 $4,413,800 $ (47,800) $(33,860,300)
=========== ============ ========== ============ ========== =========== ============
<CAPTION>
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
BALANCES, July 1, 1996.......... $ (72,600)
Issuance of common stock........ 2,500
Issuance of Series A convertible
preferred stock............... 410,000
Exercise of common stock
options....................... 600
Issuance of Series B convertible
preferred stock............... 600,000
Issuance of Series B convertible
preferred stock in conjunction
with acquisition of DSK, Inc.
(Note 11)..................... 600,000
Net loss........................ (1,802,800)
------------
BALANCES, June 30, 1997......... (262,300)
Exercise of common stock
options....................... 30,800
Issuance of warrants in
connection with issuance of
debt.......................... 157,000
Issuance of Series B convertible
preferred stock............... 1,011,100
Issuance of Series C convertible
preferred stock............... 3,873,400
Compensatory stock
arrangements.................. --
Amortization of deferred stock
compensation.................. 1,276,400
Net loss........................ (5,425,000)
------------
BALANCES, June 30, 1998......... 661,400
Issuance of Series D convertible
preferred stock............... 10,771,000
Issuance of Series E convertible
preferred stock............... 3,846,400
Exercise of Series B warrants... --
Conversion of convertible
preferred stock to common
stock......................... --
Issuance of common stock upon
initial public offering....... 67,822,000
Issuance of common stock upon
public offering............... 273,421,500
Exercise of common stock options
and warrants.................. 439,200
Issuance of common stock under
employee stock purchase
plan.......................... 272,500
Issuance of warrants in
connection with issuance of
debt and leases............... 1,355,900
Compensatory stock
arrangements.................. --
Amortization of deferred stock
compensation.................. 1,688,700
Net loss........................ (26,554,900)
------------
BALANCES, June 30, 1999......... $333,723,700
============
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,802,800) $(5,425,000) $(26,554,900)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity interest in losses of affiliates................. -- -- 200,000
Depreciation and amortization........................... 132,700 475,500 3,412,600
Stock-based compensation expense........................ -- 1,276,400 1,688,700
Noncash interest expense................................ -- 133,200 117,000
Joint venture termination fee........................... 431,100 -- --
Changes in assets and liabilities:
Accounts receivable................................... (29,100) (315,900) (2,728,000)
Prepaid expenses and other current assets............. -- (269,600) (3,577,800)
Restricted cash....................................... -- (300,000) (21,175,900)
Accounts payable...................................... 298,900 1,989,300 11,292,000
Accrued liabilities................................... 109,700 510,200 702,700
Unearned revenue...................................... 85,000 224,400 1,313,300
Deferred rent......................................... 30,400 18,200 156,100
----------- ----------- ------------
Net cash used in operating activities............... (744,100) (1,683,300) (35,154,200)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of short-term investments........................ -- -- (11,744,200)
Cash paid for rights to use fiber optic capacity.......... -- -- (7,480,000)
Purchase of property and equipment........................ (474,500) (3,666,000) (37,426,300)
Increase in deposits and other assets..................... (32,700) (111,700) (1,519,000)
Investments in affiliates................................. -- -- (2,630,100)
Cash paid for acquisition................................. -- -- (71,420,200)
----------- ----------- ------------
Net cash used in investing activities............... (507,200) (3,777,700) (132,219,800)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from notes payable and advances.................. 739,900 13,395,000 23,722,300
Debt repayments........................................... -- (70,000) (3,297,100)
Capital lease repayments.................................. (49,600) (84,700) (638,700)
Proceeds from issuance of common stock.................... 3,100 30,800 341,955,200
Proceeds from issuance of convertible preferred stock..... 800,000 -- 6,617,400
----------- ----------- ------------
Net cash provided by financing activities........... 1,493,400 13,271,100 368,359,100
----------- ----------- ------------
Net increase in cash and equivalents........................ 242,100 7,810,100 200,985,100
Cash and equivalents, beginning of period................... 89,000 331,100 8,141,200
----------- ----------- ------------
Cash and equivalents, end of period......................... $ 331,100 $ 8,141,200 $209,126,300
=========== =========== ============
Supplemental cash flow information--cash paid for
interest.................................................. $ 7,400 $ 27,600 $ 1,456,100
=========== =========== ============
Noncash investing and financing activities:
Remaining obligation for rights to use fiber optic
capacity................................................ $ -- $ -- $ 800,000
=========== =========== ============
Acquisition of equipment under capital lease.............. $ 206,200 $ 479,200 $ 5,829,500
=========== =========== ============
Acquisition of leasehold improvements in conjunction with
DSK, Inc. acquisition................................... $ 168,900 $ -- $ --
=========== =========== ============
Exchange of notes, advances, accrued interest and warrants
for convertible preferred stock......................... $ 210,000 $ 4,884,500 $ 8,000,000
=========== =========== ============
Conversion of preferred stock into common stock........... $ -- $ -- $ 21,223,900
=========== =========== ============
Issuance of warrants in connection with issuance of debt
and leases.............................................. $ -- $ 45,000 $ 1,355,900
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--AboveNet Communications Inc. (the "Company"), was formed on
March 8, 1996 (inception). The Company provides facilities-based, managed
services for customer-owned Web servers and related equipment, known as
co-location, and high performance Internet connectivity solutions for electronic
commerce and other business critical Internet operations.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the Company and its subsidiaries. All significant intercompany transactions and
amounts are eliminated in consolidation. Minority investments in joint ventures
are accounted for under the equity method of accounting, under which the Company
records in income its proportionate share of the earnings or losses of the joint
ventures.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to concentration of credit risk consist of trade receivables.
However, the Company's credit risk is mitigated by its credit evaluation process
and the reasonably short collection terms. The Company does not require
collateral or other security to support accounts receivable and maintains
reserves for potential credit losses.
CASH AND EQUIVALENTS--The Company considers all highly liquid investments
with maturities of ninety days or less when purchased by the Company to be cash
equivalents.
SHORT-TERM INVESTMENTS--Short term investments consist of treasury bills
with a maturity greater than 90 days but less than twelve months. The Company's
short-term investments are classified as available-for-sale. The investments are
carried at cost, which approximated fair value at June 30, 1999. Material
unrealized gains or losses would be reported as a separate component of
stockholders' equity. No investments were sold in the periods presented.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements and assets acquired
under capital lease are amortized over the shorter of the lease term or the
useful lives of the improvement.
RIGHTS TO USE FIBER OPTIC CAPACITY--Indefeasible rights to use (IRU)
capacity on fiber optic cable systems are stated at cost. Amortization will be
recognized over the shorter of the term of the IRU or its useful life beginning
when such capacity becomes available to the Company.
INTANGIBLE ASSETS--Goodwill is amortized on a straight-line basis over its
estimated life of ten years.
RESTRICTED CASH--Restricted cash consists of certificates of deposit which
are restricted from use pursuant to certain lease agreements.
REVENUE RECOGNITION--Revenue consists primarily of service revenue which is
recognized in the period in which the services are provided. The services
primarily include bandwidth and space requirement charges which are recognized
monthly as well as installation fees which are recognized as revenue in the
F-41
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
period of installation. Unearned revenue consists of customer advances and the
value assigned to certain ongoing services to be rendered to Compaq Computer
Corporation in connection with the acquisition of the Palo Alto Internet
Exchange ("PAIX") (see Note 2). Unearned revenue is recognized in the period in
which the services are rendered.
INCOME TAXES--Deferred tax liabilities are recognized for future taxable
amounts, and deferred tax assets are recognized for future deductions, net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF--The
Company evaluates its long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
NET INCOME (LOSS) PER SHARE--Basic income (loss) per share excludes dilution
and is computed by dividing net income (loss) by the weighted-average number of
common shares outstanding, less shares subject to repurchase by the Company, for
the period. Diluted income (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Common share equivalents are excluded
from the computation in loss periods as their effect would be antidilutive.
RECLASSIFICATIONS--Certain prior period amounts have been reclassified to
conform to the current period presentation. Such reclassifications had no effect
on stockholders' equity (deficiency) or net loss.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, REPORTING COMPREHENSIVE INCOME, which requires an enterprise to report,
by major components and as a single total, the change in the Company's net
assets during the period from nonowner sources. The Company adopted SFAS
No. 130 in fiscal 1999. For all periods presented, comprehensive loss was equal
to the Company's net loss.
Additionally, in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes annual and
interim reporting standards for an enterprise's business segments and related
disclosures about the enterprise's products, services, geographic areas and
major customers. The Company adopted this statement in fiscal 1999. The Company
has determined that it operates in one reporting segment.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1
provides guidance for an enterprise on accounting for the costs of computer
software developed or obtained for internal use. SOP 98-1 is effective for the
Company in fiscal 2000. The Company anticipates that accounting for transactions
under SOP 98-1 will not have a material impact on its financial position or
results of operations.
F-42
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for the Company in fiscal
2001. Although the Company has not fully assessed the implications of SFAS
No. 133, the Company does not believe adoption of this statement will have a
material impact on its financial position or results of operations.
2. ACQUISITION OF PALO ALTO INTERNET EXCHANGE
On June 21, 1999, the Company consummated the acquisition of certain assets
and the assumption of certain liabilities of the Palo Alto Internet Exchange
("PAIX"), a business within the Technology and Corporate Development and
Operations Management Services business units of Compaq Computer Corporation
("Compaq"). The total purchase price of $76.4 million consisted of
$70.0 million in cash, certain future ongoing services to be provided by the
Company to Compaq, with a value currently estimated to be $5.0 million, and
acquisition-related costs of $1.4 million. PAIX is a high-level switching and
peering point for global and regional Internet service providers and content
providers.
The acquisition has been recorded using the purchase method of accounting.
The excess of the aggregate purchase price over the fair market value of net
assets acquired of $69.7 million was recognized as goodwill and is being
amortized over 10 years. Amortization of goodwill for fiscal 1999 was $190,000.
At June 30, 1999, the Company made a preliminary allocation of the purchase
price. The Company will record adjustments to the purchase price allocation as
deemed necessary.
The operating results of PAIX have been included in the Company's
consolidated financial statements since the date of acquisition. Had the
acquisition of PAIX occurred on July 1, 1997 the unaudited proforma revenue, net
loss applicable to common stockholders and related basic and diluted loss per
share for the years ended June 30, 1998 and 1999 would have been: $6.6 million
and $19.7 million; $23.8 million and $44.4 million, and $45.45 per share and
$2.66 per share, respectively. These results, which are based on various
assumptions, are not necessarily indicative of what would have occurred had the
acquisition been consummated on July 1, 1997.
A reconciliation of the cash and noncash aspects of the above transaction is
as follows:
<TABLE>
<S> <C>
Tangible and intangible assets acquired..................... $76,683,200
Liabilities assumed......................................... (263,000)
Liabilities incurred in connection with purchase............ (5,000,000)
-----------
Net cash paid for acquisition............................... $71,420,200
===========
</TABLE>
F-43
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
3. PROPERTY AND EQUIPMENT, NET
Property and equipment at June 30 are comprised of the following:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Property and equipment at cost:
Telecommunication equipment....................... $2,295,300 $10,255,500
Leasehold improvements (primarily
co-location facilities)......................... 224,700 20,385,900
Office equipment.................................. 186,500 1,262,000
Construction in progress.......................... 2,389,400 18,224,900
---------- -----------
Total............................................... 5,095,900 50,128,300
Less accumulated depreciation and amortization...... (659,800) (3,537,400)
---------- -----------
Property and equipment, net......................... $4,436,100 $46,590,900
========== ===========
</TABLE>
Construction in progress primarily relates to costs incurred during the
expansion of the Company's facilities.
4. INDEFEASIBLE RIGHTS TO USE FIBER OPTIC CAPACITY
During fiscal 1999, the Company entered into a series of agreements
providing for the acquisition of an indefeasible right to use capacity on a
fiber optic cable system between the U.S. and the United Kingdom for
$8.3 million, $7.5 million of which has been paid as of June 30, 1999. The terms
of these agreements are 25 years.
In fiscal 1999, the Company entered into a series of agreements to lease
fiber optic cable systems between Washington D.C. and New York City. These
leases were initiated in the fourth quarter of fiscal 1999 and require annual
payments of $630,000 for 20 years. The leases are accounted for as capital
leases and had a net book value of $4.6 million at June 30, 1999.
5. JOINT VENTURES
In March 1999, as part of its international expansion strategy, the Company
entered into agreements to form joint ventures in Austria, Germany ("AboveNet
GmbH"), and the United Kingdom to provide managed co-location and Internet
connectivity solutions for mission critical Internet operations. The Company
invested a total of $2.4 million in fiscal 1999, which is included in deposits
and other assets at June 30, 1999. In addition, the Company has agreed to
provide up to $2 million of additional financing to certain of these joint
ventures, if required, and to arrange or provide for an additional $4.5 million
contingent upon the joint ventures raising an equivalent amount from third
parties. These joint ventures are accounted for under the equity method of
accounting.
In July 1999, the Company agreed to enter into two additional joint ventures
in Germany. The first joint venture will own real property in Frankfurt,
Germany. For an equity contribution of approximately $2 million, the Company
will own 45% and AboveNet GmbH will own 5% of this joint venture. The second
joint venture will lease the real property from the aforementioned joint
venture. It will complete improvements to the property and will manage the
property. This entity will lease managed co-location space to AboveNet GmbH and
provide leased space to other third parties. The Company will own 87.42% of this
second joint venture in exchange for equity contributions which will total
approximately $23 million,
F-44
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
of which approximately $8 million will be paid as an initial equity
contribution, with the remainder to be contributed over the following 18 to
24 months.
6. CONVERTIBLE NOTES PAYABLE AND ADVANCES
In June 1997, the Company received $739,900 in cash advances from certain
individuals, including stockholders and employees. In July and August 1997, the
Company received an additional $250,000 in cash advances. In August 1997, the
advances were converted into notes payable of $989,900 and warrants to acquire
989,906 shares of Series B convertible preferred stock at $1.00 per share. The
notes generally bore an annual interest rate of 10%. The related warrants were
valued at $112,000, or $0.12 per share, and were recorded as noncash interest
expense in fiscal 1998.
On December 31, 1997, the Company entered into exchange agreements with the
note holders. Pursuant to the exchange agreements, the above notes, accrued
interest of $21,200 and the related warrants were exchanged for (i) 1,263,792
shares of Series B convertible preferred stock and (ii) warrants to acquire
247,472 shares of Series B convertible preferred stock at $1.00 per share.
During fiscal 1998, the Company received $3,873,400 of cash advances from
certain potential investors. In May 1998, these advances were converted into
4,006,000 shares of Series C convertible preferred stock.
On June 30, 1998, in anticipation of the Company's pending sale of preferred
stock, the Company received $8 million in cash, of which $1 million represented
a noninterest-bearing cash advance and $7 million represented convertible notes
payable. The notes bore interest at 6%, were due on July 15, 1998 and were
convertible into Series D convertible preferred stock at $2.60 per share. On
July 15, 1998, the convertible notes and advance were converted into Series D
convertible preferred stock (see Note 9).
F-45
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
7. OTHER LONG-TERM OBLIGATIONS
Long-term obligations at June 30 consist of:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Credit facility..................................... $1,201,600 $21,626,800
Capital lease facility.............................. 551,100 5,741,900
Deferred rent....................................... 48,600 204,700
---------- -----------
Total obligations................................... 1,801,300 27,573,400
Less current portion of long-term obligations....... (476,000) (5,984,800)
---------- -----------
Long-term obligations............................... $1,325,300 $21,588,600
========== ===========
</TABLE>
CREDIT FACILITY
At June 30, 1999, the Company had $21.6 million outstanding under its credit
facility (the "Credit Facility"), with no additional borrowings available as of
June 30, 1999. Borrowings outstanding under the Credit Facility are payable in
42 monthly installments, bear interest at rates ranging from 13.3% to 15.1% and
are collateralized by the equipment and leasehold improvements purchased with
the proceeds of the borrowing. At June 30, 1999, the outstanding borrowings on
the Credit Facility are due as follows: fiscal 2000, $5,480,000; fiscal 2001,
$6,286,600; fiscal 2002, $6,874,200; and fiscal 2003, $2,986,000.
CAPITAL LEASE FACILITY
At June 30, 1999, the Company had $820,000 available on a $2.5 million
facility under which the Company leases certain equipment under capital leases.
Leases outstanding at June 30, 1999 expire on various dates through fiscal 2019
(see Note 12).
8. INCOME TAXES
The Company's deferred income tax assets at June 30 are comprised of the
following:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards................ $ 1,871,700 $ 10,755,900
Stock compensation expense on nonqualified stock
options....................................... 485,300 1,067,000
Accruals deductible in different periods........ 114,700 935,200
Depreciation and amortization................... (65,200) (231,600)
----------- ------------
2,406,500 12,526,500
Valuation allowance............................... (2,406,500) (12,526,500)
----------- ------------
Total............................................. $ -- $ --
=========== ============
</TABLE>
F-46
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
The Company's effective rate differs from the federal statutory tax rate for
the years ended June 30, 1997, 1998 and 1999 as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal statutory tax rate.............................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit..................... 3.0 3.0 2.9
Joint venture termination fee........................... (9.1) -- --
Other................................................... (0.1) (0.3) (0.4)
Valuation allowance..................................... (28.8) (37.7) (37.5)
----- ----- -----
Effective tax rate...................................... --% --% --%
===== ===== =====
</TABLE>
The Company has no income tax provision due to its history of operating
losses. Due to the uncertainty surrounding the realization of the benefits of
its favorable tax attributes in future tax returns, the Company has fully
reserved its net deferred tax assets as of June 30, 1997,1998 and 1999.
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $28.4 million for federal and $14.2 million for state income tax
purposes. These carryforwards begin to expire in 2003 for state and 2010 for
federal purposes. Additionally, Section 382 of the Internal Revenue Code and the
applicable California law impose annual limitations on the use of net operating
loss carryforwards if there is a change in ownership, as defined, within any
three-year period. The utilization of certain net operating loss carryforwards
may be limited due to the Company's capital stock transactions.
9. STOCKHOLDERS' EQUITY
STOCK SPLITS
During November 1998, the Company reincorporated in the State of Delaware
and effected a stock exchange of one share of common stock and preferred stock
for every two and one-half shares of common stock and preferred stock,
respectively, of its California predecessor entity. The Company also effected
another reverse stock split during November 1998 whereby one share of common and
preferred stock was issued for every 1.6 shares of common stock and preferred
stock. All share and per share amounts in these financial statements have been
adjusted to give effect to these reverse stock splits.
On May 7, 1999, the Company distributed a two-for-one stock split effected
as a stock dividend. All share or per share amounts in the consolidated
financial statements have been adjusted to give effect to this stock split.
INITIAL PUBLIC OFFERING
On December 10, 1998, the Company sold 10,000,000 shares of common stock in
an underwritten public offering and on December 30, 1998 sold an additional
1,500,000 shares through the exercise of the underwriters' over-allotment option
for net proceeds of approximately $67,822,000.
STOCK OFFERING
On April 30, 1999, the Company sold 5,650,356 shares of its common stock in
an underwritten public offering at a price of $42.50 per share and on May 5,
1999 sold an additional 1,200,000 shares through the exercise of the
underwriters' overallotment option for net proceeds to the Company of
approximately $273,421,500.
F-47
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
CONVERTIBLE PREFERRED STOCK AND WARRANTS
In fiscal 1997, the Company issued 2,050,000 shares of Series A convertible
preferred stock for cash of $200,000 and the conversion of advances of $210,000.
Also in fiscal 1997, the Company issued 1,000,000 shares of Series B convertible
preferred stock in connection with the acquisition of DSK, Inc. (see Note 11)
and issued 1,000,000 shares of Series B convertible preferred stock for cash of
$600,000. In fiscal 1998, the Company issued 1,263,792 shares of Series B
convertible preferred stock and 4,006,000 shares of Series C convertible
preferred stock upon conversions of notes, advances, and accrued interest of
$1,011,100 and $3,873,400, respectively (see Note 6). In fiscal 1999, the
Company issued 4,230,756 shares of Series D convertible preferred stock for cash
of $2,771,000 (net of costs of $229,000) and the conversion of notes and
advances of $8,000,000. During the same period, the Company issued 817,550
shares of Series E convertible preferred stock for cash of $3,846,400 (net of
costs of $223,600).
As discussed in Note 6, pursuant to certain exchange agreements entered into
on December 31, 1997, the Company issued warrants to acquire 247,472 shares of
Series B convertible preferred stock at $1.00 per share. Also, during fiscal
1998, the Company issued a warrant to purchase 2,500 shares of Series D
convertible preferred stock at an exercise price of $2.00 per share in
connection with a revolving line of credit from a bank that expired in
May 1999.
Simultaneously with the closing of the initial public offering, all
14,368,098 shares of the Company's preferred stock were converted into common
stock on a share for share basis. Additionally, all of the holders of warrants
to purchase 247,472 shares of Series B convertible preferred stock exercised
such warrants through a net issuance provision and were issued 209,400 shares of
common stock. Also in connection with the initial public offering, the warrant
to acquire 2,500 shares of Series D convertible preferred stock was converted
into a warrant to purchase an equivalent number of common shares at an exercise
price of $2.00 per share.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At June 30, 1999, the Company has reserved the following shares of common
stock for issuance in connection with:
<TABLE>
<S> <C>
Warrants issued and outstanding............................. 350,036
Options issued and outstanding.............................. 5,057,606
Options available under stock option plans.................. 1,108,547
Shares available under 1998 Purchase Plan................... 263,182
---------
Total....................................................... 6,779,371
=========
</TABLE>
COMMON STOCK SUBJECT TO REPURCHASE
Upon the exercise of certain unvested employee stock options, the Company
issued to the employees common stock which is subject to repurchase by the
Company at the original exercise price of the stock option. This right lapses
over the original vesting period. At June 30, 1999, 66,661 shares were subject
to repurchase.
F-48
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
STOCK OPTION PLANS
Under the Company's stock option plans (collectively, the "Plans") a total
of 5,656,712 nonstatutory and incentive common stock options are authorized for
issuance. Nonstatutory stock options may be granted to employees, outside
directors and consultants, and incentive stock options may only be granted to
employees. The Plans provide for the granting of incentive stock options at not
less than 100% of the fair market value of the underlying stock at the grant
date. Nonstatutory stock options may be granted at not less than 85% of the fair
market value of the underlying stock at the date of grant. Options granted to
employees generally vest over four years and expire ten years from the date of
the grant. In addition, upon change in control, all options granted under
certain plans shall immediately vest.
The plans provide that each nonemployee director who is elected to the
Company's board of directors will automatically be granted a nonstatutory stock
option to purchase 18,750 shares of common stock at an exercise price equal to
the fair value of the common stock on the grant date. These grants vest ratably
over three years. An additional option to purchase 6,250 shares of common stock
will be granted to the nonemployee director each year thereafter with an
exercise price equal to the fair market value of the common stock on that date.
These grants vest after one year of service.
EMPLOYEE STOCK PURCHASE PLAN
On December 10, 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (the "1998 Purchase Plan"). Under the 1998 Purchase Plan, eligible
employees are allowed to have salary withholdings of up to 15% of their base
compensation to purchase shares of common stock at a price equal to 85% of the
lower of the market value of the stock at the beginning or end of defined
purchase periods. The initial purchase period commenced on December 10, 1998.
The Company has reserved 312,500 shares of common stock for issuance under this
plan. As of June 30, 1999, 49,318 shares have been issued under the 1998
Purchase Plan.
NONPLAN OPTION GRANT
In connection with its hiring of the Company's President and Chief Operating
Officer in November 1997, the Company granted to this officer options to
purchase 350,000 shares of common stock with an exercise price of $0.20 per
share. The option was immediately exercisable with respect to 20% of the option
shares with the balance exercisable in equal monthly installments over the next
36 months of employment with the Company. However, vesting accelerated upon the
closing of the Company's underwritten public offering. In addition, the option
grant contained an antidilution clause which guaranteed that, prior to any
underwritten initial public offering of the Company's common stock, the number
of shares under the option grant would always be equal to 5% of its outstanding
common stock on a fully diluted basis less 36,666 shares. As a result of various
sales of equity securities and option grants since the initial grant in
November 1997, the officer was issued options to purchase an additional 638,850
shares of common stock at an exercise price of $0.20 per share during fiscal
1999. In connection with this award, the Company recognized $362,100 and
$1,087,200 in stock-based compensation expense during fiscal 1998 and 1999,
respectively.
OPTIONS AND WARRANTS GRANTED TO NONEMPLOYEES
The Company has granted options and warrants to nonemployees for services
performed and to be performed after the date of grant. In connection with these
awards, the Company recognized $310,100 and $601,500 in stock-based compensation
expense during fiscal 1998 and 1999, respectively. At June 30, 1999,
F-49
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
options to purchase 85,000 shares of common stock at an exercise price of $42.53
were unearned by certain nonemployees. These options vest over three years and
have a term of three years. At June 30, 1999, all services relating to all other
nonemployee awards have been rendered and the related options and warrants were
fully exercisable.
In connection with the Company's formation of its European joint ventures in
March 1999, the Company agreed that it will grant options to purchase up to
600,000 shares of common stock to employees of the joint ventures upon the joint
ventures meeting certain performance criteria of over the next four years. The
exercise price for these options would be based on the fair market value of the
Company's common stock at the date of grant.
In connection with the Credit Facility (see Note 7), in fiscal 1998, the
Company issued warrants to purchase 45,000 shares of common stock at a
weighted-average exercise price of $2.31 per share. The fair value of these
warrants is being recognized as interest expense through June 30, 1999. During
fiscal 1999, in connection with an amendment to the Credit Facility, the Company
issued warrants to purchase 67,032 shares of common stock which have a
weighted-average exercise price of $18.72 per share and a term of five years.
The estimated fair value of these warrants of $787,600 is included in deposits
and other assets at June 30, 1999 and is being amortized to interest expense
over the repayment period.
In connection with the signing of a new facility lease (See Note 12) in
fiscal 1999, the Company issued the lessor a warrant to purchase 200,000 shares
of its common stock at $5.00 per share. The estimated fair value of this warrant
of $609,100 is included in deposits and other assets at June 30, 1999 and will
be amortized to expense over the lease period.
At June 30, 1998, warrants to purchase 64,686 shares of common stock at a
weighted-average exercise price of $2.10 per share were outstanding; such
warrants expire in 2003. All of these warrants were issued during the year ended
June 30, 1998 and had an estimated weighted-average fair value of $1.23 per
share at the date of grant. During fiscal 1999, warrants to purchase 302,662
shares of common stock at a weighted-average exercise price of $7.99 were issued
and had an estimated weighted-average fair value of $4.72 per share at date of
grant. At June 30, 1999, warrants to purchase 350,036 shares of common stock at
a weighted-average exercise price of $7.17 per share were outstanding.
OPTION REPRICING
On December 1, 1998, the Company repriced 928,850 options previously granted
at $6.00 to $8.00 per share to fair value at that date of $5.00 per share.
F-50
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- --------
<S> <C> <C>
Balance, July 1, 1996 (137,500 shares vested at a
weighted average exercise price of $0.02 per share)... 1,140,000 $ 0.02
Granted................................................. 450,000 0.07
Exercised............................................... (31,250) 0.02
Canceled................................................ (388,750) 0.02
----------
Balance, June 30, 1997 (219,374 shares vested at a
weighted average exercise price of $0.02 per share)... 1,170,000 0.03
Granted................................................. 1,142,612 0.59
Exercised............................................... (322,446) 0.10
Canceled................................................ (32,334) 0.31
----------
Balance, June 30, 1998 (734,270 shares vested at a
weighted average exercise price of $0.19 per share)... 1,957,832 0.34
Granted................................................. 5,058,100 15.61
Exercised............................................... (822,908) 0.50
Canceled................................................ (1,135,418) 6.35
----------
Balance, June 30, 1999.................................. 5,057,606 $14.24
==========
</TABLE>
The following table summarizes information as of June 30, 1999 concerning
currently outstanding and vested options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE OF SHARES PRICE
- ----------------------- ----------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.02 - $ 0.60 1,621,374 8.3 $ 0.17 1,185,423 $ 0.19
2.00 - 2.60 276,628 8.5 2.29 45,397 2.12
4.00 - 6.50 1,337,654 9.2 5.17 337,103 5.36
12.25 - 41.06 1,595,550 9.7 33.34 690,668 36.47
42.53 - $75.13 226,400 9.5 48.55 7,500 46.63
--------- --- -------- --------- --------
5,057,606 9.1 $ 14.24 2,266,091 $ 12.21
========= === ======== ========= ========
</TABLE>
At June 30, 1999, 1,108,547 shares remained available for future grant.
F-51
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related
interpretations.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net income (loss) and net income (loss) per share had
the Company adopted the fair value method since the Company's inception. Under
SFAS No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values.
The Company's calculations for employee grants were made using the minimum
value method for grants prior to September 8, 1998 and the fair value method for
grants after that date with the following weighted average assumptions: expected
life, one year following vesting; risk free interest rate of 6%; and no
dividends during the expected term. In addition, volatility of 70% was used for
grants valued under the fair value method. The Company's calculations are based
on a multiple award valuation approach and forfeitures are recognized as they
occur. If the computed values of the Company's stock-based awards to employees
had been amortized to expense over the vesting period of the awards as specified
under SFAS No. 123, net loss would have been $1,803,800 ($4.59 per basic and
diluted share), $5,111,000 ($9.75 per basic and diluted share) and $37,202,000
($2.24 per basic and diluted share) for the years ended June 30, 1997, 1998 and
1999, respectively.
The number and estimated weighted-average grant date value per option for
employee and nonemployee awards during the year are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Employee options:
Number of shares......................... -- 1,003,250 4,957,600
Estimated weighted average value......... $ -- $ 0.10 $ 5.98
Nonemployee options:
Number of shares......................... 450,000 139,362 100,500
Estimated weighted average value......... $ 0.02 $ 0.08 $ 20.43
</TABLE>
F-52
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
10. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share at June 30:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss (numerator), basic and
diluted............................. $(1,802,800) $(5,425,000) $(26,554,900)
=========== =========== ============
Shares (denominator):
Weighted average common shares
Outstanding....................... 393,236 530,224 16,675,822
Weighted average common shares
Outstanding subject to
repurchase........................ -- (5,616) (32,795)
----------- ----------- ------------
Shares used in computation, basic and
diluted............................. 393,236 524,608 16,643,027
=========== =========== ============
Net loss per share, basic and
diluted............................. $ (4.58) $ (10.34) $ (1.60)
=========== =========== ============
</TABLE>
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic net income per share in the future, but
were excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. At June 30, 1999,
outstanding potentially dilutive securities consist of 66,661 outstanding shares
of common stock subject to repurchase, and options and warrants to purchase
5,407,642 shares of common stock.
11. JOINT VENTURE TERMINATION FEE
In fiscal 1996, the Company entered into a joint venture agreement (the
"Agreement") with DSK, Inc. ("DSK") to cooperatively market and develop the
Company's services. The Company paid $33,700 to DSK during the year ended
June 30, 1997 related to the Agreement.
In April 1997, the Company terminated the Agreement and hired the majority
stockholders of DSK as either employees or consultants by issuing 1,000,000
fully vested shares of the Series B preferred stock with a fair value of $0.60
per share, or $600,000, for the outstanding shares of common stock of DSK. The
Company recorded the transaction by allocating the value of the shares issued to
property and equipment (at DSK's net book value of $168,900, which approximated
fair value), with the balance of $431,100 reflected as a joint venture
termination fee.
Additionally, in April 1997, the Company granted to certain of the former
owners of DSK options to purchase a total of 250,000 shares of its common stock
at $0.06 per share for real estate consulting services to be performed. In
June 1998, the Company accelerated the vesting of all the DSK options awarded.
In conjunction with this award, the Company recognized $604,200 of stock-based
compensation expense during fiscal 1998.
F-53
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities under noncancelable operating leases.
These leases expire on various dates through fiscal 2002. Minimum future lease
payments under noncancelable operating and capital leases as of June 30, 1999
are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
JUNE 30, LEASES LEASES
- ------------ ----------- -----------
<S> <C> <C>
2000...................................................... $ 1,320,600 $ 3,903,200
2001...................................................... 1,282,100 4,108,000
2002...................................................... 921,500 4,215,100
2003...................................................... 630,000 4,305,600
2004...................................................... 630,000 4,341,700
Thereafter.................................................. 9,060,000 47,604,800
----------- -----------
Total minimum lease payments................................ $13,844,200 $68,478,400
=========== ===========
Less amount representing interest at rates ranging from
13.253% to 14.68%......................................... (8,102,300)
-----------
Present value of minimum lease payments..................... 5,741,900
Less current portion........................................ (569,200)
-----------
Long-term portion........................................... $ 5,172,700
===========
</TABLE>
Rent expense under operating leases for the years ended June 30, 1997, 1998
and 1999 was $444,900, $917,000 and $1.3 million, respectively.
Effective in fiscal 2000, the Company has committed to lease additional
facilities. The lease is for a minimum term of 20 years with annual rental
payments increasing from approximately $3 million to $4 million over the lease
term.
On June 29, 1999, the Company entered into an agreement to purchase
approximately nine acres of land in Fairfax County, Virginia, for $7,750,000
which is expected to close in fiscal 2000. The Company intends to open a
facility on the site in fiscal 2001.
See Note 4 regarding the Company's agreements to lease fiber optic cable
systems.
PURCHASE COMMITMENTS
The Company has entered into noncancelable commitments to purchase property
and equipment related to the expansion of its operations facilities. As of
June 30, 1999, approximately $48 million was committed for purchases under these
agreements through fiscal 2000.
TELECOMMUNICATIONS AND PEERING ARRANGEMENTS
The Company has guaranteed to pay certain monthly usage levels or fees with
various communications or interconnect providers. Minimum payments under these
agreements at June 30, 1999 are approximately $24.8 million in fiscal 2000;
$24.7 million in fiscal 2001; $23.1 million in fiscal 2002; $14.4 million in
fiscal 2003; $13.7 million in fiscal 2004; and $8.6 million in fiscal 2005.
F-54
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
The Company is a party to numerous peering agreements with other internet
providers to allow for the exchange of internet traffic. These agreements do not
have fee commitments and generally have a one year term with automatic renewals.
The Company does not record any revenue or expense associated with these
non-cash transactions as such transactions do not represent the culmination of
the earnings process and the fair value of such transactions are not reasonably
determinable.
LEGAL MATTERS
On June 29, 1999, an alleged stockholder of AboveNet filed a lawsuit in the
Court of Chancery of the State of Delaware. The plaintiff, who purports to
represent a class of all AboveNet stockholders, challenges the terms of the
merger between AboveNet and Metromedia Fiber Network, Inc. ("Metromedia") (see
Note 17). Four other vitually identical complaints have also been filed in the
Delaware Court of Chancery. None of these four complaints has been served.
AboveNet believes these lawsuits are without merit and intends to defend itself
vigorously, and accordingly, management does not expect that the outcome of
these cases will have a material effect on the Company's financial position or
results of operations.
13. RELATED PARTY TRANSACTIONS
A member of the Board of Directors is the president of an entity which is
the co-manager of the Company's primary facilities. Rent expense in fiscal 1997,
1998 and 1999 for these facilities was $16,400, $265,200 and $1,073,200,
respectively. The Company believes that its lease arrangements were on an arm's
length basis.
During fiscal 1999, the same entity was granted a warrant to purchase
200,000 shares of common stock in connection with the signing of a new facility
lease (see Note 9). The estimated fair value of the warrant when granted was
$609,100.
14. MAJOR CUSTOMERS
For the year ended June 30, 1999, no one customer accounted for more than
10% of revenues. One customer accounted for 14% and 12% of revenues in fiscal
1998 and 1997, respectively.
At June 30, 1999, one customer accounted for approximately 10% of trade
receivables. At June 30, 1998, two customers accounted for approximately 22% and
13% of trade receivables.
15. GEOGRAPHIC DATA
During the year ended June 30, 1999, the Company generated approximately 14%
of its revenues from customers domiciled in countries other than the United
States, primarily in Asia. For the years ended June 30, 1998 and 1997,
substantially all of the Company's revenues were derived from domestic
customers.
16. 401(K) PLAN
In May 1998, the Company began a 401(k) plan (the Plan) that covers all
employees who meet the Plan's eligibility requirements. Eligible employees can
contribute up to 15% of their salary, subject to certain IRS limitations. The
Company's contributions related to fiscal 1998 and 1999 were zero and $168,100,
respectively.
F-55
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
17. SUBSEQUENT EVENTS
In August 1999, the Company entered into an additional agreement for the
acquisition of an indefeasible right to use additional capacity on a fiber optic
cable system between the U.S. and the United Kingdom for a 25-year period. The
agreement commits the Company to pay approximately $15.8 million in a series of
installments through October 1999.
On September 8, 1999, the Company completed a merger with Metromedia Fiber
Network, Inc. ("MFN"). Under the terms of the agreement, AboveNet stockholders
received 1.175 shares of MFN Class A common stock for each AboveNet share owned.
Additionally, upon completion of the merger, all outstanding stock options
granted prior to June 18, 1999 became immediately vested.
F-56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Compaq Computer Corporation
We have audited the accompanying Combined Statement of Assets to be Acquired
and Liabilities to be Assumed of Palo Alto Internet Exchange (the "Business") as
of December 26, 1998 and the related Combined Statement of Revenues and Direct
Expenses for the period June 12, 1998 through December 26, 1998. These
statements are the responsibility of the Business' and Compaq Computer
Corporation's management. Our responsibility is to express an opinion on these
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in the Current Report on Form 8-K of AboveNet Communications Inc.) as
described in Note 2 and are not intended to be a complete presentation of the
Business' financial position or results of operations.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets to be acquired and liabilities to be assumed as of
December 26, 1998 and the revenues and direct expenses described in Note 2 of
the Business for the period June 12, 1998 through December 26, 1998, in
conformity with generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 15, 1999
F-57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Compaq Computer Corporation
We have audited the accompanying Combined Statement of Assets to be Acquired
and Liabilities to be Assumed of Palo Alto Internet Exchange (the "Business") as
of December 27, 1997 and the related Combined Statement of Revenues and Direct
Expenses for the period December 28, 1997 through June 11, 1998 and the fiscal
years ended December 27, 1997 and December 29, 1996. These statements are the
responsibility of the Business' and Compaq Computer Corporation's management.
Our responsibility is to express an opinion on these statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in the Current Report on Form 8-K of AboveNet Communications Inc.) as
described in Note 2 and are not intended to be a complete presentation of the
Business' financial position or results of operations.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets to be acquired and liabilities to be assumed as of
December 27, 1997 and the revenues and direct expenses described in Note 2 of
the Business for the period December 28, 1997 through June 11, 1998 and the
fiscal years ended December 27, 1997 and December 29, 1996, in conformity with
generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 15, 1999
F-58
<PAGE>
PALO ALTO INTERNET EXCHANGE
COMBINED STATEMENT OF ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 27,
1999 DECEMBER 26, DECEMBER 27,
(UNAUDITED) 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
ASSETS TO BE ACQUIRED:
Unbilled accounts receivable........... $ 102 $ 18 $ 14
Prepaid expenses....................... 29 2 1
Property and equipment, net............ 3,405 3,088 2,750
Intangible assets, net................. 32,863 33,756 --
------- ------- ------
Total assets to be acquired........ $36,399 $36,864 $2,765
======= ======= ======
LIABILITIES TO BE ASSUMED:
Unearned service revenue............... 166 200 106
------- ------- ------
Total liabilities to be assumed.... 166 200 106
------- ------- ------
Net assets to be acquired........ $36,233 $36,664 $2,659
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
PALO ALTO INTERNET EXCHANGE
COMBINED STATEMENT OF REVENUES AND DIRECT EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
QUARTER QUARTER JUNE 12, 1998 PERIOD FROM FISCAL FISCAL
ENDED ENDED THROUGH DECEMBER 28, YEAR ENDED YEAR ENDED
MARCH 27, MARCH 26, DECEMBER 26, 1997 THROUGH DECEMBER 27, DECEMBER 29,
1999 1998 1998 JUNE 11, 1998 1997 1996
--------- --------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Service revenues....................... $1,534 $ 892 $ 2,630 $1,732 $ 1,895 $ 155
------ ----- ------- ------ ------- -------
Direct expenses:
Cost of revenues..................... 616 817 1,548 1,440 2,579 537
Research and development............. -- 4 9 8 54 599
Selling, general and administrative
expenses........................... 131 83 191 242 700 121
Amortization of intangible assets.... 893 -- 1,944 -- -- --
------ ----- ------- ------ ------- -------
Total direct expenses............ 1,640 904 3,692 1,690 3,333 1,257
------ ----- ------- ------ ------- -------
Excess (shortfall) of revenues
over direct expenses......... $ (106) $ (12) $(1,062) $ 42 $(1,438) $(1,102)
====== ===== ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES
(AMOUNTS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS:
The Palo Alto Internet Exchange ("PAIX" or the "Business") is a business
within the Technology & Corporate Development and Operations Management Services
business units of Compaq Computer Corporation ("Compaq," formerly Digital
Equipment Corporation, "Digital," collectively the "Company"). The Business is a
high-level switching and peering point for global and regional Internet Service
Providers ("ISP") and content providers. The Business features a data center to
provide global services to PAIX customers for transmission of data in
high-volume over the worldwide Internet network. The Business utilizes a highly
redundant fiber-based infrastructure owned by multiple data carriers, including
the 30-mile fiber ring owned by the City of Palo Alto. The Business was started
in 1993 as a research project within the Company and commenced meaningful
operations during fiscal year 1996. The business is engaged primarily in
providing Internet interconnectivity solutions and related services in support
of mission critical Internet operations of its customers.
2. BASIS OF PRESENTATION:
The accompanying Combined Statement of Assets to be Acquired and Liabilities
to be Assumed and Combined Statement of Revenues and Direct Expenses ("the
financial statements") have been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Current Report on Form 8-K of AboveNet Communications, Inc. ("AboveNet").
The Combined Statement of Assets to be Acquired and Liabilities to be Assumed
includes the Business' assets to be sold to and liabilities to be assumed by
AboveNet, in accordance with the Asset Purchase Agreement dated May 21, 1999
(the "Agreement"). Compaq and AboveNet also entered into certain service
contracts and other arrangements that are described in the Agreement. These
arrangements include, but are not limited to, access to the Internet, favorable
pricing terms on such future services, and non-relocation and non-compete
arrangements. The terms of such contracts and other arrangements range from one
to 20 years. The assets to be acquired and liabilities to be assumed include
unbilled accounts receivable, prepaid expenses, property and equipment,
intangibles and unearned service revenue. The Combined Statement of Revenues and
Direct Expenses includes only those revenues and expenses directly related to
the Business to be sold. The financial statements exclude any other activity and
related expense that are not directly attributable to the Business, such as
corporate general and administrative costs, income taxes and interest expense.
The financial statements of the Business are derived from the historic books
and records of Digital through June 11, 1998. As a result of the acquisition of
Digital by Compaq on June 11, 1998, the financial statements of the Business
after the acquisition date are derived from the historic books and records of
Compaq.
As mentioned above, indirect costs allocated to the Business from the
Company, such as certain corporate general and administrative costs, have been
excluded from the financial statements on the basis that such costs are not
direct costs of the Business. However, in determining the Business' direct
expenses, certain allocations were made for expenses incurred by the Company, as
appropriate, that are directly attributed to the services provided to the
Business. These allocations relate primarily to engineering support in
connection with the delivery of services, facility and other occupancy costs,
and other general and administrative functions performed directly on behalf and
for the benefit of the Business. Costs for
F-61
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
2. BASIS OF PRESENTATION: (CONTINUED)
such services have been reflected in the financial statements on the basis of
activity or utilization, estimated support provided to the Business, or other
methods management believe to be reasonable.
Cost of revenues primarily consists of costs relating to facility rent, data
communications and telecommunication expenses, service delivery and engineering
support personnel and depreciation expense.
The financial statements have been prepared in accordance with the Company's
accounting policies and generally accepted accounting principles. However, these
statements do not purport to represent the costs and expenses which may be
incurred by an unaffiliated company to achieve similar results. In addition, the
financial statements do not purport to represent the financial position of the
Business.
FISCAL YEAR
For purposes of these financial statements the fiscal year of PAIX is a
fifty-two week period ending the Saturday nearest the last day of December.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
direct expenses, and related disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Building improvements, computer, telecommunications, and office equipment
and construction-in-progress are stated at cost less depreciation, which is
computed using the straight-line method. Expenditures for improvements which
substantially extend the useful life or increase the capacity of an asset are
capitalized. Ordinary repairs and maintenance are expensed as incurred.
Estimated useful lives for purposes of computing depreciation expense range from
two to 10 years.
INTANGIBLE ASSETS
Intangible assets, which consist of goodwill and customer lists related to
the acquisition of Digital by Compaq, are amortized on a straight-line basis
over 10 years.
REVENUE
Service revenue relating to Internet and colocation service contracts are
recognized over the contract period the services are provided. The Business
recognizes installation and certain other service fees as revenue on a per event
basis. Unearned service revenue represents the unearned portion of prepaid
service from Internet and colocation service contracts with customers. Such
amounts are amortized to revenue over the contract period, which ranges from one
year to three years. The Business provides for estimated
F-62
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
2. BASIS OF PRESENTATION: (CONTINUED)
future losses on Internet and colocation service contracts, to the extent such
losses are probable and estimable.
RESEARCH AND DEVELOPMENT
Research and development costs of the Business are charged to expense in the
period incurred.
LONG-LIVED ASSETS
The Business reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Business sells to customers primarily in the Internet and
Telecommunications industries and customers are primarily located in the United
States. The Company performs ongoing credit evaluations of its customers'
financial condition and maintains adequate provisions for uncollectible amounts
when necessary.
For the periods in the fiscal year ended December 26, 1998, and for the
years ended December 27, 1997 and December 29, 1996, PAIX generated more than
10% of its total revenue from the following customers:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
UUNet...................................................... 12% 19% 35%
BBN\GTE Internetworking.................................... -- -- 14%
Epoch...................................................... -- -- 31%
Genuity.................................................... -- -- 11%
</TABLE>
As of December 26, 1998 and December 27, 1997, customers which comprised 10%
or more of accounts receivable were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
UUNet....................................................... 23% 25%
Epoch....................................................... -- 20%
</TABLE>
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information for the quarters ended March 27, 1999 and
March 26, 1998 is unaudited and has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Results for the three months
F-63
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
2. BASIS OF PRESENTATION: (CONTINUED)
ended March 27, 1999 are not necessarily indicative of results to be expected
for the year ending December 31, 1999.
3. PROPERTY AND EQUIPMENT:
Major classifications of property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 26, DECEMBER 27,
USEFUL LIVES 1998 1997
--------------- ------------ ------------
<S> <C> <C> <C>
Building improvements............... 10 years $2,479 $2,450
Computer equipment.................. 2-3 years 52 87
Office equipment.................... 10 years 6 --
Electrical and telecommunications
equipment......................... 3 years 251 388
Construction in progress............ -- 521 112
------ ------
Less: accumulated depreciation...... (221) (287)
------ ------
$3,088 $2,750
====== ======
</TABLE>
Depreciation expense was approximately $221, $184, $286 and $1 for the
period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 11, 1998, and the fiscal years ended December 27, 1997 and
December 29, 1996, respectively.
4. INTANGIBLE ASSETS:
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 11,
1998 1998
------------ --------
<S> <C> <C>
Goodwill............................................... $27,400 $27,400
Customer lists......................................... 8,300 8,300
Less: accumulated amortization......................... (1,944) --
------- -------
$33,756 $35,700
======= =======
</TABLE>
On June 11, 1998, Compaq consummated its acquisition of Digital and
allocated its purchase price to the assets acquired and liabilities assumed
based on Compaq's estimates of fair value. The fair value assigned to intangible
assets acquired was based on a valuation prepared by an independent third-party
appraisal company and included goodwill and customer lists related to the
Business.
5. COMMITMENTS AND CONTINGENCIES:
The Company, on behalf of the Business, has entered into service contracts
with customers and telecommunications vendors to provide services.
F-64
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
In some instances, the Company provides limited warranties to customers in
connection with Internet and colocation service contracts. To date, costs
incurred in connection with such warranties have been immaterial.
6. LEGAL MATTERS:
The Company is involved in lawsuits, claims, investigations, and proceedings
which are being handled and defended in the ordinary course of business. There
are no such matters pending that the Company and its General Counsel expect to
be material in relation to the Business and no amounts have been accrued in the
financial statements for such matters.
7. RELATED PARTY TRANSACTIONS:
As described in Note 2, the Company incurred expenses for services performed
directly on behalf and for the benefit of the Business. Costs for such services
have been reflected in the accompanying Statement of Revenues and Direct
Expenses on the basis of activity or utilization, estimated support provided to
the Business, or other methods management believe to be reasonable. The cost of
such services is presented as cost of revenue, research and development and
general and administrative.
The Business has no external borrowings and there has been no allocation of
the Company's consolidated borrowings and related interest expense in the
financial statements.
The Business recognized revenue from AboveNet of $66, $36, $22 and $0 for
the period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 11, 1998, and the fiscal years ended December 27, 1997 and
December 29, 1996, respectively. Accounts receivable from AboveNet are $11 and
$4 at December 26, 1998 and December 27, 1997, respectively.
F-65
<PAGE>
OUR PRINCIPAL EXECUTIVE OFFICE
Metromedia Fiber Network, Inc.
One North Lexington Avenue
White Plains, New York 10601, U.S.A.
AUDITORS
Ernst & Young LLP
787 Seventh Avenue
New York, New York 10019, U.S.A.
LEGAL ADVISORS
<TABLE>
<S> <C>
FOR OUR COMPANY: FOR THE UNDERWRITERS:
Paul, Weiss, Rifkind, Wharton & Garrison Skadden, Arps, Slate, Meagher & Flom LLP
1285 Avenue of the Americas 300 South Grand Avenue
New York, New York 10019, U.S.A. Los Angeles, California 90071, U.S.A.
</TABLE>
TRUSTEE
The Bank of New York
101 Barclay Street
Floor 21 West
New York, New York 10286, U.S.A.
<TABLE>
<S> <C>
PRINCIPAL PAYING AGENT FOR DOLLAR NOTES PRINCIPAL PAYING AGENT FOR EURO NOTES
The Bank of New York The Bank of New York
101 Barclay Street London Branch
Floor 21 West 1 Canada Square
New York, New York 10286, U.S.A. London, E14 5AL, United Kingdom
</TABLE>
LUXEMBOURG PAYING AGENT
Kredietbank S.A. Luxembourgeoise
43 boulevard Royal
L-2955 Luxembourg
LISTING AGENT
Kredietbank S.A. Luxembourgeoise
43 boulevard Royal
L-2955 Luxembourg
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$600,000,000
METROMEDIA FIBER NETWORK, INC.
$ % SENIOR NOTES DUE 2009
[EURO] % SENIOR NOTES DUE 2009
[LOGO]
------
PROSPECTUS SUPPLEMENT
, 1999
---------
SALOMON SMITH BARNEY
CHASE SECURITIES INC.
DEUTSCHE BANC ALEX. BROWN
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 27, 1999
P R O S P E C T U S S U P P L E M E N T
(TO PROSPECTUS DATED , 1999)
[LOGO]
10,000,000 SHARES
METROMEDIA FIBER NETWORK, INC.
CLASS A COMMON STOCK
---------
This prospectus supplement relates to an aggregate of up to 10,000,000
shares (or 11,500,000 shares if the over-allotment option described in the trust
prospectus described below is exercised in full) of our class A common stock,
par value $.01 per share, beneficially owned by the selling stockholders
identified in this prospectus supplement under the heading "Selling
Stockholders," which may be delivered by DECS Trust VI to holders of DECS
securities of the trust. We will receive no portion of the proceeds from the
sale of the shares of class A common stock offered through this prospectus
supplement or from the sale of the DECS securities. The DECS securities are
being sold by the trust in an offering described in the separate prospectus of
that trust. This prospectus supplement relates only to the shares of our
class A common stock that may be delivered upon exchange of the DECS securities.
We take no responsibility for any information included in or omitted from the
trust prospectus. The trust prospectus does not constitute a part of, and is not
incorporated by reference into, this prospectus supplement or the accompanying
prospectus.
The shares of our class A common stock are quoted on The Nasdaq Stock
Market's National Market under the symbol "MFNX." On October 26, 1999, the last
reported sales price for our class A common stock as reported by Nasdaq was
$33 15/16 per share.
--------------
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE MATTERS SET FORTH UNDER
THE CAPTION "RISK FACTORS" BEGINNING ON PAGE S-12 OF THIS PROSPECTUS SUPPLEMENT
AND PAGE 3 OF THE ACCOMPANYING PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
--------------
The date of this prospectus supplement is , 1999.
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS SUPPLEMENT.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT
About This Prospectus Supplement............................ S-3
Summary..................................................... S-4
Risk Factors................................................ S-12
Special Note Regarding Forward-Looking Statements........... S-23
Price Range of Class A Common Stock......................... S-25
Dividend Policy............................................. S-25
Use of Proceeds............................................. S-25
Capitalization.............................................. S-26
Selected Consolidated Financial Data........................ S-28
Unaudited Pro Forma Condensed Combining Financial
Information............................................... S-30
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. S-35
Business.................................................... S-42
Management.................................................. S-61
Certain Relationships and Related Transactions.............. S-70
Proposed Transactions....................................... S-71
Selling Stockholders........................................ S-73
Description of the New Credit Facility...................... S-74
Description of Material Indebtedness........................ S-75
Certain United States Federal Tax Consequences to Non-United
States Holders of Common Stock............................ S-77
Plan of Distribution........................................ S-80
Shares Eligible for Future Sale............................. S-81
Validity of the Securities.................................. S-82
Experts..................................................... S-82
Where You Can Find More Information......................... S-82
Incorporation of Information We File With the SEC........... S-83
Index to Consolidated Financial Statements.................. F-1
PROSPECTUS
Risk Factors................................................ 3
Special Note Regarding Forward-Looking Statements........... 10
About This Prospectus....................................... 11
Business.................................................... 11
Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends................................................. 12
Use of Proceeds............................................. 12
Description of Debt Securities.............................. 13
Description of Capital Stock................................ 22
Description of Warrants..................................... 28
Selling Shareholders........................................ 29
Plan of Distribution........................................ 29
Validity of Securities...................................... 30
Experts..................................................... 30
Where You Can Find More Information......................... 31
Incorporation of Information We File With the SEC........... 31
</TABLE>
S-2
<PAGE>
ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement contains the terms of this offering. A
description of our capital stock is contained in the attached prospectus. This
prospectus supplement, or the information incorporated by reference in this
prospectus supplement, may add, update or change information in the attached
prospectus. If information in this prospectus supplement, or the information
incorporated by reference in this prospectus supplement, is inconsistent with
the attached prospectus, this prospectus supplement, or the information
incorporated by reference in this prospectus supplement, will apply and will
supersede the information in the attached prospectus.
It is important for you to read and consider all information contained in
this prospectus supplement and the attached prospectus in making your investment
decision. You should also read and consider the information in the documents we
have referred you to in "Where You Can Find More Information."
This prospectus supplement and the prospectus do not constitute an offer or
solicitation by anyone in any jurisdiction in which an offer or solicitation is
not authorized or in which the person making an offer or solicitation is not
qualified to do so, or to anyone to whom it is unlawful to make an offer or
solicitation.
S-3
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS
SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS INCORPORATED BY
REFERENCE. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
THAT YOU SHOULD CONSIDER BEFORE INVESTING. YOU SHOULD READ THE ENTIRE PROSPECTUS
SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS INCORPORATED BY
REFERENCE CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS" AND THE
FINANCIAL STATEMENTS AND RELATED NOTES TO THOSE STATEMENTS INCLUDED IN THIS
PROSPECTUS SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS
INCORPORATED BY REFERENCE. EXCEPT AS OTHERWISE REQUIRED BY THE CONTEXT,
REFERENCES IN THIS PROSPECTUS SUPPLEMENT TO "WE" OR "US" REFER TO THE COMBINED
BUSINESS OF METROMEDIA FIBER NETWORK, INC. AND ALL OF ITS SUBSIDIARIES. THE TERM
"YOU" REFERS TO PROSPECTIVE INVESTORS IN THE SHARES.
THE COMPANY
GENERAL
We provide dedicated fiber optic infrastructure and high-bandwidth Internet
connectivity for our communications intensive customers. We are a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through our acquisition of
AboveNet Communications, Inc. (often referred to as "AboveNet"), we also provide
"one-hop" connectivity that enables mission critical Internet applications to
thrive, as well as high-bandwidth infrastructure, including managed co-location
services.
We currently have operations in, or under construction in, eleven Tier I
cities throughout the United States and seven selected international markets. We
intend to expand our presence to include approximately 50 Tier I and Tier II
markets in the United States and 17 major international markets.
RECENT EVENTS
ACQUISITION OF ABOVENET. On September 8, 1999, we completed the acquisition
of AboveNet for a total purchase price of approximately $1.8 billion. AboveNet
is a leading provider of high performance Internet connectivity solutions for
electronic commerce and other business critical Internet operations and
facilities-based, managed services for customer-owned Web servers and related
equipment, known as co-location services. AboveNet has developed a network
architecture based upon strategically located, fault-tolerant facilities, known
as Internet service exchanges. AboveNet's Internet service exchanges combine
direct access to Internet service providers, (often referred to as "ISPs"), with
co-location services for Internet content providers. As of June 30, 1999,
AboveNet had more than 270 direct public and private data exchange agreements,
known as peering arrangements, including relationships with most major network
providers. AboveNet's network architecture and extensive peering relationships
are designed to reduce the number of network connections or "hops" for data
traveling across the Internet. By having both Internet content providers and
Internet service providers at its Internet service exchanges, AboveNet enables
its Internet service provider customers to provide their users with "one-hop"
connectivity, through AboveNet's local area network, to the Web sites of the
Internet content providers that are co-located at the same facility. AboveNet's
customers include a wide range of Internet service providers, Internet content
providers and Web hosting companies.
INVESTMENT BY BELL ATLANTIC. On October 7, 1999, we entered into a
securities purchase agreement with Bell Atlantic Investments, Inc. (referred to
as "Bell Atlantic"), under which Bell Atlantic would purchase up to
approximately 25.6 million newly issued shares of our class A common stock at a
purchase price of $28.00 per share and a convertible subordinated note of
approximately $975.3 million, which is convertible into shares of our class
A common stock at a conversion price of $34.00 per share. We expect this
transaction, which is subject to customary closing conditions, to be completed
by the end of the first quarter of 2000. Assuming the issuance of the
25.6 million shares of class A common
S-4
<PAGE>
stock and conversion of the convertible subordinated note, this investment would
represent 19.9% of our outstanding shares. Bell Atlantic has also agreed to pay
us $550 million over the next three years in exchange for delivery of fiber
optic facilities over the next five years. The proceeds from these two
transactions will be used to fund the expansion of our network.
NETWORK
Our existing intra-city networks consist of approximately 334,000 fiber
miles covering 680 route miles in six of our announced markets. Our inter-city
network consists of approximately 110,000 fiber miles covering 255 route miles
that we have built between New York City and Washington, D.C. We have also built
or acquired (primarily through fiber swaps) a nationwide dark fiber network
linking our intra-city networks.
In February 1999, we entered into an agreement with Viatel, Inc. and
Carrier 1 Holdings, Ltd. to jointly build a dark fiber inter-city network among
selected cities throughout Germany. Once completed, our German network will
consist of approximately 291,000 fiber miles covering 1,350 route miles
connecting 14 major cities. We have also swapped strands of fiber in the United
States for strands of fiber on the Circe network, which connects a number of
European markets. In addition to our inter-city networks, we are constructing 16
intra-city networks throughout Europe. Separately, we have also entered into a
contract to acquire dark fiber network facilities in Toronto, Canada.
We have designed our networks to provide high levels of reliability,
security and flexibility by virtue of a self-healing synchronous optical network
(often referred to as "SONET") architecture that prevents interruption in
service to our clients by instantaneously rerouting traffic in the event of a
fiber cut. Our advanced network architecture is also capable of supporting
state-of-the-art technologies, including dense wave division multiplexing (often
referred to as "DWDM") which significantly increases the transmission capacity
of a strand of fiber optic cable. Because DWDM can boost transmission capacity
significantly, it has greater relevance on our inter-city routes where we have,
on average, fewer strands of fiber installed than in our intra-city markets. We
install most of our fiber inside high-density polyethylene conduit to protect
the cable and, where practicable, we install additional unused conduits to cost
effectively accommodate future network expansion and eliminate the need for
future construction.
We believe that the market for our services in these areas is characterized
by significant and growing demand for, and limited supply of, fiber optic
capacity. To meet our customers' demand, we tailor the amount of fiber capacity
leased to the needs of our customers. Generally, customers lease fiber optic
capacity from us and connect their own transmission equipment to the leased
fiber, thereby obtaining a high-bandwidth, fixed-cost, secure communications
alternative to the metered communications services offered by traditional
providers. In addition, we believe that we have installation, operating and
maintenance cost advantages per fiber mile relative to our competitors because
we generally install 432 fibers, and have begun installing as many as 864 fibers
per route mile, as compared to the generally lower number of fibers per mile in
existing competitive networks.
We believe the market for our Internet service exchanges is characterized by
significant and growing demand for, and limited access to, highly reliable
Internet connectivity and co-location services. To meet our customers' demands,
we provide scalable connectivity and co-location services that drive our
customers' electronic commerce and other mission critical Internet applications.
Our customers lease bandwidth and co-location space from us to gain highly
reliable, secure and cost effective Internet connectivity. Through our existing
and planned networks, we believe we have the low cost position relative to those
competitors who lease rather than own their networks.
S-5
<PAGE>
CUSTOMERS
We are focused on providing our broadband communications infrastructure and
Internet connectivity services to two main customer groups located in Tier I and
Tier II markets: communications carriers and corporate/government customers.
Our targeted customers include a broad range of companies such as:
- incumbent local exchange carriers (often referred to as "ILECs");
- competitive local exchange carriers (often referred to as "CLECs");
- long distance companies/interexchange carriers (often referred to as
"IXCs");
- paging, cellular and PCS companies;
- cable companies;
- ISPs; and
- Web hosting and e-commerce companies.
Our dark fiber customers typically lease our fiber optic capacity with which
they develop their own communications networks. Leasing our fiber optic capacity
is a low-cost alternative to building their own infrastructure or purchasing
metered services from ILECs or CLECs. Our Internet connectivity and co-location
customers typically lease bandwidth and co-location space which allow them to
provide their Internet related services on a reliable and cost effective basis.
We believe that we are well-positioned to penetrate our target customer base
since we plan to install most of our dark fiber networks and Internet service
exchanges in major markets where these customers are concentrated. We believe
our target customers for our dark fiber and Internet connectivity services are
complementary and will provide significant cross-selling opportunities.
MARKET OPPORTUNITY
We intend to capitalize on the increasing demand for high-bandwidth
dedicated communications services and the limited supply of such transmission
capacity. Based on management experience and industry reports, we believe that
demand for the broadband communications infrastructure afforded by our network
will continue to increase as a result of the following factors:
- the rapid growth of communications traffic, such as data traffic, which
industry research indicates is growing by 35% annually;
- the large number of new carriers which will require significant
transmission capabilities in all sectors of the communications industry,
due in large part to industry deregulation facilitated by the
Telecommunications Act of 1996 (often referred to as the "1996 Telecom
Act");
- the fact that the Regional Bell Operating Companies (often referred to as
the "RBOCs") and other major ILECs will likely need to upgrade to fiber
optic networks with infrastructure similar to ours; and
- the advent of new communications services requiring large amounts of
transmission capacity, such as Internet, intranet and video services.
Based on industry sources, we estimate that the total 1998 market for
communications services in the United States was approximately $237 billion and
will grow to approximately $341 billion by the year 2002. In addition, we
believe that there will be increased demand for our infrastructure due to our
ability to offer fixed-cost pricing which is generally more economical for high
volume users than traditional usage-based pricing. Based on industry sources, we
estimate that worldwide Internet revenues for 1998 were approximately
$20 billion, and will grow to approximately $83 billion by the year 2002. We
expect continued rapid growth in Internet revenues as Internet use increases and
electronic commerce applications gain widespread acceptance.
S-6
<PAGE>
BUSINESS STRATEGY
Our objective is to become the preferred facilities-based provider of
broadband communications infrastructure and Internet connectivity solutions to
communications carriers, corporations and government agencies, in our target
markets. The following are the key elements of our strategy to achieve this
objective:
ESTABLISH OUR COMPANY AS THE PREFERRED CARRIERS' CARRIER OF BROADBAND
COMMUNICATIONS
INFRASTRUCTURE AND INTERNET CONNECTIVITY SOLUTIONS
We lease broadband communications infrastructure on a fixed-cost basis to
various communications carriers, thus enabling them to compete in markets which
were previously difficult to penetrate due to limited and/or costly access to
high-bandwidth communications infrastructure. We lease bandwidth and
co-location space to various Internet service providers enabling them to provide
reliable, high-quality Internet access services to their customers. We also
believe that carrier customers may be more likely to lease services from us,
rather than from a competitor, since we currently have no plans to offer
competing metered communications or retail Internet connectivity services.
POSITION OUR COMPANY AS THE PREFERRED PROVIDER OF BROADBAND COMMUNICATIONS
INFRASTRUCTURE AND
INTERNET CONNECTIVITY SERVICES TO CORPORATE AND GOVERNMENT CUSTOMERS
Our target customers for broadband communications infrastructure are those
with significant transmission needs or who require a high degree of security.
Our target customers for Internet connectivity services are those who require
reliable, secure and cost effective connectivity to the Internet to drive
electronic commerce and other mission critical business Internet applications.
In many cases, we believe our communications infrastructure and Internet
connectivity customer bases are complementary and will create significant cross
selling opportunities.
REPLICATE SUCCESSFUL BUSINESS MODEL IN NEW MARKETS
We seek to leverage the success we have demonstrated in our existing markets
by replicating our network architecture in a number of additional markets.
Specifically, we intend to:
- complete the construction of a total of approximately 50 intra-city
networks in Tier I and Tier II markets;
- replicate our successful domestic strategy in selected international
markets; and
- deploy Internet service exchanges in selected U.S. and international
markets.
CREATE A LOW COST POSITION
We believe that we have established a low cost position relative to other
communications carriers primarily because we install trunks with substantially
more fibers per route mile as well as spare conduits, thereby reducing the cost
per fiber mile to construct, upgrade and operate our networks. We believe that
we have established the low cost position relative to other Internet
connectivity providers who lease rather than own their networks. Our low cost
position should allow us to remain price competitive with other providers of
broadband communications infrastructure and Internet connectivity services and
to provide customers a cost effective alternative to constructing their own
networks or Internet connectivity facilities.
UTILIZE FIBER SWAPS AND STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF OUR
NETWORKS
We have completed a number of fiber swaps to date and will continue to
explore strategic opportunities to expand the reach of our networks at little
incremental cost. We also plan to enter into
S-7
<PAGE>
strategic relationships, such as our joint build arrangement with Viatel in
Europe, to cost effectively expand our network footprint.
EXPAND PRODUCT AND SERVICE OFFERINGS TO UTILIZE DARK FIBER NETWORK CAPACITY
We intend to identify additional uses for our dark fiber network that will
drive new revenue opportunities and cost synergies. We may develop these
applications internally or by acquiring them through strategic acquisitions,
although none are currently planned. As was the case with our acquisition of
AboveNet, we intend to continue to serve carriers and large corporate and
government customers with regard to their bandwidth intensive communications
needs.
INSTALL TECHNOLOGICALLY ADVANCED NETWORKS AND INTERNET SERVICE EXCHANGES
We have installed a technologically advanced network based on a self-healing
SONET architecture that we believe provides the high levels of reliability,
security, and flexibility that our target customers typically demand. Our
Internet service exchanges provide fault tolerant facilities designed to enable
the uninterrupted operations necessary for mission critical Internet business
applications. Furthermore, our proprietary software monitors network connection
for latency and packet loss, thereby allowing us to automatically reroute
traffic to avoid Internet congestion points.
BUILD ON MANAGEMENT EXPERIENCE AND METROMEDIA COMPANY RELATIONSHIP
Our management team and board of directors include individuals with
communications industry expertise and extensive experience in network design,
construction, operations and sales. Our Chief Executive Officer and founder,
Stephen A. Garofalo, has approximately 25 years of experience in the cable
installation business. Howard Finkelstein, our President and Chief Operating
Officer, served in various capacities in Metromedia Company over a period of
16 years, including 9 years as president of Metromedia Company's long distance
telephone company, until its merger with MCI/WorldCom, Inc. in 1993. We also
benefit from the communications industry expertise and corporate governance
experience of John W. Kluge, Stuart Subotnick and David Rockefeller. As the
owner of all of our class B common stock, Metromedia Company and its general
partners control our board of directors and all stockholder decisions and, in
general, determine the outcome of any corporate transaction or other matters
submitted to the stockholders for approval. Sherman Tuan and David Rand have
joined our board of directors following the acquisition of AboveNet and have
extensive experience with Internet related ventures. Please refer to the
sections in this prospectus supplement entitled "Risk Factors--Metromedia
Company Effectively Controls Our Company and Has the Power to Cause or Prevent a
Change of Control" and "Certain Relationships and Related Transactions."
------------------------
We were founded in 1993 and are a Delaware corporation. Our principal
executive offices are located at One North Lexington Avenue, White Plains, New
York 10601. Our telephone number is (914) 421-6700.
PROPOSED OFFERINGS
Concurrently with this offering described in this prospectus supplement, we
intend to issue $ million of % Senior Notes due 2009 and [EURO]
million of % Senior Notes due 2009, under an indenture between us and The Bank
of New York, as trustee. These notes will mature on December 15, 2009. Interest
on the Dollar notes will accrue at % per annum and interest on the Euro notes
will accrue at % per annum. In each case, interest will be payable
semiannually in arrears on June 15 and December 15 of each year.
S-8
<PAGE>
In addition, concurrently with this offering, some of the selling
stockholders intend to sell 4,671,000 shares of class A common stock (excluding
over-allotment option). Each share of class A common stock will be sold at
$ per share resulting in $ aggregate gross proceeds to those selling
stockholders. We will receive no portion of the proceeds from this sale of the
shares of class A common stock. Following consummation of the future sale of
shares of class A common stock described in this prospectus supplement and the
sale of shares of class A common stock by some of the selling stockholders
referred to in this paragraph, each selling stockholder will continue to
beneficially own at least 85% of the shares of class A common stock owned before
consummation of these offerings.
Neither of the transactions described above nor the offering described in
this prospectus supplement is conditioned upon any of the other transactions.
RISK FACTORS
You should consider carefully the information set forth in the section
entitled "Risk Factors" beginning on page S-12 of this prospectus supplement and
on page 3 of the accompanying prospectus and all the other information provided
to you in this prospectus supplement, the accompanying prospectus and the
documents incorporated by reference in deciding whether to invest in the shares.
S-9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data presented below for the
years ended December 31, 1996, 1997 and 1998 have been derived from our
consolidated financial statements and the related notes included in this
prospectus supplement beginning on page F-1. Our consolidated financial
statements for the years ended December 31, 1996, 1997 and 1998 have been
audited by Ernst & Young LLP, independent auditors. The summary consolidated
financial data for the six months ended June 30, 1998 and 1999 and the summary
historical balance sheet data as of June 30, 1999 have been derived from our
unaudited consolidated financial statements, which we believe include all
adjustments necessary for a fair presentation of the financial condition and
results of operations for those periods. The results of operations for interim
periods are not necessarily indicative of the results for a full year's
operations.
The summary unaudited pro forma statements of operations for the year ended
December 31, 1998 and for the six months ended June 30, 1999 give effect to our
acquisition of AboveNet and AboveNet's acquisition of Palo Alto Internet
Exchange as if they had been consummated on January 1, 1998. The summary
unaudited pro forma balance sheet as of June 30, 1999 gives pro forma effect to
the following transactions:
- our acquisition of AboveNet as if it had been consummated on June 30,
1999;
- the transaction referred to above and the proposed offering of our senior
notes due 2009, which offering is expected to concurrently close with the
offering described in this prospectus supplement, as if they had been
consummated on June 30, 1999; and
- the transactions referred to above and the purchase by Bell Atlantic of
shares of our class A common stock and the convertible subordinated note,
which purchase has not yet been consummated and is subject to customary
closing conditions, as if they had been consummated on June 30, 1999.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable at the time made. The summary
unaudited pro forma financial data do not purport to present our financial
position or results of operations had the transactions occurred on the dates
specified, nor are they necessarily indicative of the financial position or
results of operations that may be achieved in the future.
As you read the summary consolidated financial data, please refer to the
following: "Risk Factors--Failure to Consummate the Bell Atlantic Transactions
May Cause Us to Seek Alternative Financing," "Unaudited Pro Forma Condensed
Combining Financial Information," "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business," the
consolidated financial statements and the related notes of our company, AboveNet
and Palo Alto Internet Exchange and the other financial data appearing in this
prospectus supplement.
S-10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------ --------------
PRO FORMA PRO FORMA
FOR ABOVENET FOR ABOVENET
AQUISITION ACQUISITION
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- ------------ -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 236 $ 2,524 $36,436 $ 47,575 $ 9,133 $ 38,673 $ 51,366
Expenses:
Cost of sales..................... 699 3,572 13,937 24,071 4,553 14,819 30,714
Selling, general and
administrative.................. 2,070 6,303 14,712 23,005 5,914 13,786 26,396
Depreciation and amortization..... 613 757 1,532 80,105 440 5,058 45,602
Consulting and employment
incentives...................... 3,652 19,218 3,648 6,044 3,595 -- 519
-------- -------- ------- -------- ------- -------- --------
(Loss) income from operations....... (6,798) (27,326) 2,607 (85,650) (5,369) 5,010 (51,865)
Interest income (expense), net...... (3,561) 1,067 1,927 1,735 3,564 (16,895) (15,310)
(Loss) from joint venture........... -- -- (146) (146) (251) (393) (593)
Income taxes........................ -- -- 3,402 -- -- -- --
-------- -------- ------- -------- ------- -------- --------
Net (loss) income................... $(10,359) $(26,259) $ 986 $(84,061) $(2,056) $(12,278) $(67,768)
======== ======== ======= ======== ======= ======== ========
Net (loss) income applicable to
common stockholders per share..... $ (0.14) $ (0.28) $ 0.01 $ (0.37) $ (0.01) $ (0.06) $ (0.29)
======== ======== ======= ======== ======= ======== ========
Weighted average number of shares
outstanding....................... 71,716 94,894 186,990 228,584 185,616 189,098 230,692
======== ======== ======= ======== ======= ======== ========
Ratio of earnings to fixed
charges(1)........................ -- -- 1.61 -- -- -- --
EBITDA(2)........................... $ (6,185) $(26,569) $ 3,993 $ (5,691) $(5,180) $ 9,675 $ (6,856)
Adjusted EBITDA(2).................. $ (2,533) $ (7,351) $ 7,641 $ 353 $(1,585) $ 9,675 $ (6,337)
Cash dividends per share............ $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------------------------------------
PRO FORMA PRO FORMA FOR
PRO FORMA FOR FOR THE SENIOR BELL ATLANTIC
ACTUAL ABOVENET ACQUISITION NOTES OFFERING INVESTMENT
---------- -------------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................. $ 341,897 $ 537,768 $ 1,117,768 $ 2,808,676
Pledged securities(3)............................ 63,142 63,142 63,142 63,142
Property and equipment, net...................... 421,712 481,208 481,208 481,208
Total assets..................................... 1,034,694 2,882,533 3,482,533 5,173,441
Long-term debt................................... 673,202 694,791 1,294,791 2,270,072
Total liabilities................................ 891,905 962,080 1,562,080 2,537,361
Stockholders' equity............................. 142,789 1,920,453 1,920,453 2,636,080
</TABLE>
(1) Earnings were insufficient to cover fixed charges in the years ended
December 31, 1996 and 1997 and for the six months ended June 30, 1998 and
1999. The deficiency was $10,359,000, $26,259,000, $2,056,000, and
$12,278,000 for the years ended December 31, 1996 and 1997 and for the six
months ended June 30, 1998 and 1999, respectively. Pro forma earnings were
insufficient to cover the pro forma fixed charges in the year ended
December 31, 1998 and for the six months ended June 30, 1999. The pro forma
deficiency was $84,061,000 and $67,768,000 for the year ended December 31,
1998 and the six months ended June 30, 1999, respectively.
(2) "EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense and all depreciation and amortization expense. "Adjusted
EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense, depreciation and amortization and non-cash employment and
consulting incentives and settlements. You should not think of EBITDA and
Adjusted EBITDA as alternative measures of operating results or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles). We have included EBITDA and Adjusted EBITDA
because they are widely used financial measures of the potential capacity of
a company to incur and service debt. Our reported EBITDA and Adjusted EBITDA
may not be comparable to similarly titled measures used by other companies.
(3) Represents amounts deposited with the security agent pursuant to a security
agreement to make payments of interest through May 15, 2000 on our 10%
Senior Notes due 2008.
S-11
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION BELOW IN ADDITION TO ALL OTHER
INFORMATION PROVIDED TO YOU IN THIS PROSPECTUS SUPPLEMENT, THE ACCOMPANYING
PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE IN DECIDING WHETHER TO
INVEST IN THE SHARES OF OUR CLASS A COMMON STOCK, INCLUDING INFORMATION IN THE
SECTION ENTITLED "SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS."
RISK FACTORS RELATING TO OUR BUSINESS
WE HAVE A LIMITED HISTORY OF OPERATIONS
You will have limited historical financial information upon which to base
your evaluation of our performance. Our company was formed in April 1993 and has
a limited operating history. We currently have a limited number of customers and
are still in the process of building many of our networks. Accordingly, you must
consider our prospects in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development.
WE EXPECT TO CONTINUE TO INCUR NET LOSSES
In connection with the construction of our networks, we have incurred
substantial net losses and have not generated positive cash flow from
operations. There can be no assurance that we will generate net income or that
we will sustain positive cash flow in the future.
We cannot assure you that we will succeed in establishing an adequate
revenue base or that our services will generate profitability. In connection
with the construction of our networks, we have incurred substantial losses. We
expect to continue incurring losses while we concentrate on the development and
construction of our networks and until our networks have established a
sufficient revenue-generating customer base. We also expect to incur losses
during the initial startup phases of any services that we may provide. We expect
to continue experiencing net operating losses for the foreseeable future.
Continued losses may prevent us from pursuing our strategies for growth and
could cause us to be unable to meet our debt service obligations, capital
expenditure requirements or working capital needs.
WE HAVE SUBSTANTIAL DEBT WHICH MAY LIMIT OUR ABILITY TO BORROW, RESTRICT THE USE
OF OUR CASH FLOWS AND CONSTRAIN OUR BUSINESS STRATEGY, AND WE MAY NOT BE ABLE
TO MEET OUR DEBT OBLIGATIONS
LARGE AMOUNT OF DEBT
We have, and will continue to have after the proposed offering of senior
notes due 2009, which offering is expected to close concurrently with the
offering described in this prospectus supplement, substantial debt and debt
service requirements. Following the proposed offering of the senior notes due
2009, we will have total debt of approximately $1.3 billion. In addition, the
purchase by Bell Atlantic of a convertible subordinated note will increase our
total debt to approximately $2.3 billion. As the indentures governing our debt
allow us to borrow additional amounts in certain cases to finance the
construction and improvement of our networks, we intend to explore market
conditions in order to obtain additional financing, including additional
long-term fixed-rate financing or senior revolving credit facilities.
CONSEQUENCES OF DEBT
Our substantial debt has important consequences, including:
- our ability to borrow additional amounts for working capital, capital
expenditures or other purposes is limited;
S-12
<PAGE>
- a substantial portion of our cash flow from operations is required to make
debt service payments; and
- our leverage could limit our ability to capitalize on significant business
opportunities and our flexibility to react to changes in general economic
conditions, competitive pressures and adverse changes in government
regulation.
You should be aware that our ability to repay or refinance our debt depends
on our successful financial and operating performance and on our ability to
successfully implement our business strategy. Unfortunately, we cannot assure
you that we will be successful in implementing our strategy or in realizing our
anticipated financial results. You should also be aware that our financial and
operational performance depends upon a number of factors, many of which are
beyond our control. These factors include:
- the economic and competitive conditions in the telecommunications network
and Internet-related industries;
- any operating difficulties, increased operating costs or pricing pressures
we may experience;
- the passage of legislation or other regulatory developments that may
adversely affect us;
- any delays in implementing any strategic projects;
- our ability to complete our networks on time and in a cost-effective
manner; and
- our ability to apply our business strategies in foreign cities.
We cannot assure you that our cash flow and capital resources will be
sufficient to repay our existing indebtedness and any indebtedness we may incur
in the future, or that we will be successful in obtaining alternative financing.
In the event that we are unable to repay our debts, we may be forced to reduce
or delay the completion or expansion of our networks, sell some of our assets,
obtain additional equity capital or refinance or restructure our debt. If we are
unable to meet our debt service obligations or comply with our covenants, a
default under our existing debt agreements would result. To avoid a default, we
may need waivers from third parties, which might not be granted. You should also
read the information we have included in this prospectus supplement in the
sections entitled "--Risk Factors Relating to the Notes," "Description of
Material Indebtedness," "Recent and Proposed Transactions" and
"Business--Business Strategy."
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY BECAUSE WE
DEPEND ON FACTORS BEYOND OUR CONTROL, WHICH COULD ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS
Our future largely depends on our ability to implement our business strategy
and proposed expansion in order to create the new business and revenue
opportunities. Our results of operations will be adversely affected if we cannot
fully implement our business strategy. Successful implementation depends on
numerous factors beyond our control, including economic, competitive and other
conditions and uncertainties, the ability to obtain licenses, permits,
franchises and rights-of-way on reasonable terms and conditions and the ability
to hire and retain qualified management personnel.
A CHANGE IN ACCOUNTING STANDARDS MAY REQUIRE US TO CHANGE OUR TIMING OF
RECOGNIZING REVENUES
Effective June 30, 1999, the Financial Accounting Standards Board issued
FASB Interpretation No. 43 "Real Estate Sales" ("FIN 43") which requires that
sales of integral equipment be accounted for in accordance with real estate
accounting rules. We believe that the SEC may classify dark fiber cables in the
ground as integral equipment as defined in FIN 43. This change in the accounting
for dark fiber sales would not change any of the economics of the contracts. It
would require us, however, to recognize the revenue from some sales contracts as
operating leases over the term of the contract as
S-13
<PAGE>
opposed to the current method of recognizing revenue during the period over
which we deliver the fiber. As a result, this change in accounting treatment
would reduce the revenue and income that we would recognize in the earlier years
of the contract and spread it out over the life of the contract regardless of
when the cash was received or the delivery of the fiber took place. Please refer
to "Management's Discussion and Analysis of Financial Condition and Results of
Operations--General."
FAILURE TO CONSUMMATE THE BELL ATLANTIC TRANSACTIONS MAY CAUSE US TO SEEK
ALTERNATIVE FINANCING
In connection with Bell Atlantic's investment, we expect to receive
approximately $1.7 billion in net proceeds from Bell Atlantic for the purchase
of shares of our class A common stock and a convertible subordinated note. In
addition, Bell Atlantic has agreed to purchase a minimum of $550.0 million of
fiber optic facilities payable over the next three years. We plan to use the net
proceeds from the Bell Atlantic transactions to accelerate the build out of our
nationwide dark fiber infrastructure as well as to enter new markets in the
United States and internationally. If Bell Atlantic's investment, which is
subject to customary closing conditions, does not close, we would need to obtain
alternative sources of financing to complete the construction of our networks,
which may not be available on comparable terms, if at all. Locating an
alternative financing source could slow our growth and have a material adverse
affect on us.
WE CANNOT BE CERTAIN THAT WE WILL BE SUCCESSFUL IN INTEGRATING ABOVENET INTO OUR
BUSINESS
We believe that our acquisition of AboveNet will result in benefits to the
combined companies, including the expansion of our product and service offerings
and the combination of our fiber optic network with AboveNet's Internet
connectivity solutions. If we are not able to effectively integrate our
technology, operations and personnel in a timely and efficient manner, then the
benefits of our acquisition will not be realized and, as a result, our operating
results may be adversely affected. In particular, if the integration is not
successful:
- we may lose key personnel; and
- we may not be able to retain AboveNet's customers.
In addition, the attention and effort devoted to the integration of the two
companies will significantly divert management's attention from other important
issues, and could significantly harm the combined companies' business and
operating results.
WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY COMPLETE THE CONSTRUCTION OF OUR
NETWORKS
The construction of future networks and the addition of Internet service
exchange facilities entail significant risks, including management's ability to
effectively control and manage these projects, shortages of materials or skilled
labor, unforeseen engineering, environmental or geological problems, work
stoppages, weather interference, floods and unanticipated cost increases. The
failure to obtain necessary licenses, permits and authorizations could prevent
or delay the completion of construction of all or part of our networks or
increase completion costs. In addition, AboveNet's establishment and maintenance
of interconnections with other network providers at various public and private
points is necessary for AboveNet to provide cost efficient services. We cannot
assure you that the budgeted costs of our current and future projects will not
be exceeded or that these projects will commence operations within the
contemplated schedules, if at all.
WE CANNOT ASSURE YOU THAT A MARKET FOR OUR CURRENT OR FUTURE SERVICES WILL
DEVELOP
The practice of leasing dark fiber, which is fiber optic cable without any
of the electronic or optronic equipment necessary to use the fiber for
transmission, is not widespread and we cannot assure you that the market will
develop or that we will be able to enter into contracts, comply with the terms
S-14
<PAGE>
of these contracts or maintain relationships with communications carriers and
corporate and government customers. We also cannot assure you that these
contracts or relationships will be on economically favorable terms or that
communications carriers and corporate and government customers will not choose
to compete against, rather than cooperate with us. If we are unable to enter
into contracts, comply with the terms of the contracts or maintain relationships
with these constituencies, our operations would be materially and adversely
affected. We cannot predict whether providing services to governments will
evolve into a significant market because governments usually already control
existing rights-of-way and often build their own communications infrastructure.
We will need to strengthen our marketing efforts and increase our staff to
handle future marketing and sales requirements. If we fail to obtain
significant, widespread commercial and public acceptance of our networks and
access to sufficient buildings our visibility in the telecommunications market
could be jeopardized. We cannot assure you that we will be able to secure
customers for the commercial use of our proposed networks or access to such
buildings in each market. In addition, the market for co-location and Internet
services, which are offered by AboveNet, is new and evolving. We cannot assure
you that AboveNet's services will achieve widespread acceptance in this new
market. Further, AboveNet's success depends in large part on growth in the use
of the Internet. The growth of the Internet is highly uncertain and depends on a
variety of factors.
We may expand the range of services that we offer. These services may
include assisting customers with the integration of their leased dark fiber with
appropriate electronic and optronic equipment by facilitating the involvement of
third party suppliers, vendors and contractors. We cannot assure you that a
market will develop for our new services, that implementing these services will
be technically or economically feasible, that we can successfully develop or
market them or that we can operate and maintain our new services profitably.
SEVERAL OF OUR CUSTOMERS MAY TERMINATE THEIR AGREEMENTS WITH US IF WE DO NOT
PERFORM BY SPECIFIED TIMES
We currently have some contracts to supply leased fiber capacity which allow
the lessee to terminate the contracts and/or provide for liquidated damages if
we do not supply the stated fiber capacity by a specified time. Terminating any
of these contracts could adversely affect our operating results.
WE MAY BE UNABLE TO RAISE THE ADDITIONAL FINANCING NECESSARY TO COMPLETE THE
CONSTRUCTION OF OUR NETWORKS, WHICH WOULD ADVERSELY AFFECT OUR LONG-TERM
BUSINESS STRATEGY
We may need significant amounts of additional capital to complete the
build-out of our planned fiber optic communications networks, to expand
AboveNet's network infrastructure and to meet our long-term business strategies,
including expanding our networks to additional cities and constructing our
networks in Europe. If we need additional funds, our inability to raise them
will have an adverse effect on our operations. If we decide to raise additional
funds by incurring debt, we may become more leveraged and subject to additional
or more restrictive financial covenants and ratios. In addition, if we issue
equity securities or securities convertible or exchangeable into our equity
securities, current stockholders may face dilution.
Our ability to arrange financing and the cost of financing depends upon many
factors, including:
- general economic and capital markets conditions generally, and in
particular the non-investment grade debt market;
- conditions in the telecommunications and Internet markets;
- regulatory developments;
- credit availability from banks or other lenders;
S-15
<PAGE>
- investor confidence in the telecommunications and Internet industries and
in us;
- the success of our fiber optic communications network and Internet
services; and
- provisions of tax and securities laws that are conductive to raising
capital.
COMPETITORS OFFER SERVICES SIMILAR TO OURS IN OUR CURRENT OR PLANNED MARKETS
WHICH WOULD AFFECT OUR RESULTS OF OPERATIONS
The telecommunications industry and AboveNet's business are extremely
competitive, particularly with respect to price and service, which may adversely
affect our results of operations. A significant increase in industry capacity or
reduction in overall demand would adversely affect our ability to maintain or
increase prices. In the telecommunications industry, we compete against
incumbent local exchange carriers, which have historically provided local
telephone services and currently dominate their local telecommunications
markets, and competing carriers in the local services market. In addition to
these carriers, several other potential competitors, such as facilities-based
communications service providers, cable television companies, electric
utilities, microwave carriers, satellite carriers, wireless telephone system
operators and large end-users with private networks, are capable of offering,
and in some cases offer, services similar to those offered by us. Furthermore,
several of these service providers, such as wireless service providers, could
build wireless networks more rapidly and at lower cost than fiber optic
networks. Additionally, the business in which AboveNet competes is highly
competitive due to a lack of barriers to entry and high price sensitivity. Many
of our competitors have greater financial, research and development and other
resources than we do.
Some of our principal competitors already own fiber optic cables as part of
their telecommunications networks. Accordingly, any of these carriers, some of
which already have franchise and other agreements with local and state
governments and substantially greater resources and more experience than us,
could directly compete with us in the market for leasing fiber capacity, if they
are willing to offer this capacity to their customers. In addition, some
communications carriers and local cable companies have extensive networks in
place that could be upgraded to fiber optic cable, as well as numerous personnel
and substantial resources to begin construction to equip their networks. If
communications carriers and local cable companies decide to equip their networks
with fiber optic cable, they could become significant competitors. Our franchise
and other agreements with the city of New York and other local and state
governments are not exclusive. Potential competitors with greater resources and
more experience than us could enter into franchise and other agreements with
local and state governments and compete directly with us. Other companies may
choose to compete with us in our current or planned markets, including Europe,
by leasing fiber capacity, including dark fiber, to our targeted customers. This
additional competition could materially and adversely affect our operations.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS AND ARE MORE VULNERABLE TO CHANGING
ECONOMIC CONDITIONS AND CONSUMER PREFERENCES
We are particularly dependent on a limited number of customers. In addition,
AboveNet has a long sales cycle. We are, therefore, more susceptible to the
impact of poor economic conditions than our competitors with a more balanced mix
of business.
REGULATION OF THE TELECOMMUNICATIONS INDUSTRY MAY LIMIT THE DEVELOPMENT OF OUR
NETWORKS AND AFFECT OUR COMPETITIVE POSITION
Existing and future government laws and regulations may influence how we
operate our business, our business strategy and ultimately, our viability. U.S.
Federal and state telecommunications laws and the laws of foreign countries in
which we operate directly shape the telecommunications market. Consequently,
regulatory requirements and/or changes could adversely affect our operations and
also
S-16
<PAGE>
influence the market for Internet, web hosting and related services. However, we
cannot predict the future regulatory framework of our business.
U.S. LAWS MAY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS BY REGULATING
OUR OPERATIONS AND OUR CUSTOMERS' OPERATIONS
U.S. Federal telecommunications law imposes legal requirements on common
carriers who engage in interstate or foreign communication by wire or radio, and
on telecommunications carriers. Should these regulations be applied to us, they
may have a material adverse impact on our business and results of operation. If
providing dark fiber facilities or related services provided by us were deemed
to be a telecommunications service, then regulations, both Federal and state,
applicable to telecommunications carriers might apply to us. This could subject
the revenues we received from facility leases in interstate commerce to
assessment by the Federal Communications Commission Universal Service Fund and
the offering of those facilities or services would be subject to common carrier
regulation. In addition, our customers and, in the case of Bell Atlantic, one of
our potential shareholders, are local exchange carriers or long distance
carriers, subject to regulation by Federal Communications Commission. Our
business may be affected by regulations applicable to these telecommunications
carriers. For example, the Federal Communications Commission has recently taken
steps, and may take further steps, to reduce the access charges, the fees paid
by long distance carriers to local exchange carriers for originating and
terminating long distance calls on the incumbent local exchange carriers' local
networks, and to give the local exchange carriers greater flexibility in setting
these charges. While we cannot predict the precise effect reduction in access
charge will have on our operations, the reduction will likely make it more
attractive for long distance carriers to use local exchange carriers facilities,
rather than our fiber optic telecommunications network. A recent decision by the
Federal Communications Commission to require unbundling of incumbent local
exchange carriers' dark fiber could decrease the demand for our dark fiber by
allowing our potential customers to obtain dark fiber from incumbent local
exchange carriers at cost-based rates, and thereby have an adverse effect on the
results of our operations.
STATES LEGISLATION AFFECTS OUR PRICING POLICIES AND OUR COSTS
Our offering of transmission services, which is different from dark fiber
capacity, may be subject to regulation in each state to the extent that these
services are offered for intrastate use, and this regulation may have an adverse
effect on the results of our operations. We cannot assure you that these
regulations, if any as well as future regulatory, judicial, or legislative
action will not have a material adverse effect on us. In particular, state
regulators have the authority to determine both the rates we will pay to
incumbent local exchange carriers for certain interconnection arrangements such
as physical collocation, and the prices that incumbent local exchange carriers
will be able to charge our potential customers for services and facilities that
compete with our services. We will also incur costs in order to comply with
regulatory requirements such as the filing of tariffs, submission of periodic
financial and operational reports to regulators, and payment of regulatory fees
and assessments, including contributions to state universal service funds. In
some jurisdictions, our pricing flexibility for intrastate services may be
limited because of regulation, although our direct competitors will be subject
to similar restrictions.
LOCAL GOVERNMENTS' CONTROL OVER RIGHTS-OF-WAY CAN LIMIT THE DEVELOPMENT OF
OUR NETWORKS
Local governments exercise legal authority that may have an adverse effect
on our business because of our need to obtain rights-of-way for our fiber
network. While local governments may not prohibit persons from providing
telecommunications services nor treat telecommunication service providers in a
discriminatory manner, they can affect the timing and costs associated with our
use of public rights-of-way.
S-17
<PAGE>
THE REGULATORY FRAMEWORK FOR OUR INTERNATIONAL OPERATIONS IS EXTENSIVE AND
CONSTANTLY CHANGING, ADDING UNCERTAINTIES TO OUR PLANNED EXPANSION INTO
FOREIGN COUNTRIES
Various regulatory requirements and limitations also will influence our
business as we attempt to enter international markets. Regulation of the
international telecommunications industry is changing rapidly. We are unable to
predict how the Federal Communications Commission and foreign regulatory bodies
will resolve the various pending international policy issues and the effect of
such resolutions on us. Our US/UK undersea cable joint venture is a U.S.
international common carrier subject to U.S. regulation under Title II of the
Communications Act of 1934. We are also licensed as a U.S. international common
carrier subject to U.S. regulation under Title II of the Communications Act of
1934. Our U.K. joint venture is, and we also are, required, under Sections 214
and 203 of the Communications Act of 1934, respectively, to obtain authorization
and file an international service tariff containing rates, terms and conditions
before initiating service. International carriers are also subject to certain
annual fees and filing requirements such as the requirement to file contracts
with other carriers, including foreign carrier agreements, and reports
describing international circuit, traffic and revenue data service. So long as
our U.K. joint venture and we operate as international common carriers, they
will also be required to comply with the rules of the Federal Communications
Commission. The international services provided by our U.K. joint venture are
and our international services are also subject to regulation in the United
Kingdom and other European jurisdictions in which we may operate. National
regulations of relevant European and other foreign countries, as well as
policies and regulations on the European Union and other foreign governmental
level, impose separate licensing, service and other conditions on our foreign
joint ventures and our international service operations, and these requirements
may have a material adverse impact on us.
OUR FRANCHISES, LICENSES OR PERMITS COULD BE CANCELED OR NOT RENEWED, WHICH
WOULD IMPAIR THE DEVELOPMENT OF MAJOR MARKETS FOR OUR SERVICES
Termination or non-renewal of our franchise with the city of New York or of
certain other rights-of-way or franchises that we use for our networks would
have a material adverse effect on our business, results of operations and
financial condition. We will also need to obtain additional franchises, licenses
and permits for our planned intracity networks, intercity networks and
international networks. We cannot assure you that we will be able to maintain on
acceptable terms our existing franchises, licenses or permits or to obtain and
maintain the other franchises, licenses or permits needed to implement our
strategy.
WE MAY NOT BE ABLE TO OBTAIN AND MAINTAIN THE RIGHTS-OF-WAY AND OTHER PERMITS
NECESSARY TO IMPLEMENT OUR BUSINESS STRATEGY
We must obtain additional rights-of-way and other permits from railroads,
utilities, state highway authorities, local governments and transit authorities
to install underground conduit for the expansion of our intracity networks,
intercity networks and international networks. We cannot assure you that we will
be successful in obtaining and maintaining these right-of-way agreements or
obtaining these agreements on acceptable terms. Some of these agreements may be
short-term or revocable at will, and we cannot assure you that we will continue
to have access to existing rights-of-way after they have expired or terminated.
If any of these agreements were terminated or could not be renewed and we were
forced to remove our fiberoptic cable from under the streets or abandon our
networks, the termination could have a material adverse effect on our
operations. In addition, landowners have asserted that railroad companies and
others to whom they granted easements to their properties are not entitled as a
result of these easements to grant rights of way to telecommunications
providers. If these disputes are resolved in the landowners' favor, we could be
obligated to make substantial lease payments to these landowners for the lease
of these rights of way. More specifically, our New York/ New Jersey network
relies upon, and our planned expansions into Long Island and Westchester County
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<PAGE>
will rely upon, right-of-way agreements with Bell Atlantic Corporation and our
subsidiary, Empire City Subway Company (Ltd.). The current agreements may be
terminated at any time without cause with three months notice. In case of
termination, we may be required to remove our fiber optic cable from the
conduits or poles of Bell Atlantic. This termination would have a material
adverse effect on our operations.
RAPID TECHNOLOGICAL CHANGES COULD AFFECT THE CONTINUED USE OF FIBER OPTIC CABLE
AND OUR RESULTS OF OPERATIONS
The telecommunications industry is subject to rapid and significant changes
in technology that could materially affect the continued use of our services,
including our fiber optic cable and Internet connectivity services. We cannot
predict the effect of technological changes on our business. We also cannot
assure you that technological changes in the communications industry and
Internet-related industry will not have a material adverse effect on our
operations.
WE MAY EXPERIENCE RISKS AS A RESULT OF EXPANDING OUR NETWORKS INTO EUROPEAN AND
OTHER FOREIGN COUNTRIES, WHICH MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
Our strategy includes expanding our services to provide fiber optic cable
and developing regional Internet services exchange facilities in Europe,
particularly Austria, Germany and the United Kingdom. The following are risks we
may experience as a result of doing business in Germany, the United Kingdom and
other foreign countries in which we may expand our networks:
- difficulties in staffing and managing our operations in foreign countries;
- longer payment cycles;
- problems in collecting accounts receivable;
- fluctuations in currency exchange rates;
- delays from customs brokers or government agencies encountered as a result
of exporting fiber from the United States to Germany, the United Kingdom
or other countries in which we may operate; and
- potentially adverse consequences resulting from operating in multiple
countries such as Germany and the United Kingdom, each with their own laws
and regulations, including tax laws and industry related regulations.
We cannot assure you that we will be successful in overcoming these risks or
any other problems arising because of expansion into Europe and other foreign
countries.
WE MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY, MANAGE AND ASSIMILATE FUTURE
ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES, WHICH WOULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS
We have in the past, and may in the future, acquire, make investments in, or
enter into strategic alliances, including joint ventures in which we hold less
than a majority interest, with companies which have customer bases, switching
capabilities, existing networks or other assets in our current markets or in
areas into which we intend to expand our networks. Any acquisitions,
investments, strategic alliances or related efforts will be accompanied by risks
such as:
- the difficulty of identifying appropriate acquisition candidates;
- the difficulty of assimilating the operations of the respective entities;
- the potential disruption of our ongoing business;
- the potential inability to control joint ventures in which we hold less
than a majority interest;
S-19
<PAGE>
- the inability of management to capitalize on the opportunities presented
by acquisitions, investments, strategic alliances or related efforts;
- the failure to successfully incorporate licensed or acquired technology
and rights into our services,
- the inability to maintain uniform standards, controls, procedures and
policies, and
- the impairment of relationships with employees and customers as a result
of changes in management.
We cannot assure you that we would be successful in overcoming these risks
or any other problems encountered with such acquisitions, investments, strategic
alliances or related efforts.
IN THE TELECOMMUNICATIONS INDUSTRY, CONTINUED PRICING PRESSURES FROM OUR
COMPETITORS AND AN EXCESS OF NETWORK CAPACITY CONTINUE TO CAUSE PRICES FOR OUR
SERVICES TO DECLINE
We anticipate that prices for our services specifically, and transmission
services in general, will continue to decline over the next several years due
primarily to the following:
- price competition as various network providers continue to install
networks that might compete with our networks,
- recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber, and
- strategic alliances or similar transactions, such as long distance
capacity purchasing alliances among regional Bell operating companies,
that increase the parties' purchasing power.
WE MAY EXPERIENCE ADDITIONAL RISKS AS A RESULT OF ABOVENET'S CO-LOCATION AND
INTERNET CONNECTIVITY SERVICES
The legal landscape that governs AboveNet has yet to be interpreted or
enforced. Regulatory issues for AboveNet's industry include property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy. AboveNet's business may be adversely affected by the
adoption and interpretation of any future or currently existing laws and
regulations. AboveNet has no patented technology and relies on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect certain proprietary rights in its
technology. AboveNet's business may be adversely affected by a claim that it is
infringing the proprietary rights of others.
Despite AboveNet's design and implementation of a variety of network
security measures, unauthorized access, computer viruses, accidental or
intentional action and other disruptions could occur. In addition, we may incur
significant costs to prevent breaches in AboveNet's security or to alleviate
problems caused by those breaches. The law relating to the liability of online
services companies and Internet access providers of information carried on or
disseminated through their networks is currently unsettled. It is possible that
claims could be made against online services companies, co-location companies
and Internet access providers. We may need to implement measures to reduce our
exposure to this potential liability which may require the expenditure of
substantial resources. The increased attention focused upon liability issues as
a result of lawsuits, new laws and legislative proposal could impede the growth
of Internet use.
In addition, some of AboveNet's customers have sent unsolicited commercial
E-mails from servers co-located at its facilities to massive numbers of people.
This practice known as "spamming" can lead to complaints against service
providers that enable such activities, such as AboveNet. In addition,
legislation has recently been passed that prohibits "spamming."
S-20
<PAGE>
ABOVENET DEPENDS ON THE GROWTH AND PERFORMANCE OF THE INTERNET
AboveNet's success will depend in large part on growth in the use of the
Internet. Growth of the Internet depends on many factors, including security,
reliability, cost, ease of access, quality of service and bandwidth. The recent
growth of the Internet has placed strain on the Internet, necessitating upgrades
to its infrastructure. Any perceived or actual weakening in the performance of
the Internet could undermine AboveNet's services, which are dependent on third
parties. AboveNet's ability to attract new customers similarly depends on a
variety of factors, including the ability to provide continuous service. In
addition, AboveNet's customers might terminate or decide not to renew
commitments to use its services. AboveNet must continue to expand and adapt its
network infrastructure as the number of its users grows, as its users place
increasing demands on it, and as requirements change.
OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL THE LOSS OF WHOM COULD
ADVERSELY AFFECT OUR BUSINESS.
Our business is managed by a small number of key management and operating
personnel. We believe that the success of our business strategy and our ability
to operate profitably depend on the continued employment of our senior
management team led by Stephen A. Garofalo, Chief Executive Officer and Chairman
of the Board of Directors. Our business and financial results could be
materially affected if Mr. Garofalo or other members of our senior management
team became unable or unwilling to continue in their present positions.
METROMEDIA COMPANY EFFECTIVELY CONTROLS OUR COMPANY AND HAS THE POWER TO CAUSE
OR PREVENT A CHANGE OF CONTROL
Metromedia Company and one of its general partners currently own 100% of our
class B common stock, which currently represents approximately 63% of the total
voting power and also is entitled to elect 75% of the members of our board of
directors. Accordingly, Metromedia Company is able to control the board of
directors and all stockholder decisions and, in general, to determine the
outcome of any corporate transaction or other matter submitted to the
stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets, without the consent of our other
stockholders. In addition, Metromedia Company has the power to prevent or cause
a change in control of our company.
WE ARE INVOLVED IN A LEGAL PROCEEDING WHICH COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION
We are involved in a legal proceeding in connection with the sale of 900,000
shares (not adjusted for stock splits) of our class A common stock. Please refer
to the section in this prospectus supplement entitled "Business--Legal
Proceedings."
If we are unsuccessful in defending against the allegations made in this
proceeding, an award of the magnitude being sought in this legal proceeding
could have a material adverse effect on our financial condition and results of
operations. We intend to vigorously defend this action because we believe that
we acted appropriately in connection with the matters at issue in this case.
However, we cannot assure you that we will not determine that the advantages of
entering into a settlement outweigh the risk and expense of protracted
litigation or that ultimately we will be successful in defending against these
allegations.
FAILURES TO ADDRESS THE YEAR 2000 PROBLEM MAY CAUSE DISRUPTIONS IN THE OPERATION
OF OUR NETWORKS AND OUR SERVICES TO CUSTOMERS
Many computer systems and software products will not function properly in
the year 2000 and beyond due to a once-common programming standard that
represents years using two digits. This problem is often referred to as the year
2000 problem. It is possible that our currently installed computer systems,
software products or other information technology systems, including imbedded
S-21
<PAGE>
technology, or those of our suppliers, contractors, or major systems developers
working either alone or in conjunction with other softwares or systems, will not
properly function in the year 2000 because of the year 2000 problem. If we or
our customers, suppliers, contractors, and major systems developers are unable
to address their year 2000 issues in a timely manner, a material adverse effect
on our results of operations and financial condition could result. We are
currently working to evaluate and resolve the potential impact of the year 2000
on our processing of date-sensitive information and network systems. We have
contacted all our significant suppliers, contractors and major systems
developers to determine our vulnerability to their year 2000 situations. We
cannot assure you that the year 2000 problem will only have a minimal cost
impact or that other companies will convert their systems on a timely basis and
that their failure will not have an adverse effect on our systems.
RISK FACTORS RELATING TO OUR CLASS A COMMON STOCK
THE STOCK PRICE OF OUR CLASS A COMMON STOCK MAY BE VOLATILE
The market price of our class A common stock is subject to fluctuations in
response to various factors and events, including the liquidity of the market
for the class A common stock, variations in our quarterly operating results,
regulatory or other changes, both domestic and international, affecting the
telecommunications and Internet-related industries generally or us specifically,
announcements of business developments by us or our competitors, changes in
operating results and changes in general market conditions.
SHARES ELIGIBLE FOR FUTURE SALE MAY HAVE A POTENTIAL ADVERSE EFFECT ON OUR STOCK
PRICE
Sales of a substantial number of shares of our class A common stock in the
public market, or the perception that sales may occur, could adversely effect
prevailing market prices for the class A common stock and our ability to raise
capital in the future. As of October 26, 1999, there were 198,999,336 shares of
class A common stock outstanding and 33,769,272 shares of class B common stock
(which are convertible into class A common stock on a one-for-one basis)
outstanding. All of the shares of class B common stock are currently owned by
persons who are affiliates. In addition, as of October 26, 1999, 50,866,379
shares of class A common stock are issuable upon the exercise of outstanding
options and warrants.
On October 7, 1999, we entered into a securities purchase agreement with
Bell Atlantic Investments, Inc. (referred to as "Bell Atlantic") under which
Bell Atlantic would purchase up to 25.6 million newly issued shares of our class
A common stock at a purchase price of $28.00 per share and a convertible
subordinated note of approximately $975.3 million, which is convertible into
shares of our class A common stock at a conversion price of $34.00 per share. We
expect this transaction, which is subject to customary closing conditions, to be
completed by the end of the first quarter of 2000.
Concurrently with this offering, some of our stockholders intend to sell
4,671,000 shares of class A common stock (excluding the over-allotment option).
See "Proposed Offerings."
No prediction can be made as to the effect, if any, that sales of shares of
class A common stock or the availability of those shares for sale will have on
the market prices prevailing from time to time. Nevertheless, the possibility
that substantial amounts of class A common stock, including those shares into
which the class B common stock is convertible, may be sold in the public market
may adversely affect prevailing market prices for the class A common stock and
impair our ability to raise equity capital in the future.
WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS
We anticipate that all of our earnings in the foreseeable future, if any,
will be retained to finance the continued growth and expansion of our business
and have no current intention to pay cash dividends on our class A common stock.
See "Dividend Policy."
S-22
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus supplement under the
sections entitled "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. They include
statements about our expectations, beliefs, plans, objectives, assumptions or
future events or performance. These statements are often, but not always, made
through the use of words or phrases such as "will likely result," "expect,"
"will continue," "anticipate," "estimate," "intends," "plan," "projection,"
"would," and "outlook." These forward-looking statements are based on our
expectations and are subject to a number of risks and uncertainties. Certain of
these risks and uncertainties are beyond our control. In this prospectus
supplement, we have described our current network and our anticipated program of
network expansion. However, there is no assurance that we will be able to
implement our proposed business strategy. Our actual results may differ
materially from those suggested by these forward-looking statements for various
reasons, including those discussed under the sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Some of the key factors that have a direct bearing
on our results of operations are:
- general economic and business conditions;
- competition in the telecommunications industry;
- industry capacity;
- success of acquisitions and operating initiatives, including our ability
to successfully integrate our acquisitions;
- management of growth;
- dependence on senior management;
- brand awareness;
- general risks of the telecommunications industries;
- development risks;
- risks relating to the availability of financing;
- the existence or absence of adverse publicity;
- changes in business strategy or development plans;
- 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;
- costs and other effects of legal and administrative proceedings;
- changes in marketing and technology; and
- changes in political, social and economic conditions, especially with
respect to our foreign operations, and other factors referenced in this
prospectus supplement.
These factors and the risk factors referred to above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements made by us. You should not place undue reliance on
any such forward-looking statements. Further, any forward-looking statement
S-23
<PAGE>
speaks only as of the date on which it is made and we undertake no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time, and it
is not possible for us to predict which will arise. In addition, we cannot
assess the impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
For a discussion of important risks of an investment in our securities,
including factors that could cause actual results to differ materially from
results referred to in the forward-looking statements, see "Risk Factors." You
should carefully consider the information set forth under the caption "Risk
Factors." In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in or incorporated by reference in this
prospectus supplement might not occur.
S-24
<PAGE>
PRICE RANGE OF CLASS A COMMON STOCK
Our class A common stock is quoted on The Nasdaq Stock Market's National
Market under the symbol "MFNX." The following table sets forth for the periods
indicated the high and low sale prices of the class A common stock as reported
by Nasdaq for the fiscal periods indicated. All share prices give effect to our
stock splits.
<TABLE>
<CAPTION>
HIGH LOW
------------------- -------------------
<S> <C> <C>
1997
Fourth Quarter............................................ 3 3/32 1 3/4
1998
First Quarter............................................. 5 7/16 1 59/64
Second Quarter............................................ 5 29/32 3 3/16
Third Quarter............................................. 9 1/16 4 7/32
Fourth Quarter............................................ 19 1/16 5 7/8
1999
First Quarter............................................. 28 5/8 16 7/8
Second Quarter............................................ 47 9/16 26 9/16
Third Quarter............................................. 41 1/4 21 1/8
Fourth Quarter (through October 26, 1999)................. 38 3/8 23 3/4
</TABLE>
On October 26, 1999, the last reported sale price of the class A common
stock as reported by Nasdaq was $33 15/16. As of October 25, 1999, there were
approximately 361 holders of record of the class A common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our class A common
stock and do not expect to do so in the foreseeable future. We anticipate that
all future earnings, if any, generated from operations will be retained to
finance the expansion and continued development of our business. Any future
determination with respect to the payment of dividends will be within the sole
discretion of our board of directors and will depend upon, among other things,
our earnings, capital requirements, the terms of our then existing indebtedness,
applicable requirements of the Delaware General Corporation Law, general
economic conditions and other factors considered relevant by the our board of
directors.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of class
A common stock by the selling stockholders.
S-25
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of June 30, 1999:
- on a historical basis;
- on a pro forma basis to reflect our acquisition of AboveNet, as if this
acquisition had been consummated on June 30, 1999;
- on a pro forma basis to reflect the transaction described above and the
proposed offering of the senior notes due 2009, which offering is expected
to concurrently close with the offering described in the prospectus
supplement, as if they had been consummated on June 30, 1999; and
- on a pro forma basis to reflect the transactions described above and the
purchase by Bell Atlantic of shares of our class A common stock and the
convertible subordinated note, which has not yet been consummated and is
subject to customary closing conditions, as if they had been consummated
on June 30, 1999.
You should read this table together with the consolidated financial
statements and related notes of our company, AboveNet and Palo Alto Internet
Exchange included in this prospectus supplement beginning on page F-1 and the
information in the sections entitled "Risk Factors--Failure to Consummate the
Bell Atlantic Transactions May Cause Us to Seek Alternative Financing,"
"Unaudited Pro Forma Condensed Combining Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------------------------------------------------
PRO FORMA PRO FORMA FOR
PRO FORMA FOR FOR THE SENIOR BELL ATLANTIC
ACTUAL ABOVENET ACQUISITION NOTES OFFERING INVESTMENT
-------- -------------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $341,897 $ 537,768 $1,117,768 $2,808,676
======== ========== ========== ==========
Pledged securities (1)..................... $ 63,142 $ 63,142 $ 63,142 $ 63,142
======== ========== ========== ==========
Debt:
Capital lease obligations less current
portion................................ $ 23,202 $ 28,375 $ 28,375 $ 28,375
10% Senior Notes due 2008................ 650,000 650,000 650,000 650,000
6.15% Convertible Subordinated Note to be
issued to Bell Atlantic................ -- -- -- 975,281
New credit facility (2).................. -- -- -- --
Senior Notes due 2009 concurrently....... -- -- 600,000 600,000
Other less current portion............... -- 16,416 16,416 16,416
-------- ---------- ---------- ----------
Total debt............................... 673,202 694,791 1,294,791 2,270,072
-------- ---------- ---------- ----------
Stockholders' equity
Class A common stock, $.01 par value;
2,404,031,240 shares authorized;
156,293,412 shares issued and
outstanding, actual; and 197,887,552
shares issued and outstanding, pro
forma for AboveNet acquisition and
pro forma for the offering;
223,442,661 shares issued and
outstanding, pro forma for Bell
Atlantic investment.................. 1,563 1,979 1,979 2,235
</TABLE>
S-26
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------------------------------------------------
PRO FORMA PRO FORMA FOR
PRO FORMA FOR FOR THE SENIOR BELL ATLANTIC
ACTUAL ABOVENET ACQUISITION NOTES OFFERING INVESTMENT
-------- -------------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Class B common stock, $.01 par value;
522,254,782 shares authorized;
33,769,272 shares issued and
outstanding, actual and pro forma for
AboveNet acquisition, pro forma for
the offering and pro forma for Bell
Atlantic investment.................. 338 338 338 338
Additional paid-in capital................. 200,370 1,977,618 1,977,618 2,692,989
Accumulated deficit........................ (54,515) (54,515) (54,515) (54,515)
Cumulative comprehensive loss.............. (4,967) (4,967) (4,967) (4,967)
-------- ---------- ---------- ----------
Total stockholders' equity........... 142,789 1,920,453 1,920,453 2,636,080
-------- ---------- ---------- ----------
Total capitalization....................... $815,991 $2,615,244 $3,215,244 $4,906,152
======== ========== ========== ==========
</TABLE>
- ------------------------
(1) Represents amounts deposited with the security agent pursuant to a security
agreement to make payments of interest through May 15, 2000 on our 10%
Senior Notes due 2008.
(2) We have obtained a commitment from a lender for a senior secured credit
facility which provides for a maximum amount of $150.0 million. We
anticipate that we will not consummate the new credit facility
simultaneously with the consummation of the offering of the notes. For a
description of the new credit facility, please refer to the section in this
prospectus supplement entitled "Description of the New Credit Facility."
S-27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data presented below and for the years
ended December 31, 1996, 1997 and 1998 have been derived from our consolidated
financial statements and the related notes included in this prospectus
supplement beginning on page F-1. Our consolidated financial statements as of
and for the years ended December 31, 1996, 1997 and 1998 have been audited by
Ernst & Young LLP, independent auditors. The selected financial data presented
below as of and for the years ended December 31, 1994 and 1995 have been derived
from our audited financial statements which are not included in this prospectus
supplement. The selected consolidated financial data and balance sheet data as
of and for the six months ended June 30, 1999 and the selected consolidated
financial data for the six months ended June 30, 1998 have been derived from our
unaudited consolidated financial statements, which we believe include all
adjustments necessary for a fair presentation of the financial condition and
results of operations for such periods. The results of operations for interim
periods are not necessarily indicative of the results for a full year's
operations.
The selected unaudited pro forma balance sheet as of June 30, 1999 gives pro
forma effect to the following transactions:
- our acquisition of AboveNet, as if it had been consummated on June 30,
1999;
- the transaction referred to above and the proposed offering of the senior
notes due 2009, which offering is expected to close concurrently with the
offering described in this prospectus supplement, as if they had been
consummated on June 30, 1999; and
- the transactions referred to above and the purchase by Bell Atlantic of
shares of our class A common stock and the convertible subordinated note,
which purchase has not yet been consummated and is subject to customary
closing conditions, as if they had been consummated on June 30, 1999.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable at the time made. The selected
unaudited pro forma balance sheet data does not purport to present our financial
position had the transactions occurred on the dates specified, nor are they
necessarily indicative of the financial position that may be achieved in the
future.
As you read the selected consolidated financial data, please refer to the
following: "Risk Factors--Failure to Consummate the Bell Atlantic Transactions
Cause Us to Seek Alternative Financing," "Unaudited Pro Forma Condensed
Combining Financial Information," "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
S-28
<PAGE>
"Business," the consolidated financial statements and the related notes of our
company, AboveNet and Palo Alto Internet Exchange and the other financial data
appearing in this prospectus supplement.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ -- $ 56 $ 236 $ 2,524 $ 36,436 $ 9,133 $ 38,673
Expenses:
Cost of sales................................ -- -- 699 3,572 13,937 4,553 14,819
Selling, general and administrative.......... 874 3,886 2,070 6,303 14,712 5,914 13,786
Depreciation and amortization................ -- 162 613 757 1,532 440 5,058
Consulting and employment incentives......... -- -- 3,652 19,218 3,648 3,595 --
------- ------- -------- -------- -------- ------- --------
(Loss) Income from operations.................. (874) (3,992) (6,798) (27,326) 2,607 (5,369) 5,010
Interest income (expense), net................. -- (327) (3,561) 1,067 1,927 3,564 (16,895)
(Loss) from joint venture...................... -- -- -- -- (146) (251) (393)
Income taxes................................... -- -- -- -- 3,402 -- --
------- ------- -------- -------- -------- ------- --------
Net (loss) income.............................. $ (874) $(4,319) $(10,359) $(26,259) $ 986 $(2,056) $(12,278)
======= ======= ======== ======== ======== ======= ========
Net (loss) income applicable to common
stockholders per share........................ $ (0.02) $ (0.09) $ (0.14) $ (0.28) $ 0.01 $ (0.01) $ (0.06)
======= ======= ======== ======== ======== ======= ========
Weighted average number of shares
outstanding................................... 46,672 49,658 71,716 94,894 186,990 185,616 189,098
======= ======= ======== ======== ======== ======= ========
Ratio of earnings to fixed charges (1)......... -- -- -- -- 1.61 -- --
EBITDA (2)..................................... $ (874) $(3,830) $ (6,185) $(26,569) $ 3,993 $(5,180) $ 9,675
Adjusted EBITDA (2)............................ $ (874) $(3,830) $ (2,533) $ (7,351) $ 7,641 $(1,585) $ 9,675
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------------------------------------------------
PRO FORMA
FOR PRO FORMA FOR PRO FORMA FOR
ABOVENET THE SENIOR BELL ATLANTIC
ACTUAL ACQUISITION NOTES OFFERING INVESTMENT
------------- ------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................. $ 341,897 $ 537,768 $1,117,768 $2,808,676
Pledged securities (3)............................... 63,142 63,142 63,142 63,142
Property and equipment, net.......................... 421,712 481,208 481,208 481,208
Total assets......................................... 1,034,694 2,882,533 3,482,533 5,173,441
Long-term debt....................................... 673,202 694,791 1,294,791 2,270,072
Total liabilities.................................... 891,905 962,080 1,562,080 2,537,361
Stockholders' equity................................. 142,789 1,920,453 1,920,453 2,636,080
</TABLE>
(1) Earnings were insufficient to cover fixed charges in the years ended
December 31, 1994, 1995, 1996 and 1997 and for the six months ended
June 30, 1998 and 1999. The deficiency was $874,000, $4,319,000,
$10,359,000, $26,259,000, $2,056,000, and $12,278,000 for the periods ended
December 31, 1994, 1995, 1996, and 1997 and for the six months ended
June 30, 1998 and 1999, respectively.
(2) "EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense and all depreciation and amortization expense. "Adjusted
EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense, depreciation and amortization and non cash employment and
consulting incentives and settlements. You should not think of EBITDA and
Adjusted EBITDA as alternative measures of operating results or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles). We have included EBITDA and Adjusted EBITDA
because they are widely used financial measures of the potential capacity of
a company to incur and service debt. Our reported EBITDA and Adjusted EBITDA
may not be comparable to similarly titled measures used by other companies.
(3) Represents amounts deposited with the security agent pursuant to a security
agreement to make payments of interest through May 15, 2000 on our 10%
Senior Notes due 2008.
S-29
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
The following unaudited pro forma condensed combining financial information
illustrates the effect of the merger of AboveNet with our wholly-owned
subsidiary under the terms of the merger agreement, dated June 22, 1999. Under
the terms of the merger agreement, the holders of AboveNet common stock received
1.175 shares of our class A common stock for each share of AboveNet common
stock. The share price used to determine the acquisition cost was derived from
taking the average of the closing price of our class A common stock for the two
days prior to and subsequent to the announcement of the proposed merger, which
was June 23, 1999.
On June 21, 1999, AboveNet acquired the assets and assumed obligations
related to the Palo Alto Internet Exchange from Compaq Computer Corporation
("Compaq") for approximately $76.5 million, consisting of $70 million in cash,
an obligation to provide various services to Compaq with a value currently
estimated to be approximately $5 million and expenses of approximately
$1.5 million.
The unaudited pro forma condensed combining financial information presented
herein gives effect to our acquisition of AboveNet and AboveNet's acquisition of
Palo Alto Internet Exchange. The unaudited pro forma condensed combining
financial information is based on the historical financial statements of
Metromedia, AboveNet and Palo Alto Internet Exchange.
AboveNet has a fiscal year end of June 30. The unaudited historical
financial information for AboveNet for the year ended December 31, 1998 consists
of the period from January 1, 1998 to June 30, 1998 combined with the period
from July 1, 1998 to December 31, 1998 derived from AboveNet's historical
unaudited financial statements.
The unaudited pro forma condensed combining statements of operations for the
six months ended June 30, 1999 and for the year ended December 31, 1998 give
effect to the above transactions as if they had been consummated on January 1,
1998. The unaudited pro forma condensed combining balance sheets, as of
June 30, 1999, give effect to our acquisition of AboveNet as if it had been
consummated on June 30, 1999.
ACCOUNTING TREATMENT
We plan to record the acquisition of AboveNet using the purchase method of
accounting. Accordingly, the assets acquired and liabilities assumed will be
recorded at their estimated fair values, which are subject to further adjustment
based upon appraisals and other analyses.
AboveNet recorded the acquisition of Palo Alto Internet Exchange using the
purchase method of accounting. Accordingly, the assets acquired and obligations
assumed have been recorded at their estimated fair values, which are subject to
further adjustments based upon appraisals and other analyses.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable at the time made. The unaudited pro
forma condensed combining financial statements do not purport to present our
financial position or results of operations had the acquisitions occurred on the
dates specified, nor are they necessarily indicative of the financial position
or results of operations that may be achieved in the future. The unaudited pro
forma condensed combining statements of operations do not reflect any
adjustments for synergies that we expect to realize following consummation of
the acquisitions. No assurances can be made as to the amount of cost savings or
revenue enhancements, if any, that may be realized.
The unaudited pro forma condensed combining financial statements should be
read in conjunction with the consolidated financial statements and notes of our
company, AboveNet and Palo Alto Internet Exchange.
S-30
<PAGE>
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
METROMEDIA METROMEDIA
ABOVENET PAIX PRO FORMA FIBER FIBER
HISTORICAL HISTORICAL ADJUSTMENTS ABOVENET HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 9,522 $3,171 $ -- $ 12,693 $ 38,673 $ -- $ 51,366
Expenses:
Cost of sales........... 13,882 2,013 -- 15,895 14,819 -- 30,714
Selling, general and
administrative........ 12,309 301 -- 12,610 13,786 -- 26,396
Consulting and
employment
incentives............ 519 -- -- 519 -- -- 519
Depreciation and 3,485 (1) (3,485)(2)
amortization.......... 2,209 1,696 (1,696)(1) 5,694 5,058 38,335 (3) 45,602
-------- ------ ------- -------- -------- -------- --------
Income (loss) from
operations............ (19,397) (839) (1,789) (22,025) 5,010 (34,850) (51,865)
Other income (expense):
Interest income......... 2,665 -- -- 2,665 13,512 -- 16,177
Interest expense........ (1,080) -- -- (1,080) (30,407) -- (31,487)
Loss in joint venture... (200) -- -- (200) (393) -- (593)
-------- ------ ------- -------- -------- -------- --------
Net loss before income
taxes................. (18,012) (839) (1,789) (20,640) (12,278) (34,850) (67,768)
Income taxes............ -- -- -- -- -- -- --
-------- ------ ------- -------- -------- -------- --------
Net loss................ $(18,012) $ (839) $(1,789) $(20,640) $(12,278) $(34,850) $(67,768)
======== ====== ======= ======== ======== ======== ========
Net loss per
share--basic.......... $ (0.06) $ (0.29)
======== ========
Net loss per share--
diluted............... n/a n/a
======== ========
Weighted average number
of shares
outstanding--basic
(4)................... 189,098 230,692
======== ========
Weighted average number
of shares
outstanding--
diluted............... n/a n/a
======== ========
</TABLE>
(SEE THE ACCOMPANYING NOTES ON PAGE S-36)
S-31
<PAGE>
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
METROMEDIA METROMEDIA
ABOVENET PAIX PRO FORMA FIBER FIBER
HISTORICAL HISTORICAL ADJUSTMENTS ABOVENET HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................... $ 6,777 $ 4,362 $ -- $ 11,139 $36,436 $ -- $ 47,575
Expenses:
Cost of sales..................... 7,551 2,583 -- 10,134 13,937 -- 24,071
Selling, general and
administrative.................. 7,843 450 -- 8,293 14,712 -- 23,005
Consulting and employment
incentives...................... 2,396 -- -- 2,396 3,648 -- 6,044
(1,944)(1) (6,970)(2)
Depreciation and amortization..... 1,497 2,349 6,970 (1) 8,872 1,532 76,671 (3) 80,105
-------- ------- ------- -------- ------- -------- --------
Income (loss) from operations..... (12,510) (1,020) (5,026) (18,556) 2,607 (69,701) (85,650)
Other income (expense):
Interest income................... 337 -- -- 337 8,788 -- 9,125
Interest expense.................. (529) -- -- (529) (6,861) -- (7,390)
Loss in joint venture............. -- -- -- -- (146) -- (146)
-------- ------- ------- -------- ------- -------- --------
Net income (loss) before income
taxes........................... (12,702) (1,020) (5,026) (18,748) 4,388 (69,701) (84,061)
Income taxes...................... -- -- -- -- 3,402 (3,402)(5) --
-------- ------- ------- -------- ------- -------- --------
Net income (loss)................. $(12,702) $(1,020) $(5,026) $(18,748) $ 986 $(66,299) $(84,061)
======== ======= ======= ======== ======= ======== ========
Net income (loss) per share --
basic........................... $ 0.01 $ (0.37)
======= ========
Net income (loss) per share --
diluted......................... 0.01 n/a
======= ========
Weighted average number of shares
outstanding -- basic(4)......... 186,990 228,584
======= ========
Weighted average number of shares
outstanding -- diluted.......... 219,524 n/a
======= ========
</TABLE>
(SEE THE ACCOMPANYING NOTES ON PAGE S-36)
S-32
<PAGE>
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEETS
(UNAUDITED)
JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
METROMEDIA METROMEDIA
ABOVENET FIBER FIBER
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $220,871 $ 341,897 $ (25,000)(2) $ 537,768
Short-term investments..................... -- 19,716 -- 19,716
Pledged securities......................... -- 63,142 -- 63,142
Accounts receivable........................ 3,355 86,258 -- 89,613
Other current assets....................... 3,850 2,761 -- 6,611
-------- ---------- ---------- ----------
Total current assets......................... 228,076 513,774 (25,000) 716,850
Fiber optic transmission network and related
equipment, net............................. 12,905 417,803 -- 430,708
Property and equipment, net.................. 46,591 3,909 -- 50,500
Restricted cash.............................. 21,476 51,920 25,000 (2) 98,396
Other assets................................. 5,377 47,288 -- 52,665
Intangible assets............................ 69,474 -- (69,474)(2) 1,533,414
1,533,414 (2)
-------- ---------- ---------- ----------
Total assets................................. $383,899 $1,034,694 $1,463,940 $2,882,533
======== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 13,593 $ 7,276 $ -- $ 20,869
Accrued expenses........................... 2,122 134,736 20,000(2) 156,858
Current portion of deferred revenue........ 2,511 8,106 -- 10,617
Current portion of long-term obligations... 5,985 55 -- 6,040
-------- ---------- ---------- ----------
Total current liabilities.................... 24,211 150,173 20,000 194,384
Deferred revenue............................. 4,375 68,530 -- 72,905
Notes payable................................ -- 650,000 -- 650,000
Capital lease obligation, net of current
portion.................................... 5,173 23,202 -- 28,375
Long-term obligations........................ 16,416 -- -- 16,416
Total stockholders' equity................... 333,724 142,789 1,443,940 (2) 1,920,453
-------- ---------- ---------- ----------
Total liabilities and stockholders' equity... $383,899 $1,034,694 $1,463,940 $2,882,533
======== ========== ========== ==========
</TABLE>
(SEE THE ACCOMPANYING NOTES ON PAGE S-36)
S-33
<PAGE>
METROMEDIA FIBER NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
(1) Reflects adjustments related to the acquisition by AboveNet of Palo Alto
Internet Exchange at January 1, 1998 for the income statements as follows:
(i) the elimination of Palo Alto Internet Exchange historical intangible
asset amortization; and
(ii) the addition of amortization of the excess of cost over net tangible
assets acquired of Palo Alto Internet Exchange ($69.7 million) over
10 years.
(2) Reflects our acquisition of AboveNet at June 30, 1999 for the balance sheet
and January 1, 1998 for the income statements as follows:
(i) the issuance of approximately 41.6 million shares of our class A common
stock in exchange for shares of AboveNet common stock at a ratio of
1.175;
(ii) the placement of cash into a restricted account to secure AboveNet's
renegotiated credit facility;
(iii) the elimination of AboveNet's historical net tangible assets acquired;
and
(iv) issuance of shares of our class A common stock:
<TABLE>
<S> <C> <C>
Number of shares issued to acquire AboveNet..... 41,594,140
Per share price of stock........................ $ 40.36
----------
Value of shares issued.......................... $1,678,739,000
Value of our company's options and warrants
issued in exchange for AboveNet's options and
warrants....................................... 98,925,000
Transaction costs............................... 20,000,000
--------------
Total acquisition cost.......................... 1,797,664,000
AboveNet's net tangible assets acquired......... 264,250,000
--------------
Excess of cost over net tangible assets
acquired....................................... $1,533,414,000
==============
</TABLE>
We have made a preliminary allocation to intangible assets of excess cost
over estimated net tangible assets acquired as AboveNet's tangible assets
and liabilities are estimated to approximate fair value. However, there can
be no assurance that the actual allocation will not differ significantly
from the pro forma allocation.
(3) Reflects amortization of the excess of cost over net tangible assets
acquired in the merger by use of the straight-line method over 20 years.
(4) The average common shares outstanding used in calculating pro forma loss per
common share are calculated assuming that the estimated number of shares of
our class A common stock to be issued in the merger were outstanding from
the beginning of the periods presented.
(5) Reflects the adjustment of the tax provision.
S-34
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING INFORMATION TOGETHER WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED IN THIS PROSPECTUS
SUPPLEMENT BEGINNING ON PAGE F-1. CERTAIN STATEMENTS IN THIS SECTION ARE
"FORWARD-LOOKING STATEMENTS." YOU SHOULD READ THE INFORMATION UNDER "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS" FOR SPECIAL INFORMATION ABOUT OUR
PRESENTATION OF FORWARD-LOOKING INFORMATION.
GENERAL
We provide dedicated fiber optic infrastructure and high-bandwidth Internet
connectivity for our communications intensive customers. We are a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through our acquisition of
AboveNet, we also provide "one-hop" connectivity that enables mission critical
Internet applications to thrive, as well as high-bandwidth infrastructure,
including managed co-location services.
We currently have operations in, or under construction in, eleven Tier I
cities throughout the United States and seven selected international markets. We
intend to expand our presence to include approximately 50 Tier I and Tier II
markets in the United States and 17 major international markets.
Our existing intra-city networks consist of approximately 334,000 fiber
miles covering 680 route miles in six of our announced markets. Our inter-city
network consists of approximately 110,000 fiber miles covering 255 route miles
that we have built between New York City and Washington, D.C. We have also built
or acquired (primarily through fiber swaps) a nationwide dark fiber network
linking our intra-city networks.
In February 1999, we entered into an agreement with Viatel, Inc. and
Carrier 1 Holdings, Ltd. to jointly build a dark fiber inter-city network among
selected cities throughout Germany. Once completed, our German network will
consist of approximately 291,000 fiber miles covering 1,350 route miles
connecting 14 major cities. We have also swapped strands of fiber in the United
States for strands of fiber on the Circe network, which connects a number of
European markets. In addition to our inter-city networks, we are constructing 16
intra-city networks throughout Europe. Separately, we have also entered into a
contract to acquire dark fiber network facilities in Toronto, Canada.
On September 8, 1999, we consummated the merger between our wholly-owned
subsidiary and AboveNet. The holders of AboveNet common stock received 1.175
shares of our class A common stock for each share of AboveNet common stock.
AboveNet is a leading provider of facilities-based, managed services for
customer-owned Web servers and related equipment, known as co-location, and high
performance Internet connectivity solutions for electronic commerce and other
business critical Internet operations.
On October 7, 1999, we entered into a securities purchase agreement with
Bell Atlantic, under which Bell Atlantic would purchase up to approximately
25.6 million newly issued shares of our class A common stock at a purchase price
of $28.00 per share and a convertible subordinated note of approximately
$975.3 million, which is convertible into shares of our class A common stock at
a conversion price of $34.00 per share. We expect this transaction, which is
subject to customary closing conditions, to be completed by the end of the first
quarter of 2000. Assuming the issuance of the 25.6 million shares of class A
common stock and conversion of the convertible subordinated note, this
investment would represent 19.9% of our outstanding shares. Bell Atlantic has
also agreed to pay us $550 million over the next three years in exchange for
delivery of fiber optic facilities over the next five years. The proceeds from
these two transactions will be used to fund the expansion of our network.
S-35
<PAGE>
Most of our contracts are operating leases under which we recognize
recurring monthly revenues. Under other contracts we recognize revenue from the
sale of fiber. Effective June 30, 1999, the Financial Accounting Standards Board
issued FASB Interpretation No. 43 "Real Estate Sales" ("FIN 43") which requires
that sales of integral equipment be accounted for in accordance with real estate
accounting rules. We believe that the SEC may classify dark fiber cables in the
ground as integral equipment as defined in FIN 43. This change in the accounting
for dark fiber sales would not change any of the economics of the contracts. It
would require us, however, to recognize the revenue from some sales contracts as
operating leases over the term of the contract as opposed to the current method
of recognizing revenue during the period over which we deliver the fiber. As a
result, this change in accounting treatment would reduce the revenue and income
that we would recognize in the earlier years of the contract and spread it out
over the life of the contract regardless of when the cash was received or the
delivery of the fiber took place.
By way of example, if we enter into an agreement for a 25 year lease for
dark fiber with a customer who pays $100.0 million in cash when the contract is
signed, we previously would have recorded average revenues of $20.0 million over
the 5 years during which we delivered the dark fiber. By contrast, if we are
required to use real estate accounting rules in accordance with FIN 43, although
we would receive a cash payment of $100 million when the contract is signed, we
might be required to recognize revenue of $4.0 million per year over the 25 year
term of the contract.
STOCK SPLITS
On August 28, 1998, December 22, 1998, and May 19, 1999, we completed
two-for-one stock splits of our class A common stock and class B common stock in
the form of 100 percent stock dividends to all stockholders of record as of
specified dates.
All share and per share amounts presented herein give retroactive effect to
the stock dividends. As of October 26, 1999, adjusted for the effect of the
stock dividends, we had 198,999,336 shares of class A common stock outstanding
and 33,769,272 shares of class B common stock outstanding.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
(HISTORICAL)
REVENUES. Revenues for the six months ended June 30, 1999 were $38.7
million or 325% greater than revenues of $9.1 million for the same period in
1998. The increase for the six months ended June 30, 1999, compared with the six
months ended June 30, 1998, reflected higher revenues associated with
commencement of service to an increased total number of customers, as well as
revenue recognized related to capital leases of portions of our network and
sales of portions of our network through joint-build agreements.
COST OF SALES. Cost of sales for the six months ending June 30, 1999 was
$14.8 million or greater than a 222% increase over cost of sales of $4.6 million
for the same period in 1998. Cost of sales increased due to costs associated
with the commencement of service to customers, as well as higher fixed costs
associated with the build-out of our network. Cost of sales as percentages of
revenues for the first six months of 1999 and 1998 were 38% and 50%
respectively, declining as a result of the significant increase in the number of
customers and revenues associated with those customers, coupled with a slower
growth in costs associated with these revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended June 30, 1999 were $13.8
million or 134% greater than selling, general and administrative expenses of
$5.9 million for the same period in 1998. The increase in selling, general and
administrative expenses resulted primarily from increased overhead to
accommodate our network
S-36
<PAGE>
expansion. As a percentage of revenue, selling, general and administrative
expenses decreased to 36% of revenue for the six months ended June 30, 1999,
from 65% for the comparable period in 1998.
SETTLEMENT AGREEMENT. We recorded $3.4 million for a settlement agreement
in the six months ended June 30, 1998. The amount represented the expense
associated with the issuance of stock options and payment of cash related to a
settlement agreement.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the six
months ended June 30, 1999 was $5.1 million or 1175% greater than depreciation
and amortization of $0.4 million for the same period ended June 30, 1998. The
increase in depreciation and amortization expense resulted from increased
investment in our completed fiber optic network and additional property and
equipment acquired.
INCOME (LOSS) FROM OPERATIONS. Income from operations for the six months
ended June 30, 1999, income from operations was $5.0 million, or a $10.4 million
improvement over the $5.4 million loss for the comparable period in 1998. The
improvement in income from operations for the six month period over the previous
year was attributable to the increase in revenue as well as a reduction, as a
percentage of sales, in cost of goods sold, selling, general and administrative
expenses and depreciation. In addition, the 1998 amount included the settlement
agreement, mentioned above.
INTEREST INCOME. Interest income for the six months ended June 30, 1999 was
$13.5 million or 275% greater than interest income of $3.6 million for the same
period in 1998. Interest income increased in the period as a result of the
investment of our excess cash received as proceeds from the issuance and sale of
our 10% senior notes in November 1998.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 1999
was $30.4 million, compared with $12,000 during the same period of 1998. The
increase in interest expense reflects the cost of additional debt acquired
related to the issuance and sale of 10% senior notes in November 1998.
LOSS FROM JOINT VENTURE. For the six months ended June 30, 1999 we recorded
a $0.4 million loss from joint venture compared to $0.3 million loss for the
same period in 1998.
NET LOSS. Net loss for the six months ended June 30, 1999 was $12.3 million
or 486% greater than a net loss of $2.1 million for the same period in 1998. For
the six months ended June 30, 1999 and 1998, the basic net loss per share, after
the stock split, was $0.06 and $0.01, respectively. The net losses were
primarily attributable to the increase in net interest expense related to the
issuance and sale of our 10% senior notes in November 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for 1998 were $36.4 million or 1,356% greater than
revenues of $2.5 million for 1997. The increase in revenue for 1998 versus 1997
reflected higher revenues associated with commencement of service to an
increased total number of customers, as well as revenue recognized related to
grants of indefeasible rights of use to portions of our network and sales of
dark fiber classified as sales type leases.
COST OF SALES. Cost of sales was $13.9 million in 1998, a 286% increase
over cost of sales of $3.6 million in 1997. Cost of sales increased for 1998 as
compared to 1997 due to costs associated with the commencement of service to
customers, higher fixed costs associated with the operation of our network in
service and the allocated costs of the network related to revenue recognized for
grants of indefeasible rights of use to portions of our network and sales type
leases of portions of our dark fiber classified as capital leases. Costs of
sales, as percentages of revenue for 1998 and 1997 were 38% and
S-37
<PAGE>
142%, 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 for 1998 were $14.7 million or 133% greater than
selling, general and administrative expenses of $6.3 million during 1997. The
increase in selling, general and administrative expenses for 1998 as compared to
1997 resulted primarily from increased overhead to accommodate our network
expansion.
CONSULTING AND EMPLOYMENT INCENTIVES EXPENSE. Consulting and employment
incentives expense for 1998 were $0.2 million compared with $19.2 million for
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 1998, the amount recorded reflects
amortization for the unvested component of options issued in 1997 to key
employees.
SETTLEMENT AGREEMENT. We recorded $3.4 million for a settlement agreement
in 1998. The amount was recorded in the first quarter of 1998 for the expense
associated with the issuance of stock options and payment of cash related to a
settlement agreement.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for 1998 was $1.5 million or 88% greater than depreciation and
amortization expense of $0.8 million during 1997. The increases in depreciation
and amortization expense resulted from increased investment in our completed
fiber optic network and property and equipment.
INTEREST INCOME (EXPENSE). Interest income for 1998 was $8.8 million or
389% greater than interest income of $1.8 million during 1997. Interest income
during 1998 was derived from investment of our excess cash received as proceeds
from our initial public offering in October 1997 and the additional cash
received in November 1998 from the proceeds of our $650 million note issuance.
Interest expense increased in 1998 to $6.9 million as compared to $0.7 million
for 1997. The increase in interest expense reflects interest accrued for the
senior notes issued in November 1998.
INCOME (LOSS) FROM JOINT VENTURE. We recorded a $0.1 million loss from our
50% share of the ION joint venture's loss for 1998. The loss primarily
represents startup costs and operating activities for the joint venture.
INCOME TAXES. We recorded a provision for income taxes for 1998 in the
amount of $3.4 million. This represents an estimated effective tax rate, for
federal and state taxes, of 77.5%.
NET INCOME (LOSS). Net income was $1.0 million for 1998, as compared to a
net loss of $26.3 million for 1997. For 1998, basic net income per share was
$0.01 as compared to a basic net loss per share of $0.28 for 1997. On a diluted
basis, net income per share for 1998 was $0.01.
The improvements in results for 1998 were primarily attributable to the
growth of revenues and the improvements in gross margins, as noted above, as
well as the increase in net interest income related to the investment made by
Metromedia Company and the funds raised through our initial public offering as
compared to net interest expense.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues for 1997 were $2.5 million, a 1,150% increase as
compared to 1996 revenues of $0.2 million. The revenue increase was generated by
one-time revenues associated with commencement of services to customers as well
as increased recurring lease revenues, which reflects the growth in the number
of our customers.
COST OF SALES. Cost of sales for 1997 was $3.6 million, an increase of 414%
as compared to the $0.7 million that was recorded as cost of sales in 1996. The
increase in cost of sales was associated with
S-38
<PAGE>
the increased revenues. Cost of sales as a percentage of revenues improved to
142% in 1997 from 296% in 1996. The improvement in cost of sales as a percentage
of revenues reflects the increases in revenue outdistancing the increases in
cost, as the components of cost were mostly of a fixed nature.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1997 was $6.3 million or 200% greater than selling,
general and administrative expenses of $2.1 million in 1996. This increase
resulted primarily from increased legal expenses as a result of our increased
business activities and the increased staffing to accommodate our anticipated
growth.
CONSULTING AND EMPLOYMENT INCENTIVES EXPENSE. Consulting and employment
incentives expense for 1997 was $19.2 million or 419% greater than consulting
and employment incentives expenses of $3.7 million in 1996. The 1997 expense
represents the value of stock options issued to key employees, officers,
directors and consultants in order to attract or retain their services. The
amount recorded in 1996 reflects the expense associated with issuance of stock
and warrants to consultants in consideration for services rendered.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense was $0.8 million in 1997 as compared to $0.6 million in 1996. The
increase in depreciation and amortization expense resulted from increased
investment in our fiber optic network.
INTEREST INCOME (EXPENSE). We had interest income of $1.8 million in 1997
as compared to no interest income during 1996. The interest income in 1997 arose
from the investment of our excess cash during the year. In 1996, we had no
excess cash to invest and, accordingly, earned no interest income. Interest
expense (including financing costs) decreased in 1997 to $0.7 million from $3.6
million in 1996. The decrease in interest expense reflects the repayment of all
of our debt during the year with the proceeds of the investment made by
Metromedia Company, as well as lower financing costs.
NET LOSS. We recorded a net loss of $26.3 million in 1997 as compared to a
net loss of $10.4 million in 1996. The increase in the net loss was primarily
attributable to costs associated with organizing to meet our growth objectives.
In particular, such costs include the consulting and employment incentive,
described above, to attract and retain key employees, officers and directors, as
well as increased overhead to meet our growth objectives.
LIQUIDITY AND CAPITAL RESOURCES
Our initial public offering, on October 28, 1997, of 72,864,000 shares of
class A common stock generated net proceeds of $133.9 million, after deducting
the underwriters' commission and expenses relating to such initial public
offering. In addition, on November 25, 1998, we issued and sold 10% Senior Notes
due 2008 which generated net proceeds of $630.0 million, after deducting the
underwriters' commission and related expenses. On October 7, 1999, we entered
into a securities purchase agreement with Bell Atlantic, under which Bell
Atlantic would purchase shares of our class A common stock and a convertible
subordinated note. We expect that this transaction, which is subject to
customary closing conditions, will close by the end of the first quarter of 2000
and generate net proceeds of approximately $1.7 billion. In addition, Bell
Atlantic has agreed to purchase a minimum of $550 million of fiber optic
facilities payable over the next three years.
For the six months ended June 30, 1999, our operating activities generated
$21.0 million of cash, compared with $13.3 million during the comparable period
in 1998. For the six months ended June 30, 1999, we used $235.5 million of cash
for investing activities compared with $32.3 million for the same period in
1998. This increase was due primarily to investments in the expansion of our
networks and related construction in progress, the restriction of cash as
security for letters of credit in connection with our German network build, and
the acquisition of dark fiber infrastructure in certain markets in Texas. For
the six months ended June 30, 1999, we made net payments of $13.0 million of
cash from financing activities, compared to $0.8 million of net proceeds from
the issuance of common stock in
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1998, which was primarily attributable to the payment relating to the
acquisition of the dark fiber infrastructure in Texas market.
We anticipate that we will continue to incur net operating losses as we
expand and complete our existing networks, construct additional networks and
market our services to an expanding customer base. We anticipate spending
approximately $3.4 billion through the year ended December 31, 2001 on the
build-out of our fiber optic networks and Internet service exchanges in 50
Tier I and Tier II markets in the United States and in 17 major international
markets. We believe that the net proceeds from the investment by Bell Atlantic,
the net proceeds from the proposed issuance and sale of the senior notes due
2009, which proposed issuance and sale is expected to close concurrently with
the offering described in this prospectus supplement, cash on hand, the proceeds
from the new credit facility, vendor financing and cash generated by operations
(including advance customer payments), will enable us to fully fund the planned
build-out of our networks and our other working capital needs through the year
ended December 31, 2001. The indentures governing our debt permit us to incur
additional indebtedness to finance the engineering, construction, installation,
acquisition, lease, development or improvement of telecommunications assets. As
a result, we may also consider from time to time private or public sales of
additional equity or debt securities, entering into other credit facilities and
financings, depending upon market conditions, in order to finance the continued
build-out of our network. We cannot assure you that we will be able to
successfully consummate any such financing on acceptable terms or at all.
We expect to continue to experience negative cash flows for the foreseeable
future. In addition, our acquisition of AboveNet will cause us to record
approximately $1.5 billion in goodwill and other intangible assets, to be
amortized over periods of up to twenty years. Accordingly, we expect to report
further net operating losses for the foreseeable future.
YEAR 2000 SYSTEM MODIFICATIONS
We are currently working to evaluate and resolve the potential impact of the
Year 2000 on our processing of date-sensitive information and network systems.
The Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the year 2000, which could result in
miscalculations or system failures resulting from recognition of a date using
"00" as the year 1900 rather than the year 2000.
We have delegated responsibility to a group of executives to coordinate the
identification, evaluation and implementation of changes to computer systems and
applications necessary to achieve our goal of a Year 2000 date conversion which
would minimize the effect on our customers and avoid disruption to business
operations. We are also focusing on hardware and software tools, programming and
outside forces that may affect our operations, including our vendors, banks and
utility companies. Our analysis of the Year 2000 threat is ongoing and will be
continuously updated throughout 1999 as necessary.
For Metromedia Fiber, we have developed a questionnaire and project plan to
be completed by our systems and operating personnel to identify all business and
computer applications so that we can identify potential compliance problems. We
have initiated communications with our significant customers, suppliers,
contractors and major systems developers to determine their plans to remedy any
Year 2000 issues that arise in their business with us. We have compiled a
database of information based upon these responses. To the extent problems are
identified, we will implement corrective procedures where necessary, then test
the applications for Year 2000 compliance. We expect to complete this project
prior to January 1, 2000.
Based on preliminary data, our estimate is that the Year 2000 effort will
have a nominal cost impact, although we can make no assurances as to the
ultimate cost of the Year 2000 effort or the total cost of information systems.
Such costs will be expensed as incurred, except to the extent such costs are
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incurred for the purchase or lease of capital equipment. We expect to make some
of the necessary modifications through our ongoing investment in system
upgrades. We believe that our exposure to this issue, based on our internal
systems, is somewhat limited by the fact that substantially all of our existing
systems have been purchased or replaced since 1997.
As of June 30, 1999, we had incurred nominal consulting costs in respect of
our Year 2000 conversion effort. We have not deferred any other information
systems projects due to the Year 2000 efforts. We expect that the source of
funds for Year 2000 costs will be cash on hand. Accordingly, we are devoting the
necessary resources to resolve all significant Year 2000 issues.
If our customers, suppliers, contractors or major systems developers are
unable to resolve Year 2000 processing issues in a timely manner, a material
adverse effect on our results of operations and financial condition could
result.
AboveNet's Year 2000 readiness review includes assessment, implementation,
testing and contingency planning. To date, AboveNet has evaluated its internally
developed software and believes that this software is Year 2000 compliant.
However, AboveNet utilizes software and hardware developed by third parties both
for its network and internal information systems. AboveNet has not done any
testing of such third party software to determine if such software is Year 2000
compliant. AboveNet has sought assurances from some of its vendors, and intends
to continue to seek assurances from others, that such vendors' products are or
will be Year 2000 compliant.
AboveNet expects to continue assessing and testing its internal information
technology and non-information technology systems. AboveNet is not currently
aware of any material operations issues or costs associated with preparing its
internal information technology and non-information technology systems for the
Year 2000. However, AboveNet may experience material unanticipated problems and
costs caused by undetected errors or defects in the technology used in its
internal information technology and non-information technology systems.
Based upon the public filings and press releases of AboveNet's equipment,
telecommunications and data communications providers, AboveNet is aware that all
such providers are in the process of reviewing and implementing their own Year
2000 compliance programs. Since AboveNet does not believe that it will be
afforded the opportunity to test the systems of these providers, AboveNet will
seek assurances from them that they are Year 2000 compliant. If AboveNet's
primary vendors experience business interruptions as a result of the failure to
achieve Year 2000 compliance, AboveNet's ability to provide Internet
connectivity could be impaired, which could have a material adverse effect on
AboveNet's business, results of operations and financial condition.
AboveNet does not currently have any information regarding the Year 2000
status of its customers, most of whom are private companies. However, AboveNet
is in the process of developing a plan to survey all of its customers regarding
their Year 2000 compliance. As in the case with similarly situated companies, if
its customers experience Year 2000 problems, which result in business
interruptions or otherwise impact their operations, AboveNet could experience a
decrease in the demand for its services, which could have a material adverse
impact on its business, results of operations and financial condition.
AboveNet has not incurred any significant expenses to date associated with
its Year 2000 plan and is not aware of any material costs associated with its
anticipated Year 2000 efforts. AboveNet believes that a material loss of
revenues would arise if its major customers or providers fail to achieve Year
2000 readiness. AboveNet has not yet developed a comprehensive contingency plan
to address the issues which could result from such failure.
This constitutes a Year 2000 Readiness Disclosure Statement, and the
statements are subject to the Year 2000 Information and Readiness Disclosure
Act. We hereby claim the protection of this act for this prospectus supplement
and all information contained herein.
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BUSINESS
GENERAL
We provide dedicated fiber optic infrastructure and high-bandwidth Internet
connectivity for our communications intensive customers. We are a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through our acquisition of
AboveNet, we also provide "one-hop" connectivity that enables mission critical
Internet applications to thrive, as well as high-bandwidth infrastructure,
including managed co-location services.
THE INTRA-CITY NETWORKS. Our existing intra-city networks consist of
approximately 334,000 fiber miles covering 680 route miles in six of our
announced markets. We are currently planning to expand our existing local
intra-city networks in these metropolitan areas, and to construct additional
intra-city networks in approximately 40 additional Tier I and Tier II markets in
the United States.
THE INTER-CITY NETWORKS. Our inter-city network currently consists of 255
route miles, or approximately 110,000 fiber mile network segment that we have
built between New York City and Washington, D.C. We have also obtained,
primarily through exchanges of fiber capacity or "fiber swaps" with other
carriers, a nationwide fiberoptic network.
THE INTERNATIONAL NETWORKS. In addition to our domestic build-up, we intend
to expand our international presence to include approximately 17 major markets.
In February 1999, we entered into an agreement with Viatel, Inc. and Carrier 1
Holdings, Ltd. to jointly build a dark fiber inter-city network between selected
cities throughout Germany. Once completed, the German network will consist of
approximately 291,000 fiber miles covering 1,350 route miles connecting 14 major
cities. We have also swapped strands of fiber in the United States for strands
of fiber on the Circe network, which connects a number of European markets. In
addition to our inter-city networks, we are constructing 16 intra-city networks
throughout Europe. Separately, we have also entered into a contract to acquire
dark fiber network facilities in Toronto, Canada.
INTERNET CONNECTIVITY. Through our acquisition of AboveNet, we are a
leading provider of high performance Internet connectivity services to a wide
range of Internet service providers, Internet content providers and Web hosting
companies and facilities based, managed co-location services. Our Internet
exchange server facilities provide high performance, reliable and scalable
solutions for electronic commerce and other business critical applications.
AboveNet developed a network architecture based upon strategically located,
fault-tolerant Internet exchange servers. We currently operate two Internet
service exchange campuses, located near two of the major Internet access points,
metropolitan area exchange (often referred to as "MAE") West and MAE East, using
our suite of sophisticated network management and remote monitoring tools. We
believe that our centralized network architecture provides enhanced connectivity
while eliminating the need to build numerous geographically dispersed data
centers. AboveNet's Internet service exchange model offers customers the
benefits of combining direct Internet service providers access with co-location
services for Internet content providers. As of June 30, 1999, AboveNet had more
than 270 direct public and private data exchange agreements, known as peering
arrangements, including relationships with most major network providers. The
convergence of content providers and Internet service providers at our Internet
service exchanges enables Internet service provider customers to provide their
users with "one hop" connectivity, through our local area network, to the Web
sites of the Internet content providers that are co-located at the same site.
This direct connectivity minimizes the risk of delays and data loss often
encountered in the transmission of data over the public Internet infrastructure.
CUSTOMERS. We are focused on providing our broadband communications
infrastructure and Internet connectivity services to two main customer groups
located in Tier I and Tier II markets: communications carriers and
corporate/government customers.
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Our targeted customers include a broad range of companies such as:
- ILECs;
- CLECs;
- long distance companies/IXCs;
- paging, cellular and PCS companies;
- cable companies;
- ISPs; and
- Web hosting and e-commerce companies.
Our dark fiber customers typically lease our fiber optic capacity with which
they develop their own communications networks. Leasing our fiber optic capacity
is a low-cost alternative to building their own infrastructure or purchasing
metered services from ILECs or CLECs. Our Internet connectivity and co-location
customers typically lease bandwidth and co-location space which allow them to
provide their Internet related services on a reliable and cost effective basis.
We believe that we are well-positioned to penetrate our target customer base
since we plan to continue to install most of our dark fiber networks and
Internet service exchanges in major markets where these customers are
concentrated. We believe our target customers for our dark fiber and Internet
connectivity are complementary and will provide significant cross selling
opportunities.
NETWORK INFRASTRUCTURE. We have designed our networks to provide high
levels of reliability, security and flexibility by virtue of a self-healing
SONET architecture that prevents interruption in service to our clients by
instantaneously rerouting traffic in the event of a fiber cut. Our advanced
network architecture is also capable of supporting state-of-the-art
technologies, including DWDM (dense wave division multiplexing) which
significantly increases the transmission capacity of a strand of fiber optic
cable. Because DWDM can boost transmission capacity significantly, it has
greater relevance on our inter-city routes where we have, on average, fewer
strands of fiber installed than in our intra-city markets. Where practicable, we
install additional unused conduits to cost effectively accommodate future
network expansion and eliminate the need for future construction.
MARKET OPPORTUNITY. We believe that the market for our dark fiber services
is characterized by significant and growing demand for, and limited supply of,
fiber optic capacity. To meet our customers' demand, we tailor the amount of
fiber capacity leased to the needs of our customers. Generally, customers lease
fiber optic capacity from us and connect their own transmission equipment to the
leased fiber, thereby obtaining a high-bandwidth, fixed-cost, secure
communications alternative to the metered communications services offered by
traditional providers. In addition, we believe that we have installation,
operating and maintenance cost advantages per fiber mile relative to our
competitors because we generally install 432 fibers, and have begun installing
as many as 864 fibers, per route mile, as compared to the generally lower number
of fibers per mile in existing competitive networks.
We believe the market for our Internet service exchanges is characterized by
significant and growing demand for, and limited access to, highly reliable
Internet connectivity and co-location services. To meet our customers' demands,
we provide scalable connectivity and co-location services that drive our
customers' electronic commerce and other mission critical Internet applications.
Our customers lease bandwidth and co-location space from us to gain highly
reliable, secure and cost effective Internet connectivity. Through our existing
and planned networks, we believe we have the low cost position relative to those
competitors who lease rather than own their networks.
MANAGEMENT EXPERTISE. We benefit from the support of our controlling
stockholder Metromedia Company and anticipate similar benefits from our
anticipated investment by Bell Atlantic. On April 30, 1997, Metromedia Company
and certain of its affiliates made a substantial equity investment in our
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company (the "Metromedia Investment"). As a result, Metromedia Company and its
partners own all of our outstanding shares of class B common stock, par value
$.01 per share. Our class B common stock is entitled to 10 votes per share and
to vote separately to elect at least 75% of the members of the Board of
Directors. As of September 30, 1999, Metromedia Company and its partners own and
control approximately 63% of the outstanding voting power of our company.
RECENT TRANSACTIONS. On October 7, 1999, we entered into a securities
purchase agreement with Bell Atlantic, under which Bell Atlantic Investments
would purchase up to approximately 25.6 million newly issued shares of our class
A common stock at a purchase price of $28.00 per share and a convertible
subordinated note of approximately $975.3 million, which is convertible into
shares of our class A common stock at a conversion price of $34.00 per share.
This transaction, which is subject to customary closing conditions, is expected
to be completed by the end of the first quarter of 2000. Assuming the issuance
of the 25.6 million shares of class A common stock and conversion of the
convertible subordinated note, this investment would represent 19.9% of our
outstanding shares. Bell Atlantic has also agreed to pay us $550 million over
the next three years in exchange for delivery of fiber optic facilities over the
next five years. The proceeds from these two transactions will be used to fund
the expansion of our network.
BUSINESS STRATEGY
Our objective is to become the preferred facilities-based provider of
broadband communications infrastructure and Internet connectivity solutions to
communications carriers, corporations and government agencies, in our target
markets. The following are the key elements of our strategy to achieve this
objective:
ESTABLISH THE COMPANY AS THE PREFERRED CARRIERS' CARRIER OF BROADBAND
COMMUNICATIONS INFRASTRUCTURE AND INTERNET CONNECTIVITY SOLUTIONS
- Lease broadband communications infrastructure on a fixed cost basis
- Enable carriers to penetrate markets previously too costly to build or
purchase
- Allow customers to bypass the ILECs and CLECs
- Continue to differentiate ourselves as the only company whose principal
business is providing dark fiber on a fixed cost basis
- Lease high-bandwidth long haul capacity to provide seamless connectivity
between our intra-cities
- Provide Internet connectivity services through leasing bandwidth and
co-location space to ISPs
- Enable ISPs to provide reliable, high-quality Internet access services
- Capitalize on the fact that we do not offer competing metered
communications or retail Internet connectivity solutions in competition
with our carrier and ISP customers
POSITION THE COMPANY AS THE PREFERRED PROVIDER OF BROADBAND COMMUNICATIONS
INFRASTRUCTURE AND INTERNET CONNECTIVITY SERVICES TO CORPORATE AND GOVERNMENT
CUSTOMERS
- Target broadband communications infrastructure customers with significant
transmission and high security needs
- Provide scalable services for customers seeking lower broadband
transmission capacity
- Offer our dark fiber services on a fixed cost rather than metered basis,
to provide a more economical solution to our customers
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- Target Internet connectivity customers who require reliable, secure and
cost effective connectivity to the internet to drive their electronic
commerce and other mission critical business Internet applications
- Capitalize on the complementary customer bases for our Infrastructure and
Internet connectivity services through effective cross selling
REPLICATE SUCCESSFUL BUSINESS MODEL IN NEW MARKETS
- Leverage our success in existing markets by replicating our network
architecture in a number of additional markets
- Rapidly roll out our U.S. network to a total of approximately 50
intra-city networks in Tier I and Tier II markets
- Expand our international market coverage to a total of approximately 17
markets
- Deploy Internet service exchanges in selected U.S. and international
markets, replicating the successful AboveNet design
CREATE A LOW COST POSITION
- Provide our customers a cost effective alternative to constructing their
own networks and Internet connectivity facilities
- Install trunks with up to 864 fibers per route mile, which is
substantially more fiber than our competitors, reducing our per mile cost
to construct, upgrade and operate our networks
- Capitalize on the operating and maintenance cost advantages generated by
our newly constructed networks, with advanced fiber optic technology
- Create first mover advantages for us versus new entrants by securing
rights of way and building our networks quickly
- Install spare conduit where practical to reduce expansion and upgrade
costs in the future and provide significant excess capacity
- Establish a low cost advantage for our Internet connectivity services by
utilizing our own network rather than leasing capacity like some of our
competitors
- Use our low cost position to remain price competitive with other providers
of broadband communications infrastructure and Internet connectivity
services
UTILIZE FIBER SWAPS AND STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF OUR
NETWORKS
- Opportunistically utilize fiber swaps, as we have in the past, to expand
our network reach at little incremental cost
- Enter into strategic relationships, such as our joint build arrangement
with Viatel, to cost effectively expand our network footprint
EXPAND PRODUCT AND SERVICE OFFERINGS TO UTILIZE DARK FIBER NETWORK CAPACITY.
- Vertically expand our service offering by identifying additional uses for
our dark fiber network, such as with the AboveNet acqusition, that will
drive new revenue opportunities and cost synergies
- Maintain our competitive advantage by offering services that do not
directly compete with our carrier customers
- Focus on serving our carrier and large corporate/government customers'
bandwidth intensive communications needs
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INSTALL TECHNOLOGICALLY ADVANCED NETWORKS AND INTERNET SERVICE EXCHANGES
- Continue to install a technologically advanced network based on
self-healing SONET architecture
- Use our self-healing SONET architecture to minimize the interruption to
service caused by fiber cuts
- Construct our networks to deliver the high levels of reliability, security
and flexibility that our customers demand
- Continually monitor and maintain quality control over our networks on a
24-hour basis
- Continue to ensure our network is capable of providing the highest
commercially available capacity transmission (OC-192) to support capacity
intensive data applications such as Frame Relay, ATM and Internet
applications
- Provide fault tolerant Internet service exchange facilities designed to
enable the uninterrupted operations necessary for mission critical
business applications
- Use our proprietary software to monitor our network connections for
latency and packet loss and automatically reroute Internet traffic to
avoid Internet congestion points
BUILD ON MANAGEMENT EXPERIENCE AND METROMEDIA COMPANY RELATIONSHIP
- Leverage the communications industry knowledge and sales expertise of our
management team and board of directors including:
- Stephen Garofalo, our Chief Executive Officer and founder, who has
approximately 25 years of experience in the cable installation business
- Howard M. Finkelstein, our President and Chief Operating Officer, who
served in various capacities in Metromedia Company and its affiliates over
a period of 16 years, including 9 years as President of Metromedia
Company's long distance telephone company, until its merger with
MCI/WorldCom, Inc. in 1993
- David Rand and Sherman Tuan who joined our Board of Directors following
the acquisition of AboveNet and have extensive experience with Internet
related ventures
- John W. Kluge, Stuart Subotnick and David Rockefeller, each of whom bring
extensive communications industry expertise and corporate governance
experience
BUILD-OUT OF NETWORKS
We have concentrated on developing and constructing our networks. We have
either obtained or are currently pursuing the acquisition of necessary licenses,
franchises and rights-of-way to construct these networks. In constructing our
fiber optic networks, we seek to create strategic alliances with the engineering
and construction management firms that have been engaged to develop routes,
easements and manage deployment plans. Firms with whom we are allied in this
regard have deployed local loop network infrastructure for RBOCs as well as for
CLECs. Though we anticipate to outsource much of the actual construction to
various construction firms, we maintain strict oversight of the design and
implementation of our fiber optic communications networks. We utilize only
advanced commercially available fiber. We have ordered a substantial portion of
our fiber optic cable from Lucent Technologies, Inc. However, we believe that we
could obtain advanced fiber from other suppliers on acceptable terms.
Our existing intra-city networks currently consist of approximately 334,000
fiber miles covering 680 route miles in six of our announced markets. Our
inter-city network consists of approximately 110,000 fiber miles covering 255
route miles that we have built between New York City and Washington D.C. We have
also built or acquired, primarily through fiber swaps, a nationwide dark fiber
network linking our intra-city networks.
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We have entered into a forty year agreement with a subsidiary of Racal, a
United Kingdom manufacturer of electronics and other equipment and a provider of
telecommunications services, to create ION, a joint venture in which we hold a
50% equity interest. ION has obtained transatlantic fiber optic cable rights on
Gemini and AC-1 which link our New York network to London, England. Through ION,
we are able to offer our customers seamless broadband transatlantic
communications services between New York and London. Under the ION joint venture
agreement, each party may contribute additional capital as agreed by the
parties. In May 1998, ION was awarded a 25 year term contract in excess of $25
million from a leading provider of undersea cable capacity to provide inland
capacity services from such provider's undersea cable landing stations in the
U.K. and the U.S.
We have also entered into an agreement with Carrier 1 Holdings, Ltd and
Viatel, Inc., to develop jointly approximately 291,000 fiber miles covering
1,350 route miles that will connect 14 of Germany's largest cities such as
Hamburg, Berlin, Munich, Frankfurt and Dusseldorf. We have also signed an
agreement with Viatel pursuant to which we would receive the right to use
approximately 3,880 fiber miles covering approximately 970 route miles on
Viatel's network in France, Germany, The Netherlands and the United Kingdom. Our
networks will be high-capacity broadband networks capable of supporting
high-quality voice, video, internet protocol and data traffic and built using a
self-healing SONET architecture.
THE ABOVENET INTERNET SERVICE EXCHANGE
Our Internet service exchanges provide co-location services, Internet
connectivity services, network management services and tools. Our Internet
service exchanges are designed to provide customers with the high performance,
scalability, connectivity, security, reliability and expertise they need to
enhance their business critical Internet applications. We create solutions for
our customers based on their specific business and technical requirements,
modifying the services as each customer's needs evolve. Our Internet related
services are primarily delivered through centralized campuses located near MAE
West and MAE East. Our New York facility is connected to our facility located
near MAE East by high speed, high capacity fiber optic cable. This facility is
intended to facilitate access to European Internet traffic. Our management
services and tools enable us and our customers to continuously manage their
Internet operations jointly, proactively and remotely.
INTERNET CONNECTIVITY
Our Internet connectivity services are designed to meet the requirements of
high bandwidth, business critical Internet operations by providing highly
reliable, scalable, non-stop and uncongested operations. On June 30, 1999,
AboveNet had peering relationships with more than 270 network providers,
covering over 700 peering points. Any failure by AboveNet to maintain and
increase peering relationships would have a material adverse effect on our
business, results of operations and financial condition.
Our network is designed to minimize the likelihood of service interruptions.
Each ISX has multiple physical fiber paths into the facility. We maintain
multiple network links from multiple vendors and regularly check that our
network traffic traverses physically separated paths. This network architecture
enhances the availability of a customer's site, even in the event of a link
failure. In addition, since our customers' Internet operations often experience
network traffic spikes due to promotions or events, we have a policy of
maintaining significant excess capacity. We might not be able to expand or adapt
our telecommunications infrastructure to meet additional demand or our
customers' changing requirements on a timely basis and at a commercially
reasonable cost, or at all.
Our Internet connectivity services are also designed to reduce latency and
to enhance network performance. Our engineering personnel continuously monitor
traffic patterns and congestion points throughout the Internet and dynamically
reroute traffic flows to improve end-user response times. We
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also enhance network performance by maintaining what we believe is among the
largest number of direct public and private network peering interconnections in
the industry. For customers seeking a direct communications link to the site of
another customer that is located at the same ISX, we offer highly secure, fast
and efficient cross-connections.
CO-LOCATION SERVICES
We provide co-location services designed to meet the demands of
sophisticated, multi-vendor business critical Internet operations. We support
most leading Internet hardware and software system vendor platforms, including
those from Ascend Communications, Inc., Nortel Networks, Cisco Systems, Inc.,
Compaq Computer Corporation, Dell Computer Corporation, EMC Corporation,
Hewlett-Packard Company, International Business Machines Corporation, Lucent
Technologies Inc., Microsoft Corporation, Apple Computer, Inc., Network
Appliance, Inc., Silicon Graphics Inc., Sun Microsystems Inc. and 3Com
Corporation. This multi-vendor compatibility enables our customers to retain
control over their choice of technical solution and to integrate their Internet
operations into our existing information technology architecture. Because
business critical Internet operations are dynamic and often require timely
hardware and software upgrades to maintain targeted service levels, customers
have twenty-four hours a day, seven days a week physical and remote access to
the ISX facilities. Additional space and electrical power can be added as needed
in order to provide our customers with access to additional server co-location
services. Customers install and manage their own hardware and software at our
facilities. We do not provide any Web hosting services.
MANAGEMENT SERVICES AND TOOLS
Our management services and tools support business critical Internet
operations by providing the customer with detailed monitoring, reporting and
management tools to control their hardware, network, software and application
environments. Through our network management services and tools, customers are
able to remotely manage their business critical Internet operations housed at
our ISX facilities. We believe that this provides an important advantage to
enterprises that seek to outsource a portion of their Internet operations and to
link the management of the outsourced operations with in-house operations. Our
proactive management services and tools enable us to identify and resolve
hardware, software, network and application problems, often before the customer
is aware that a problem exists.
INTERNATIONAL INTERNET SERVICE EXCHANGES
We are seeking to create a global network by investing in joint ventures and
foreign companies that can develop regional Internet service exchanges
internationally. In March 1999, AboveNet entered into agreements with local
partners to establish regional Internet service exchanges in Austria, Germany
and the United Kingdom. We intend to continue to expand our European network
through additional investments in joint ventures in other major business centers
and countries with high levels of Internet traffic. We plan to leverage our
communications infrastructure in Europe, in a similar manner to our market
entrants in the future. We believe that participants in this market must grow
rapidly and achieve a significant presence in the market in order to compete
effectively. We believe that the principal competitive factors in our market are
uncongested connectivity, quality of facilities, level of customer service,
price, the financial stability and credibility of the provider, brand name and
the availability of network management tools. We might not have the resources or
expertise to compete successfully in the future.
TECHNOLOGY
Our networks consist of fiber optic communications networks which allow for
high speed, high quality transmission of voice, data and video. Fiber optic
systems use laser-generated light to transmit
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voice, data and video in digital formats through ultra-thin strands of glass.
Fiber optic systems are generally characterized by large circuit capacity, good
sound quality, resistance to external signal interference and direct interface
to digital switching equipment or digital microwave systems. We plan to install
backbone fiber optic cables containing up to 864 fiber optic strands, which have
significantly greater bandwidth than traditional analog copper cables. Using
current electronic transmitting devices, a single pair of glass fibers used by
our network can transmit up to 8.6 gigabits of data per second or the equivalent
of approximately 129,000 simultaneous voice conversations, which is
substantially more than traditional analog copper cable installed in many
current communications networks. We believe that continuing developments in
compression technology and multiplexing equipment will increase the capacity of
each fiber optic strand, thereby providing more bandwidth carrying capacity at
relatively low incremental costs. Our network is capable of using the highest
commercially available capacity transmission (OC-192) and thereby can handle
advanced, capacity-intensive data applications such as voice over Internet
Protocol, video teleconferencing, Frame Relay, ATM, multimedia and Internet-
related applications. In our intra-city networks, we offer end-to-end fiber
optic capacity, capable of utilizing SONET capable ring architecture, which has
the ability to route customer traffic in either direction around its ring design
thereby assuring that fiber cuts do not interrupt service to customers on our
networks. Our networks are also capable of supporting dense wave division
multiplexing (often referred to as "DWDM"). Currently, a state-of-the-art
network operating system continuously monitors and maintains quality control of
networks on a 24-hour basis, alerts us of any degradation or loss of fiber
capacity and pinpoints the location of such degradation. This network operating
system also enables us to repair or replace impaired fiber without any loss of
service. In addition, the monitoring system automatically reroutes traffic in
the event of a catastrophic break in the system, enabling us to ensure that our
customers obtain continuous service.
Our connectivity services utilize our proprietary ASAP technology to enhance
Internet connectivity by monitoring all of our direct and indirect network
connections for congestion. ASAP automatically monitors all of our major
providers' and peers' direct and indirect connections on a real-time 24-hour
basis to identify congestion. If packet loss and congestion is detected on any
of the links that directly affect customers' performance, our network engineers
are able to dynamically reroute traffic temporarily away from the problem link.
This functionality is particularly important for emerging applications such as
audio and video streaming and voice over the Internet.
FRANCHISE, LICENSE AND RELATED AGREEMENTS
When we decide to build a fiber optic communications network, our corporate
development staff seeks to obtain the necessary rights-of-way and governmental
authorizations. In some jurisdictions, a construction permit is all that is
required. In other jurisdictions, a license agreement, permit or franchise is
also required. Such licenses, permits and franchises are generally for a term of
limited duration. Where possible, rights-of-way are leased under multi-year
agreements with renewal options and are generally non-exclusive. We lease
underground conduit and pole space and other rights-of-way from entities such as
ILECs, utilities, railroads, IXCs, state highway authorities, local governments
and transit authorities. We strive to obtain rights-of-way that afford us the
opportunity to expand our communications networks as business develops.
SALES AND MARKETING
Our sales and marketing strategy includes:
- positioning ourselves as the preferred facilities based provider of
broadband communications infrastructure and Internet connectivity
services;
- focusing on high dollar volume corporate and government customers;
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- emphasizing the cost advantages which will allow us to lease our fiber
optic infrastructure at fixed prices which represent potentially
significant savings for our large volume carrier and corporate customers
relative to their present build or buy alternatives;
- achieve broad market penetration and increase brand recognition for our
Internet connectivity services among Internet service providers, Internet
content providers and Web hosting companies; and
- identify opportunities to cross sell our Internet connectivity services to
our complementary infrastructure customer base.
We also believe that communications carriers and corporate and government
customers will be attracted to our dark fiber product and our unmetered pricing
structure. Dark fiber is installed fiber optic cable which is not otherwise
carrying a signal originated by the service provider, such as our company, but
which will carry a signal generated by the customer. We intend initially to
centralize our sales and marketing efforts on carrier customers through a
national sales team and we are currently in the process of hiring additional
sales professionals to focus on these customers. As we have constructed fiber
optic networks in new cities, we have hired sales forces in these areas to
target regional corporate, government and to a lesser extent carrier customers
and we plan to continue this strategy.
For our Internet connectivity services, we have developed a two-tiered sales
strategy to target leading Internet service providers, Internet content
providers and Web hosting companies through direct sales and channel
relationships. We maintain a direct sales force of highly trained individuals in
San Jose, California and Vienna, Virginia. Our sales force is supported by our
sales engineers and, in many circumstances, by our senior management. We are
also seeking to develop relationships with potential channel partners including
hardware vendors, value added resellers, system integrators, application hosting
and Web hosting companies in order to leverage their sales organizations.
COMPETITION
Fiber optic systems are currently under construction both locally and
nationally. In New York City, for example, several franchisees have been granted
the right to install and operate a telecommunications network within the city.
Development of fiber optic networks is also continuing on a national scale. The
construction of these networks enables their owners to lease access to their
networks to other communications carriers or large corporate or government
customers seeking high bandwidth capacity, without these customers having to
incur costly expenditures associated with building networks of their own.
Alternatively, some network owners may choose to use their infrastructure to
provide switched voice and data services, competing directly with ILECs and
IXCs. Currently, we do not provide such services or plan to provide such
services.
In the cities where we plan to deploy fiber optic communications networks,
we face significant competition from the ILECs, which currently dominate their
local communications markets. We also face competition from CLECs and other
potential competitors in these markets and will face competition in the cities
in which we plan to build our networks. Many of our competitors have financial,
management and other resources substantially greater than ours, as well as other
competitive advantages over us, including established reputations in the
communications market.
Various communications carriers already own fiber optic cables as part of
their communications networks. Accordingly, each of these carriers could, and
some do, compete directly with us in the market for leasing fiber capacity. In
addition, although CLECs generally provide a wider array of services to their
customers than we presently provide to our customers, CLECs nevertheless
represent an alternative means by which our potential customer could obtain
direct access to an IXC POP or other site of the customer's choosing. Thus,
CLECs could compete with us.
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Some communications carriers and local cable companies have extensive
networks in place that could be upgraded to fiber optic cable, as well as
numerous personnel and substantial resources to undertake the requisite
construction to so equip their networks. To the extent that communications
carriers and local cable companies decide to equip their networks with fiber
optic cable, they are potential direct competitors provided that these
competitors are willing to offer this capacity to all of their customers.
We believe that as competition in the local exchange market develops, a
fundamental division between the needs of corporate, governmental and
institutional end users and residential end users will drive the creation of
differentiated communications services and service providers. We believe that
the CLECs, IXCs, ISPs, wireless carriers and corporate and government customers
on which we focus will have distinct requirements, including maximum
reliability, consistent high quality transmissions, capacity for high-speed data
transmissions, diverse routing and responsive customer service. We believe that
we will be able to satisfy the needs of such customers.
Our Internet connectivity services business is intensely competitive. There
are few substantial barriers to entering the co-location service business, and
we expect that we will face additional competition from existing competitors and
new market entrants in the future. We believe that participants in this market
must grow rapidly and achieve a significant presence in the market in order to
compete effectively. We believe that the principal competitive factors in this
market are uncongested connectivity, quality of facilities, level of customer
service, price, the financial stability and credibility of the provider, brand
name and the availability of network management tools. AboveNet might not have
the resources or expertise to compete successfully in the future. Our current
and potential competitors in this market include:
- providers of co-location services, such as Exodus Communications, Inc.,
Frontier Corporation, which has entered into an agreement to be acquired
by Global Crossing Ltd., Hiway Technologies, Inc., which was acquired by
Verio Inc., and Globix Corporation;
- national and regional ISPs, such as Concentric Network Corporation,
PSINet, Inc., MCI WorldCom and certain subsidiaries of GTE Corporation;
- global, regional and local telecommunications companies, such as Sprint,
MCI WorldCom and Regional Bell Operating Companies, some of whom supply
capacity to AboveNet; and
- large information technology outsourcing firms, such as International
Business Machines Corporation and Electronic Data Systems.
REGULATION
As a provider of communications facilities, we are subject to varying
degrees of regulation in each of the jurisdictions in which we operate. In the
United States, some aspects of our services are regulated by the Federal
Communications Commission (the "FCC") and various state regulatory bodies. In
some local jurisdictions, we must obtain approval to operate or construct our
networks. In other countries where we operate we may also be subject to
regulations by the agencies having jurisdiction over the provision of
telecommunications services.
FEDERAL
In the United States, federal telecommunications law directly shapes the
market in which we compete. We offer two types of services--the leasing of dark
fiber and the provision of telecommunications transmission services--that are
subject to varying degrees of regulation by the FCC pursuant to the provisions
of the Communications Act of 1934, as amended, including by the
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Telecommunications Act of 1996 (the "Communications Act"), and the FCC
regulations implementing and interpreting the Communications Act.
The Communications Act imposes legal requirements on "common carriers" who
engage in "interstate or foreign communication by wire or radio" and on
"telecommunications carriers." Telecommunications carriers, or common carriers,
are providers of telecommunications services, which is defined by the
Communications Act as the offering of telecommunications for a fee "directly to
the public" or to all potential users of an indiscriminate basis subject to
standardized rates, terms, and conditions.
DARK FIBER LEASING. We believe that we are not a "telecommunications
carrier" or "common carrier" with respect to our leasing of dark fiber
facilities, and therefore that our dark fiber activities are not subject to
special legal requirements applicable to such carriers. First, we do not believe
that the leasing of dark fiber is a "telecommunications service" that is subject
to FCC regulation. The FCC generally regulates "communication by wire or radio"
or the "transmission" of "information of the users' choosing," neither of which
describes the leasing of dark fiber facilities. Second, we do not offer dark
fiber facilities as a common carrier, I.E., to all potential users on an
indiscriminate basis. Instead, we enter into individualized negotiations on a
selective basis with prospective lessees of our dark fiber facilities to
determine whether and on what terms to serve each potential lessee. Our dark
fiber offerings should therefore not be subject to the common carrier
jurisdiction of the FCC or to the common carrier provisions of the
Communications Act.
If our offering of dark fiber facilities were deemed to constitute
"telecommunications," then our revenues from such leases to end users (but not
to other telecommunication carriers), whether or not provided on a common
carrier basis, would become subject to assessment for the FCC's Universal
Service Fund, a fund that was established by the FCC pursuant to the
Telecommunications Act of 1996 (the "1996 Act") to assist in ensuring the
universal availability of basic telecommunications services at affordable
prices, and other FCC assessments. The FCC announced that the rate of assessment
will be approximately 3.9% of gross interstate and 1% of gross intra-state
end-user revenues for the third quarter of 1999. On July 30, 1999, the U.S.
Court of Appeals for the Fifth Circuit upheld in part the FCC's order but
determined that assessments must be limited to interstate revenues. We cannot
predict the effect of this ruling on the rate of assessment, or what rates of
assessment will apply in future years. We may also be liable for assessments by
state commissions for state universal service programs.
TRANSMISSION SERVICES. With respect to our offering of telecommunications
services, however, we will likely operate as a common carrier, offering such
transmission services to all potential users indiscriminately, and therefore
will be subject to the regulatory requirements applicable to common carriers and
to telecommunications carriers. For example, we will be required, with respect
to our transmission services, to (1) provide such services indiscriminately upon
any reasonable request; (2) charge rates and adopt practices, classifications
and regulations that are just and reasonable; and (3) avoid unreasonable
discrimination in charges, practices, regulations, facilities and services. We
may also be required to file tariffs setting forth the rates for our services.
Under current FCC policies, these regulatory requirements should not impose any
substantial burdens on us. The FCC has recently determined, for example, that
providers of "access" services (intracity transmission services used to
originate and/or terminate interstate and foreign communications) need not file
tariffs and may offer such services to customers on a private, contractual
basis. Our revenues from transmission services will also be subject to FCC
Universal Service Fund assessments as discussed above, to the extent that these
services are purchased by end users. Since the revenues of our competitors will
be subject to comparable assessments, this should not reduce our
competitiveness. Also, being regulated as a "telecommunications carrier" will
give us certain legal benefits. In particular, we will be entitled, like other
competitive local exchange carriers (often referred to as "CLECs"), to insist
upon access to the existing telecommunications infrastructure by interconnecting
our fiber-optic networks with incumbent local exchange carriers (often referred
to as "ILECs") central offices and other facilities. Under the
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1996 Telecom Act, ILECs must, among other things: (i) allow interconnection at
any technically feasible point and provide service equal in quality to that
provided to others, (ii) provide unbundled access to network elements, and (iii)
provide access to their poles, ducts, conduits and other rights-of-way. Our
rights as a CLEC may not extend to cover our dark fiber business (unless our
dark fiber business is considered a telecommunications service). Accordingly, an
ILEC may refuse to interconnect with (or provide the collocation described
below) us other than in connection with our transmission services business.
ILECs must also provide "physical collocation" for other telecommunications
carriers. Physical collocation is an offering by an ILEC that enables another
telecommunications carrier to enter the ILEC's premises to install, maintain and
repair its own equipment that is necessary for interconnection or access to the
ILEC's network elements. An ILEC is required to allocate reasonable amounts of
space to carriers on a first-come first-served basis. If space limitations or
practical or technical reasons prohibit physical collocation, an ILEC must offer
"virtual collocation," by which the other carrier may specify ILEC equipment to
be dedicated to its use and electronically monitor and control communications
terminating in such equipment. We intend, in some instances, to collocate
portions of our network on the premises of certain ILECs. Our ability to do this
on a cost-effective basis will depend on the rates, terms and conditions
established for collocation, which will be established by state regulators in
arbitration proceedings and therefore may vary from one state to the next.
The FCC has responsibility under the 1996 Telecom Act's interconnection
provisions to determine what elements of an ILEC's network must be provided to
competitors on an unbundled basis. The FCC declared dark fiber an unbundled
network element under these provisions. The FCC's requirements for unbundling
were overturned by the Supreme Court, which ordered the FCC to re-evaluate the
standard it uses to determine which network elements need to be unbundled. In
response, the FCC recently issued an order affirming all but one of the network
elements and also stating for the first time that ILECs must provide access to
dark fiber as a separate element. In addition, federal district courts in a
number of jurisdictions have interpreted the 1996 Telecom Act to include dark
fiber as a network element, which must be unbundled. The FCC decision to treat
dark fiber as an unbundled element, as well as these court rulings, could
decrease the demand for dark fiber provided by us because our potential
customers will be able to obtain dark fiber from ILECs at cost-based rates. In
addition, the FCC has announced that state commissions may decide to add network
elements to the FCC's list of elements that are required to be unbundled by
carriers.
ILECs, CLECs and inter-exchange carriers (often referred to as "IXCs") are
subject to other requirements under the Communications Act, the FCC regulations
and additional federal telecommunications laws. These requirements may affect
our business by virtue of the inter-relationships that exist among us and many
of these regulated telecommunications carriers. For example, the FCC recently
issued an order requiring, among other things, that access charges (fees charged
by ILECs to IXCs for use of local telephone facilities for the origination and
termination of long-distance calls) shift in part from being usage driven to a
fixed flat cost-based structure. The FCC recently issued an order granting ILECs
greater pricing flexibility for their access services (both switched and
non-switched), which may permit the ILECs to compete more effectively against
some of our service offerings. While it is not possible to predict the precise
effect the access charge changes will have on our business or financial
condition, the reforms will reduce access charges paid by IXCs, likely making
the use of ILEC facilities by IXCs more attractive, which could have a material
adverse effect on the use of our fiber optic telecommunications networks by
IXCs. Bell Atlantic's proposed investment could subject us to additional
regulation by the FCC. Bell Atlantic is an ILEC and pursuant to the
Communications Act may not provide long distance service within its geographic
region until certain conditions are met. Companies in which an ILEC owns greater
than a ten percent ownership interest are subject to the same prohibitions. If
such prohibitions applied to us it would have a material adverse effect on our
business. For that reason, our agreement with Bell Atlantic prohibits it from
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owning more than ten percent of us until the long-distance prohibitions no
longer apply to Bell Atlantic and its affiliates.
STATE
The 1996 Telecom Act prohibits state and local governments from enforcing
any law, rule or legal requirement that prohibits, or has the effect of
prohibiting, any person from providing any interstate or intrastate
telecommunications service. Nonetheless, this provision of the 1996 Telecom Act
should enable us and our customers to provide telecommunications services in
states that previously prohibited competitive entry.
However, states retain jurisdiction, under the 1996 Telecom Act to, adopt
regulations necessary to preserve universal service, protect public safety and
welfare, manage public rights of way, ensure the continued quality of
communications services and safeguard the rights of consumers.
States continue to determine the rates that ILECs can charge for most of
their services. They are also responsible for mediating and arbitrating ILEC
interconnection arrangements with other carriers if voluntary agreements are not
reached. Accordingly, state involvement in local telecommunications services is
substantial.
Each state (and the District of Columbia, which is treated as a state for
the purpose of regulation of telecommunications services) has its own statutory
scheme for regulating providers of telecommunications services of they are
"common carriers" or "public utilities". As with the federal regulatory scheme,
we believe that the offering of dark fiber facilities does not make us of common
carrier or public utility so we would not be subject to this type of regulation
in most jurisdictions in which we currently have or plan to construct
facilities. Our offering of transmission services (as distinct from dark fiber
capacity), however, will likely be subject to regulation in each of these
jurisdictions to the extent that these services are offered for intra-state use.
Even though our facilities will be physically located in individual states, we
anticipate that most customers will use our facilities and services for the
purpose of originating and/or terminating interstate and foreign communications.
Under current FCC policies, any dedicated transmission service or facility that
is used more than 10% of the time for the purpose of inter-state or foreign
communication is subject to FCC jurisdiction to the exclusion of any state
regulation.
State regulation of the telecommunications industry is changing rapidly, and
the regulatory environment varies substantially from state to state. Our
subsidiaries are currently authorized to provide intrastate telecommunications
services in California, Colorado, Connecticut, Delaware, District of Columbia,
Florida, Georgia, Illinois, Maryland, Massachusetts, Missouri, New Jersey, New
York, Oregon, Pennsylvania, Rhode Island, Texas, Virginia, Washington, Colorado,
Florida, Georgia, Missouri, South Dakota and Oregon and have applications
pending in Arizona and Minnesota. At present, we do not anticipate that the
regulatory requirements to which we will be subject in the states in which we
currently intend to operate will have any material adverse effect on our
operations. These regulations may require, among other things, that we obtain
certification to operate, and that we provide notification of, or obtain
authorization for, certain corporate transactions, such as the transaction with
Bell Atlantic. In any event, we will incur certain costs to comply with these
and other regulatory requirements such as the filing of tariffs, submission of
periodic financial and operational reports to regulators, and payment of
regulatory fees and assessments, including contributions to state universal
service programs. In some jurisdictions, our pricing flexibility for intra-state
services may be limited because of regulation, although our direct competitors
will be subject to similar restrictions. However, we make no assurances that
future regulatory, judicial, or legislative action will not materially adversely
affect us.
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Bell Atlantic recently filed an application with the FCC to provide long
distance service in New York on the grounds that it provides access and
interconnection to its network facilities for the network facilities of one or
more unaffiliated competing providers of telecommunications services. The FCC
has until the end of 1999 to approve the application. We hope that Bell Atlantic
will be a significant customer of ours when it enters the long distance market.
LOCAL
In addition to federal and state laws, local governments exercise legal
authority that affect our business. For example, local governments, such as the
City of New York, typically retain the ability to manage public rights-of-way,
subject to the limitation that local governments may not prohibit persons from
providing telecommunications services and local governments may not treat
telecommunication service providers in a discriminatory manner. Because of the
need to obtain approvals, local authorities affect the timing and costs
associated with our use of public rights-of-way. In addition, some local
authorities must approve or be notified of certain corporate transactions, such
as the Bell Atlantic transaction. These regulations may have an adverse effect
on our business.
FEDERAL REGULATION OF INTERNATIONAL SERVICE
Various regulatory requirements and limitations also will influence our
business as we enter the market for international telecommunications service. We
have entered into a 50/50 joint venture, ION, with a subsidiary of Racal that
contemplates jointly acquiring and selling international, facilities-based
telecommunications capacity between the U.S. and the United Kingdom and possibly
between the U.S. and other markets. ION is a U.S. international common carrier
subject to U.S. regulation under Title II of the Communications Act, and,
depending on our specific business plans, it is possible that we will also
become a U.S. international common carrier subject to the same regulations.
Under current FCC rules, international carriers that do not exercise market
power and that are not affiliated with dominant foreign carriers (carriers
possessing market power in their local markets) are subject to relatively
relaxed U.S. regulation as nondominant international carriers. As a non-dominant
common carrier, ION is and we would be subject to, among other policies, the
common carrier obligation of nondiscrimination. In addition, FCC rules prohibit
U.S. carriers from bargaining for special concessions from certain foreign
partners. ION is and we would also be required, under Sections 214 and 203 of
the Communications Act to obtain authorization and file an international service
tariff containing rates, terms and conditions prior to initiating service. As a
nondominant carrier, ION has sought and we would be eligible to seek "global"
authorization under Section 214 to operate as facilities-based and/or resale
carrier. International carriers are also subject to certain annual fees and
filing requirements, such as the requirement to file contracts with other
carriers, including foreign carrier agreements, and reports setting forth
international circuit, traffic and revenue data. Failure to obtain an
appropriate U.S. license for international service or the revocation of a
license could materially adversely affect our future operations.
Until recently, international common carriers were also required to comply
with the FCC's International Settlements Policy which defines the permissible
boundaries for U.S. carriers and their foreign correspondents to settle the cost
of terminating each other's traffic over their respective networks. The FCC,
however, recently decided that it is no longer necessary to apply the
International Settlement Policy rules to U.S. carrier arrangements with
non-dominant foreign carriers and with arrangements with all foreign carriers in
competitive foreign markets. Since the U.S.-UK route has been declared
competitive by the FCC, we and ION will not have to comply with the
International Settlement Policy.
The FCC has also made significant changes to other aspects of its
international regulatory regime that facilitate our international operations.
For example, it has approved the provisions of switched services over private
lines ("ISR") interconnected with the public switched network between the United
States and 22 other countries, including the UK and Germany. Recently, the FCC
took steps to
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streamline the application process for authority to provide international
services, relaxing further the rules for almost all international services to
almost all countries (with China, Taiwan, Russia, Saudi Arabia, the notable
exceptions). The FCC continues to refine its international service rules to
promote competition, reflect and encourage liberalization in foreign countries,
and reduce accounting rates toward cost. We are unable to predict how the FCC
will resolve the various pending international policy issues and the effect of
such resolutions on us.
REGULATION OF INTERNATIONAL OPERATIONS
Our international services are also subject to regulation in other countries
where we operate. Such regulation, as well as policies and regulations on the
European Union level, may impose separate licensing, service and other
conditions on our international service operations, and these requirements may
have a material adverse effect on our ability to operate. In addition to our
joint venture, ION, we have entered into a joint venture with Carrier 1 and
Viatel to develop a fiber network linking Germany's main cities. We also have an
agreement with Viatel to use Viatel's network in France, Germany, the UK and the
Netherlands. The following discussion is intended to provide a general outline
of certain regulations and current regulatory posture in certain foreign
jurisdictions in which we currently operate or intend to operate, and is not
intended as a comprehensive discussion of such regulations or regulatory
posture. Local laws and regulations differ significantly among these
jurisdictions, and, within such jurisdictions, the interpretation and
enforcement of such laws and regulations can be unpredictable.
THE EUROPEAN UNION
The European Union (the "EU") was established by the Treaty of Rome and
subsequent treaties. EU member states are required to implement directives
issued by the European Commission (the "EC") and the European Council by passing
national legislation. The EC and European Council have issued a number of key
directives establishing basic principles for the liberalization of the EU
telecommunications market. This basic framework has been advanced by a series of
harmonization directives, which include the so-called Open Network Provision
directives and the Licensing Directive of April 1997 and the Interconnection
Directive of June 1997, which address the procedures for granting license
authorizations and conditions applicable to such licenses and the
interconnection of networks and the interoperability of services as well as the
achievement of universal service. The Licensing Directive sets out framework
rules for the procedures associated with the granting of national authorizations
for the provision of telecommunications services and for the establishment or
operation of any infrastructure for the provision of telecommunications
services. It distinguishes between "general authorizations," which should
normally be easier to obtain since they do not require an explicit decision by
the national regulatory authority, and "individual licenses." EU member states
may impose individual license requirements for the establishment and operation
of public telecommunications networks and for the provision of voice telephony,
among other things. Consequently, ION's operations in the U.K., our operation
with respect to the German Network and European Network and our proposed
operations may require that ION or the Company, respectively, be subject to an
individual licensing system rather than to a general authorization in the
majority of EU member states. In some countries where we operate, we may also be
required to contribute to a fund for the provision of universal service. The
United Kingdom and each other EU member state in which ION currently conducts or
we conduct our business has a different regulatory regime and such differences
are expected to continue. The requirement that ION, our former joint venture, or
we obtain necessary approvals varies considerably from country to country.
UNITED KINGDOM
The Telecommunications Act of 1984 (the "U.K. Act") provides a licensing and
regulatory framework for telecommunications activities in the United Kingdom.
The Secretary of State for Trade
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and Industry at the Department of Trade and Industry (the "Secretary of Trade")
is responsible for granting licenses under the U.K. Act and for overseeing
telecommunications policy, while the Director General of Telecommunications (the
"Director General") and his office (the Office of Telecommunications ("OFTEL"))
are responsible, among other things, for enforcing the terms of such licenses.
Operators wishing to use their own facilities to provide international services
were until recently required to obtain an International Facilities License
("IFL"). An IFL authorized the running of telecommunication systems within the
U.K. and permitted the licensee to connect U.K. systems to overseas systems, and
to offer international services. ION obtained an IFL on December 9, 1998.
On September 27, 1999, the Telecommunications (licence Modification) (Fixed
Voice Telephony and International Facilities Operator Licences) Regulations 1999
(the "Regulations") came into force. The Regulations implemented the
requirements of the Licensing Directive and converted existing IFLs, into Public
Telecommunications Operator Licenses ("PTO Licenses") which now include an
authorization for the provision of international facilities. Under its new PTO
License, ION is also entitled to offer domestic telecommunications services.
Metromedia Fiber Network UK Limited ("MFN UK"), which was incorporated by us in
the United Kingdom on March 4, 1999 was awarded a PTO license on October 7,
1999. MFN UK will be used as the operating company in the United Kingdom and has
been granted code powers which gives it statutory rights of way over land which
overide private rights.
With effect from June 30, 1999, it is no longer necessary to hold an
individual telecommunications license to have interconnection rights. Similarly,
it is no longer necessary for an operator to build its own infrastructure to be
included within the "Annex II list" of operators with rights and obligations to
interconnect pursuant to the Interconnection Directive. Any operator who appears
on the Annex II list on the OFTEL web-site (www.oftel.gov.uk) has the right to
negotiate interconnection as well as a corresponding obligation to negotiate
interconnection with any other operator in Annex II. The terms, conditions and
charges to be applied to interconnection between operators who do not have
significant market power are not specifically regulated and are therefore
subject to commercial agreement. All Annex II operators are eligible to benefit
from the terms and conditions and charges which fixed-line operators with
significant market power are obliged to offer by the Interconnection Directive.
In the United Kingdom, British Telecommunications and Kingston Communications
have significant market power for the provision of fixed networks and services
and leased lines. ION is included in the Annex II list of operators on OFTEL's
web-site and therefore has a right coupled with a corresponding obligation to
negotiate interconnection with any other operator on the Annex II list. MFN UK
is not currently included in the Annex II list but may apply to OFTEL to be
included in the list.
The U.K. Government passed a Competition Act in November 1998 which grants
concurrent powers to the industry specific regulators and the Director General
of Fair Trading for the enforcement of prohibitions against anti-trust behavior
modeled on Articles 81 and 82 of the Treaty of Rome. The Act introduces into
U.K. legislation prohibitions on the abuse of a dominant position and anti-
competitive agreements, and provides for third party rights of action, stronger
investigative powers, interim measures and effective enforcement powers. The
prohibitions are expected to come into force on March 1, 2000. The Act gives the
Director General power to exercise concurrent powers with the Director General
of Fair Trading in relation to "commercial activities connected with
telecommunications." The Act enables third parties to bring enforcement actions
directly against telecommunications operators who are in breach of the
prohibitions contained in the Act and seek damages rather than have to wait for
the Director General to issue an enforcement order. Depending on how these
provisions of the Act are implemented, it may give us and our competitors
greater ability to challenge anti-competitive behavior in the U.K.
telecommunications market.
GERMANY
The German Telecommunications Act of July 25, 1996 (the "German
Telecommunications Act") liberalized all telecommunications activities. Under
the German Telecommunications Act, voice
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telephony was liberalized as of January 1, 1998. The German Telecommunications
Act has been complemented by several Ordinances. The most significant Ordinances
concern license fees, rate regulation, interconnection, universal service,
frequencies and customer protection. Under the German regulatory scheme,
licenses can be granted within four license classes. A license is required for
operation of transmission lines that extend beyond the limits of a property and
that are used to provide telecommunications services for the general public. The
licenses required for the operation of transmission lines are divided into 3
infrastructure license classes: mobile telecommunications (license class 1);
satellite (license class 2); and telecommunications services for the general
public (license class 3). The provision of dark fiber does not require a
license. Beside the infrastructure licenses, an additional license is required
for provision of voice telephony services on the basis of self-operated
telecommunications networks (license class 4). A class 4 license does not
include the right to operate transmission lines. According to the License Fees
Ordinance, a nationwide class 4 license costs a one-time fee of DM 3,000,000.
The costs for a territorial class 3 license will be determined by the
Regulierungsbehorde fur Telekommunikation und Post (the "RegTP") and is
dependent on the population and the geographical area covered by the territorial
class 3 license. A nationwide territorial class 3 license costs DM 10,600,000.
The Administrative Court of Cologne held in a preliminary ruling that there is a
high probability that the license fees are excessive and that therefore the
Ordinance might be void. The RegTP does not invoice any license fees at the
present time in view of the pending administrative court procedure. Since we
have not yet received a license fee order, it is presently unclear what the
amount of our license fee will be. Licensees that operate transmission lines
crossing the boundary of a property have the right to install transmission lines
on, in and above public roads, squares, bridges and public waterways without
payment; however, when installing transmission lines a planning agreement must
be obtained from the relevant authorities.
A company which operates a public telecommunications network has the right
to receive favorable interconnection rates from Deutsche Telekom, as a dominant
carrier. If the company does not agree with the offered rates or Deutsche
Telekom refuses to interconnect for whatever reason, the company can refer the
case to the RegTP which shall decide upon the request for interconnection within
a period of six weeks; if the RegTP decides to extend this deadline, it must at
the latest decide within ten weeks of the request. Whether, and under which
conditions, carrier to carrier operators will receive favorable interconnection
rates or less favorable "special network access rates" from Deutsche Telekom
depends on whether they operate a "public telecommunications network."
According to the regulatory authority, a public telecommunication network
consists of at least one switch and three transmission lines. Therefore, a
carrier with this minimal network configuration has the right to interconnect
with Deutsche Telekom or other operators of public telecommunications networks.
Deutsche Telekom has terminated its Interconnection Agreements with most of the
carriers and is now imposing, in its new standard interconnection contracts,
additional interconnection conditions. Deutsche Telekom demands inter alia, that
carriers which do not meet certain minimum traffic requirements must pay a
stipulated penalty. In addition, Deutsche Telekom requests a minimum lease
period for interconnection access points (often referred to as "ICA") of
24 months. If traffic at one point of interconnection exceeds 48.8 Erlang,
Deutsche Telekom requests the establishment of additional points of
interconnection up to a maximum of 23 points of interconnection. It is presently
unclear whether or not these and other interconnection conditions will be upheld
by the regulatory authority or the courts.
The rates of Deutsche Telekom's services in conjunction with interconnection
and special network access are subject to regulatory approval; this approval is
typically granted for a limited period of time. The current approval expires on
December 31, 1999. It is uncertain which interconnection rates will apply to the
next year.
Licensed operators are under an obligation to present their standard terms
and conditions (with regard to the provision of telecommunications services for
the public) to the RegTP. The RegTP may, based upon certain criteria decide not
to accept these terms and conditions. We may become subject to
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universal service financing obligations. Currently, it is unlikely that the
universal service financing system will be implemented in Germany in the
foreseeable future. These obligations do not apply as far as the provision of
mere dark fiber is concerned.
Metromedia Fiber Network GmbH has obtained a class 3 license for the whole
territory of Germany. In addition, Metromedia Fiber Network GmbH has concluded
frameworks agreements with the cities of Frankfurt, Stuttgard and Cologne on the
conditions and procedures for obtaining the necessary planning agreements with
the city authorities.
OTHER EUROPEAN COUNTRIES
In addition to our United Kingdom and German operations, we have
incorporated local subsidiaries in Belgium, France and The Netherlands. We are
currently in the process of incorporating local subsidiaries in Austria, The
Czech Republic, France, Hungary, Ireland, Italy, Japan, Spain and Switzerland.
In the Netherlands, the local subsidiary has registered with the Dutch
regulator. We are in the process of applying, through our local subsidiaries,
for necessary licenses and registrations in the other above mentioned countries
to enable us to provide dark fiber and DWDM services.
EMPLOYEES
As of September 30, 1999, we employed 529 people, including 262 in
engineering and construction, 168 in sales and marketing and 99 in
administration. Our employees are not represented by any labor union. We
consider our relationship with employees to be good.
PROPERTIES
Our principal properties currently are the NY Network and its component
assets. We own substantially all of the communications equipment required for
our business. Our installed fiber optic cable is laid under the various
rights-of-way held by us. Please refer to the section of this prospectus
supplement entitled "--Build-out of Networks--Rights-of-Way." Our other fixed
assets are located at various leased locations in the geographic areas that we
serve. Our executive and administrative offices are located at our principal
office at One North Lexington Avenue, White Plains, New York. We lease this
space (currently approximately 21,000 square feet) under an agreement that
expires in March 2003. Our sales offices are located at 685 Third Avenue, New
York, New York. We lease this space (approximately 9,670 square feet) under an
agreement that expires in September 2003. We lease additional space (currently
8,710 square feet) at 60 Hudson Street, New York, New York, from Hudson
Telegraph Associates under an agreement that expires in March 2010.
AboveNet's executive and administrative offices are located at 50 West San
Fernando Street, San Jose, California. We lease this space (approximately 19,850
square feet) under an agreement that expires in February 2008. Palo Alto
Internet Exchange's executive and administrative offices are located at 285
Hamilton Avenue, Palo Alto, California (approximately 5,130 square feet) under
an agreement that expires in January 2007. In addition, AboveNet and Palo Alto
Internet Exchange lease various co-location facilities in California, Virginia
and New York that range from 10,000 to 29,000 square feet under agreements that
expire within the next 10 to 20 years.
LEGAL PROCEEDINGS
On or about October 20, 1997, VCNY commenced an action against us, 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, VCNY filed an amended
complaint. On or about July 2, 1999, VCNY filed a second amended complaint. In
its complaint, as amended, VCNY alleges seven causes of action in
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connection with its sale 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 seven causes of action include: (i) violation of Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated under
such Act; (ii) fraud and fraudulent concealment; (iii) breach of fiduciary duty;
(iv) negligent misrepresentation and omission; and (v) breach of contract. VCNY
is seeking, among other things, rescission of the VCNY Sale, or alternatively,
damages in an amount which cannot currently be ascertained but VCNY contends to
be in excess of $460 million, together with interest. VCNY is also seeking
unspecified punitive damages, reasonable legal fees and the cost of this action.
All the defendants, including us and Stephen A. Garofalo, have moved for summary
judgment on VCNY's second amended complaint.
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).
Mr. Contardi alleges a cause of action for, among other things, breach of a
finder's fee agreement entered into between Mr. Sahagen and Mr. Contardi 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. Mr. Contardi is seeking, among
other things, a number of shares of the Company which we cannot currently
ascertain but believe to be approximately 112,500 shares (calculated as of the
date on which the complaint was filed) or damages in an amount which we cannot
currently ascertain but believe to be approximately $4.9 million (calculated as
of the date on which the complaint was filed) and all costs and expenses
incurred by him in this action. We have filed an answer to the complaint and
have raised affirmative defenses. We have moved for summary judgment on the
complaint.
We intend to vigorously defend both these actions because we believe that we
acted appropriately in connection with the matters at issue in these two cases.
However, we can make no assurances that we will not determine that the
advantages of entering into a settlement outweigh the risk and expense of
protracted litigation or that ultimately we will be successful in defending
against these allegations. If we are unsuccessful in defending against these
allegations, an award of the magnitude being sought in the VCNY Litigation would
have a material adverse effect on our financial condition or results of
operations.
We were a defendant in Howard Katz, et al. v. Metromedia Fiber Network,
Inc., et al., No. 97 Civ. 2764 (the "Katz Litigation"). In their second amended
complaint, Howard Katz, Realprop Capital Corporation and Evelyn Katz
(collectively, the "Katz Entities") alleged causes of action against our
company, Stephen A. Garofalo, Peter Sahagen, Peter Silverman, Silverman,
Collura, Chernis & Balzano, P.C. and Metromedia Company, in connection with the
repurchase of the Katz Securities, as defined, for, among other things, common
law fraud, violations of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated under such Act, breach of fiduciary duty and
negligent misrepresentation. In March 1998, we entered into a settlement
agreement with the Katz Entities which, among others, settled and resulted in
the dismissal of the Katz Litigation.
In addition, we are subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, we
believe that none of such current claims, or proceedings, individually or in the
aggregate, including the VCNY Litigation and the Contardi litigation, will have
a material adverse effect on our financial condition or results of operations,
although we can make no assurances in this regard.
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MANAGEMENT
The directors and executive officers of our company and their ages as of the
date of this prospectus supplement are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- -------- -------------
<S> <C> <C>
Stephen A. Garofalo........ 48 Chairman of the Board and Chief Executive Officer
Howard M. Finkelstein...... 46 President, Chief Operating Officer and Director
Vincent A. Galluccio....... 53 Senior Vice President and Director
Gerard Benedetto........... 42 Senior Vice President--Chief Financial Officer
Nicholas M. Tanzi.......... 40 Senior Vice President--Sales and Marketing
Silvia Kessel.............. 49 Executive Vice President and Director
John W. Kluge.............. 85 Director
David Rand................. 36 Director; Chief Technology Officer of AboveNet
David Rockefeller.......... 83 Director
Stuart Subotnick........... 56 Director
Sherman Tuan............... 45 Director; Chief Executive Officer of AboveNet
Arnold L. Wadler........... 56 Executive Vice President, General Counsel, Secretary and
Director
Leonard White.............. 60 Director
</TABLE>
STEPHEN A. GAROFALO founded our company in April 1993. Mr. Garofalo has been
serving as Chairman of the Board of Directors since our inception and as Chief
Executive Officer since October 1996. Mr. Garofalo served as President from 1993
to 1996 and as Secretary from 1993 to 1997. From 1979 to 1993 Mr. Garofalo
served as president and chief executive officer of F. Garofalo Electric Co.,
Inc., an electrical contractor.
HOWARD M. FINKELSTEIN has been President, Chief Operating Officer and a
Director of our company since April 1997. Prior to joining our company,
Mr. Finkelstein was employed by various affiliates of Metromedia Company for 16
years. His most recent position was as executive vice president and chief
operating officer of Metromedia International Telecommunications, Inc. From 1984
to 1993, Mr. Finkelstein served as president of Metromedia Communications
Corporation, a national long distance telecommunications carrier. In addition,
Mr. Finkelstein served as executive vice president and chief operating officer
of Metromedia Restaurant Group from 1993 to 1995. Mr. Finkelstein is a director
of Multimedia Medical Systems, Incorporated, a privately held company.
VINCENT A. GALLUCCIO has been a Director of our company since
February 1997. Prior to joining our company, Mr. Galluccio served as president
of ION since February 1998 and as a senior vice president since December 1995.
From January 1992 to October 1994, Mr. Galluccio was employed by British
Telecommunications plc, as a global sales manager for network outsourcing
operations. Prior to joining British Telecommunications plc, Mr. Galluccio spent
25 years with International Business Machines Corporation in various sales,
marketing and business development positions and was involved in both domestic
and world trade assignments.
GERARD BENEDETTO has been Senior Vice President--Chief Financial Officer
since February 1998. From July 1995 to January 1998, he was vice
president--chief accounting officer at Metromedia International
Telecommunications, Inc. From October 1993 to July 1995, he was vice
president--chief financial officer at Metromedia Restaurant Group. From
February 1985 to October 1993, he was vice president--chief financial officer at
Metromedia Communications Corporation.
NICHOLAS M. TANZI has been Senior Vice President--Sales and Marketing since
August 1997. From March 1995 to July 1997, he served as vice
president--enterprise networks division at Fujitsu Business Communications
Systems. From April 1993 to February 1995, Mr. Tanzi was director of sales,
Eastern
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Region at Asante Technologies Inc. Mr. Tanzi was employed in various capacities
from November 1979 through October 1993 at Digital Equipment Corporation.
SILVIA KESSEL has served as a Director of our company since July 1997 and as
Executive Vice President since October 1997. Ms. Kessel has served as chief
financial officer and treasurer of Metromedia International Group, Inc. since
1995 and executive vice president of Metromedia International Group, Inc. since
1996. In addition, Ms. Kessel served as executive vice president of Orion
Pictures Corporation, a motion picture production and distribution company, from
January 1993 through July 1997, senior vice president of Metromedia Company
since 1994 and president of Kluge & Company since January 1994. Prior to that
time, Ms. Kessel served as senior vice president and a director of Orion
Pictures Corporation from June 1991 to November 1992 and managing director of
Kluge & Company from April 1990 to January 1994. Ms. Kessel is executive vice
president and a member of the Board of Directors of Big City Radio, Inc. and of
Metromedia International Group, Inc. In addition, Ms. Kessel is a director of
Liquid Audio, Inc.
JOHN W. KLUGE has been a Director of our company since July 1997. Mr. Kluge
has been the president and chairman of Metromedia Company and its
predecessor-in-interest, Metromedia, Inc., for over five years. Mr. Kluge has
been the chairman of the Board of Metromedia International Group, Inc. since
1995. In addition, Mr. Kluge has been chairman of the Board of Directors and a
director of Orion Pictures Corporation from 1992 until July 1997. He also serves
as a director of Conair Corporation and Occidental Petroleum Corporation.
DAVID RAND has served as a Director of our company since September 1999. Mr.
Rand has served as AboveNet's Chief Technology Officer since March 1996,
initially as a consultant, and since May 1998 as an employee. Mr. Rand has
served as a member of the Internet Engineering Task Force for the past seven
years. Mr. Rand authored rfc 1962 and rfc 1663, developed the EtherValve
technology, ASAP and APS, as well as co-developed MRTG. From September 1995 to
May 1998, Mr. Rand was an engineer at Cisco Systems, Inc., a router
manufacturer. From February 1994 to August 1995, Mr. Rand was an engineer at
Innovative Systems and Technologies, a video compression company. From
October 1993 to February 1994, Mr. Rand was a software engineer at
Novell, Inc., a network server company.
DAVID ROCKEFELLER has served as a Director of our company since
October 1997. Mr. Rockefeller currently serves as chairman of The Chase
Manhattan Bank's International Advisory Committee, as chairman of Rockefeller
Center Properties, Inc. (since 1995) and as a director of Rockefeller & Co.,
Inc. (since 1994), a privately owned investment management firm and its parent
corporation, Rockefeller Financial Services. From 1961 to 1981, Mr. Rockefeller
served as chairman of The Chase Manhattan Corporation and The Chase Manhattan
Bank, N.A. From 1981 to 1995, he served as chairman of Rockefeller Group, Inc.
STUART SUBOTNICK has served as a Director of our Company since July 1997.
Mr. Subotnick has been the vice chairman of the Board of Directors of Metromedia
International Group, Inc. since 1995 and president and chief executive officer
of Metromedia International Group, Inc. since December 1996. In addition,
Mr. Subotnick served as vice chairman of the Board of Directors of Orion
Pictures Corporation from 1992 until July 1997. Mr. Subotnick has served as
executive vice president of Metromedia Company and its predecessor-in-interest,
Metromedia, Inc., for over five years. Mr. Subotnick has served as vice chairman
of Metromedia International Group, Inc. since November 1995 and president and
chief executive officer of Metromedia International Group, Inc. since November
1996. Mr. Subotnick is also a director of Carnival Cruise Lines, Inc. and
chairman of the Board of Directors of Big City Radio, Inc.
SHERMAN TUAN, the founder of AboveNet, has served as a Director of our
company since September 1999. Mr. Tuan has served as Chief Executive Officer and
a Director of AboveNet since 1996, and President until January 1998. Mr. Tuan
served as chairman of the board of AboveNet from
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August 1998 to September 1999. Mr. Tuan was president of InterNex Information
Services, Inc., an Internet infrastructure provider, from November 1994 to
October 1995 and from February 1994 to November 1995, was president of Tiara
Computer, Inc., a network equipment manufacturer, which merged with InterNex
Information Services, Inc. in November 1994. From January 1992 to June 1993,
Mr. Tuan was vice president of worldwide sales and marketing of Primus
Technologies, Inc., a provider of problem resolution and knowledge management
software, and president of Celerite Graphics, Inc., a manufacturer of video
chips. Mr. Tuan received an electrical engineering degree from Feng-Chia
University in Taiwan.
ARNOLD L. WADLER has served as our Executive Vice President, General Counsel
and Secretary since October 1997 and has served as a Director of our company
since July 1997. Mr. Wadler has served as executive vice president, general
counsel and secretary of Metromedia International Group, Inc. since August 29,
1996 and, from November 1, 1995 until that date, as senior vice president,
general counsel and secretary of Metromedia International Group, Inc. and as the
executive vice president, general counsel, secretary and director of Big City
Radio, Inc. since December 1997. In addition, Mr. Wadler serves as a director of
Metromedia International Group, Inc. and has served as a director of Orion
Pictures Corporation from 1991 until July 1997 and as senior vice president,
secretary and general counsel of Metromedia Company, and its
predecessor-in-interest, Metromedia, Inc., for over five years.
LEONARD WHITE has served as a Director of our company since October 1997.
Mr. White has served as president and chief executive officer of Rigel
Enterprises since July 1997. Mr. White served as president and chief executive
officer of Orion Pictures Corporation from 1992 until 1997 and as president and
chief executive officer of Orion Home Entertainment Corporation from 1987 to
1992. Mr. White also serves as a director of Metromedia International Group,
Inc., Big City Radio, Inc. and American Film Technologies, Inc.
BOARD OF DIRECTORS
There are presently eleven members on the Board of Directors of our company.
Holders of the class B common stock are entitled to elect 75% of the Board of
Directors and holders of the class A common stock are entitled to vote as a
separate class to elect the remaining directors. Currently, eight of the eleven
directors are nominees of the holders of class B common stock and as a result
holders of the class A common stock are entitled to fill three vacancies on the
Board of Directors. Members of each class of directors will hold office until
their successors are elected and qualified. The directors are elected by a
plurality vote of all votes cast at each annual meeting of the stockholders
entitled to vote for such directors and hold office for a one-year term.
COMPENSATION OF DIRECTORS
During 1999, each director of our company who was not an officer, employee
or affiliate of our company (the "Non-Employee Directors") will be entitled to
receive a $20,000 annual retainer plus a separate attendance fee of $1,200 for
each meeting of the Board of Directors attended by a Non-Employee Director in
person or $500 for each meeting of the Board of Directors in which a Non-
Employee Director participated by conference telephone call. Members of
committees of the Board of Directors are paid $500 for each meeting attended. In
addition, our 1998 Incentive Stock Plan entitles any Non-Employee Director who
meets the criteria for "outside director" under Section 162(m) of the Internal
Revenue Code and who first serves on the Board of Directors subsequent to the
adoption of the 1998 Incentive Stock Plan to receive awards under such plan of
40,000 shares of class A common stock, each having an exercise price equal to
the fair market value of a share of class A common stock on the date of grant.
Awards to Non-Employee Directors under the 1998 Incentive Stock Plan will be
aggregated with awards under the 1997 Incentive Stock Plan so that total awards
under each plan will not exceed 40,000 shares of class A common stock.
Non-Employee Directors are entitled to receive options to purchase 40,000
shares of our class A common stock under our 1997 Incentive Stock Plan. Options
to purchase 40,000 shares of class A
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common stock will be granted annually on the day of each annual stockholder
meeting. Each outside director is eligible to receive options to purchase a
maximum of 100,000 shares of class A common stock under the plan. Under the 1997
Incentive Stock Plan, each Non-Employee Director who was a director of our
company on October 28, 1997 was granted an option to purchase 40,000 shares of
our common stock at an exercise price of $2.00, the price of the class A common
stock on the date of the Initial Public Offering.
In addition, on August 20, 1997, we granted to each of Mr. Kluge and
Mr. Subotnick options to purchase 2,028,000 shares of class A common stock at an
exercise price of $.245 per share, and to each of Mr. Wadler and Ms. Kessel
options to purchase 405,600 shares of class A common stock at an exercise price
of $.245 per share, in each case.
EXECUTIVE COMPENSATION
The following table provides you with information on the compensation
awarded to, earned by or paid to the Chief Executive Officer and the four other
most highly compensated executive officers of our company whose individual
compensation exceeded $100,000 during the fiscal years ended December 31, 1998,
1997 and 1996 for services rendered in all capacities to us and our
subsidiaries. The persons listed in the table below are referred to as the
"Named Executive Officers."
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------ ---------------------------
OTHER NUMBER OF ALL
ANNUAL SECURITIES OTHER
COMPENSATION UNDERLYING STOCK COMPENS.
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS ($) ($)(1) OPTIONS (2) ($)
- --------------------------- -------- --------- --------- ------------ ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Garofalo.................. 1998 328,385 100,000 23,301 -- -- -- --
Chairman and Chief Executive 1997 295,000 50,000 14,157 3,042,000(3)
Officer 1996 225,960 -- --
Howard M. Finkelstein................ 1998 321,462 100,000 24,074 -- -- -- --
President and Chief Operating 1997 196,756 50,000 11,769 12,168,000(5)
Officer(4) 1996 -- -- --
Vincent A. Galluccio................. 1998 183,400 15,000 1,673 300,000(6) -- --
Senior Vice President 1997 181,522 -- -- 2,481,840(7) --
1996 127,087 -- --
Gerard Benedetto..................... 1998 181,423 -- 3,355 1,100,000(9) -- -- --
Senior Vice President--Chief 1997 -- -- -- --
Financial Officer(8) 1996 -- -- --
Nicholas M. Tanzi.................... 1998 158,000 65,000 2,819 300,000(6) -- --
Senior Vice President--Sales and 1997 -- -- -- 721,680(11)
Marketing(10) 1996 -- -- -- --
</TABLE>
- ------------------------
(1) Includes amounts paid as automobile allowance, insurance premiums and 401(k)
matching funds.
(2) This information gives effect to our stock splits.
(3) Includes presently exercisable options to purchase 3,043,000 shares of
class A common stock at an exercise price of $.245 per share.
(4) Since Mr. Finkelstein was hired by us during 1997, the preceding year's
compensation is not applicable.
(5) Includes presently exercisable options to purchase 12,168,000 shares of
class A common stock at an exercise price of $.245 per share.
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(6) Includes options to purchase 300,000 shares of class A common stock at an
exercise price of $5.25 per share that will become exercisable ratably over
a four year period commencing August 31, 1999.
(7) Includes presently exercisable options to purchase 1,281,840 shares of
class A common stock at an exercise price of $.245 per share, and options to
purchase 300,000 shares of class A common stock, which Mr. Galluccio
exercised during 1998. Also includes options to purchase 600,000 shares of
class A common stock at an exercise price of $2.00 per share that will
become exercisable ratably over a four year period commencing October 28,
1998.
(8) Since Mr. Benedetto was hired by us during 1998, the preceding year's
compensation is not applicable.
(9) Includes options to purchase 800,000 and 300,000 shares of class A common
stock at an exercise price of $1.94 and $5.25 per share that will become
exercisable ratably over a four year period commencing January 6, 1999 and
August 31, 1999, respectively.
(10) Since Mr. Tanzi was hired by Metromedia Fiber Network during 1997, the
preceding year's compensation is not applicable. Compensation information
for 1997 is omitted because aggregate compensation during such fiscal year
was less than $100,000.
(11) Includes presently exercisable options to purchase 121,680 shares of
class A common stock at an exercise price of $.96 per share and options to
purchase 600,000 shares of class A common stock at an exercise price of
$2.00 per share that will become exercisable ratably over a four year
period commencing October 28, 1998.
During 1998 and 1997, Mr. Wadler and Ms. Kessel, each of whom serves as an
executive officer of our company, were employed and paid by Metromedia Company,
pursuant to a management agreement with Metromedia Company, dated as of
January 2, 1998, as amended (the "Management Agreement"). Please refer to the
section in this prospectus supplement entitled "Certain Relationships and
Related Transactions--Recent Transactions--Management Agreement." We did not pay
any other amounts to the Named Executive Officers during 1997 or 1998.
During 1999, certain of our executive officers were granted stock options to
purchase 150,000 shares of class A common stock at an exercise price of $26.375
per share.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of our Named Executive
Officers.
GAROFALO EMPLOYMENT AGREEMENT. Mr. Garofalo's employment agreement, dated
as of February 26, 1997, has a five year term. It provides Mr. Garofalo a base
salary of $295,000 for the first year, $335,000 for the second year, $375,000
for the third year, $415,000 for the fourth year and $455,000 for the fifth
year. Mr. Garofalo is also entitled to receive an annual incentive bonus to be
determined by the Compensation Committee of the Board of Directors. The
incentive bonus will not be less than $100,000 per year. Mr. Garofalo's
employment agreement also provides for other employee benefits such as a car
allowance, life insurance, health care and certain disability and death
benefits. In addition, Mr. Garofalo was granted options to purchase 3,042,000
shares of class A common stock at an exercise price of $.245 per share after
giving effect to the recent stock splits. These options are immediately
exercisable and expire 10 years from their grant. We registered the shares of
class A common stock underlying the options under the Securities Act upon the
consummation of the initial public offering.
Except in the case of disability, we may terminate Mr. Garofalo's employment
only for cause, upon which termination Mr. Garofalo will have no right to
receive any compensation or benefit from us. If the agreement is terminated
without cause, or if Mr. Garofalo terminates employment for good reason,
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we will be obligated to pay Mr. Garofalo an amount equal to the greater of
(i) his monthly base salary as then in effect multiplied by the number of months
remaining in term of his employment as of such termination date and (ii)
$1,000,000. "Good reason" includes:
- a reduction in the nature or scope of Mr. Garofalo's titles, authorities,
powers, duties or responsibilities;
- a change in the method or formula for determining the bonus, which results
in a decrease in the amount of bonus payable to Mr. Garofalo;
- the removal of Mr. Garofalo as a member of the Board of Directors, unless
such removal occurs after termination of Mr. Garofalo's employment for
cause;
- a sale of all or substantially all of the ownership interests or assets of
our company, or a merger or consolidation of our company with any other
corporation or entity;
- a change in control of our company, defined as any person or entity, other
than Mr. Garafalo, becoming a beneficial owner, as defined in Rule 13d-3
of the Securities Exchange Act of 1934, directly or indirectly, of
securities of our company representing 50% or more of the combined voting
power of our then outstanding securities; or
- a material breach by our company of our affirmative or negative covenants
or undertakings in the employment agreement, and a failure to remedy such
breach within 15 days.
Pursuant to the agreement, Mr. Garofalo has agreed not to compete with us
for a period of one year following termination of the agreement. During such
non-compete period, Mr. Garofalo will be entitled to receive an amount equal to
his base salary as in effect on the date of termination, so long as the
agreement was not terminated prior to the expiration of the term by either
party.
FINKELSTEIN EMPLOYMENT AGREEMENT. Mr. Finkelstein's employment agreement,
dated as of April 30, 1997, has a three year term. It provides Mr. Finkelstein
with a base salary of $295,000 for the first year, $335,000 for the second year
and $375,000 for the third year. Mr. Finkelstein is also entitled to receive an
annual incentive bonus to be determined by the Compensation Committee of the
Board of Directors. The incentive bonus will not be less than $100,000 for each
year. Mr. Finkelstein's employment agreement also provides for other employee
benefits such as a car allowance, life insurance, health care, and certain
disability and death benefits. In addition, Mr. Finkelstein was granted options
to purchase 12,168,000 shares of class A common stock at an exercise price of
$.245 per share after giving effect to the recent stock splits, which options
are immediately exercisable and expire 10 years from their grant. We registered
these shares of class A common stock under the Securities Act upon the
consummation of our initial public offering.
Except in the case of disability, we may terminate Mr. Finkelstein's
employment only for cause, upon which termination Mr. Finkelstein will have no
right to receive any compensation or benefit from us. If the agreement is
terminated without cause, or if Mr. Finkelstein terminates employment for good
reason, we will be obligated to pay to Mr. Finkelstein his base salary, bonus
and benefits that are accrued and unpaid as of the date of termination, as well
as an amount equal to one and a half time his base salary as then in effect.
"Good reason" includes
- a reduction in the nature or scope of Mr. Finkelstein's titles,
authorities, powers, duties or responsibilities;
- a change in the method or formula for determining the bonus, which results
in a decrease in the amount of bonus payable to Mr. Finkelstein;
- the removal of Mr. Finkelstein as a member of the Board of Directors,
unless such removal occurs after termination of Mr. Finkelstein's
employment for cause;
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- a sale of all or substantially all of the ownership interests or assets of
our company, or a merger or consolidation of our company with any other
corporation or entity;
- a change in control of our company, defined as any person or entity, other
than Mr. Garofalo, becoming a beneficial owner, as defined in Rule 13d-3
of the Securities Exchange Act of 1934, directly or indirectly, of
securities of our company representing 50% or more of the combined voting
power of our then outstanding securities; or
- a material breach by us of our affirmative or negative covenants or
undertakings in the employment agreement, and a failure to remedy such
breach within 15 days.
Pursuant to the agreement, Mr. Finkelstein has agreed not to compete with us
for a period of one year following termination of the agreement. During such
non-compete period, Mr. Finkelstein will be entitled to receive an amount equal
to his base salary as in effect on the date of termination, so long as the
agreement was not terminated prior to the expiration of the term by either
party.
GALLUCCIO EMPLOYMENT AGREEMENT. Mr. Galluccio's employment agreement, dated
as of August 31, 1998, has a one year term and contains a one-year renewal
option which was exercised by the Company. It provides Mr. Galluccio with an
annual base salary of $225,000 for the current year. Mr. Galluccio is also
entitled to receive an annual incentive bonus, which is dependent upon our
performance, to be determined by the Compensation Committee of the Board of
Directors. If approved by the Compensation Committee, the incentive bonus has an
initial target of 20% of Mr. Galluccio's base salary. Mr. Galluccio's employment
agreement also provides for other employee benefits such as the right to
participate in all group health and insurance programs. In addition,
Mr. Galluccio was granted options to purchase 300,000 shares of class A common
stock at an exercise price of $5.25 per share. These shares have been registered
under the Securities Act on Form S-8.
Except in the case of disability or a change of control, we may terminate
Mr. Galluccio's employment only for cause, upon which termination Mr. Galluccio
will have no right to receive any compensation or benefit from us. If
Mr. Galluccio's employment is terminated for any reason other than for cause, or
in the event that there is a change of control of our company and Mr. Galluccio
is requested, in connection with such change of control, to perform his duties
under this agreement on a regular, full-time basis at a location further than 75
miles from Mr. Galluccio's current principal office location, Mr. Galluccio, in
his sole and absolute discretion, may deem this agreement to be terminated by us
without cause. Upon such termination, Mr. Galluccio will be entitled to receive
his base salary for the remaining term of his employment agreement, all
previously earned and accrued entitlements and benefits from us and our employee
benefit plans, and an amount equal to 25% of Mr. Galluccio's base salary.
Mr. Galluccio has agreed not to compete with us or any affiliated company
for a period of two years following the termination of his employment agreement.
BENEDETTO EMPLOYMENT AGREEMENT. Mr. Benedetto's employment agreement, dated
as of August 31, 1998, has a three and one-half year term. It provides
Mr. Benedetto with an annual base salary of $225,000 for the current year.
Mr. Benedetto is also entitled to receive an annual incentive bonus, which is
dependent upon our performance, to be determined by the Compensation Committee
of the Board of Directors. If approved by the Compensation Committee, the
incentive bonus has an initial target of 20% of Mr. Benedetto's base salary.
Mr. Benedetto's employment agreement also provides for other employee benefits
such as the right to participate in all group health and insurance programs. In
addition, Mr. Benedetto was granted options to purchase 300,000 shares of
class A common stock at an exercise price of $5.25 per share. These shares have
been registered under the Securities Act on Form S-8.
Except in the case of disability or a change of control, we may terminate
Mr. Benedetto's employment only for cause, upon which termination Mr. Benedetto
will have no right to receive any
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compensation or benefit from us. If Mr. Benedetto's employment is terminated for
any reason other than for cause, or in the event that there is a change of
control of our company and Mr. Benedetto is requested, in connection with such
change of control, to perform his duties under this agreement on a regular,
full-time basis at a location further than 75 miles from Mr. Benedetto's current
principal office location, Mr. Benedetto, in his sole and absolute discretion,
may deem this agreement to be terminated by us without cause. Upon such
termination, Mr. Benedetto will be entitled to receive his base salary for the
remaining term of his employment agreement, all previously earned and accrued
entitlements and benefits from us and our employee benefit plans, and an amount
equal to 25% of Mr. Benedetto's base salary.
Mr. Benedetto has agreed not to compete with us or any affiliated company
for a period of two years following termination of his employment agreement.
TANZI EMPLOYMENT AGREEMENT. Mr. Tanzi's employment agreement, dated as of
August 31, 1998, has a two year term. It provides Mr. Tanzi with an annual base
salary of $225,000 for the current year. Mr. Tanzi is also entitled to receive
an annual incentive bonus, which is dependent upon our performance, to be
determined by the Compensation Committee of the Board of Directors. If approved
by the Compensation Committee, the incentive bonus has an initial target of 40%
of Mr. Tanzi's base salary. Mr. Tanzi's employment agreement also provides for
other employee benefits such as the right to participate in all group health and
insurance programs. In addition, Mr. Tanzi was granted options to purchase
300,000 shares of class A common stock at an exercise price of $5.25 per share.
These shares have been registered under the Securities Act on Form S-8.
Except in the case of disability or change of control, we may terminate
Mr. Tanzi's employment only for cause, upon which termination Mr. Tanzi will
have no right to receive any compensation or benefit from us. If Mr. Tanzi's
employment is terminated for any reason other than for cause, or in the event
that there is a change of control of our company and Mr. Tanzi is requested, in
connection with such change of control, to perform his duties under this
agreement on a regular, full-time basis at a location further than 75 miles from
Mr. Tanzi's current principal office location, Mr. Tanzi, in his sole and
absolute discretion, may deem this agreement to be terminated by us without
cause. Upon such termination, Mr. Tanzi will be entitled to receive his base
salary for the remaining term of his employment agreement, all previously earned
and accrued entitlements and benefits from us and our employee benefit plans,
and an amount equal to 25% of Mr. Tanzi's base salary.
Mr. Tanzi has agreed not to compete with us or any affiliated company for a
period of two years following termination of his employment agreement.
1997 AND 1998 INCENTIVE STOCK PLANS
We have adopted the 1997 Incentive Stock Plan and the 1998 Incentive Stock
Plan pursuant to which key employees, officers and directors (including
independent directors and members of the Compensation Committee) of our company
and its subsidiaries who have substantial responsibility in the direction of our
company and its subsidiaries, and others whom the option committee determines
provide substantial and important services to our company, may be granted
(i) incentive stock options ("ISOs") and/or (ii) non-qualified stock options
("NQSOs" and, together with ISOs, "Stock Options"). The aggregate number of
shares of the class A common stock that may be the subject of Stock Options
under the Incentive Stock Plans is 28,000,000 (8,000,000 under the 1997
Incentive Stock Plan and 20,000,000 under the 1998 Incentive Stock Plan), and
the maximum number of shares of class A common stock available with respect to
Stock Options granted to any one grantee is 2,000,000 (800,000 under the 1997
Incentive Stock Plan and 1,200,000 under the 1998 Incentive Stock Plan) shares.
The exercise price of all ISOs is the fair market value of the class A
common stock on the date of grant (or 110% of such fair market value with
respect to ISOs granted to persons who own stock possessing more than 10% of the
voting rights of our company's capital stock), and the exercise price
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of all NQSOs is determined by the Compensation Committee, although the initial
awards will be made at fair market value of the class A common stock on the date
of grant. Stock Options vest and become exercisable over a period of years, as
determined by the Compensation Committee, and have a term not to exceed ten
years.
If a grantee's employment with us is terminated because of the grantee's
death, or the grantee's retirement on or after attaining the age which the
company may from time to time establish as the retirement age for any class of
its employees, or the age specified in the employment agreement with such
grantee, prior to the date when the Stock Option is by its terms exercisable,
the Stock Option will be immediately exercisable as of the date of the
termination of the grantee's employment, subject to the other terms of the
Incentive Stock Plans. Upon a "change in control" of our company (as defined in
the Incentive Stock Plans), each holder of a Stock Option will have the right to
exercise the Stock Option in full without regard to any waiting period,
installment period or other limitation or restriction thereon, and the right,
exercisable by written notice within 60 days after the change in control, to
receive in exchange for the surrender of an option an amount of cash equal to
the difference between the fair market value of the class A common stock on the
date of exercise and the exercise price of the Stock Option. For options granted
under the 1998 Incentive Stock Plan on or after November 13, 1998, in the event
of a change in control, the Board of Directors may in its sole discretion
determine (i) that each holder of such a Stock Option will have the right to
exercise the Stock Option in full without regard to any waiting period,
installment period or other limitation or restriction thereon, and/or (ii) each
holder of such a Stock Option will have the right, exercisable by written notice
within 60 days after the change of control, to receive, in exchange for the
surrender of a Stock Option, an amount of cash equal to the difference between
the fair market value of the class A common stock on the date of exercise and
the exercise price of the Stock Option. Alternatively, the board of directors
may in its sole discretion determine to take neither action. Upon a grantee's
termination of employment from our company or a subsidiary on account of
disability, the grantee or the legal representative of the grantee will have the
right, for a period of one year following the date of such termination, to
exercise a Stock Option, to the extent such award is exercisable and to the
extent such Stock Option has not yet expired. In the event the grantee's
employment with us is terminated for any reason other than disability, death or
retirement, the grantee may exercise a Stock Option within three months after
his or her termination of employment.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with certain officers and
directors. The indemnification agreements provide for indemnification of such
directors and officers to the fullest extent authorized or permitted by law. The
indemnification agreements also provide that:
- we will advance all expenses incurred by the director or officer in
defending certain litigation,
- we will appoint in certain circumstances an independent legal counsel to
determine whether the director or officer is entitled to indemnification,
and
- we will continue to maintain a directors' and officers' liability
insurance (which currently consists of $25.0 million of primary coverage).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Rockefeller and White.
Neither member of the Compensation Committee served as an officer or employee of
our company or any of its subsidiaries during fiscal 1998. There were no
material transactions between us and any of the members of the Compensation
Committee during fiscal 1998.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRADEMARK LICENSE AGREEMENT. We are a party to a ten year royalty free
license agreement with Metromedia Company, pursuant to which Metromedia Company
has granted us a nonexclusive, nontransferable and nonassignable right and
license, without the right to grant sublicenses and to use the trade name,
trademark and corporate name Metromedia in the United States and worldwide. The
license agreement with Metromedia Company can be terminated by Metromedia
Company upon one month's prior written notice in the event that:
- Metromedia Company or its affiliates own less than 20% of the common
stock;
- a change in control of our company occurs; or
- any of the stock or all or substantially all of the assets of any of our
subsidiaries are sold or transferred, in which case, the license agreement
with Metromedia Company will terminate with respect to such subsidiary.
A change in control of our company for purpose of the trademark license
agreement is defined as:
- a transaction in which a person or group, within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934, not in existence
at the time of the execution of the Metromedia license agreement becomes
the beneficial owner of stock entitling such person or group to exercise
50% or more of the combined voting power of all classes of our stock;
- a change in the composition of our Board of Directors whereby a majority
of the members are not directors serving on the Board of Directors at the
time of the license agreement with Metromedia Company, or any person
succeeding such director who was recommended or elected by such directors;
- a reorganization, merger or consolidation where following consummation
thereof, Metromedia Company would hold less than 20% of the combined
voting power of all classes of our stock;
- a sale or other disposition of all or substantially all of our assets; or
- any transaction the result of which would be that the common stock would
not be required to be registered under the Securities Exchange Act of
1934, and the holders of common stock would not receive common stock of
the survivor to the transaction which is required to be registered under
the Securities Exchange Act of 1934.
In addition, Metromedia Company has reserved the right to terminate this
trademark license agreement in its entirety immediately upon written notice to
us if, in Metromedia Company's sole judgment, our continued use of Metromedia as
a trade name would jeopardize or be detrimental to the good will and reputation
of Metromedia Company.
We have agreed to indemnify Metromedia Company and hold it harmless against
any and all losses, claims, suits, actions, proceedings, investigations,
judgments, deficiencies, damages, settlements, liabilities and reasonable legal
expenses, and other related expenses, arising in connection with the license
agreement with Metromedia Company.
MANAGEMENT AGREEMENT. We are a party to the management agreement under
which Metromedia Company provides us with consultation and advisory services
relating to legal matters, insurance, personnel and other corporate policies,
cash management, internal audit and finance, taxes, benefit plans and other
services as we may reasonably request. The management agreement terminates on
December 31 of each year, and is automatically renewed for successive one year
terms unless either party terminates upon 60 days prior written notice. We are
also obligated to reimburse Metromedia Company all its out-of-pocket costs and
expenses incurred and advances paid by Metromedia Company in connection with the
management agreement. In this agreement, we have agreed to indemnify
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Metromedia Company and hold it harmless from and against any and all damages,
liabilities, losses, claims, actions, suits, proceedings, fees, costs or
expenses, including reasonable attorneys' fees and other costs and expenses
incident to any suit, proceeding or investigation of any kind imposed on,
incurred by or asserted against Metromedia Company in connection with the
management agreement. In 1997, Metromedia Company received no money for its
out-of-pocket costs and expenses or for interest on advances extended by it to
us under the management agreement. For the year ended December 31, 1998, we
incurred $500,000 to Metromedia Company under this agreement. The management fee
for 1999 under the agreement is $1,000,000, payable quarterly at a rate of
$250,000.
PROPOSED TRANSACTIONS
OFFERING OF OUR SENIOR NOTES DUE 2009
GENERAL. Concurrently with the offering described in this prospectus
supplement, we intend to issue $ million of % Senior Notes due 2009 and
[EURO] million of % Senior Notes due 2009, under an indenture between us
and The Bank of New York, as trustee.
PRINCIPAL, MATURITY AND INTEREST. These notes will mature on December 15,
2009. Interest on the Dollar notes will accrue at % per annum and interest on
the Euro notes will accrue at % per annum. In each case, interest will be
payable semiannually in arrears on June 15 and December 15 of each year.
RANKING. These notes will be general obligations, will rank equal in right
of payment with all of our existing and future senior unsecured indebtedness and
will be effectively subordinated to all of our existing and future secured
indebtedness to the extent of the assets that secure such indebtedness and to
all of our subsidiaries' existing or future indebtedness, whether or not
secured.
REDEMPTION. These notes will be redeemable on or after December 15, 2004,
at our option, in whole or in part, at the following redemption prices
(expressed as percentages of principal amount) described below plus accrued
interest, if redeemed during the twelve-month period beginning on December 15 of
the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2004........................................................ %
2005........................................................ %
2006........................................................ %
2007 and thereafter......................................... %
</TABLE>
In addition, at any time prior to December 15, 2002, we will be permitted to
redeem up to 35% of the original aggregate principal amount of each of the
Dollar notes and the Euro notes, determined separately, with the net proceeds of
a sale of common equity at a redemption price equal to % of the principal
amount, in the case of the Dollar notes redeemed, and % of the principal
amount, in the case of the Euro notes redeemed, in each case, plus accrued
interest, provided that at least 65% of the original aggregate principal amount
of each of the Dollar notes and the Euro notes, determined separately, these
notes remains outstanding after the redemption and we use the net cash proceeds
of any public equity offerings resulting in gross proceeds of at least
$100 million. Except in connection with a change of control or an asset sale (as
those terms are defined in the indentures relating to these notes) of our
company, we will not be required to make mandatory redemption or sinking fund
payments with respect to these notes.
COVENANTS. The indenture relating to these notes will restrict, among other
things, our ability to incur additional indebtedness, pay dividends or make
certain other restricted payments, incur certain liens, sell, assign, transfer,
lease, convey or otherwise dispose of substantially all of our assets or enter
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into certain transactions with affiliates. The indenture relating to these notes
will permit, under certain circumstances, our subsidiaries to be deemed
unrestricted subsidiaries and thus not subject to the restrictions of the
indenture.
EVENTS OF DEFAULT. The indenture relating to these notes will contain
standard events of default, including:
- defaults in the payment of principal, premium or interest;
- defaults in the compliance with covenants contained in the indenture;
- cross defaults on more than $15 million of other indebtedness;
- failure to pay more than $15 million of judgments; and
- certain events of our subsidiaries
SALE OF CLASS A COMMON STOCK BY THE SELLING STOCKHOLDERS
Concurrently with the offering described in this prospectus supplement, some
of the selling stockholders intend to sell 4,671,000 shares of class A common
stock (excluding the over-allotment option). Each share of class A common stock
will be sold at $ per share resulting in $ aggregate gross proceeds to
those selling stockholders. We will receive no portion of the proceeds from this
sale of shares of class A common stock.
Neither of the transactions described above nor the offering described in
this prospectus supplement is conditioned upon any of the other transactions.
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SELLING STOCKHOLDERS
Some of the shares of our class A common stock, or cash in lieu of class A
common stock, may be delivered to DECS Trust VI by the selling stockholders
under prepaid forward contracts relating to the DECS securities. The following
table shows the selling stockholders' beneficial ownership of our common stock
as of the date of this prospectus supplement, the maximum number of shares the
selling stockholders may be required to deliver to the trust under the
applicable contracts, and the selling stockholders' beneficial ownership of our
common stock after the offering assuming that each of them satisfies his, her or
its obligations under the applicable contracts with shares of class A common
stock and not cash. Except as indicated in the footnotes to the table, the
persons named in the table have sole voting and investment power with respect to
shares of common stock shown as beneficially owned by them. The address of the
selling stockholders is One North Lexington Avenue, White Plains, New York
10601, unless otherwise indicated.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK(1)
--------------------------------------------------------------------- ---------------------------
MAXIMUM TO BE
NUMBER OWNED
DELIVERABLE TO AFTER
THE TRUST DELIVERY UNDER OWNED
OWNED BEFORE UNDER THE THE BEFORE THE
THE OFFERING CONTRACTS(2) CONTRACTS(3) OFFERING
--------------------------- -------------- ---------------------- ---------------------------
SELLING STOCKHOLDERS NUMBER % NUMBER NUMBER % NUMBER %
- -------------------- ------------- -------- -------------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen A.
Garofalo........... 45,495,512(4) 22.5 4,844,000 40,651,512 20.1 -- --
Metromedia
Company(5)......... -- -- -- -- -- 31,462,048 93.2
John W. Kluge........ 2,028,000(7) 1.0 -- 2,028,000 1.0 31,462,048(6) 93.2
Stuart Subotnick..... 2,028,000(7) 1.0 -- 2,028,000 1.0 33,769,272(6) 100.0
<CAPTION>
CLASS B COMMON STOCK(1)
-----------------------------------------
MAXIMUM
NUMBER TO BE
DELIVERABLE TO OWNED
THE TRUST AFTER
UNDER THE DELIVERY UNDER
CONTRACTS(2) THE CONTRACTS(3)
-------------- ------------------------
SELLING STOCKHOLDERS NUMBER NUMBER %
- -------------------- -------------- ------------- --------
<S> <C> <C> <C>
Stephen A.
Garofalo........... -- -- --
Metromedia
Company(5)......... 4,880,000(6) 26,582,048(8) 92.9
John W. Kluge........ 4,880,000(6) 26,582,048(8) 92.9
Stuart Subotnick..... 5,156,000(6) 28,613,272(8) 100.0
</TABLE>
- ----------------------------------
* less than 1%
(1) The shares of class B common stock are convertible into shares of class A
common stock at the rate of one share of class A common stock for each share
of class B common stock. The selling stockholders who hold shares of class B
common stock will convert the shares to be sold on , 2002 (or
, 2003 if the exchange date is extended) into shares of class A
common stock immediately prior to the delivery of the shares to the holders
of the DECS securities of the trust.
(2) Assumes over-allotment option described in the trust prospectus is not
exercised. In the event the over-allotment option is exercised, the maximum
aggregate number of shares deliverable to the trust would be 11,500,000
shares.
(3) Assumes maximum number of shares of class A common stock, in lieu of cash,
are delivered to DECS Trust VI under the prepaid forward contracts.
(4) Includes presently exercisable options to purchase 3,042,000 shares of
class A common stock at an exercise price of $0.245 per share of which
options to purchase 2,882,000 shares are held by the Stephen A. Garofalo
1999 Annuity Trust No. 1 and options to purchase 160,000 shares are held by
the Stephen A. Garofalo 1999 Annuity Trust No. 2. Mr. Garofalo is the
trustee of both trusts.
(5) Metromedia Company's address is One Meadowlands Plaza, East Rutherford, NJ
07073.
(6) Includes shares owned by Metromedia Company. Messrs. Kluge and Subotnick,
directors of our company, are general partners of Metromedia Company.
(7) Consists of 2,028,000 presently exercisable options to purchase shares of
class A common stock at an exercise price of $0.245 per share held by each
of Mr. Kluge and Mr. Subotnick. Mr. Kluge's address is 215 East 67th Street,
New York, NY 10021 and Mr. Subotnick's address is 215 East 67th Street, New
York, NY 10021.
Each of the selling stockholders, except Metromedia Company, is a director
and/or executive officer of our company. The general partners of Metromedia
Company serve as our directors. See "Management."
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DESCRIPTION OF THE NEW CREDIT FACILITY
The description provided below does not purport to be complete and is
qualified in its entirety by reference to certain agreements setting forth the
principal terms and conditions of the new credit facility.
We have entered into a commitment letter with an affiliate of one of the
underwriters that provides us with a senior secured reducing revolving credit
facility of up to $150.0 million from the lender. We do not intend to consummate
the new credit facility simultaneously with consummation of the offering
described in this prospectus supplement. Depending upon market conditions, we
may incur certain additional indebtedness in place of the new credit facility.
We can use the new credit facility to help finance the cost of building out
networks and for other general corporate purposes.
The new credit facility will mature on the fifth anniversary of the closing
of the new credit facility. Amounts outstanding under the new credit facility
will bear interest at an applicable margin plus, at our option, the lender's
base rate (in which case the applicable margin will initially be 2.25%, subject
to reductions upon obtaining performance criteria based on our leverage ratio)
or LIBOR (in which case the applicable margin will initially be 3.25%, subject
to reductions upon obtaining performance criteria based on our leverage ratio).
Our obligations under the new credit facility will be unconditionally and
irrevocably guaranteed by each of our subsidiaries (other than certain foreign
subsidiaries or ION) and secured by a pledge of substantially all of our assets
and our restricted subsidiaries' assets. We will pay an annual commitment fee of
1.25% when less than 33 1/3% of the new credit facility has been utilized, 1.00%
when at least 33 1/3%, but not less than 66 2/3%, of the new credit facility has
been utilized and 0.75% thereafter. We will also pay certain upfront commitment
and other fees to the lender and their affiliate.
The new credit facility will contain certain financial and operational
covenants and ratios and other restrictions with which we must comply,
including, among others:
- limitations on the incurrence of additional indebtedness,
- limitations on paying dividends and other payments,
- restrictions on mergers, consolidations and dispositions of assets,
- restrictions on sale-leaseback transactions and lease payments,
- restrictions on transactions with affiliates,
- restrictions on capital expenditures, investments, acquisitions, joint
ventures and partnerships,
- restrictions on liens,
- maximum net total debt to net property, plant and equipment,
- minimum annualized revenue, number of fiber miles, interest coverage ratio
and fixed charge coverage, and
- maximum leverage ratios and (total debt to annualized EBITDA).
The new credit facility will contain the following customary events of
default:
- material misrepresentations,
- payment defaults,
- breach of performance of covenants,
- bankruptcy default,
- failure to make payments to the FCC,
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- default under material contracts,
- judgment and cross defaults, and
- change in control.
Commitments and amounts outstanding under the new credit facility will
automatically reduce in equal quarterly amounts, commencing on the first quarter
following the third anniversary of the closing date under the new credit
facility, pursuant to a schedule to be agreed. Commitments under the new credit
facility will be permanently reduced (and loans under the facility prepaid to
the extent the loans exceed the amount of the commitments under the facility as
so reduced) from (i) 100% of the net proceeds from all non-ordinary course asset
dispositions, subject to customary reinvestment provisions, and (ii) 100% of the
net proceeds from insurance recovery and condemnation event, in each case with
customary baskets and exceptions. We may make voluntary prepayments and
commitment reductions at any time without premium or penalty.
The lender may syndicate the amounts to be provided to us under the new
credit facility. Our commitment letter with the lender allows the lender to
change most of the terms (including the interest rate and other fees payable to
the lender) of their commitment letter with us (other than the amount of the
proposed loan), if the lender believes that these changes are needed to
syndicate successfully the new credit facility. In addition, the lender's
obligation to enter into a definitive agreement and lend us monies under the new
credit facility remains subject to a number of significant conditions and we
therefore can not assure you that we will be able to enter into binding
agreements and borrow money from the lender. These conditions include:
- we must negotiate and enter into definitive documents and provide the
lender with a number of certificates and legal opinions,
- there not occurring certain material changes in the loan syndication,
financial or capital markets or any material adverse change in our
business and operations,
- satisfaction by the lender with certain due diligence matters and
financial statements relating to us, and
- other customary conditions.
DESCRIPTION OF MATERIAL INDEBTEDNESS
DESCRIPTION OF OUR 10% SENIOR NOTES DUE 2008
GENERAL. On November 25, 1998 we issued $650 million of 10% Senior Notes
due 2008 pursuant to an indenture between us and IBJ Schroeder Bank and Trust
Company, as trustee. On May 26, 1999, we consummated an offer to exchange those
notes for $650 million of 10% Senior Notes due 2008 that had been registered
under the Securities Act.
PRINCIPAL, MATURITY AND INTEREST. The 10% Senior Notes due 2008 are limited
in aggregate principal amount to $650 million and will mature on November 15,
2008. Interest on the 10% Senior Notes due 2008 accrues at 10% per annum and is
payable semiannually in arrears on May 15 and November 15 of each year.
RANKING The 10% Senior Notes due 2008 are our unsecured senior obligations,
that rank equally in right of payment with all of our existing and future senior
unsecured obligations and rank senior in right of payment to all of our future
subordinated obligations. The 10% Senior Notes due 2008, however, are
effectively subordinated to all of our existing and future secured indebtedness
to the extent of the assets that secure that indebtedness and to all of our
subsidiaries existing and future obligations, whether or not secured.
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REDEMPTION. The 10% Senior Notes due 2008 are redeemable on or after
November 15, 2003, at our option, in whole or in part, at the following
redemption prices (expressed as percentages of principal amount) described below
plus accrued interest, if redeemed during the twelve-month period beginning on
November 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2003........................................................ 105.000%
2004........................................................ 103.333%
2005........................................................ 101.667%
2006 and thereafter......................................... 100.000%
</TABLE>
In addition, at any time on or before November 15, 2001, we may redeem up to
35% of the original aggregate principal amount of the 10% Senior Notes due 2008
with the net proceeds of a sale of common equity at a redemption price equal to
110% of the principal amount thereof, plus accrued interest, provided that at
least 65% of the original aggregate principal amount of 10% Senior Notes due
2008 remains outstanding after such redemption and provided further, that we use
the net cash proceeds of any public equity offering resulting in gross proceeds
of at least $100 million. Except in connection with a change of control or an
asset sale, as defined in the indenture relating to the 10% Senior Notes due
2008, of our company, we are not required to make mandatory redemption or
sinking fund payments with respect to the 10% Senior Notes due 2008.
COVENANTS. The indenture relating to the 10% Senior Notes due 2008
restricts, among other things, our ability to incur additional indebtedness, pay
dividends or make certain other restricted payments, incur certain liens, sell,
assign, transfer, lease, convey or otherwise dispose of substantially all of our
assets, enter into certain transactions with affiliates, or incur certain
indebtedness. The indenture relating to the 10% Senior Notes due 2008 permits,
under certain circumstances, our subsidiaries to be deemed unrestricted
subsidiaries and thus not subject to the restrictions of the indenture.
EVENTS OF DEFAULT. The indenture relating to the 10% Senior Notes due 2008
contains standard events of default, including:
- defaults in the payment of principal, premium or interest;
- defaults in the compliance with covenants contained in the indenture;
- cross defaults on more than $15 million of other indebtedness;
- failure to pay more than $15 million of judgements; and
- certain events of our subsidiaries.
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<PAGE>
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF CLASS A COMMON STOCK
GENERAL
The following general discussion summarizes certain of the material U.S.
federal income and estate tax consequences of the ownership and disposition of
our class A common stock applicable to a non-U.S. holder (as described below).
This discussion is based on provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing, temporary and proposed regulations promulgated
under the Code and administrative and judicial interpretations of the Code, all
as in effect or proposed on the date of this prospectus supplement and all of
which are subject to change, possibly with retroactive effect, or different
interpretations. This discussion assumes that our class A common stock is held
as a capital asset within the meaning of section 1221 of the Code. This
discussion does not address all aspects of U.S. federal income and estate
taxation and does not address any foreign, state or local tax consequences.
Furthermore, this discussion does not consider any specific facts or
circumstances that may apply to a particular non-U.S. holder and does not
address all aspects of U.S. federal income tax law that may be relevant to
non-U.S. holders that may be subject to special treatment under that tax law,
such as insurance companies, tax-exempt organizations, financial institutions,
broker-dealers or certain U.S. expatriates.
For purposes of this discussion, the term "U.S. holder" means a holder that
is:
- a citizen or resident of the United States;
- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or any of its
political subdivisions;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source;
- a trust if a U.S. court is able to exercise primary supervision over
administration of the trust and one or more U.S. persons have authority to
control all substantial decisions of the trust; or
- otherwise subject to United States federal income tax on a net income
basis in respect of our class A common stock.
In the case of a partnership that is a holder of class A common stock, any
partner described in any of the points above is also a U.S. holder. A "non-U.S.
holder" is a holder, including any partner in a partnership, that holds our
class A common stock and that is not a U.S. holder.
DIVIDENDS
In general, the gross amount of dividends paid to a non-U.S. holder that are
not effectively connected with a U.S. trade or business of the non-U.S. holder
will be subject to U.S. federal withholding tax at a 30% rate, or some lower
rate as may be specified by an applicable tax treaty. To receive a reduced
treaty rate, the non-U.S. holder must furnish the Company or its paying agent a
duly completed Internal Revenue Service ("IRS") Form 1001 or IRS Form W-8BEN (or
substitute form) certifying to its qualification for that rate.
Dividends that are effectively connected with the conduct of a trade or
business within the United States or, if a tax treaty applies, are attributable
to a U.S. permanent establishment of the non-U.S. holder, are exempt from U.S.
federal withholding tax, provided that the non-U.S. holder furnishes us or our
paying agent a duly completed IRS Form 4224 or IRS Form W-8ECI (or substitute
form) certifying to that fact. Effectively connected dividends are subject to
U.S. federal income tax on a net income basis at the same graduated rates
applicable to U.S. persons. In the case of a non-U.S. holder that is a
corporation, effectively connected income may, in certain circumstances, be
subject to an additional
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<PAGE>
"branch profits tax" at a 30% rate or a lower rate as may be specified by an
applicable income tax treaty.
A non-U.S. holder that is eligible for a reduced rate of withholding tax
pursuant to a tax treaty may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund with the IRS.
DISPOSITION OF CLASS A COMMON STOCK
Generally, subject to the special rules applicable to U.S. real property
holding companies discussed below, a non-U.S. holder will not be subject to U.S.
federal income tax on any gain recognized on the disposition of our class A
common stock unless:
- the gain is effectively connected with a trade or business carried on by
the non-U.S. holder within the United States, or, alternatively, if a tax
treaty applies, the gain is attributable to a U.S. permanent establishment
maintained by that non-U.S. holder, in which case that gain will be
subject to tax at the rates and in the manner applicable to U.S. persons,
and, if the holder is a corporation, the branch profits tax may also
apply; or
- the class A common stock is disposed of by an individual non-U.S. holder
who holds the class A common stock as a capital asset and is present in
the United States for 183 or more days in the taxable year of the
disposition and certain other conditions are met, in which case that gain
will be subject to a flat 30% tax, which may be offset by United States
source capital losses even though the individual is not considered a
resident of the United States.
Non-U.S. holders should consult applicable tax treaties, which may exempt
from U.S. taxation gains realized upon the disposition of common stock in
certain cases.
Notwithstanding the above, because of our present ownership and anticipated
acquisition of substantial interests in real property assets in the United
States, it is possible that we may presently be, or may become, a U.S. real
property holding company. If we were to be treated as a U.S. real property
holding company, a non-U.S. holder who owns more than 5% of our class A common
stock may be subject to U.S. federal income taxation on any gain realized from
the sale or exchange of that stock, unless an exemption is provided under an
applicable tax treaty.
FEDERAL ESTATE TAX
Class A common stock held by an individual non-U.S. holder at the time of
death will be included in the holder's gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under U.S. Treasury regulations, we must report annually to the IRS and to
each non-U.S. holder the amount of dividends paid to and the tax withheld from,
that holder, regardless of whether any tax was actually withheld or whether
withholding was required. This information may also be made available to the tax
authorities in the non-U.S. holder's country of residence.
Backup withholding, which generally is a withholding tax imposed at a rate
of 31% on certain payments to persons that fail to furnish the information
required under the U.S. information reporting and backup withholding rules,
generally will not apply to:
- dividends paid to non-U.S. holders that are subject to the U.S.
withholding tax, whether at 30% or a reduced treaty rate; or
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<PAGE>
- dividends paid to non-U.S. holders at an address outside the United States
on or prior to December 31, 2000 unless the payor has actual knowledge
that the payee is a U.S. person.
In the case of a non-U.S. holder that sells class A common stock to or
through a U.S. office of a broker, the broker must backup withhold at a rate of
31% and report the sale to the IRS, unless the holder certifies its non-U.S.
status under penalties of perjury or otherwise establishes an exemption. In the
case of a non-U.S. holder that sells class A common stock to or through the
foreign office of a U.S. broker, or a foreign broker with certain types of
relationships to the United States, the broker must report the sale to the IRS
(but not backup withhold) unless the broker has documentary evidence in its
files that the seller is a non-U.S. holder or certain other conditions are met,
or the holder otherwise establishes an exemption. A non-U.S. holder will
generally not be subject to information reporting or backup withholding if that
non-U.S. holder sells the class A common stock to or through a foreign office of
a non-U.S. broker.
Backup withholding is not an additional tax. Any amount withheld under the
backup withholding rules from a payment to a holder is allowable as a credit
against the holder's U.S. federal income tax liability, provided the required
information or appropriate claim for refund is filed with the IRS.
Recently promulgated U.S. Treasury regulations effective for payments made
after December 31, 2000 eliminate the general, current legal presumption that
dividends paid to an address in a foreign country are paid to a resident of that
country. In addition, these regulations impose certain certification and
documentation requirements on non-U.S. holders claiming the benefit, under a tax
treaty, of a reduced withholding rate on dividends.
THE FOREGOING DISCUSSION IS A SUMMARY OF CERTAIN U.S. FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF THE
CLASS A COMMON STOCK BY NON-U.S. HOLDERS. ACCORDINGLY, HOLDERS ARE URGED TO
CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF CLASS A COMMON STOCK
INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR
OTHER TAXING JURISDICTION.
S-79
<PAGE>
PLAN OF DISTRIBUTION
Under the prepaid forward contracts, DECS Trust VI has agreed, subject to
the terms and conditions set forth in those contracts, to purchase from the
selling stockholders named in this prospectus supplement a number of shares of
class A common stock equal to the total number of DECS to be purchased by the
underwriters from the trust under an underwriting agreement (including any DECS
to be purchased by the underwriters upon exercise of an over-allotment option
plus the number of DECS purchased by Salomon Smith Barney Inc., who sponsored
the formation of the trust, in connection with the organization of the trust)
among Salomon Smith Barney Inc., Credit Suisse First Boston Corporation,
Deutsche Bank Securities Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Under the terms of the prepaid forward contracts, each selling
stockholder will deliver to the trust at an exchange date a number of shares of
class A common stock (or, at the option of each selling stockholder, the cash
equivalent of those shares) and/or any other consideration permitted or required
by the terms of the prepaid forward contracts, that are expected to have the
same value as the shares of class A common stock delivered under the DECS.
In connection with the DECS offering, the underwriters may over-allot, or
engage in syndicate covering transactions, stabilizing transactions and penalty
bids. Over-allotment involves syndicate sales of DECS or class A common stock in
excess of the number of DECS to be purchased by the underwriters in this
offering, which creates a syndicate short position. Syndicate covering
transactions involve purchases of the DECS or class A common stock in the open
market after the distribution has been completed in order to cover syndicate
short positions. Stabilizing transactions consist of certain bids or purchases
of DECS or class A common stock made for the purpose of preventing or retarding
a decline in the market price of the DECS or class A common stock while the
offering is in progress. Penalty bids permit the underwriters to reclaim a
selling concession from a syndicate member when one of the underwriters, in
covering syndicate short positions or making stabilizing purchases, repurchases
DECS or class A common stock originally sold by the syndicate member. These
activities may cause the price of DECS or class A common stock to be higher than
the price that otherwise would exist in the open market in the absence of these
transactions. These transactions may be effected on the Nasdaq National Market
or in the over-the-counter market, or otherwise and, if commenced, may be
discontinued at any time.
In addition, in connection with the DECS offering, certain of the
underwriters (and selling group members) may engage in passive market making
transactions in the DECS or class A common stock on The Nasdaq National Market,
prior to the pricing and completion of the DECS offering. Passive market making
consists of displaying bids on The Nasdaq National Market no higher than the bid
prices of independent market makers and making purchases at prices no higher
than those independent bids and effected in response to order flow. Net
purchases by a passive market on each day are limited to a specified percentage
of the passive market maker's average daily trading volume in the class A common
stock during a specified period and must be discontinued when that limit is
reached. Passive market making may cause the price of the class A common stock
to be higher than the price that otherwise would exist in the open market in the
absence of these transactions. If passive market making is commenced, it may be
discontinued at any time.
The underwriters have performed certain investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. The underwriters may, from time to time, engage in transactions
with and perform services for us in the ordinary course of its business.
We, our executive officers and the selling stockholders have agreed that,
for a period of 45 days from the date of this prospectus supplement, we will
not, without the prior written consent of Salomon Smith Barney Inc., as
representative of the underwriters, offer, sell, contract to sell, or otherwise
S-80
<PAGE>
dispose of, any shares of class A common stock or any securities convertible
into, or exercisable or exchangeable for, class A common stock. Salomon Smith
Barney Inc. in its sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice. However, this agreement
will not restrict our ability and the ability of selling stockholders to take
any of the actions listed above in connection with the offering by the trust of
the DECS or any delivery of shares of class A common stock under the terms of
the DECS.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make in
respect of those liabilities.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial amount of class A common stock in the public market,
or the perception that sales may occur, could adversely affect the market price
of the class A common stock prevailing from time to time in the public market
and could impair our ability to raise additional capital through the sale of our
equity securities in the future.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted securities from us or
any of our "affiliates", as that term is defined under the Securities Act, the
holder is entitled to sell within any three-month period a number of shares of
class A common stock that does not exceed the greater of 1% of the
then-outstanding shares of the class A common stock or the average weekly
trading volume of shares of class A common stock on all exchanges and reported
through the automated quotation system of a registered security association
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales under Rule 144 are also
subject to certain restrictions on the manner of sales, notices, requirements
and the availability of current public information about the company. If two
years have elapsed since the date of acquisition of restricted shares from us or
from any "affiliate" of the company, and the holder thereof is deemed not to
have been an affiliate of the company at any time during the 90 days preceding a
sale, such person would be entitled to sell such class A common stock in the
public market under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.
Assuming the over-allotment option described in the trust prospectus is not
exercised, up to 10,000,000 shares of class A common stock may be delivered in
2002 (or later if the contract is extended) to DECS Trust VI under the prepaid
forward purchase contracts. In addition, if all of the selling stockholders
elect to deliver shares under the contracts (assuming the over-allotment option
described in the trust prospectus is not exercised) up to 5,156,000 shares of
class B common stock may be converted on a one-for-one basis into shares of
class A common stock. The selling stockholders are currently affiliates of our
company.
The shares of class A common stock delivered under this prospectus
supplement will be freely tradeable without restriction or further registration
under the Securities Act by persons other than our "affiliates" within the
meaning of Rule 144. The holders of restricted shares generally will be entitled
to sell these shares in the public securities market without registration under
the Securities Act to the extent permitted by Rule 144 or any exemption under
the Securities Act.
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-8, covering the shares of common stock issuable upon
exercise of certain officer's options and the shares of class A common stock
underlying options granted under the 1997 Incentive Stock Plan and the 1998
Incentive Stock Plan. The shares of class A common stock so registered and
acquired under the 1997 Incentive Stock Plan and the 1998 Incentive Stock Plan
will be available for sale by non-Affiliates in the public securities market
without limitation and by affiliates, subject to the volume limitations of Rule
144.
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<PAGE>
Certain persons have registration rights agreements with us and/or warrant
agreements with us to purchase shares of class A common stock. As a result, the
number of shares eligible for future sale and the availability of those shares
in the public securities market may be effected by the exercise of these
registration rights and warrants and by additional shares of class A common
stock that are entitled to "piggyback" registration rights and may be included
in any such registration. See "Risk Factors-Shares Eligible for Future Sale may
have a Potential Adverse Effect on Our Stock price."
VALIDITY OF THE SECURITIES
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, will pass upon
certain legal matter for us in connection with the offering of the shares.
EXPERTS
The consolidated financial statements of Metromedia Fiber Network, Inc. at
December 31, 1997 and 1998 and for each of the years in the three-year period
ended December 31, 1998, appearing in this prospectus supplement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere in this prospectus supplement and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
AboveNet's financial statements as of June 30, 1998 and 1999 and for each of
the three years in the period ended June 30, 1999 included and incorporated by
reference in this prospectus supplement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report, which is included and
incorporated by reference herein, and have been so included and incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The Combined Statement of Assets to be Acquired and Liabilities to be
Assumed of Palo Alto Internet Exchange as of December 26, 1998 and December 27,
1997 and the related Combined Statement of Revenues and Direct Expenses for the
period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 12, 1998 and the fiscal years ended December 27, 1997 and
December 29, 1996 appearing in this prospectus supplement, have been included in
reliance on the reports of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounts.
WHERE YOU CAN FIND MORE INFORMATION
We are currently subject to the periodic reporting and other informational
requirements of the Exchange Act. The reports and other information that we
filed with the Securities and Exchange Commission can be inspected and copied at
prescribed rates at the public reference facilities maintained by the Securities
and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and will also be available for inspection and copying at
the regional offices of the Securities and Exchange Commission located at 7
World Trade Center, Suite 1300, New York, New York 10048 and the Citicorp Center
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may
obtain information on the operation of the public reference facilities by
calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities
and Exchange Commission also maintains an Internet Web Site at
http://www.sec.gov that contains reports, proxy and information statements and
other information. You can also obtain copies of such materials from us upon
request.
S-82
<PAGE>
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The following documents and other materials, which have been filed by us
with the Securities and Exchange Commission, are incorporated herein and
specifically made a part of this prospectus supplement by this reference:
- our Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
- our Quarterly Report on Form 10-Q for the three months ended March 31,
1999;
- our Quarterly Report on Form 10-Q for the six months ended June 30, 1999;
- our Current Report on Form 8-K dated June 30, 1999;
- our Current Report on Form 8-K dated September 10, 1999, as amended by our
Current Report on Form 8-K/A dated October 14, 1999 as further amended by
our Current Report on Form 8-K/A dated October 26, 1999;
- the "Risk Factors--Risk Factors Applicable to AboveNet" and "Business of
AboveNet" sections contained in our Registration Statement on Form S-4
dated August 5, 1999 (File No. 333-84541); and
- our Current Report on Form 8-K filed on October 18, 1999.
In addition, all documents filed with the Securities and Exchange Commission
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act
of 1934 by us subsequent to the date of this prospectus supplement shall be
deemed to be incorporated by reference into this prospectus supplement and to be
a part hereof from the date of filing of such documents with the Securities and
Exchange Commission. Any statement contained in this prospectus supplement or in
a document incorporated or deemed to be incorporated by reference in this
prospectus supplement shall be deemed to be modified or superseded for purposes
of this prospectus supplement to the extent that a statement contained in this
prospectus supplement or in any other subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus
supplement.
Statements contained in this prospectus supplement or in any document
incorporated by reference in this prospectus supplement as to the contents of
any contract or other document referred to herein or therein are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the documents incorporated by
reference, each such statement being qualified in all respects by such
reference.
This prospectus supplement incorporates documents by reference that are not
presented herein or delivered herewith. Copies of such documents, other than
exhibits to such documents that are not specifically incorporated by reference
herein, are available without charge to any person to whom this prospectus
supplement is delivered, upon written or oral request to: Metromedia Fiber
Network, Inc., c/o Metromedia Company, One Meadowlands Plaza, East Rutherford,
NJ 07073; Attention: General Counsel; tel: (201) 531-8000.
S-83
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
METROMEDIA FIBER NETWORK, INC. AND SUBSIDIARIES:
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................ F-5
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) for the years ended December 31, 1998, 1997 and
1996........................................................ F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Statements of Operations for the six months
ended
June 30, 1998 and 1999 (unaudited).......................... F-24
Consolidated Balance Sheet as of June 30, 1999
(unaudited)............................................... F-25
Consolidated Statements of Cash Flows for the six months
ended
June 30, 1998 and 1999 (unaudited).......................... F-26
Notes to Consolidated Financial Statements.................. F-27
ABOVENET COMMUNICATIONS INC.:
Independent Auditors' Report................................ F-36
Consolidated Balance Sheets as of June 30, 1998 and 1999.... F-37
Consolidated Statements of Operations for the Years Ended
June 30, 1997, 1998 and 1999.............................. F-38
Consolidated Statements of Stockholders' Equity for the
Years Ended
June 30, 1997, 1998 and 1999.............................. F-39
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1998 and 1999.............................. F-40
Notes to Consolidated Financial Statements.................. F-41
PALO ALTO INTERNET EXCHANGE:
Independent Accountants' Reports............................ F-57
Combined Statements of Assets to be Acquired and Liabilities
to be Assumed as of March 27, 1999 (unaudited), December
26, 1998 and December 27, 1997............................ F-59
Combined Statement of Revenues and Direct Expenses for the
Quarters Ended March 27, 1999 and March 26, 1998
(unaudited), period from June 12, 1998 through December
26, 1998, period from December 28, 1997 through June 11,
1998 and the Fiscal Years Ended December 27, 1997 and
December 29, 1996......................................... F-61
Notes to Combined Statements of Assets to be Acquired and
Liabilities to be Assumed and Combined Statements of
Revenues and Direct Expenses.............................. F-61
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Metromedia Fiber Network, Inc.
We have audited the accompanying consolidated balance sheets of Metromedia
Fiber Network, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedule listed in
the index at Item 14(a). These consolidated financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Metromedia Fiber Network, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
<TABLE>
<S> <C> <C>
/s/ ERNST & YOUNG LLP
</TABLE>
New York, New York
March 4, 1999, except for paragraph 16 of note 2,
as to which the date is May 19, 1999
F-2
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $569,319 $138,846
Pledged securities, current portion....................... 61,384 --
Accounts receivable....................................... 30,910 837
Prepaid expenses and other current assets................... 4,210 874
-------- --------
Total current assets.................................. 665,823 140,557
Fiber optic transmission network and related equipment,
net....................................................... 244,276 24,934
Property and equipment, net................................. 2,716 759
Pledged securities.......................................... 30,512 --
Investment in/advance to joint venture...................... 4,156 56
Other assets................................................ 26,934 1,072
-------- --------
Total assets.......................................... $974,417 $167,378
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,106 $ 3,072
Accrued liabilities....................................... 96,512 3,271
Deferred revenue, current portion......................... 8,100 1,184
Capital lease obligations, current portion................ 55 --
-------- --------
Total current liabilities............................. 110,773 7,527
Senior notes payable........................................ 650,000 --
Capital lease obligations................................... 22,675 --
Deferred revenue............................................ 33,455 10,311
Commitments and contingencies (see notes)
Stockholders' equity:
Class A common stock, $.01 par value; 360,000,000 shares
authorized; 155,210,220 and 149,793,136 shares issued
and outstanding, respectively........................... 1,552 1,498
Class B common stock, $.01 par value; 40,000,000 shares
authorized; 33,769,272 shares issued and outstanding.... 338 338
Additional paid-in capital................................ 197,861 190,927
Accumulated deficit....................................... (42,237) (43,223)
-------- --------
Total stockholders' equity............................ 157,514 149,540
-------- --------
Total liabilities and stockholders' equity............ $974,417 $167,378
======== ========
</TABLE>
See accompanying notes
F-3
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenue..................................................... $36,436 $ 2,524 $ 236
Expenses:
Cost of sales............................................. 13,937 3,572 699
Selling, general and administrative....................... 14,712 6,303 2,070
Consulting and employment incentives...................... 248 19,218 3,652
Settlement agreement...................................... 3,400 -- --
Depreciation and amortization............................. 1,532 757 613
------- -------- --------
Income (loss) from operations............................... 2,607 (27,326) (6,798)
Interest income........................................... 8,788 1,808 --
Interest expense (including financing costs).............. (6,861) (741) (3,561)
Loss from joint venture................................... (146) -- --
------- -------- --------
Income (loss) before income taxes........................... 4,388 (26,259) (10,359)
Income taxes.............................................. 3,402 -- --
------- -------- --------
Net income (loss)........................................... $ 986 $(26,259) $(10,359)
======= ======== ========
Net income (loss) per share, basic.......................... $ 0.01 $ (0.28) $ (0.14)
======= ======== ========
Net income per share, diluted............................... $ 0.01 N/A N/A
======= ======== ========
Weighted average number of shares outstanding, basic........ 186,990 94,894 71,716
======= ======== ========
Weighted average number of shares outstanding, diluted...... 219,524 N/A N/A
======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 986 $(26,259) $(10,359)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 1,532 757 613
Stock options and warrants issued for services.......... 248 19,439 5,395
Warrants issued for settlement agreement................ 3,000 -- --
Deferred taxes.......................................... 2,707
Reserve for note receivable............................. -- 338 --
Loss from joint venture................................. 146 -- --
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable..................................... (30,073) (656) 2
Accounts payable and accrued expenses................... 13,449 (12) 758
Deferred revenue........................................ 30,060 10,387 833
Other................................................... (4,070) (1,806) 12
-------- -------- --------
Net cash provided by (used in) operating activities......... 17,985 2,188 (2,746)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures on fiber optic transmission network and
related equipment......................................... (114,849) (19,206) (974)
Deposit payments............................................ (4,675) (87) --
Investment in / advance to joint venture.................... (4,246) (56) --
Purchase of pledged securities.............................. (91,896) -- --
Capital expenditures on property and equipment.............. (2,305) (318) (95)
-------- -------- --------
Net cash used in investing activities..................... (217,971) (19,667) (1,069)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 1,038 133,975 123
Proceeds from issuance of preferred stock and warrants...... -- 32,500 2,025
Dividends paid on preferred stock........................... -- (77) --
Repayments of notes payable- private placement.............. -- (1,408) 25
Repayments of notes payable................................. -- (5,950) (3,350)
Proceeds from notes payables, net........................... 630,000 -- 5,450
Payments of capital lease obligations....................... (579) -- --
Purchase of common stock.................................... -- (1,140) --
Purchase of preferred stock................................. -- (2,039) --
-------- -------- --------
Net cash provided by financing activities................. 630,459 155,861 4,273
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 430,473 138,382 458
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD............... 138,846 464 6
CASH AND CASH EQUIVALENTS-END OF PERIOD..................... $569,319 $138,846 $ 464
Supplemental information:
Interest paid........................................... $ 219 $ 1,145 $ 996
======== ======== ========
Income taxes paid....................................... $ 3,760 $ -- $ --
======== ======== ========
Supplemental disclosure of significant non-cash investing
activities:
Capital lease obligations............................... $ 23,309 $ -- $ --
======== ======== ========
Accrued capital expenditures............................ $ 82,916 $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes
F-5
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
SERIES A & B ------------------- -------------------
PREFERRED STOCK COMMON STOCK CLASS CLASS
------------------- ------------------- A B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... -- -- 49,920 $ 499 -- $ -- -- $ --
Issuance of common stock and
warrants for services rendered... -- -- 21,305 213 -- -- -- --
Issuance of common stock and
warrants related to debt
financing activities............. -- -- 6,870 69 -- -- -- --
Issuance of common stock in
connection with the exercise of
warrants......................... -- -- 1,525 15 -- -- -- --
Sale of common stock and
warrants......................... -- -- 392 4 -- -- -- --
Sale of preferred stock with
warrants......................... 300 30 -- -- -- -- -- --
Net loss for the year.............. -- -- -- -- -- -- -- --
---- --- ------- ----- ------- ------ ------ ----
Balance at December 31, 1996....... 300 30 80,012 800 -- -- -- --
Issuance of common stock in
connection with the exercise of
warrants......................... -- -- 1,216 12 -- -- -- --
Issuance of options to employees... -- -- -- -- -- -- -- --
Issuance of warrants in connection
with debt extension.............. -- -- -- -- -- -- -- --
Dividends on preferred stock....... -- -- -- -- -- -- -- --
Repurchase and retirement of Series
A preferred stock and warrants... (300) (30) -- -- -- -- -- --
Repurchase and retirement of common
stock and warrants............... -- -- (4,707) (47) -- -- -- --
Sale of Series B preferred stock... 16 -- -- -- -- -- -- --
Net proceeds from initial Public
Offering......................... -- -- -- -- 72,863 729 -- --
Conversion of Common Stock to
Series A Common Stock............ -- -- (76,521) (765) 76,520 765 -- --
Conversion of Series B Preferred
Stock to Series A & B Common
Stock............................ (16) -- -- -- 314 3 33,769 338
Sale of Series A Common Stock for
warrant.......................... -- -- -- -- 96 1 -- --
Net loss for the year.............. -- -- -- -- -- -- -- --
---- --- ------- ----- ------- ------ ------ ----
Balance at December 31, 1997....... -- -- -- -- 149,793 1,498 33,769 338
Issuance of options to employees... -- -- -- -- -- -- -- --
Issuance of warrants in connection
with settlement agreement........ -- -- -- -- -- -- -- --
Issuance of common stock in
connection with the exercise of
warrants......................... -- -- -- -- 4,317 43 -- --
Issuance of common stock in
connection with the exercise of
stock options.................... -- -- -- -- 1,100 11 -- --
Net income for the year............ -- -- -- -- -- -- -- --
Income tax benefit from exercises
of employee stock options........ -- -- -- -- -- -- -- --
---- --- ------- ----- ------- ------ ------ ----
Balance at December 31, 1998....... -- -- -- $ -- 155,210 $1,552 33,769 $338
==== === ======= ===== ======= ====== ====== ====
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ------------ --------
<S> <C> <C> <C>
Balance at December 31, 1995....... $ (454) $ (5,381) (5,336)
Issuance of common stock and
warrants for services rendered... 4,702 -- 4,915
Issuance of common stock and
warrants related to debt
financing activities............. 1,703 -- 1,772
Issuance of common stock in
connection with the exercise of
warrants......................... (15) -- --
Sale of common stock and
warrants......................... 120 -- 124
Sale of preferred stock with
warrants......................... 1,995 -- 2,025
Net loss for the year.............. -- (10,359) (10,359)
-------- -------- --------
Balance at December 31, 1996....... 8,051 (15,740) (6,859)
Issuance of common stock in
connection with the exercise of
warrants......................... (2) -- 10
Issuance of options to employees... 19,218 -- 19,218
Issuance of warrants in connection
with debt extension.............. 220 -- 220
Dividends on preferred stock....... -- (77) (77)
Repurchase and retirement of Series
A preferred stock and warrants... (1,996) (13) (2,039)
Repurchase and retirement of common
stock and warrants............... 42 (1,134) (1,139)
Sale of Series B preferred stock... 32,500 -- 32,500
Net proceeds from initial Public
Offering......................... 133,150 -- 133,879
Conversion of Common Stock to
Series A Common Stock............ -- -- --
Conversion of Series B Preferred
Stock to Series A & B Common
Stock............................ (341) -- --
Sale of Series A Common Stock for
warrant.......................... 85 -- 86
Net loss for the year.............. -- (26,259) (26,259)
-------- -------- --------
Balance at December 31, 1997....... 190,927 (43,223) 149,540
Issuance of options to employees... 248 -- 248
Issuance of warrants in connection
with settlement agreement........ 3,000 -- 3,000
Issuance of common stock in
connection with the exercise of
warrants......................... 118 -- 161
Issuance of common stock in
connection with the exercise of
stock options.................... 861 -- 872
Net income for the year............ -- 986 986
Income tax benefit from exercises
of employee stock options........ 2,707 -- 2,707
-------- -------- --------
Balance at December 31, 1998....... $197,861 $(42,237) $157,514
======== ======== ========
</TABLE>
F-6
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS OPERATIONS AND LINE OF BUSINESS
The Company is a facilities-based provider of a technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate/government customers in the United States. The Company
focuses its operations on domestic intracity fiber optic networks in clusters of
the 15 largest cities, based on population, throughout the United States.
The Company operates high-bandwidth fiber optic communications networks in
New York and Philadelphia. The Company also is engineering and constructing
networks in Washington, D.C., Chicago, San Francisco and Boston. The Company is
designing networks in Atlanta, Dallas, Houston, Seattle and Los Angeles.
The Company has also built or obtained intercity fiber optic capacity that
links certain of its intracity networks. The Company has under construction a
250-route mile network from New York to Washington, D.C. The Company has also
obtained rights for fiber optic capacity with other facilities-providers and
obtained fiber optic capacity linking certain of the metropolitan areas (New
York-Chicago, New York-Boston, Chicago-Seattle-Portland) in which it plans to
construct intracity networks, except in Portland.
In addition, the Company has entered into a joint venture with a United
Kingdom telecommunications company to connect its New York network to London.
The Company has formed a joint venture to construct a high-bandwidth fiber optic
network connecting 13 major cities in Germany and obtain certain additional
fiber optic capacity in Western Europe.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant inter-company balances and transactions
have been eliminated in consolidation. The investment in a 50% owned joint
venture with a United Kingdom telecommunications company is accounted for by the
equity method. Certain balances in the consolidated financial statements have
been restated to conform to the current period presentation.
MANAGEMENT ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value. The fair value of long-term
debt is determined based on quoted market rates or the cash flows from such
financial instruments discounted at the Company's estimated current interest
rate to enter similar financial instruments. At December 31, 1998, the fair
value of the Company's fixed rate long-term debt for the 10% Senior Notes due in
2008, was $650 million. The recorded amounts for all other long-term debt of the
Company approximates fair values.
F-7
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company considers
all highly liquid investments with an original maturity of three months or less
when purchased to be cash equivalents.
PLEDGED SECURITIES
In connection with the sale of 10% Senior Notes (see Note 9), a portion of
the net proceeds was utilized to purchase a portfolio consisting of U.S.
government securities, which mature at dates sufficient to provide for payment
in full of interest on the 10% Senior Notes through May 15, 2000. The pledged
securities are stated at cost, adjusted for premium amortization and accrued
interest. The fair value of the pledged securities approximates the carrying
value.
ACCOUNTS RECEIVABLE
Accounts receivable includes trade receivables and costs and estimated
earnings in excess of billings for those contracts where the Company utilizes
the percentage of completion method for recognizing revenue.
FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
The fiber optic transmission network and related equipment are stated at
cost. Costs in connection with the installation and expansion of the network are
capitalized. Depreciation is computed using the straight-line method through the
life of either the franchise agreement or right of way for the related network.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
OTHER ASSETS
Other assets include debt issuance costs, franchise agreements and deposits.
Those costs, which are amortizable, are amortized on a straight-line basis over
a period ranging from ten to fifteen years.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company has
identified no such impairment indicators.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
for the tax consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year end,
based on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when
F-8
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
necessary to reduce deferred tax assets to the amount that is "more likely than
not" to be realized. The provision for income taxes is the tax payable for the
period and the change, during the period, in deferred tax assets and
liabilities.
RECAPITALIZATIONS
In April 1997, the Company increased its authorized common stock of $.01 par
value to 60,000,000 shares; in addition, authorized preferred stock with a par
value of $.01 was increased to 2,000,000 shares. On April 29, 1997, the Company
effected a 3-for-one stock split of its outstanding shares of common stock.
In September 1997, the Company effected a .507-for-one reverse stock split
of its common stock.
On October 28, 1997, the total authorized number of shares of common stock
of the Company was increased to 200 million shares, par value $0.01 per share,
of which 180 million shares were designated Class A common stock and 20 million
shares were designated Class B common stock.
On August 28, 1998, the Company completed a two-for-one stock split of the
Company's Class A and Class B Common Stock in the form of a 100 percent stock
dividend to all shareholders of record as of the close of business on August 7,
1998. In addition, on December 22, 1998, the Company completed another
two-for-one stock split of the Company's Class A and Class B Common Stock in the
form of a 100 percent stock dividend to all shareholders of record as of the
close of business on December 8, 1998.
On May 19, 1999, the Company completed a two-for-one stock split of the
Company's Class A Common Stock and Class B Common Stock in the form of a 100
percent stock dividend.
The accompanying financial statements give retroactive effect to the above
recapitalizations.
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.
F-9
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock options.
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 24,762,600 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 at
the date of grant.
EARNINGS PER SHARE
In accordance with the Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," basic earnings per share is computed based upon the weighted average
number of common shares outstanding during the periods. Diluted earnings per
share is computed based upon the weighted average number of common shares
outstanding plus the assumed issuance of common stock equivalents computed in
accordance with the treasury stock method.
DEFERRED REVENUE
Deferred revenue represents prepayments received from customers for future
use of the Company's fiber optic network as well as prepayment for installation
services, which have not yet been provided. Lease payments are structured as
either prepayments or monthly recurring charges. Prepayments are accounted for
as deferred revenues and recognized over the term of the respective customer
lease agreement. At December 31, 1998, the Company had received prepaid lease
payments in excess of revenue recognized totaling $41.6 million.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB released SFAS No. 130 "Reporting Comprehensive
Income," governing the reporting and display of comprehensive income and its
components. This statement is effective for financial statements issued for
periods beginning after December 15, 1997. The Company adopted this standard as
required in fiscal 1998 in its Statement of Changes in Stockholders' Equity
(Deficiency).
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. In 1998 the
Company adopted SFAS No. 131. The Company currently operates in one business
segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments and hedging activities. This standard is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The
F-10
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company does not expect the adoption of SFAS No. 133 to have an impact on its
results of operations, financial position or cash flows.
NOTE 3: ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Trade accounts receivable................................... $ 560 $837
Costs and earnings in excess of billings.................... 30,134 --
Other....................................................... 216 --
------- ----
$30,910 $837
======= ====
</TABLE>
At December 31, 1998, three customers accounted for 43%, 40% and 14%,
respectively, of the Company's combined accounts receivable.
NOTE 4: FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
Fiber optic transmission network and related equipment consists of the
following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Material-fiber optic cable............................... $ 23,436 $ 1,133
Engineering and layout costs............................. 7,101 3,322
Fiber optic cable installation costs..................... 16,639 1,869
Other.................................................... 4,242 2,019
Construction in progress................................. 195,256 17,835
-------- -------
246,674 26,178
Less: accumulated depreciation........................... (2,398) (1,244)
-------- -------
$244,276 $24,934
======== =======
</TABLE>
Construction in progress includes amounts incurred in the Company's
expansion of its network. These amounts include fiber optic cable and other
materials, engineering and other layout costs, fiber optic cable installation
costs and other network assets held under capital leases. Construction in
progress also includes payments for rights of way for the underlying sections of
the network build.
F-11
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997 USEFUL LIFE
-------- -------- -----------
<S> <C> <C> <C>
Leasehold improvements........................... $ 614 $538 174 months
Furniture, equipment and software................ 2,581 352 5 years
------ ----
3,195 890
Less: accumulated depreciation and
amortization................................... (479) (131)
------ ----
$2,716 $759
====== ====
</TABLE>
NOTE 6: INVESTMENT IN/ADVANCES TO JOINT VENTURE
The Company has a joint venture agreement with Racal Telecommunications,
Inc. ("Racal"), that provides broad-based transatlantic communication services
between New York and London. As of December 31, 1997, neither party had made a
capital contribution. The balance of the investment at December 31, 1997
represents advances made to the joint venture by the Company. During 1998, each
party made capital contributions of $4.3 million. The Company and Racal may each
be required to contribute additional capital as needed for their respective 50%
interests. The Company accounts for its investment using the equity method. For
1998, the Company recorded a $146,000 loss from the joint venture based on its
50% interest in the joint venture. Included within the Company's accounts
receivable is $70,000 for administrative services provided to the joint venture
which were not reimbursed as of December 31, 1998.
NOTE 7: GERMAN NETWORK BUILD
In February, 1999, the Company entered into a joint venture with Viatel,
Inc. and Carrier 1 Holdings, Ltd. to jointly build a national fiber optic
telecommunications network in Germany. Upon completion of construction, the
joint venture will be dissolved and the Company will own its own separate German
broadband network. In connection with the terms of this agreement, the Company
made a deposit payment of $4.7 million, during the third quarter of 1998. Upon
signing a definitive agreement, the Company provided an irrevocable standby
letter of credit in the amount of $64 million as security for the construction
costs of the network, which, in addition to the deposit payment made, covers the
Company's portion of the estimated construction costs.
NOTE 8: RELATED PARTY TRANSACTIONS
The Company is a party to a management agreement under which the Company's
controlling shareholder, Metromedia Company, provides consultation and advisory
services relating to legal matters, insurance, personnel and other corporate
policies, cash management, internal audit and finance, taxes, benefit plans and
other services as are reasonably requested. The management agreement terminates
on December 31, of each year, and is automatically renewed for successive one-
year terms unless either party terminates upon 60 days prior written notice. The
1998 management fee under the agreement was $500,000 per year, payable quarterly
at a rate of $125,000. The Company is also obligated to reimburse Metromedia
Company for all its out-of-pocket costs and expenses incurred and advances paid
by Metromedia Company in connection with the management agreement. In 1997,
F-12
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: RELATED PARTY TRANSACTIONS (CONTINUED)
Metromedia Company received no money for its out-of-pocket costs and expenses or
for interest on advances extended by it to the Company under the management
agreement.
In March and June 1997, the Company entered into two one-year leases for
office space with an affiliate. Subsequent to June 1997, the affiliate sold this
property. For the year ended December 31, 1997, office rent expenses for these
leases amounted to approximately $110,000.
NOTE 9: SETTLEMENT AGREEMENTS
In February 1996, the Company entered into a settlement agreement with a
former officer regarding the termination of his employment. This agreement
provided for the Company to make payments to the officer totaling $1,003,000,
including interest. The former officer's services effectively terminated prior
to December 31, 1995. Accordingly, as of December 31, 1995, the Company recorded
$876,146 as a liability in accordance with the terms of the settlement
agreement. The settlement agreement also reaffirmed an option previously issued
to this former officer on May 1, 1995, which entitles the holder to purchase
415,766 shares of the Company's common stock at $0.003 per share through
February 1, 1999. In 1997 the Company repurchased and retired the warrants held
by this former officer. On November 14, 1996, the Company amended the above
referenced settlement agreement with the former officer, whereby a consultant to
the Company agreed to purchase common stock of the company from the former
officer and certain of his affiliates in exchange for $640,000 and the complete
satisfaction of the aforementioned liability.
On February 11, 1997, the Company entered into an agreement with a
consultant/director. Pursuant to the agreement the Company agreed to pay the
consultant/director a fee of $250,000 in full and complete payment for all
services provided to the Company by the consultant/director and for any fees or
compensation due to the consultant/director resulting from any prior agreements
with the Company, and the consultant/director agreed to release the Company from
any claims against the Company.
In March 1998, the Company entered into a settlement agreement with Howard
Katz, Realprop Capital Corporation and Evelyn Katz, among others, which settled
and resulted in the dismissal of litigation for which the Company was a
defendant in KATZ, ET AL. V. NATIONAL FIBER NETWORK, INC., ET AL., No. 97 Civ.
2764 (JGK) (the "Katz Litigation").
NOTE 10: NOTES PAYABLE
On November 25, 1998, the Company issued and sold $650.0 million of 10%
Senior Notes due November 15, 2008. The net proceeds of the 10% Senior Notes
were approximately $630.0 million, after deducting offering costs, which are
included in other long-term assets. Interest on the 10% Senior Notes is payable
semi-annually in arrears on May 15 and November 15 of each year, commencing May
15, 1999. Approximately $91.5 million of the net proceeds was utilized to
purchase certain pledged securities, the proceeds of which, together with
interest earned on such securities, will be used to satisfy the Company's
semi-annual interest obligations through May 15, 2000. The 10% Senior Notes are
subject to redemption at the option of the Company, in whole or in part, at any
time on or after November 15, 2003, at specified redemption prices. In addition,
prior to November 15, 2001, the Company may use the net cash proceeds from
certain specified equity transactions to redeem up to 35% of the 10% Senior
Notes at specified redemption prices.
F-13
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: NOTES PAYABLE (CONTINUED)
The indentures pursuant to which the 10% Senior Notes are issued contain
certain covenants that, among other matters, limit the ability of the Company
and its subsidiaries to incur additional indebtedness, issue stock in
subsidiaries, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets, and enter into certain mergers and consolidations.
In the event of a change in control of the Company as defined in the
indentures, holders of the 10% Senior Notes will have the right to require the
Company to purchase their Notes, in whole or in part, at a price equal to 101%
of the stated principal amount thereof, plus accrued and unpaid interest, if
any, thereon to the date of purchase. The 10% Senior Notes are senior unsecured
obligations of the Company, and are subordinated to all current and future
indebtedness of the Company's subsidiaries, including trade payables.
NOTE 11: EQUITY TRANSACTIONS
COMMON STOCK
On November 3, 1997, the Company completed the initial public offering (the
"IPO") of 72,864,000 shares of its Class A common stock, at an offering price of
$2 per share. The net proceeds to the Company from the IPO, after deducting
expenses of the IPO, were approximately $133.9 million.
In addition, on October 28, 1997, a total of 76,519,520 shares of the common
stock of the Company owned by stockholders prior to the IPO were exchanged for
an equal number of shares of Class A common stock. The Company also reserved for
issuance 34,083,888 shares of Class A common stock for conversion of the
Class B common stock.
On October 28, 1996, a shareholder granted to the Company's Chairman of the
Board an option to purchase 3,199,112 shares of common stock of the company for
an aggregate exercise price of $500,000. By letter dated December 3, 1996, the
option was amended to reduce the number of option shares to 2,590,712 shares.
The Chairman thereafter assigned the option to the Company. On February 11,
1997, the Company exercised the option by payment of $500,000.
On April 15, 1996, the Company entered into a stock purchase agreement with
Vento & Company of New York, LLC ("VCNY"). Pursuant to this agreement, the
Company issued 12,168,000 shares of common stock to VCNY as consideration for
services provided by VCNY. The Company estimated the value of the stock issued
approximated $2,760,000.
Concurrent with the execution of the aforementioned stock purchase
agreement, the parties entered into a consulting agreement. The term of the
agreement was from April 15, 1996 to April 15, 2001. Under the terms of the
agreement, VCNY was to provide guidance and advice with respect to the
management of the day-to-day operations of the Company's fiber optic
transmission network. In consideration for such services, the Company reimbursed
VCNY for all reasonable personnel and travel costs incurred by VCNY with respect
to the performance of these services. On October 9, 1996, the Company entered
into a settlement agreement with the Company's former chief executive officer
and VCNY regarding the termination of such officer's employment and services
provided by VCNY. The agreement provided for VCNY to deliver a total of
12,168,000 shares of common stock in exchange for
F-14
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
payments made by the Company. The payments were not made and the sale of the
shares and the Company's obligation to buy the shares was deemed null and void.
In September 1996, the Company sold 87,472 shares of common stock to three
individuals for total proceeds of $23,500.
In August 1996, the Company issued 1,460,160 shares of common stock for
consulting services. The Company recorded a non-cash charge of $334,800 for such
issuance.
In July 1996, the Company issued 97,344 shares of common stock as
consideration for consulting services. The Company recorded a non-cash charge of
$21,200 for such issuance. In addition, the Company issued 1,204,632 shares to
three employees for services rendered. The transaction was later rescinded and
the shares were returned to the Company.
In June 1996, the Company sold a total of 304,200 shares of common stock to
two individuals for total proceeds of $100,000. Concurrent with the issuance of
these shares, the Company issued warrants to these shareholders entitling the
holders to purchase a total of 304,200 shares at $0.33 per share for a
three-year period.
On January 12, 1996, the Company entered into an agreement with its legal
counsel to issue common stock as additional consideration for legal services
provided. Pursuant to this agreement, as amended, the Company issued a total of
3,928,840 shares of its common stock. Management has estimated the value of the
3,928,840 shares issued to be $907,301 and has recorded a non-cash charge in
connection with such issuance.
PREFERRED STOCK
On April 30, 1997, the Company sold an aggregate of 67,226,600 shares of
Series B convertible preferred stock, par value $0.01 per share (the "Series B
preferred stock"), to Metromedia Company and affiliates ("Metromedia") for an
aggregate purchase price of $32.5 million (the "Metromedia Investment"). Each
share of the Series B preferred stock was convertible into 507 shares of the
Company's common stock. On October 28, 1997, the Series B convertible preferred
shares were converted into 34,083,888 shares of Class B common stock. Further,
on October 28,1997, a total of 314,616 shares of Class B common stock
outstanding were converted into an equivalent number of shares of Class A common
stock.
A portion of the proceeds from the Metromedia Investment was used to repay
the Metromedia Loan, discussed below, and accrued interest thereon ($4,058,127),
repay other short-term indebtedness ($3,485,000), and redeem (for $2,115,000)
all of the outstanding shares of the Company's preferred stock (the "Series A
preferred stock") and related warrants.
Through April 30, 1997, Metromedia loaned the Company an aggregate of
$4,000,000 (the "Metromedia Loan"). A portion of the proceeds from the
Metromedia Loan was used to purchase 4,707,760 shares of the Company's common
stock and warrants to purchase 1,663,064 shares of its common stock.
No shares of the Company's Series A preferred stock or Series B preferred
stock remained outstanding at December 31, 1997. Both the Series A and Series B
preferred stock of the Company have been eliminated pursuant to actions by the
Board of Directors.
F-15
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
STOCK WARRANTS
A. In 1996, the Company entered into an agreement with a Customer for
exclusive usage rights for fibers on portions of its network. In connection with
this agreement, the Company borrowed $4.9 million from the customer. On
April 30, 1997, the Company amended this agreement to satisfy the obligations of
the above-referenced note by providing (i) additional leased fiber miles,
(ii) a cash payment of $1,370,000 and (iii) a warrant to purchase common stock
of the Company. In July 1998, the agreement was amended to include additional
fiber miles on the Company's network and for cancellation of the warrants.
B. From October 1995 through February 1996, the Company issued and sold a
private offering of $858,000 of convertible subordinated notes. Concurrent with
the issuance of these notes, warrants were issued by the Company to the
noteholders to purchase 1,044,016 shares of common stock at $1.00 per share
through November 2000. In 1996 and 1997, in exchange for the extension of the
due dates of the notes, the Company issued warrants to purchase 1,318,084 shares
of its common stock at $1.00 per share and recorded a charge of $111,306 and
$220,036 in 1996 an 1997, respectively. In 1997, the Company repaid the
outstanding balance of these notes plus all accrued interest. As of
December 31, 1998, 1,564,032 of such warrants have been exercised.
C. In September 1996, the Company entered into a loan agreement with a
finance company for $550,000. The loan bore interest at 10% per annum and was
repaid in 1997. As an incentive for the loan, the Company issued to the finance
company warrants to purchase 754,416 shares of common stock at an exercise price
of $0.74. The warrants are exercisable through September 1999. In 1996, the
Company recorded a non-cash charge of $13,640 in connection with the issuance of
the warrants. All of the warrants have been exercised.
D. In August 1995, the Company initiated a $600,000 private offering of
subordinated notes which bore interest at an annual rate of 15% and were repaid
in 1997. With the issuance of the notes, warrants were issued to the
noteholders. In April 1996, the Company issued a total of 474,872 shares of the
Company's common stock in exchange for the surrender and cancellation of the
warrants and a three-month extension of the maturity date of the notes. In 1996,
the Company recorded a non-cash charge of $107,322 in connection with such
issuance.
E. In April 1995, the Company entered into a loan agreement with a customer
for $500,000 bearing interest at 11% per annum. In July 1997, the note was
repaid in full. In connection with this loan, the Company issued the customer a
warrant entitling the holder to purchase a total of 5,353,336 shares of the
Company's common stock. In February 1997, this warrant was exchanged for a new
warrant to purchase 3,650,400 shares of the Company's common stock at $0.61 per
share. The new warrant expires on February 13, 2000. As of December 31, 1998,
none of the warrants have been exercised.
F. On December 13, 1996, the Company issued and sold to a private investor,
for an aggregate cash consideration of $2,025,000, (i) 1,200,000 shares of 10%
cumulative convertible preferred stock (the "Series A preferred stock") bearing
dividends at a rate of $.17 per share per annum, (ii) warrants to purchase
912,600 shares of Class A common stock at an exercise price of $0.62 per share
and (iii) a contingent stock subscription warrant to purchase a number of shares
of Class A common stock (such number to be determined based on certain future
events) at an exercise price of $0.005 per share. In
F-16
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
connection with the Metromedia Investment, the private investor allowed the
Series A preferred stock and the contingent warrants to be redeemed at an
aggregate redemption price of $2,115,000 (which includes accrued but unpaid
dividends on the Series A preferred stock) and the number of shares underlying
the private investor's warrants to be increased from 912,600 to 1,825,200. In
January 1998, the private investor made a cashless exercise of all its warrants
and the number of its shares issuable upon exercise was reduced by the number of
shares at the closing on the day of exercise having a value equal to the
aggregate exercise price. Accordingly, the Company issued the private investor
1,382,120 common shares for all its warrants.
G. In June 1996, the Company granted 1,216,800 common stock purchase
warrants to the Company's legal counsel exercisable at $.01 per share for a
period of four years as additional consideration for legal services provided.
The Company recorded a non-cash charge of $200,000 for such issuance. As of
December 31, 1998, all of the warrants have been exercised.
As of December 31, 1998, in the aggregate, the Company had reserved
approximately 4,456,100 shares of its Class A common stock for exercise of
outstanding warrants.
STOCK OPTIONS
In 1997, the Company granted to certain officers, employees and directors
options to purchase up to 24,761,888 shares of its Class A common stock. The
options have exercise prices between $0.25 and $0.96 per share and expire in
2007. The Company recorded a non-cash charge of $19,218,591 for such issuance.
On October 28, 1997, the Stockholders of the Company approved the Metromedia
Fiber Network, Inc. 1997 Incentive Stock Plan ("1997 Option Plan"). The 1997
Option Plan authorized the award of up to 8,000,000 options to acquire Class A
common stock of the Company to directors, officers and employees of the Company
and others who are deemed to provide substantial and important services to the
Company. In 1997, options to purchase 4,900,000 shares of the Company's Class A
common stock were granted at an exercise price of $2.00 per share, the market
price at the date of grant. In 1998, options to purchase 3,400,000 shares of the
Company's Class A common stock were granted at exercise prices ranging from
$1.94 to $4.30 per share, the market price at the date of grant. Of these
grants, 1,115,000 were canceled and 235,000 were exercised as of December 31,
1998.
On May 18, 1998, the Stockholders of the Company approved the Metromedia
Fiber Network, Inc. 1998 Incentive Stock Plan ("1998 Option Plan"). The 1998
Option Plan authorized the award of up to 20,000,000 options to acquire Class A
common stock of the Company to directors, officers and employees of the Company
and others who are deemed to provide substantial and important services to the
Company. Options to purchase 6,918,000 shares of the Company's Class A common
stock were granted at exercise prices ranging from $3.64 to $13.25 per share,
the market prices at the dates of grant.
The compensation committee of the Company's Board of Directors is
responsible for determining the type of award, when and to whom awards are
granted, the number of shares and terms of the awards and the exercise price.
The options are exercisable for a period not to exceed ten years from the date
of the grant. Vesting periods range from immediate vesting to four years.
F-17
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
The following table summarizes the stock option transactions for the two
years ended December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS EXERCISE PPRICES
-------------- ----------------
<S> <C> <C>
Granted prior to December 31, 1997.......................... 29,661,888 $0.25 to $ 2.00
----------
Balance outstanding at December 31, 1997.................... 29,661,888 0.25 to 2.00
----------
Granted..................................................... 10,318,000 1.94 to 13.25
Excercised.................................................. 1,100,048 0.25 to 3.74
Cancelled................................................... 1,135,000 0.25 to 4.30
----------
Balance outstanding at December 31, 1998.................... 37,744,840 0.25 to 13.25
==========
Exercisable at:
December 31, 1997........................................... 24,482,344 0.25 to 0.96
==========
December 31, 1998........................................... 24,881,840 0.25 to 2.00
==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS GRANTED OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED WEIGHTED
RANGES OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
YEAR OF GRANT PRICES AT 12/31/98 LIFE (YEARS) PRICE AT 12/31/98 PRICE
- ------------- --------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
1997.................. $0.25 to $ 2.00 27,596,840 8.40 $0.49 24,881,840 $0.33
1998.................. 1.94 to 13.25 10,148,000 9.42 4.88 -- --
---------- ---- ----- ---------- -----
37,744,840 8.67 $1.67 24,881,840 $0.33
========== ==== ===== ========== =====
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Standards No. 123, "Accounting for
Stock-Based Compensation", and has been determined as if the Company had
accounted for its employees' stock options under the fair value method provided
by that Statement. The fair value of the options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions for vested and non-vested options:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Risk-free interest yield............................ 5.53-6.56% 5.73-6.56%
Volatility factor................................... .499 .369
Dividend yield...................................... -- --
Average life........................................ 5 years 5 years
</TABLE>
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option
F-18
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
valuation models require the input of highly subjective assumptions including
the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma information is as follows (000's):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Pro forma net loss applicable to common stock............. $ (864) $(28,043)
Pro forma net loss per share applicable to common stock,
basic................................................... $(0.01) $ (0.30)
</TABLE>
NOTE 12: SIGNIFICANT CUSTOMERS
During the years ended December 31, 1998 and 1997 one customer accounted for
40% and 21%, respectively of the Company's total revenue. During the years ended
December 31, 1998 and 1997 another customer accounted for 35% and 15%,
respectively of the Company's total revenue. During the years ended
December 31, 1998 a third customer accounted for 12% of the Company's total
revenue.
NOTE 13: INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998, 1997 and
1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CURRENT
Federal.............................................. $4,513 $ -- $ --
State and local...................................... 2,720 -- --
------ ---- ----
7,233 -- --
------ ---- ----
DEFERRED
Federal.............................................. (2,375) -- --
State and local...................................... (1,456) -- --
------ ---- ----
(3,831) -- --
------ ---- ----
$3,402 $ -- $ --
====== ==== ====
</TABLE>
F-19
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: INCOME TAXES (CONTINUED)
Total income tax expense (benefit) differed from the amounts computed by
applying the federal statutory income tax rate (35%) to earnings (loss) before
income tax expense (benefit) as a result of the following items for the years
ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. statutory rate applied to pre-tax income (loss)... $1,492 $ -- $ --
State and local taxes, net of federal tax benefit...... 834 -- --
Non deductible expenses................................ 1,118 -- --
Valuation allowance.................................... -- -- --
Others, net............................................ (42) -- --
------ ---- ----
$3,402 $ -- $ --
====== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Deferred revenue.............................. $ 19,923 $ 5,173 $ 499
Employee benefits............................. 9,893 10,074 1,425
Cost of sales of IRU's and sales type
leases...................................... 5,599 573 --
Net operating losses.......................... -- 1,125 3,668
Others........................................ 2,522 1,465 1,047
-------- -------- -------
$ 37,937 $ 18,410 $ 6,639
-------- -------- -------
Valuation allowance........................... (18,309) (18,309) (6,579)
-------- -------- -------
19,628 101 60
DEFERRED TAX (LIABILITIES)
Capitalized leases............................ (14,782) -- --
Depreciation and amortization................. (1,003) (89) (48)
Other......................................... (12) (12) (12)
-------- -------- -------
(15,797) (101) (60)
-------- -------- -------
Net deferred asset............................ $ 3,831 $ -- $ --
======== ======== =======
</TABLE>
A portion of the deferred tax asset has been reserved since it is not
certain that future taxable income will be realized in the carryforward period
or in year of asset turnaround.
There was no provision for federal or state income taxes for the years ended
December 31, 1997 and 1996. At December 31, 1998, the Company expects to have
fully utilized its net operating losses
NOTE 14: 401(K) PLAN
In 1998, the Company implemented a 401(k) Plan (the "Plan") which permits
employees to make contributions to the Plan on a pre-tax salary reduction basis
in accordance with the Internal Revenue Code. All full-time employees are
eligible to participate at the beginning of the quarter following three
F-20
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: 401(K) PLAN (CONTINUED)
months of service. Eligible employees may contribute up to 15% of their annual
compensation. The Company matches 50% of the employees first 6% of
contributions. The Company contributed $78,000 for 1998 as these matching
contributions. The company bore the nominal administrative cost of the plan
during 1998.
NOTE 15: RECONCILIATION OF EARNINGS PER SHARE (IN THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)............................. $ 986 $(26,259) $(10,359)
Deduct dividend on preferred shares........... -- 77 --
-------- -------- --------
Net loss applicable to common stock........... 986 (26,336) (10,359)
======== ======== ========
Shares
Weighted average number of common shares
outstanding--basic.......................... 186,990 94,894 71,716
Net income (loss) per common share--basic..... $ 0.01 $ (0.28) $ (0.14)
======== ======== ========
Weighted average number of common shares
outstanding--basic.......................... 186,990 94,894 71,716
Assuming conversion of warrants and options
outstanding................................. 32,534 -- --
-------- -------- --------
Weighted average number of common shares
outstanding--diluted........................ 219,524 94,894 71,716
======== ======== ========
Net income (loss) per common share--diluted... $ 0.01 N/A N/A
======== ======== ========
</TABLE>
NOTE 16: COMMITMENTS AND CONTINGENCIES
NETWORK CONSTRUCTION PROJECTS
In 1998, the Company commenced construction of various networks outside of
the New York Metropolitan area. The Company's commitment to purchase materials
and contracts for the construction of fiber optic network systems was
approximately $70 million as of December 31, 1998.
FRANCHISE, LICENSE, RIGHT-OF WAY AGREEMENTS AND OPERATING AND CAPITAL LEASES
The Company has entered into various franchise and license agreements with
municipalities and utility-related companies to, in most instances, install,
operate, repair, maintain and replace cable, wire, fiber or other transmission
media and the related equipment and facilities. The terms for these agreements
vary in length, with various renewal and termination provisions. The Company
charges the portions of these agreements incurred to construction-in-progress
until the related portion of the network is completed. The fees charged to
operations in connection with these agreements were approximately $1,673,000,
$607,000 and $459,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
F-21
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition, the company leases office and operation facilities and various
equipment, which expire at various times through March 31, 2010. Rent expense
charged to operations was approximately $958,000, $268,000 and $158,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
The Company has entered into capital lease agreements for certain network
assets and for certain rights-of-ways. Total assets acquired under capital
leases were approximately $27,876,000 at December 31, 1998. The capital leases
are held as construction-in-progress until the related portion of the network is
completed.
Approximate minimum payments under the aforementioned agreements are (in
thousands):
<TABLE>
<CAPTION>
FRANCHISE,
LICENSE AND
RIGHT-OF-WAY CAPITAL OPERATING
AGREEMENTS LEASES LEASES
------------ -------- ---------
<S> <C> <C> <C>
For the year ended December 31,
1999.......................................... $ 1,018 $ 1,551 $ 1,994
2000.......................................... 1,121 1,797 2,032
2001.......................................... 1,121 1,859 2,054
2002.......................................... 971 1,923 2,050
2003.......................................... 661 1,991 1,532
Thereafter.................................... 7,922 42,972 7,339
------- ------- -------
Total minimum lease payments.................. $12,814 52,093 $17,001
======= =======
Less amounts representing interest............ 29,363
-------
Present value of future minimum lease
payments.................................... 22,730
Less amounts due in one year.................. 55
-------
$22,675
=======
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has executed employment contracts for future services, for up to
five years, with certain senior executives for whom the Company has a minimum
commitment aggregating approximately $3.4 million at December 31, 1998. This
amount is not included in the consolidated financial statements at December 31,
1998.
LITIGATION
On or about October 20, 1997, Vento & Company of New York, LLC commenced an
action against Metromedia Fiber Network, 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). On or about May 29, 1998, Vento
& Company filed an amended complaint. In its complaint, as amended, Vento &
Company alleges four causes of action in connection with its sale of
F-22
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 four
causes of action include: (i) violation of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated under such Act; (ii) fraud and
fraudulent concealment; (iii) breach of fiduciary duty; and (iv) negligent
misrepresentation and omission. On the first and second causes of action, Vento
& Company is seeking, among other things, rescission of the Vento & Company
sale, or alternatively, damages in an amount which we cannot currently ascertain
but believe to be in excess of $36 million, together with interest. On the third
and fourth causes of action, Vento & Company is seeking damages in an amount
which we cannot currently ascertain but believe to be in excess of $36 million,
together with interest. Vento & Company is also seeking punitive damages in the
amount of $50 million, reasonable legal fees and the cost of this action. All
the defendants, including Metromedia Fiber Network and Stephen A. Garofalo, have
moved to dismiss Vento and Company's amended complaint.
On or about June 12, 1998, Claudio E. Contardi commenced an action against
Peter Sahagen, Sahagen Consulting Group of Florida and Metromedia Fiber Network
in the United States District Court for the Southern District of New York (No.
98 CIV 4140). Mr. Contardi alleges a cause of action for, among other things,
breach of a finder's fee agreement entered into between Mr. Sahagen and
Mr. Contardi 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.
Mr. Contardi is seeking, among other things, a number of shares of Metromedia
Fiber Network which we cannot currently ascertain but believe to be
approximately 225,000 shares (calculated as of the date on which the complaint
was filed and not adjusted for subsequent stock splits) or damages in an amount
which we cannot currently ascertain but believe to be approximately $4.9 million
(calculated as of the date on which the complaint was filed) and all costs and
expenses incurred by him in this action. We have filed an answer to the
complaint and has raised affirmative defenses.
We intend to vigorously defend both these actions because we believe that we
acted appropriately in connection with the matters at issue in these two cases.
However, we cannot assure you that we will not determine that the advantages of
entering into a settlement outweigh the risk and expense of protracted
litigation or that ultimately we will be successful in defending against these
allegations. If we are unsuccessful in defending against these allegations, an
award of the magnitude being sought in the Vento & Company litigation would have
a material adverse effect on our financial condition or results of operations.
In addition, we are subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, we
believe that none of such current claims, or proceedings, individually, or in
the aggregate, including the Vento & Company litigation and the Contardi
litigation, will have a material adverse effect on our financial condition or
results of operations, although we can make no assurances in this regard.
F-23
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue..................................................... $ 38,673 $ 9,133
Expenses:
Cost of sales............................................. 14,819 4,553
Selling, general and administrative....................... 13,786 5,914
Consulting and employment incentives...................... -- 195
Settlement agreement...................................... -- 3,400
Depreciation and amortization............................. 5,058 440
-------- --------
Income (loss) from operations............................... 5,010 (5,369)
Other income (expenses):
Interest income........................................... 13,512 3,576
Interest expense.......................................... (30,407) (12)
Loss from joint venture................................... (393) (251)
-------- --------
Net income (loss)........................................... $(12,278) $ (2,056)
======== ========
Net income (loss) per share, basic.......................... $ (0.06) $ (0.01)
======== ========
Net income (loss) per share, diluted........................ N/A N/A
======== ========
Weighted average number of shares outstanding, basic........ 189,098 185,616
======== ========
Weighted average number of shares outstanding, diluted...... N/A N/A
======== ========
</TABLE>
SEE ACCOMPANYING NOTES
F-24
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
1999
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 341,897
Marketable securities..................................... 19,716
Pledged securities, current portion....................... 63,142
Accounts receivable....................................... 86,258
Prepaid expenses and other current assets................. 2,761
----------
Total current assets.................................. 513,774
Fiber optic transmission network and related equipment,
net....................................................... 417,803
Property and equipment, net................................. 3,909
Pledged securities.......................................... --
Restricted cash............................................. 51,920
Investment in/advances to joint venture..................... 6,763
Other assets................................................ 40,525
----------
Total assets.......................................... $1,034,694
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,276
Accrued liabilities....................................... 134,736
Deferred revenue, current portion......................... 8,106
Capital lease obligations, current portion................ 55
----------
Total current liabilities............................. 150,173
Senior notes payable........................................ 650,000
Capital lease obligations................................... 23,202
Deferred revenue............................................ 68,530
Commitments and contingencies (see notes) Stockholders'
equity:
Preferred stock, $.01 par value; 20,000,000 shares
authorized; none issued and outstanding................. --
Class A common stock, $.01 par value; 2,404,031,240 shares
authorized; 156,293,412 shares issued and outstanding... 1,563
Class B common stock, $.01 par value; 522,254,782 shares
authorized; 33,769,272 shares issued and outstanding.... 338
Additional paid-in capital................................ 200,370
Accumulated deficit....................................... (54,515)
Cumulative comprehensive loss............................. (4,967)
----------
Total stockholders' equity............................ 142,789
----------
Total liabilities and stockholders' equity............ $1,034,694
==========
</TABLE>
See accompanying notes
F-25
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(12,278) $ (2,056)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 5,057 440
Amortization of deferred financing costs.................. 1,000 --
Options issued for settlement agreement................... -- 3,000
Stocks, options and warrants issued for services.......... 395 195
Loss from joint venture................................... 393 251
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable....................................... (48,985) (6,676)
Accounts payable and accrued liabilities.................. 37,990 1,532
Deferred revenue.......................................... 35,081 16,802
Other..................................................... 2,391 (149)
-------- --------
Net cash provided by operating activities................. 21,044 13,339
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities........................... (19,716) --
Capital expenditures on fiber optic transmission network and
related equipment......................................... (122,823) (28,779)
Restricted cash secured by letter of credit................. (63,313) --
Investment in / advances to joint venture................... (3,000) (2,745)
Capital expenditures on property and equiptment............. (1,676) (770)
Business acquisition (net of cash acquired)................. (24,966) --
-------- --------
Net cash used in investing activities....................... (235,494) (32,294)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 2,056 754
Payments of business acquisition's pre-acquisition's debt... (15,028) --
-------- --------
Net cash used in financing activities..................... (12,972) 754
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (227,422) (18,201)
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD............... 569,319 138,846
-------- --------
CASH AND CASH EQUIVALENTS-END OF PERIOD..................... $341,897 $120,645
======== ========
Supplemental information:
Interest paid............................................. $ 31,152 $ 12
======== ========
Income taxes paid......................................... $ 2,736 $ 473
======== ========
Interest capitalized...................................... $ 3,072 $ --
======== ========
Supplemental disclosure of significant non-cash investing
activites: Capital lease obligations...................... $ 527 $ 19,401
======== ========
Accrued capital expenditures.............................. $ 30,092 $ 20,543
======== ========
</TABLE>
See accompanying notes
F-26
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS AND LINE OF BUSINESS
Metromedia Fiber Network, Inc. and its subsidiaries (collectively, the
"Company") is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate and government customers in the United States and Europe.
The Company focuses its operations on domestic, intra-city fiber optic networks
in clusters of the 15 largest cities throughout the United States based on
population. The Company leases or otherwise makes available for use its
broadband communications infrastructure to two main customer groups:
communications carriers and corporate/government customers located in selected
top 15 cities in the United States based on population. The Company currently
operates high-bandwidth fiber optic communications networks in the New York
metropolitan area, the greater Philadelphia area and parts of the Dallas
Metroplex, Washington D.C. and Chicago areas. The Company has also begun
engineering and constructing networks in Boston, Los Angeles, Seattle, Houston
and Atlanta. The Company expects that its domestic intra-city networks will
ultimately encompass approximately 810,000 fiber miles, covering approximately
1,896 route miles. Fiber miles means the number of strands of fiber contained in
a length of fiber optic cable multiplied by the length of cable in miles. Route
miles means the number of miles spanned by fiber optic cable calculated without
including physically overlapping segments of cable.
The Company has also built or obtained inter-city fiber optic capacity that
links certain of its intra-city networks. The Company built a 250 route-mile
network from New York to Washington D.C., which was put into operation at the
end of the first quarter of 1999. When complete, as currently planned, this
network will cover approximately 180,000 net fiber miles. The Company has also
obtained rights for fiber optic capacity with other facilities-providers,
obtained fiber optic capacity linking New York to Chicago, New York to Boston,
Chicago to Seattle and Seattle to Portland and plans to construct intra-city
networks in all of these metropolitan areas except Portland.
In addition, the Company has entered into a joint venture with a U.K.
telecommunications company to connect its New York network to London. The
Company has also formed a joint venture to construct a high-bandwidth fiber
optic network connecting 13 cities in Germany and obtained certain additional
fiber optic capacity in Western Europe. In addition, the Company plans to
engineer and construct networks in the European cities of London, Amsterdam,
Frankfurt, Stuttgart, and Cologne.
The Company has entered into letters of intent with a Canadian
telecommunications company, providing the Company with access to intra-city
fiber optic network facilities in Toronto, Canada.
The Company expects that the entire network when completed, as currently
planned, will ultimately consist of approximately 1.2 million fiber miles
covering approximately 9,250 route miles.
On June 22, 1999, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with AboveNet Communications, Inc. Pursuant to the Merger
Agreement, each share of AboveNet common stock will convert into the right to
receive 1.175 shares of the Company's class A common stock. Following
consummation of the merger, AboveNet will become a wholly-owned subsidiary of
the Company. AboveNet is a leading provider of facilities-based, managed
services for customer-owned Web servers and related equipment, known as
co-location, and high performance Internet connectivity solutions for electronic
commerce and other business critical Internet operations.
F-27
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The interim unaudited consolidated financial statements in this Report have
been prepared in accordance with the United States Securities and Exchange
Commission's Regulation S-X and consequently do not include all disclosures
required under generally accepted accounting principles. The interim unaudited
consolidated financial statements should be read in conjunction with the audited
Consolidated Financial Statements of the Company and accompanying Notes for the
year ended December 31, 1998, contained in the Company's Annual Report on Form
10-K. 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 report have been made. Certain balances have been
reclassified to conform to the current period presentation.
STOCK SPLITS
On August 28, 1998, December 22, 1998 and May 19, 1999, the Company
completed two-for-one stock splits of the Company's class A and class B common
stock in the form of 100 percent stock dividends to all stockholders of record
as of certain specified dates.
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. In addition,
the Company occasionally enters into sales of portions of its network. For those
sales occurring prior to completion of the portion of the network, the Company
recognizes revenue 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. The Company also provides installation services
for its customers, and as these services typically are completed within a short
time period, the Company records the revenues and related costs for these
services under the completed contract method.
FOREIGN CURRENCY TRANSLATION
For translation of the financial statements of its newly formed German
operations, the Company has determined that the local currency is the functional
currency. Assets and liabilities of foreign operations are translated at the
period-end exchange rates and income statement items are translated at average
exchange rates for the period. The resulting adjustments are made directly to
the Cumulative Translation Adjustment component of Stockholders' Equity. Foreign
currency transactions are recorded at the exchange rate prevailing on the
transaction date.
F-28
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
For purposes of the consolidated financial statements, the Company considers
all highly liquid investments with a maturity of greater than three months from
the financial statement date to be marketable securities.
COMPREHENSIVE INCOME (LOSS)
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, ("SFAS 130") Reporting Comprehensive Income (Loss). This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income (loss) consists of net income (loss) and foreign currency
translation adjustments. The comprehensive loss for the three and six months
ended June 30, 1999 was $8.5 million and $17.2 million, respectively, compared
with comprehensive income of $2.2 million and comprehensive loss of $2.1
million, respectively, for the comparable periods in 1998.
2. FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
Fiber optic transmission network and related equipment consist of the
following (in 000's):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Material-fiber optic cable.................................. $76,273 $23,436
Engineering and layout costs................................ 7,515 7,101
Fiber optic cable installation costs........................ 101,714 16,639
Other....................................................... 34,525 4,242
Construction in progress.................................... 204,563 195,256
------- -------
424,590 246,674
Less: accumulated depreciation.............................. (6,787) (2,398)
------- -------
417,803 244,276
======= =======
</TABLE>
Construction in progress includes amounts incurred in the Company's
expansion of its network. These amounts include fiber optic cable and other
materials, engineering and other layout costs, fiber optic cable installation
costs and other network assets held under capital leases. Construction in
progress also includes payments for rights of way for the underlying sections of
the network build.
3. INVESTMENT IN/ADVANCES TO JOINT VENTURE
The Company has a joint venture agreement with Racal Telecommunications,
Inc. ("Racal") that provides broad-based transatlantic communication services
between New York and London. During 1998, each party made capital contributions
of $4.3 million. The Company and Racal may each be required to contribute
additional capital as needed for their respective 50% interests. The Company
accounts for its investment using the equity method. For the three and six
months ended June 30, 1999, the Company recorded losses of $193,000 and
$393,000, respectively, from the joint venture based on
F-29
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. INVESTMENT IN/ADVANCES TO JOINT VENTURE (CONTINUED)
its 50% interest in the joint venture compared with $0 and $251,000,
respectively, for the comparable periods in 1998.
4. ACQUISITION OF COMMUNICATION SYSTEMS DEVELOPMENT, INC.
On March 11, 1999, the Company acquired all the outstanding common stock of
Communication Systems Development, Inc. ("CSD") for $25 million in cash. CSD has
its primary operations in Dallas, Texas and is engaged in the engineering and
construction of fiber optic networks. The acquisition has been accounted for by
the purchase method and, accordingly, the results of operations of CSD have been
included in the Company's consolidated financial statements from March 11, 1999.
The purchase price has been preliminarily allocated based on estimated fair
values as of the date of acquisition pending final determination of certain
tangible and intangible assets.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and CSD as if the acquisition had
occurred as of the beginning of 1999 and 1998, after giving effect to certain
adjustments, including amortization of goodwill, additional depreciation expense
and related income tax effects. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the
Company and CSD constituted a single entity during such periods. The amounts are
presented in thousands, except per share amounts.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue............................................. $ 41,940 $ 9,985
======== =======
Net Loss............................................ $(12,263) $(1,779)
======== =======
Loss per share, basic............................... $ (0.06) $ (0.01)
======== =======
</TABLE>
5. GERMAN NETWORK BUILD
In February 1999, the Company entered into a joint venture with Viatel, Inc.
and Carrier 1 Holdings, Ltd. to jointly build a national fiber optic
telecommunications network in Germany. Upon completion of construction, the
joint venture will be dissolved and the Company will own its own separate German
broadband network. In connection with the terms of this agreement, the Company
made a deposit payment of $4.7 million during the third quarter of 1998. Upon
signing a definitive agreement, the Company provided irrevocable standby letters
of credit in the amount of approximately DM110 million (approximately $63
million) as security for the construction costs of the network, which, in
addition to the deposit payment made, covers the Company's portion of the
estimated construction costs of the network. As of June 30, 1999, the Company
had restricted cash of approximately $52 million to secure the remaining value
of the irrevocable standby letters of credit.
F-30
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. ACQUISITION OF ABOVENET COMMUNICATIONS, INC.
On June 22, 1999, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with AboveNet Communications, Inc. ("AboveNet"). Pursuant
to the Merger Agreement, each share of AboveNet common stock was converted into
the right to receive 1.175 shares of the Company's class A common stock.
Following consummation of the merger, AboveNet became a wholly-owned subsidiary
of the Company. In connection with the execution of the Merger Agreement, the
Company and AboveNet entered into an Option Agreement pursuant to which the
Company was granted an option to acquire up to 19.9% of AboveNet's common stock
at a price of $49.9375 per share. The transaction closed on September 8, 1999.
7. RELATED PARTY TRANSACTIONS
The Company is party to a management agreement under which the Company's
controlling shareholder, Metromedia Company, provides consultation and advisory
services relating to legal matters, insurance, personnel and other corporate
policies, cash management, internal audit and finance, taxes, benefit plans and
other services as are reasonably requested. The management agreement terminates
on December 31 of each year, and is automatically renewed for successive one-
year terms unless either party terminates upon 60 days prior written notice. The
1998 management fee under the agreement was $500,000 per year, payable quarterly
at a rate of $125,000. The 1999 management fee under the agreement is $1,000,000
per year, payable quarterly at a rate of $250,000. The Company is also obligated
to reimburse Metromedia Company for all its out-of-pocket costs, expenses
incurred and advances paid by Metromedia Company in connection with the
management agreement.
8. SETTLEMENT AGREEMENT
In March 1998, the Company entered into a settlement agreement with Howard
Katz, Realprop Capital Corporation and Evelyn Katz, among others, which settled
and resulted in the dismissal of litigation for which the Company was a
defendant in KATZ, ET AL. V. NATIONAL FIBER NETWORK, INC., ET AL., No. 97 Civ.
2764 (JGK).
9. NOTES PAYABLE
On November 25, 1998, the Company issued and sold $650.0 million of 10%
Senior Notes due November 15, 2008. The net proceeds of the 10% Senior Notes
were approximately $630.0 million, after deducting offering costs, which are
included in other long-term assets. Interest on the 10% Senior Notes is payable
semi-annually in arrears on May 15 and November 15 of each year, commencing May
15, 1999. Approximately $91.5 million of the net proceeds was utilized to
purchase certain pledged securities the proceeds of which, together with
interest earned on such securities, will be used to satisfy the Company's
semi-annual interest obligations through May 15, 2000. The 10% Senior Notes are
subject to redemption at the option of the Company, in whole or in part, at any
time on or after November 15, 2003, at specified redemption prices. In addition,
prior to November 15, 2001, the Company may use the net cash proceeds from
certain specified equity transactions to redeem up to 35% of the 10% Senior
Notes at specified redemption prices.
The indenture pursuant to which the 10% Senior Notes are issued contains
certain covenants that, among other matters, limit the ability of the Company
and its subsidiaries to incur additional
F-31
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. NOTES PAYABLE (CONTINUED)
indebtedness, issue stock in subsidiaries, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, engage
in sale and leaseback transactions, create liens, enter into transactions with
affiliates, sell assets, and enter into mergers and consolidations.
In the event of a change in control of the Company as defined in the
indentures, holders of the 10% Senior Notes will have the right to require the
Company to purchase their Notes, in whole or in part, at a price equal to 101%
of the stated principal amount thereof, plus accrued and unpaid interest, if
any, thereon to the date of purchase. The 10% Senior Notes are senior unsecured
obligations of the Company, and are subordinated to all current and future
indebtedness of the Company's subsidiaries, including trade payables.
The Company made an interest payment on May 15, 1999. As a result, the value
of pledged securities to satisfy the Company's semi-annual interest obligation
through May 15, 1999 was reduced to approximately $63 million.
10. EQUITY TRANSACTIONS
AUTHORIZED CAPITAL
On May 18, 1999, the stockholders of the Company approved an amendment to
its Certificate of Incorporation to increase the authorized number of shares of
its capital stock to 2,946,286,022 shares consisting of (a) 2,404,031,240 shares
of class A common stock, (b) 522,254,782 shares of class B common stock, and (c)
20,000,000 shares of preferred stock.
STOCK SPLITS
As discussed in Note 1, on August 28, 1998, December 22, 1998 and May 19,
1999 the Company completed two-for-one stock splits of the Company's class A and
class B common stock in the form of 100 percent stock dividends to all
stockholders of record as of certain specified dates. The accompanying financial
statements give retroactive effect to the stock dividends.
As of June 30, 1999, adjusted for the effect of the stock dividends, the
Company had 156,293,412 class A common shares outstanding and 33,769,272 class B
common shares outstanding.
STOCK WARRANTS
(a) On December 13, 1996, the Company issued and sold to a private investor,
for an aggregate cash consideration of $2,025,000, (i) 1,200,000 shares of 10%
cumulative convertible preferred stock (the "Series A preferred stock") bearing
dividends at a rate of $.17 per share per annum, (ii) warrants to purchase
912,600 shares of class A common stock at an exercise price of $.62 per share
and (iii) a contingent stock subscription warrant to purchase a number of shares
of class A common stock (such number to be determined based on certain future
events) at an exercise price of $0.01 per share. In connection with the
investment in the Company by Metromedia Company, the private investor allowed
the Series A preferred stock and the contingent warrants to be redeemed at an
aggregate redemption price of $2,115,000 (which includes accrued but unpaid
dividends on the Series A preferred stock) and the number of shares underlying
the private investor's warrants to be increased from 912,600 to 1,825,200. In
January 1998, the private investor made a cashless exercise of all its warrants
and the
F-32
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. EQUITY TRANSACTIONS (CONTINUED)
number of its shares issuable upon exercise was reduced by the number of shares
at the closing on the day of exercise having a value equal to the aggregate
exercise price. Accordingly, the Company issued the private investor 1,382,120
shares of class A common stock for all its warrants.
(b) In April 1995, the Company entered into a loan agreement with a
customer for $500,000 bearing interest at 11% per annum. In July 1997, the
note was repaid in full. In connection with this loan, the Company issued
the customer a warrant entitling the holder to purchase a total of 5,353,336
shares of the Company's common stock. In February 1997, this warrant was
exchanged for a new warrant to purchase 3,650,400 shares of the Company's
common stock at $.60 per share. In February 1999, in accordance with an
anti-dilution provision in the warrant, the Company increased the warrant to
include the right to purchase an additional 331,882 shares of the Company's
class A common stock at $.56 per share and repriced the existing warrant to
the same $.56 per share. As of March 31, 1999, none of the warrants have
been exercised. The warrant expires on February 13, 2000.
11. CONTINGENCIES
(a) On or about October 20, 1997, Vento & Company of New York, LLC 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, Robert Kramer, Birdie Capital Corp., Lawrence
Black, Sterling Capital LLC, Penrush Limited, Needham Capital Group, Arthur
Asch, Michael Asch and Ronald Kuzon in the United States District Court for the
Southern District of New York, No. 97 CIV 7751(JGK). On or about May 29, 1998,
Vento & Company filed an amended complaint. In its complaint, as amended, Vento
& Company alleges four causes of action in connection with its sale of 900,000
shares, not adjusted for subsequent stock splits, of the Company's class A
common stock to Mr. Sahagen and some of the defendants on January 13, 1997. The
four causes of action include:
(i) violation of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated under such Act;
(ii) fraud and fraudulent concealment;
(iii) breach of fiduciary duty; and
(iv) negligent misrepresentation and omission.
On the first and second causes of action, Vento & Company is seeking,
among other things, rescission of the Vento & Company sale, or
alternatively, damages in an amount which the Company cannot currently
ascertain but believe to be in excess of $36 million, together with
interest. On the third and fourth causes of action, Vento & Company is
seeking damages in an amount, which the Company cannot currently ascertain
but believe to be in excess of $36 million, together with interest. Vento &
Company is also seeking punitive damages in the amount of $50 million,
reasonable legal fees and the cost of this action. All the defendants,
including Metromedia Fiber Network and Stephen A. Garofalo, have moved to
dismiss Vento & Company's amended complaint. On or about March 17, 1999 the
defendant's motions to dismiss were denied in part
F-33
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. CONTINGENCIES (CONTINUED)
and granted in part. The Company filed an answer to the amended complaint
and raised affirmative defenses.
On or about July 1, 1999, Vento & Company filed a second amended
complaint. In its complaint, as amended, Vento & Company alleges seven
causes of action in connection with its sale of 900,000 shares, not adjusted
for subsequent stock splits, of the Company's class A common stock to
Mr. Sahagen and some of the defendants on January 13, 1997, including
(i) violation of Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated under such Act; (ii) fraud and fraudulent
concealment; (iii) breach of fiduciary duty (but not against the Company);
(iv) negligent misrepresentation and omission; and (v) breach of contract.
Vento & Company is seeking, among other things, recission of the Vento &
Company sale, or alternatively, damages in an amount not currently
ascertainable but believed to be in excess of $460 million, together with
interest thereon. Vento & Company is also seeking punitive damages in an
amount not yet determined, reasonable legal fees and the costs of this
action.
The Company has filed an answer to the second amended complaint and has
raised affirmative defenses. All the defendants, including the Company and
its Chairman, served motions for summary judgment to dismiss the action.
(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(JGK). Mr. Contardi alleges a cause of action for, among
other things, breach of a finder's fee agreement entered into between
Mr. Sahagen and Mr. Contardi 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. Mr. Contardi is seeking, among other things, a number of our
shares of class A common stock which we cannot currently ascertain but
believe to be approximately 112,500 shares (calculated as of the date on
which the complaint was filed without taking into account subsequent stock
splits) or damages in an amount which we cannot currently ascertain but
believe to be approximately $4.9 million (calculated as of the date on which
the complaint was filed) and all costs and expenses incurred by him in this
action. The Company has filed an answer to the complaint and has raised
affirmative defenses.
The Company intends to vigorously defend both these actions because the
Company believes that it acted appropriately in connection with the matters
at issue in these two cases. However, the Company cannot assure you that it
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 defending against these allegations. If
the Company is unsuccessful in defending against these allegations, an award
of the magnitude being sought in the Vento & Company litigation would have a
material adverse effect on our financial condition and results of
operations.
(c) On June 29, 1999, an alleged stockholder of AboveNet filed a
lawsuit, captioned KAUFMAN V. TUAN, et al, Del. Ch. C.A. No. 17259NC, in the
Court of Chancery of the State of Delaware in and for the New Castle County.
The plaintiff, who purports to represent a class of all AboveNet
stockholders, challenges the terms of the proposed merger between the
Company and AboveNet. The complaint names, as defendants, AboveNet, the
directors of AboveNet, and the
F-34
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. CONTINGENCIES (CONTINUED)
Company (as an aider and abettor). The complaint alleges generally that
AboveNet's directors breached their fiduciary duty to stockholders of
AboveNet, and seeks an injunction against the merger, or, in the
alternative, rescission and the recovery of unspecified damages, fees and
expenses. AboveNet, the Company and the individual defendants believe the
lawsuit is without merit and intend to defend themselves vigorously.
AboveNet and the individual director defendants' responses were filed on
July 22, 1999. In connection with these responses, a motion to dismiss the
complaint in its entirety and a motion to stay discovery pending the outcome
of the motion to dismiss were filed by the AboveNet and the individual
directors of AboveNet on July 22, 1999. Similar motions to dismiss the
complaint and stay discovery were filed by the Company on July 26, 1999.
Four other complaints, which are virtually identical to the complaint in
KAUFMAN V. TUAN, have also been filed in the Delaware Court of the Chancery.
None of these four complaints have been served. The four actions are
captioned BROSIOUS V. TUAN, et al, Del. Ch. C.A. No. 17271NC, CHONG V. TUAN,
et al, Del. Ch. C.A. No. 17281NC, EHLERT V. TUAN, et al, Del. Ch. C.A. No.
17284NC, HORN V. TUAN, et al, Del. Ch. C.A. No. 17300NC.
In addition, the Company is subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, the
Company believes that none of such current claims, or proceedings, individually,
or in the aggregate, including the Vento & Company litigation and the Contardi
litigation, will have a material adverse effect on our financial condition or
results of operations, although the Company can make no assurances in this
regard.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AboveNet Communications Inc.:
We have audited the accompanying consolidated balance sheets of AboveNet
Communications Inc. as of June 30, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AboveNet Communications Inc. as of
June 30, 1998 and 1999 and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1999 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
July 28, 1999
(September 8, 1999 as to Note 17)
F-36
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 8,141,200 $209,126,300
Short-term investments.................................... -- 11,744,200
Accounts receivable, net of reserve for doubtful accounts
of $60,000 and $388,300, respectively................... 357,000 3,355,000
Prepaid expenses and other current assets................. 269,600 3,850,400
----------- ------------
Total current assets.................................. 8,767,800 228,075,900
Property and equipment, net................................. 4,436,100 46,590,900
Rights to use fiber optic capacity.......................... -- 12,904,500
Intangible assets........................................... -- 69,474,100
Restricted cash............................................. 300,000 21,475,900
Deposits and other assets................................... 189,400 5,377,400
----------- ------------
Total assets................................................ $13,693,300 $383,898,700
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,301,300 $ 13,593,300
Remaining obligation for rights to use fiber optic
capacity................................................ -- 800,000
Accrued liabilities....................................... 619,900 1,322,600
Unearned revenue.......................................... 309,400 2,510,700
Current portion of long-term obligations.................. 476,000 5,984,800
----------- ------------
Total current liabilities............................. 3,706,600 24,211,400
Convertible notes payable and advances...................... 8,000,000 --
Unearned revenue............................................ -- 4,375,000
Other long-term obligations................................. 1,325,300 21,588,600
Commitments and contingencies (Notes 4, 5 and 12)
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized;
shares issued and outstanding--none..................... -- --
Convertible preferred stock, $0.001 par value:
Series A; shares issued and outstanding: 2,050,000 and
none, respectively.................................... 410,000 --
Series B; shares issued and outstanding: 3,263,792 and
none, respectively.................................... 2,323,100 --
Series C; shares issued and outstanding: 4,006,000 and
none, respectively.................................... 3,873,400 --
Series D; no shares issued and outstanding.............. -- --
Series E; no shares issued and outstanding.............. -- --
Common stock, $0.001 par value, 60,000,000 shares
authorized; shares issued and outstanding: 728,696 and
34,548,308, respectively................................ 38,900 363,218,000
Common stock options...................................... 1,861,500 4,413,800
Deferred stock compensation............................... (540,100) (47,800)
Accumulated deficit....................................... (7,305,400) (33,860,300)
----------- ------------
Total stockholders' equity............................ 661,400 333,723,700
----------- ------------
Total liabilities and stockholders' equity.................. $13,693,300 $383,898,700
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenues.............................................. $ 551,600 $ 3,436,400 $ 13,967,800
----------- ----------- ------------
Costs and expenses:
Data communications and telecommunications.......... 558,600 2,199,800 12,649,700
Network operations.................................. 416,700 1,571,800 6,084,300
Sales and marketing................................. 382,600 1,618,700 11,251,300
General and administrative.......................... 433,700 1,621,500 6,610,900
Depreciation and amortization....................... 132,700 475,500 3,412,600
Stock-based compensation expense.................... -- 1,276,400 1,688,700
Joint venture termination fee....................... 431,100 -- --
----------- ----------- ------------
Total costs and expenses.......................... 2,355,400 8,763,700 41,697,500
Loss from operations.................................. (1,803,800) (5,327,300) (27,729,700)
Interest expense...................................... (7,400) (160,800) (1,573,100)
Interest and other income............................. 8,400 63,100 2,947,900
----------- ----------- ------------
Loss before equity interest in affiliates............. (1,802,800) (5,425,000) (26,354,900)
Equity interest in losses of affiliates............... -- -- (200,000)
----------- ----------- ------------
Net loss.............................................. $(1,802,800) $(5,425,000) $(26,554,900)
=========== =========== ============
Basic and diluted loss per share...................... $ (4.58) $ (10.34) $ (1.60)
=========== =========== ============
Shares used in basic and diluted loss per share....... 393,236 524,608 16,643,027
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK COMMON DEFERRED
-------------------------- ------------------------- STOCK STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT OPTIONS COMPENSATION DEFICIT
----------- ------------ ---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, July 1, 1996.......... -- $ -- 250,000 $ 5,000 $ -- $ -- $ (77,600)
Issuance of common stock........ 125,000 2,500
Issuance of Series A convertible
preferred stock............... 2,050,000 410,000
Exercise of common stock
options....................... 31,250 600
Issuance of Series B convertible
preferred stock............... 1,000,000 600,000
Issuance of Series B convertible
preferred stock in conjunction
with acquisition of DSK, Inc.
(Note 11)..................... 1,000,000 600,000
Net loss........................ (1,802,800)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1997......... 4,050,000 1,610,000 406,250 8,100 -- -- (1,880,400)
Exercise of common stock
options....................... 322,446 30,800
Issuance of warrants in
connection with issuance of
debt.......................... 112,000 45,000
Issuance of Series B convertible
preferred stock............... 1,263,792 1,011,100
Issuance of Series C convertible
preferred stock............... 4,006,000 3,873,400
Compensatory stock
arrangements.................. 1,816,500 (1,816,500)
Amortization of deferred stock
compensation.................. 1,276,400
Net loss........................ (5,425,000)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1998......... 9,319,792 6,606,500 728,696 38,900 1,861,500 (540,100) (7,305,400)
Issuance of Series D convertible
preferred stock............... 4,230,756 10,771,000
Issuance of Series E convertible
preferred stock............... 817,550 3,846,400
Exercise of Series B warrants... 209,400 --
Conversion of convertible
preferred stock to common
stock......................... (14,577,498) (21,223,900) 14,577,498 21,223,900
Issuance of common stock upon
initial public offering....... 11,500,000 67,822,000
Issuance of common stock upon
public offering............... 6,850,356 273,421,500
Exercise of common stock options
and warrants.................. 842,440 439,200
Issuance of common stock under
employee stock purchase
plan.......................... 49,318 272,500
Issuance of warrants in
connection with issuance of
debt and leases............... 1,355,900
Compensatory stock
arrangements.................. 1,196,400 (1,196,400)
Amortization of deferred stock
compensation.................. 1,688,700
Net loss........................ (26,554,900)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1999......... -- $ -- 34,548,308 $363,218,000 $4,413,800 $ (47,800) $(33,860,300)
=========== ============ ========== ============ ========== =========== ============
<CAPTION>
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
BALANCES, July 1, 1996.......... $ (72,600)
Issuance of common stock........ 2,500
Issuance of Series A convertible
preferred stock............... 410,000
Exercise of common stock
options....................... 600
Issuance of Series B convertible
preferred stock............... 600,000
Issuance of Series B convertible
preferred stock in conjunction
with acquisition of DSK, Inc.
(Note 11)..................... 600,000
Net loss........................ (1,802,800)
------------
BALANCES, June 30, 1997......... (262,300)
Exercise of common stock
options....................... 30,800
Issuance of warrants in
connection with issuance of
debt.......................... 157,000
Issuance of Series B convertible
preferred stock............... 1,011,100
Issuance of Series C convertible
preferred stock............... 3,873,400
Compensatory stock
arrangements.................. --
Amortization of deferred stock
compensation.................. 1,276,400
Net loss........................ (5,425,000)
------------
BALANCES, June 30, 1998......... 661,400
Issuance of Series D convertible
preferred stock............... 10,771,000
Issuance of Series E convertible
preferred stock............... 3,846,400
Exercise of Series B warrants... --
Conversion of convertible
preferred stock to common
stock......................... --
Issuance of common stock upon
initial public offering....... 67,822,000
Issuance of common stock upon
public offering............... 273,421,500
Exercise of common stock options
and warrants.................. 439,200
Issuance of common stock under
employee stock purchase
plan.......................... 272,500
Issuance of warrants in
connection with issuance of
debt and leases............... 1,355,900
Compensatory stock
arrangements.................. --
Amortization of deferred stock
compensation.................. 1,688,700
Net loss........................ (26,554,900)
------------
BALANCES, June 30, 1999......... $333,723,700
============
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,802,800) $(5,425,000) $(26,554,900)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity interest in losses of affiliates................. -- -- 200,000
Depreciation and amortization........................... 132,700 475,500 3,412,600
Stock-based compensation expense........................ -- 1,276,400 1,688,700
Noncash interest expense................................ -- 133,200 117,000
Joint venture termination fee........................... 431,100 -- --
Changes in assets and liabilities:
Accounts receivable................................... (29,100) (315,900) (2,728,000)
Prepaid expenses and other current assets............. -- (269,600) (3,577,800)
Restricted cash....................................... -- (300,000) (21,175,900)
Accounts payable...................................... 298,900 1,989,300 11,292,000
Accrued liabilities................................... 109,700 510,200 702,700
Unearned revenue...................................... 85,000 224,400 1,313,300
Deferred rent......................................... 30,400 18,200 156,100
----------- ----------- ------------
Net cash used in operating activities............... (744,100) (1,683,300) (35,154,200)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of short-term investments........................ -- -- (11,744,200)
Cash paid for rights to use fiber optic capacity.......... -- -- (7,480,000)
Purchase of property and equipment........................ (474,500) (3,666,000) (37,426,300)
Increase in deposits and other assets..................... (32,700) (111,700) (1,519,000)
Investments in affiliates................................. -- -- (2,630,100)
Cash paid for acquisition................................. -- -- (71,420,200)
----------- ----------- ------------
Net cash used in investing activities............... (507,200) (3,777,700) (132,219,800)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from notes payable and advances.................. 739,900 13,395,000 23,722,300
Debt repayments........................................... -- (70,000) (3,297,100)
Capital lease repayments.................................. (49,600) (84,700) (638,700)
Proceeds from issuance of common stock.................... 3,100 30,800 341,955,200
Proceeds from issuance of convertible preferred stock..... 800,000 -- 6,617,400
----------- ----------- ------------
Net cash provided by financing activities........... 1,493,400 13,271,100 368,359,100
----------- ----------- ------------
Net increase in cash and equivalents........................ 242,100 7,810,100 200,985,100
Cash and equivalents, beginning of period................... 89,000 331,100 8,141,200
----------- ----------- ------------
Cash and equivalents, end of period......................... $ 331,100 $ 8,141,200 $209,126,300
=========== =========== ============
Supplemental cash flow information--cash paid for
interest.................................................. $ 7,400 $ 27,600 $ 1,456,100
=========== =========== ============
Noncash investing and financing activities:
Remaining obligation for rights to use fiber optic
capacity................................................ $ -- $ -- $ 800,000
=========== =========== ============
Acquisition of equipment under capital lease.............. $ 206,200 $ 479,200 $ 5,829,500
=========== =========== ============
Acquisition of leasehold improvements in conjunction with
DSK, Inc. acquisition................................... $ 168,900 $ -- $ --
=========== =========== ============
Exchange of notes, advances, accrued interest and warrants
for convertible preferred stock......................... $ 210,000 $ 4,884,500 $ 8,000,000
=========== =========== ============
Conversion of preferred stock into common stock........... $ -- $ -- $ 21,223,900
=========== =========== ============
Issuance of warrants in connection with issuance of debt
and leases.............................................. $ -- $ 45,000 $ 1,355,900
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--AboveNet Communications Inc. (the "Company"), was formed on
March 8, 1996 (inception). The Company provides facilities-based, managed
services for customer-owned Web servers and related equipment, known as
co-location, and high performance Internet connectivity solutions for electronic
commerce and other business critical Internet operations.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the Company and its subsidiaries. All significant intercompany transactions and
amounts are eliminated in consolidation. Minority investments in joint ventures
are accounted for under the equity method of accounting, under which the Company
records in income its proportionate share of the earnings or losses of the joint
ventures.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to concentration of credit risk consist of trade receivables.
However, the Company's credit risk is mitigated by its credit evaluation process
and the reasonably short collection terms. The Company does not require
collateral or other security to support accounts receivable and maintains
reserves for potential credit losses.
CASH AND EQUIVALENTS--The Company considers all highly liquid investments
with maturities of ninety days or less when purchased by the Company to be cash
equivalents.
SHORT-TERM INVESTMENTS--Short term investments consist of treasury bills
with a maturity greater than 90 days but less than twelve months. The Company's
short-term investments are classified as available-for-sale. The investments are
carried at cost, which approximated fair value at June 30, 1999. Material
unrealized gains or losses would be reported as a separate component of
stockholders' equity. No investments were sold in the periods presented.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements and assets acquired
under capital lease are amortized over the shorter of the lease term or the
useful lives of the improvement.
RIGHTS TO USE FIBER OPTIC CAPACITY--Indefeasible rights to use (IRU)
capacity on fiber optic cable systems are stated at cost. Amortization will be
recognized over the shorter of the term of the IRU or its useful life beginning
when such capacity becomes available to the Company.
INTANGIBLE ASSETS--Goodwill is amortized on a straight-line basis over its
estimated life of ten years.
RESTRICTED CASH--Restricted cash consists of certificates of deposit which
are restricted from use pursuant to certain lease agreements.
REVENUE RECOGNITION--Revenue consists primarily of service revenue which is
recognized in the period in which the services are provided. The services
primarily include bandwidth and space requirement charges which are recognized
monthly as well as installation fees which are recognized as
F-41
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
revenue in the period of installation. Unearned revenue consists of customer
advances and the value assigned to certain ongoing services to be rendered to
Compaq Computer Corporation in connection with the acquisition of the Palo Alto
Internet Exchange ("PAIX") (see Note 2). Unearned revenue is recognized in the
period in which the services are rendered.
INCOME TAXES--Deferred tax liabilities are recognized for future taxable
amounts, and deferred tax assets are recognized for future deductions, net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF--The
Company evaluates its long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
NET INCOME (LOSS) PER SHARE--Basic income (loss) per share excludes dilution
and is computed by dividing net income (loss) by the weighted-average number of
common shares outstanding, less shares subject to repurchase by the Company, for
the period. Diluted income (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Common share equivalents are excluded
from the computation in loss periods as their effect would be antidilutive.
RECLASSIFICATIONS--Certain prior period amounts have been reclassified to
conform to the current period presentation. Such reclassifications had no effect
on stockholders' equity (deficiency) or net loss.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, REPORTING COMPREHENSIVE INCOME, which requires an enterprise to report,
by major components and as a single total, the change in the Company's net
assets during the period from nonowner sources. The Company adopted SFAS
No. 130 in fiscal 1999. For all periods presented, comprehensive loss was equal
to the Company's net loss.
Additionally, in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes annual and
interim reporting standards for an enterprise's business segments and related
disclosures about the enterprise's products, services, geographic areas and
major customers. The Company adopted this statement in fiscal 1999. The Company
has determined that it operates in one reporting segment.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1
provides guidance for an enterprise on accounting for the costs of computer
software developed or obtained for internal use. SOP 98-1 is effective for the
Company in
F-42
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
fiscal 2000. The Company anticipates that accounting for transactions under SOP
98-1 will not have a material impact on its financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for the Company in fiscal
2001. Although the Company has not fully assessed the implications of SFAS
No. 133, the Company does not believe adoption of this statement will have a
material impact on its financial position or results of operations.
2. ACQUISITION OF PALO ALTO INTERNET EXCHANGE
On June 21, 1999, the Company consummated the acquisition of certain assets
and the assumption of certain liabilities of the Palo Alto Internet Exchange
("PAIX"), a business within the Technology and Corporate Development and
Operations Management Services business units of Compaq Computer Corporation
("Compaq"). The total purchase price of $76.4 million consisted of
$70.0 million in cash, certain future ongoing services to be provided by the
Company to Compaq, with a value currently estimated to be $5.0 million, and
acquisition-related costs of $1.4 million. PAIX is a high-level switching and
peering point for global and regional Internet service providers and content
providers.
The acquisition has been recorded using the purchase method of accounting.
The excess of the aggregate purchase price over the fair market value of net
assets acquired of $69.7 million was recognized as goodwill and is being
amortized over 10 years. Amortization of goodwill for fiscal 1999 was $190,000.
At June 30, 1999, the Company made a preliminary allocation of the purchase
price. The Company will record adjustments to the purchase price allocation as
deemed necessary.
The operating results of PAIX have been included in the Company's
consolidated financial statements since the date of acquisition. Had the
acquisition of PAIX occurred on July 1, 1997 the unaudited proforma revenue, net
loss applicable to common stockholders and related basic and diluted loss per
share for the years ended June 30, 1998 and 1999 would have been: $6.6 million
and $19.7 million; $23.8 million and $44.4 million, and $45.45 per share and
$2.66 per share, respectively. These results, which are based on various
assumptions, are not necessarily indicative of what would have occurred had the
acquisition been consummated on July 1, 1997.
A reconciliation of the cash and noncash aspects of the above transaction is
as follows:
<TABLE>
<S> <C>
Tangible and intangible assets acquired..................... $76,683,200
Liabilities assumed......................................... (263,000)
Liabilities incurred in connection with purchase............ (5,000,000)
-----------
Net cash paid for acquisition............................... $71,420,200
===========
</TABLE>
F-43
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
3. PROPERTY AND EQUIPMENT, NET
Property and equipment at June 30 are comprised of the following:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Property and equipment at cost:
Telecommunication equipment....................... $2,295,300 $10,255,500
Leasehold improvements (primarily
co-location facilities)......................... 224,700 20,385,900
Office equipment.................................. 186,500 1,262,000
Construction in progress.......................... 2,389,400 18,224,900
---------- -----------
Total............................................... 5,095,900 50,128,300
Less accumulated depreciation and amortization...... (659,800) (3,537,400)
---------- -----------
Property and equipment, net......................... $4,436,100 $46,590,900
========== ===========
</TABLE>
Construction in progress primarily relates to costs incurred during the
expansion of the Company's facilities.
4. INDEFEASIBLE RIGHTS TO USE FIBER OPTIC CAPACITY
During fiscal 1999, the Company entered into a series of agreements
providing for the acquisition of an indefeasible right to use capacity on a
fiber optic cable system between the U.S. and the United Kingdom for
$8.3 million, $7.5 million of which has been paid as of June 30, 1999. The terms
of these agreements are 25 years.
In fiscal 1999, the Company entered into a series of agreements to lease
fiber optic cable systems between Washington D.C. and New York City. These
leases were initiated in the fourth quarter of fiscal 1999 and require annual
payments of $630,000 for 20 years. The leases are accounted for as capital
leases and had a net book value of $4.6 million at June 30, 1999.
5. JOINT VENTURES
In March 1999, as part of its international expansion strategy, the Company
entered into agreements to form joint ventures in Austria, Germany ("AboveNet
GmbH"), and the United Kingdom to provide managed co-location and Internet
connectivity solutions for mission critical Internet operations. The Company
invested a total of $2.4 million in fiscal 1999, which is included in deposits
and other assets at June 30, 1999. In addition, the Company has agreed to
provide up to $2 million of additional financing to certain of these joint
ventures, if required, and to arrange or provide for an additional $4.5 million
contingent upon the joint ventures raising an equivalent amount from third
parties. These joint ventures are accounted for under the equity method of
accounting.
In July 1999, the Company agreed to enter into two additional joint ventures
in Germany. The first joint venture will own real property in Frankfurt,
Germany. For an equity contribution of approximately $2 million, the Company
will own 45% and AboveNet GmbH will own 5% of this joint venture. The second
joint venture will lease the real property from the aforementioned joint
venture. It will complete improvements to the property and will manage the
property. This entity will lease managed co-location space to AboveNet GmbH and
provide leased space to other third parties. The Company will own 87.42% of this
second joint venture in exchange for equity contributions which will total
F-44
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
approximately $23 million, of which approximately $8 million will be paid as an
initial equity contribution, with the remainder to be contributed over the
following 18 to 24 months.
6. CONVERTIBLE NOTES PAYABLE AND ADVANCES
In June 1997, the Company received $739,900 in cash advances from certain
individuals, including stockholders and employees. In July and August 1997, the
Company received an additional $250,000 in cash advances. In August 1997, the
advances were converted into notes payable of $989,900 and warrants to acquire
989,906 shares of Series B convertible preferred stock at $1.00 per share. The
notes generally bore an annual interest rate of 10%. The related warrants were
valued at $112,000, or $0.12 per share, and were recorded as noncash interest
expense in fiscal 1998.
On December 31, 1997, the Company entered into exchange agreements with the
note holders. Pursuant to the exchange agreements, the above notes, accrued
interest of $21,200 and the related warrants were exchanged for (i) 1,263,792
shares of Series B convertible preferred stock and (ii) warrants to acquire
247,472 shares of Series B convertible preferred stock at $1.00 per share.
During fiscal 1998, the Company received $3,873,400 of cash advances from
certain potential investors. In May 1998, these advances were converted into
4,006,000 shares of Series C convertible preferred stock.
On June 30, 1998, in anticipation of the Company's pending sale of preferred
stock, the Company received $8 million in cash, of which $1 million represented
a noninterest-bearing cash advance and $7 million represented convertible notes
payable. The notes bore interest at 6%, were due on July 15, 1998 and were
convertible into Series D convertible preferred stock at $2.60 per share. On
July 15, 1998, the convertible notes and advance were converted into Series D
convertible preferred stock (see Note 9).
F-45
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
7. OTHER LONG-TERM OBLIGATIONS
Long-term obligations at June 30 consist of:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Credit facility..................................... $1,201,600 $21,626,800
Capital lease facility.............................. 551,100 5,741,900
Deferred rent....................................... 48,600 204,700
---------- -----------
Total obligations................................... 1,801,300 27,573,400
Less current portion of long-term obligations....... (476,000) (5,984,800)
---------- -----------
Long-term obligations............................... $1,325,300 $21,588,600
========== ===========
</TABLE>
CREDIT FACILITY
At June 30, 1999, the Company had $21.6 million outstanding under its credit
facility (the "Credit Facility"), with no additional borrowings available as of
June 30, 1999. Borrowings outstanding under the Credit Facility are payable in
42 monthly installments, bear interest at rates ranging from 13.3% to 15.1% and
are collateralized by the equipment and leasehold improvements purchased with
the proceeds of the borrowing. At June 30, 1999, the outstanding borrowings on
the Credit Facility are due as follows: fiscal 2000, $5,480,000; fiscal 2001,
$6,286,600; fiscal 2002, $6,874,200; and fiscal 2003, $2,986,000.
CAPITAL LEASE FACILITY
At June 30, 1999, the Company had $820,000 available on a $2.5 million
facility under which the Company leases certain equipment under capital leases.
Leases outstanding at June 30, 1999 expire on various dates through fiscal 2019
(see Note 12).
8. INCOME TAXES
The Company's deferred income tax assets at June 30 are comprised of the
following:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards................ $ 1,871,700 $ 10,755,900
Stock compensation expense on nonqualified stock
options....................................... 485,300 1,067,000
Accruals deductible in different periods........ 114,700 935,200
Depreciation and amortization................... (65,200) (231,600)
----------- ------------
2,406,500 12,526,500
Valuation allowance............................... (2,406,500) (12,526,500)
----------- ------------
Total............................................. $ -- $ --
=========== ============
</TABLE>
F-46
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
The Company's effective rate differs from the federal statutory tax rate for
the years ended June 30, 1997, 1998 and 1999 as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal statutory tax rate.............................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit..................... 3.0 3.0 2.9
Joint venture termination fee........................... (9.1) -- --
Other................................................... (0.1) (0.3) (0.4)
Valuation allowance..................................... (28.8) (37.7) (37.5)
----- ----- -----
Effective tax rate...................................... --% --% --%
===== ===== =====
</TABLE>
The Company has no income tax provision due to its history of operating
losses. Due to the uncertainty surrounding the realization of the benefits of
its favorable tax attributes in future tax returns, the Company has fully
reserved its net deferred tax assets as of June 30, 1997,1998 and 1999.
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $28.4 million for federal and $14.2 million for state income tax
purposes. These carryforwards begin to expire in 2003 for state and 2010 for
federal purposes. Additionally, Section 382 of the Internal Revenue Code and the
applicable California law impose annual limitations on the use of net operating
loss carryforwards if there is a change in ownership, as defined, within any
three-year period. The utilization of certain net operating loss carryforwards
may be limited due to the Company's capital stock transactions.
9. STOCKHOLDERS' EQUITY
STOCK SPLITS
During November 1998, the Company reincorporated in the State of Delaware
and effected a stock exchange of one share of common stock and preferred stock
for every two and one-half shares of common stock and preferred stock,
respectively, of its California predecessor entity. The Company also effected
another reverse stock split during November 1998 whereby one share of common and
preferred stock was issued for every 1.6 shares of common stock and preferred
stock. All share and per share amounts in these financial statements have been
adjusted to give effect to these reverse stock splits.
On May 7, 1999, the Company distributed a two-for-one stock split effected
as a stock dividend. All share or per share amounts in the consolidated
financial statements have been adjusted to give effect to this stock split.
INITIAL PUBLIC OFFERING
On December 10, 1998, the Company sold 10,000,000 shares of common stock in
an underwritten public offering and on December 30, 1998 sold an additional
1,500,000 shares through the exercise of the underwriters' over-allotment option
for net proceeds of approximately $67,822,000.
STOCK OFFERING
On April 30, 1999, the Company sold 5,650,356 shares of its common stock in
an underwritten public offering at a price of $42.50 per share and on May 5,
1999 sold an additional 1,200,000 shares
F-47
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
through the exercise of the underwriters' overallotment option for net proceeds
to the Company of approximately $273,421,500.
CONVERTIBLE PREFERRED STOCK AND WARRANTS
In fiscal 1997, the Company issued 2,050,000 shares of Series A convertible
preferred stock for cash of $200,000 and the conversion of advances of $210,000.
Also in fiscal 1997, the Company issued 1,000,000 shares of Series B convertible
preferred stock in connection with the acquisition of DSK, Inc. (see Note 11)
and issued 1,000,000 shares of Series B convertible preferred stock for cash of
$600,000. In fiscal 1998, the Company issued 1,263,792 shares of Series B
convertible preferred stock and 4,006,000 shares of Series C convertible
preferred stock upon conversions of notes, advances, and accrued interest of
$1,011,100 and $3,873,400, respectively (see Note 6). In fiscal 1999, the
Company issued 4,230,756 shares of Series D convertible preferred stock for cash
of $2,771,000 (net of costs of $229,000) and the conversion of notes and
advances of $8,000,000. During the same period, the Company issued 817,550
shares of Series E convertible preferred stock for cash of $3,846,400 (net of
costs of $223,600).
As discussed in Note 6, pursuant to certain exchange agreements entered into
on December 31, 1997, the Company issued warrants to acquire 247,472 shares of
Series B convertible preferred stock at $1.00 per share. Also, during fiscal
1998, the Company issued a warrant to purchase 2,500 shares of Series D
convertible preferred stock at an exercise price of $2.00 per share in
connection with a revolving line of credit from a bank that expired in
May 1999.
Simultaneously with the closing of the initial public offering, all
14,368,098 shares of the Company's preferred stock were converted into common
stock on a share for share basis. Additionally, all of the holders of warrants
to purchase 247,472 shares of Series B convertible preferred stock exercised
such warrants through a net issuance provision and were issued 209,400 shares of
common stock. Also in connection with the initial public offering, the warrant
to acquire 2,500 shares of Series D convertible preferred stock was converted
into a warrant to purchase an equivalent number of common shares at an exercise
price of $2.00 per share.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At June 30, 1999, the Company has reserved the following shares of common
stock for issuance in connection with:
<TABLE>
<S> <C>
Warrants issued and outstanding............................. 350,036
Options issued and outstanding.............................. 5,057,606
Options available under stock option plans.................. 1,108,547
Shares available under 1998 Purchase Plan................... 263,182
---------
Total....................................................... 6,779,371
=========
</TABLE>
COMMON STOCK SUBJECT TO REPURCHASE
Upon the exercise of certain unvested employee stock options, the Company
issued to the employees common stock which is subject to repurchase by the
Company at the original exercise price of the stock option. This right lapses
over the original vesting period. At June 30, 1999, 66,661 shares were subject
to repurchase.
F-48
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
STOCK OPTION PLANS
Under the Company's stock option plans (collectively, the "Plans") a total
of 5,656,712 nonstatutory and incentive common stock options are authorized for
issuance. Nonstatutory stock options may be granted to employees, outside
directors and consultants, and incentive stock options may only be granted to
employees. The Plans provide for the granting of incentive stock options at not
less than 100% of the fair market value of the underlying stock at the grant
date. Nonstatutory stock options may be granted at not less than 85% of the fair
market value of the underlying stock at the date of grant. Options granted to
employees generally vest over four years and expire ten years from the date of
the grant. In addition, upon change in control, all options granted under
certain plans shall immediately vest.
The plans provide that each nonemployee director who is elected to the
Company's board of directors will automatically be granted a nonstatutory stock
option to purchase 18,750 shares of common stock at an exercise price equal to
the fair value of the common stock on the grant date. These grants vest ratably
over three years. An additional option to purchase 6,250 shares of common stock
will be granted to the nonemployee director each year thereafter with an
exercise price equal to the fair market value of the common stock on that date.
These grants vest after one year of service.
EMPLOYEE STOCK PURCHASE PLAN
On December 10, 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (the "1998 Purchase Plan"). Under the 1998 Purchase Plan, eligible
employees are allowed to have salary withholdings of up to 15% of their base
compensation to purchase shares of common stock at a price equal to 85% of the
lower of the market value of the stock at the beginning or end of defined
purchase periods. The initial purchase period commenced on December 10, 1998.
The Company has reserved 312,500 shares of common stock for issuance under this
plan. As of June 30, 1999, 49,318 shares have been issued under the 1998
Purchase Plan.
NONPLAN OPTION GRANT
In connection with its hiring of the Company's President and Chief Operating
Officer in November 1997, the Company granted to this officer options to
purchase 350,000 shares of common stock with an exercise price of $0.20 per
share. The option was immediately exercisable with respect to 20% of the option
shares with the balance exercisable in equal monthly installments over the next
36 months of employment with the Company. However, vesting accelerated upon the
closing of the Company's underwritten public offering. In addition, the option
grant contained an antidilution clause which guaranteed that, prior to any
underwritten initial public offering of the Company's common stock, the number
of shares under the option grant would always be equal to 5% of its outstanding
common stock on a fully diluted basis less 36,666 shares. As a result of various
sales of equity securities and option grants since the initial grant in
November 1997, the officer was issued options to purchase an additional 638,850
shares of common stock at an exercise price of $0.20 per share during fiscal
1999. In connection with this award, the Company recognized $362,100 and
$1,087,200 in stock-based compensation expense during fiscal 1998 and 1999,
respectively.
OPTIONS AND WARRANTS GRANTED TO NONEMPLOYEES
The Company has granted options and warrants to nonemployees for services
performed and to be performed after the date of grant. In connection with these
awards, the Company recognized $310,100
F-49
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
and $601,500 in stock-based compensation expense during fiscal 1998 and 1999,
respectively. At June 30, 1999, options to purchase 85,000 shares of common
stock at an exercise price of $42.53 were unearned by certain nonemployees.
These options vest over three years and have a term of three years. At June 30,
1999, all services relating to all other nonemployee awards have been rendered
and the related options and warrants were fully exercisable.
In connection with the Company's formation of its European joint ventures in
March 1999, the Company agreed that it will grant options to purchase up to
600,000 shares of common stock to employees of the joint ventures upon the joint
ventures meeting certain performance criteria of over the next four years. The
exercise price for these options would be based on the fair market value of the
Company's common stock at the date of grant.
In connection with the Credit Facility (see Note 7), in fiscal 1998, the
Company issued warrants to purchase 45,000 shares of common stock at a
weighted-average exercise price of $2.31 per share. The fair value of these
warrants is being recognized as interest expense through June 30, 1999. During
fiscal 1999, in connection with an amendment to the Credit Facility, the Company
issued warrants to purchase 67,032 shares of common stock which have a
weighted-average exercise price of $18.72 per share and a term of five years.
The estimated fair value of these warrants of $787,600 is included in deposits
and other assets at June 30, 1999 and is being amortized to interest expense
over the repayment period.
In connection with the signing of a new facility lease (See Note 12) in
fiscal 1999, the Company issued the lessor a warrant to purchase 200,000 shares
of its common stock at $5.00 per share. The estimated fair value of this warrant
of $609,100 is included in deposits and other assets at June 30, 1999 and will
be amortized to expense over the lease period.
At June 30, 1998, warrants to purchase 64,686 shares of common stock at a
weighted-average exercise price of $2.10 per share were outstanding; such
warrants expire in 2003. All of these warrants were issued during the year ended
June 30, 1998 and had an estimated weighted-average fair value of $1.23 per
share at the date of grant. During fiscal 1999, warrants to purchase 302,662
shares of common stock at a weighted-average exercise price of $7.99 were issued
and had an estimated weighted-average fair value of $4.72 per share at date of
grant. At June 30, 1999, warrants to purchase 350,036 shares of common stock at
a weighted-average exercise price of $7.17 per share were outstanding.
OPTION REPRICING
On December 1, 1998, the Company repriced 928,850 options previously granted
at $6.00 to $8.00 per share to fair value at that date of $5.00 per share.
F-50
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- --------
<S> <C> <C>
Balance, July 1, 1996 (137,500 shares vested at a
weighted average exercise price of $0.02 per share)... 1,140,000 $ 0.02
Granted................................................. 450,000 0.07
Exercised............................................... (31,250) 0.02
Canceled................................................ (388,750) 0.02
----------
Balance, June 30, 1997 (219,374 shares vested at a
weighted average exercise price of $0.02 per share)... 1,170,000 0.03
Granted................................................. 1,142,612 0.59
Exercised............................................... (322,446) 0.10
Canceled................................................ (32,334) 0.31
----------
Balance, June 30, 1998 (734,270 shares vested at a
weighted average exercise price of $0.19 per share)... 1,957,832 0.34
Granted................................................. 5,058,100 15.61
Exercised............................................... (822,908) 0.50
Canceled................................................ (1,135,418) 6.35
----------
Balance, June 30, 1999.................................. 5,057,606 $14.24
==========
</TABLE>
The following table summarizes information as of June 30, 1999 concerning
currently outstanding and vested options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE OF SHARES PRICE
- ----------------------- ----------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.02 - $ 0.60 1,621,374 8.3 $ 0.17 1,185,423 $ 0.19
2.00 - 2.60 276,628 8.5 2.29 45,397 2.12
4.00 - 6.50 1,337,654 9.2 5.17 337,103 5.36
12.25 - 41.06 1,595,550 9.7 33.34 690,668 36.47
42.53 - $75.13 226,400 9.5 48.55 7,500 46.63
--------- --- -------- --------- --------
5,057,606 9.1 $ 14.24 2,266,091 $ 12.21
========= === ======== ========= ========
</TABLE>
At June 30, 1999, 1,108,547 shares remained available for future grant.
F-51
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related
interpretations.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net income (loss) and net income (loss) per share had
the Company adopted the fair value method since the Company's inception. Under
SFAS No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values.
The Company's calculations for employee grants were made using the minimum
value method for grants prior to September 8, 1998 and the fair value method for
grants after that date with the following weighted average assumptions: expected
life, one year following vesting; risk free interest rate of 6%; and no
dividends during the expected term. In addition, volatility of 70% was used for
grants valued under the fair value method. The Company's calculations are based
on a multiple award valuation approach and forfeitures are recognized as they
occur. If the computed values of the Company's stock-based awards to employees
had been amortized to expense over the vesting period of the awards as specified
under SFAS No. 123, net loss would have been $1,803,800 ($4.59 per basic and
diluted share), $5,111,000 ($9.75 per basic and diluted share) and $37,202,000
($2.24 per basic and diluted share) for the years ended June 30, 1997, 1998 and
1999, respectively.
The number and estimated weighted-average grant date value per option for
employee and nonemployee awards during the year are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Employee options:
Number of shares......................... -- 1,003,250 4,957,600
Estimated weighted average value......... $ -- $ 0.10 $ 5.98
Nonemployee options:
Number of shares......................... 450,000 139,362 100,500
Estimated weighted average value......... $ 0.02 $ 0.08 $ 20.43
</TABLE>
F-52
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
10. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share at June 30:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss (numerator), basic and
diluted............................. $(1,802,800) $(5,425,000) $(26,554,900)
=========== =========== ============
Shares (denominator):
Weighted average common shares
Outstanding....................... 393,236 530,224 16,675,822
Weighted average common shares
Outstanding subject to
repurchase........................ -- (5,616) (32,795)
----------- ----------- ------------
Shares used in computation, basic and
diluted............................. 393,236 524,608 16,643,027
=========== =========== ============
Net loss per share, basic and
diluted............................. $ (4.58) $ (10.34) $ (1.60)
=========== =========== ============
</TABLE>
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic net income per share in the future, but
were excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. At June 30, 1999,
outstanding potentially dilutive securities consist of 66,661 outstanding shares
of common stock subject to repurchase, and options and warrants to purchase
5,407,642 shares of common stock.
11. JOINT VENTURE TERMINATION FEE
In fiscal 1996, the Company entered into a joint venture agreement (the
"Agreement") with DSK, Inc. ("DSK") to cooperatively market and develop the
Company's services. The Company paid $33,700 to DSK during the year ended
June 30, 1997 related to the Agreement.
In April 1997, the Company terminated the Agreement and hired the majority
stockholders of DSK as either employees or consultants by issuing 1,000,000
fully vested shares of the Series B preferred stock with a fair value of $0.60
per share, or $600,000, for the outstanding shares of common stock of DSK. The
Company recorded the transaction by allocating the value of the shares issued to
property and equipment (at DSK's net book value of $168,900, which approximated
fair value), with the balance of $431,100 reflected as a joint venture
termination fee.
Additionally, in April 1997, the Company granted to certain of the former
owners of DSK options to purchase a total of 250,000 shares of its common stock
at $0.06 per share for real estate consulting services to be performed. In
June 1998, the Company accelerated the vesting of all the DSK options awarded.
In conjunction with this award, the Company recognized $604,200 of stock-based
compensation expense during fiscal 1998.
F-53
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities under noncancelable operating leases.
These leases expire on various dates through fiscal 2002. Minimum future lease
payments under noncancelable operating and capital leases as of June 30, 1999
are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
JUNE 30, LEASES LEASES
- ------------ ----------- -----------
<S> <C> <C>
2000...................................................... $ 1,320,600 $ 3,903,200
2001...................................................... 1,282,100 4,108,000
2002...................................................... 921,500 4,215,100
2003...................................................... 630,000 4,305,600
2004...................................................... 630,000 4,341,700
Thereafter.................................................. 9,060,000 47,604,800
----------- -----------
Total minimum lease payments................................ $13,844,200 $68,478,400
=========== ===========
Less amount representing interest at rates ranging from
13.253% to 14.68%......................................... (8,102,300)
-----------
Present value of minimum lease payments..................... 5,741,900
Less current portion........................................ (569,200)
-----------
Long-term portion........................................... $ 5,172,700
===========
</TABLE>
Rent expense under operating leases for the years ended June 30, 1997, 1998
and 1999 was $444,900, $917,000 and $1.3 million, respectively.
Effective in fiscal 2000, the Company has committed to lease additional
facilities. The lease is for a minimum term of 20 years with annual rental
payments increasing from approximately $3 million to $4 million over the lease
term.
On June 29, 1999, the Company entered into an agreement to purchase
approximately nine acres of land in Fairfax County, Virginia, for $7,750,000
which is expected to close in fiscal 2000. The Company intends to open a
facility on the site in fiscal 2001.
See Note 4 regarding the Company's agreements to lease fiber optic cable
systems.
PURCHASE COMMITMENTS
The Company has entered into noncancelable commitments to purchase property
and equipment related to the expansion of its operations facilities. As of
June 30, 1999, approximately $48 million was committed for purchases under these
agreements through fiscal 2000.
TELECOMMUNICATIONS AND PEERING ARRANGEMENTS
The Company has guaranteed to pay certain monthly usage levels or fees with
various communications or interconnect providers. Minimum payments under these
agreements at June 30, 1999 are approximately $24.8 million in fiscal 2000;
$24.7 million in fiscal 2001; $23.1 million in fiscal 2002; $14.4 million in
fiscal 2003; $13.7 million in fiscal 2004; and $8.6 million in fiscal 2005.
F-54
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
The Company is a party to numerous peering agreements with other internet
providers to allow for the exchange of internet traffic. These agreements do not
have fee commitments and generally have a one year term with automatic renewals.
The Company does not record any revenue or expense associated with these
non-cash transactions as such transactions do not represent the culmination of
the earnings process and the fair value of such transactions are not reasonably
determinable.
LEGAL MATTERS
On June 29, 1999, an alleged stockholder of AboveNet filed a lawsuit in the
Court of Chancery of the State of Delaware. The plaintiff, who purports to
represent a class of all AboveNet stockholders, challenges the terms of the
merger between AboveNet and Metromedia Fiber Network, Inc. ("Metromedia") (see
Note 17). Four other vitually identical complaints have also been filed in the
Delaware Court of Chancery. None of these four complaints has been served.
AboveNet believes these lawsuits are without merit and intends to defend itself
vigorously, and accordingly, management does not expect that the outcome of
these cases will have a material effect on the Company's financial position or
results of operations.
13. RELATED PARTY TRANSACTIONS
A member of the Board of Directors is the president of an entity which is
the co-manager of the Company's primary facilities. Rent expense in fiscal 1997,
1998 and 1999 for these facilities was $16,400, $265,200 and $1,073,200,
respectively. The Company believes that its lease arrangements were on an arm's
length basis.
During fiscal 1999, the same entity was granted a warrant to purchase
200,000 shares of common stock in connection with the signing of a new facility
lease (see Note 9). The estimated fair value of the warrant when granted was
$609,100.
14. MAJOR CUSTOMERS
For the year ended June 30, 1999, no one customer accounted for more than
10% of revenues. One customer accounted for 14% and 12% of revenues in fiscal
1998 and 1997, respectively.
At June 30, 1999, one customer accounted for approximately 10% of trade
receivables. At June 30, 1998, two customers accounted for approximately 22% and
13% of trade receivables.
15. GEOGRAPHIC DATA
During the year ended June 30, 1999, the Company generated approximately 14%
of its revenues from customers domiciled in countries other than the United
States, primarily in Asia. For the years ended June 30, 1998 and 1997,
substantially all of the Company's revenues were derived from domestic
customers.
16. 401(K) PLAN
In May 1998, the Company began a 401(k) plan (the Plan) that covers all
employees who meet the Plan's eligibility requirements. Eligible employees can
contribute up to 15% of their salary, subject to certain IRS limitations. The
Company's contributions related to fiscal 1998 and 1999 were zero and $168,100,
respectively.
F-55
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
17. SUBSEQUENT EVENTS
In August 1999, the Company entered into an additional agreement for the
acquisition of an indefeasible right to use additional capacity on a fiber optic
cable system between the U.S. and the United Kingdom for a 25-year period. The
agreement commits the Company to pay approximately $15.8 million in a series of
installments through October 1999.
On September 8, 1999, the Company completed a merger with Metromedia Fiber
Network, Inc. ("MFN"). Under the terms of the agreement, AboveNet stockholders
received 1.175 shares of MFN Class A common stock for each AboveNet share owned.
Additionally, upon completion of the merger, all outstanding stock options
granted prior to June 18, 1999 became immediately vested.
F-56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Compaq Computer Corporation
We have audited the accompanying Combined Statement of Assets to be Acquired
and Liabilities to be Assumed of Palo Alto Internet Exchange (the "Business") as
of December 26, 1998 and the related Combined Statement of Revenues and Direct
Expenses for the period June 12, 1998 through December 26, 1998. These
statements are the responsibility of the Business' and Compaq Computer
Corporation's management. Our responsibility is to express an opinion on these
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in the Current Report on Form 8-K of AboveNet Communications Inc.) as
described in Note 2 and are not intended to be a complete presentation of the
Business' financial position or results of operations.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets to be acquired and liabilities to be assumed as of
December 26, 1998 and the revenues and direct expenses described in Note 2 of
the Business for the period June 12, 1998 through December 26, 1998, in
conformity with generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 15, 1999
F-57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Compaq Computer Corporation
We have audited the accompanying Combined Statement of Assets to be Acquired
and Liabilities to be Assumed of Palo Alto Internet Exchange (the "Business") as
of December 27, 1997 and the related Combined Statement of Revenues and Direct
Expenses for the period December 28, 1997 through June 11, 1998 and the fiscal
years ended December 27, 1997 and December 29, 1996. These statements are the
responsibility of the Business' and Compaq Computer Corporation's management.
Our responsibility is to express an opinion on these statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in the Current Report on Form 8-K of AboveNet Communications Inc.) as
described in Note 2 and are not intended to be a complete presentation of the
Business' financial position or results of operations.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets to be acquired and liabilities to be assumed as of
December 27, 1997 and the revenues and direct expenses described in Note 2 of
the Business for the period December 28, 1997 through June 11, 1998 and the
fiscal years ended December 27, 1997 and December 29, 1996, in conformity with
generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 15, 1999
F-58
<PAGE>
PALO ALTO INTERNET EXCHANGE
COMBINED STATEMENT OF ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 27,
1999 DECEMBER 26, DECEMBER 27,
(UNAUDITED) 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
ASSETS TO BE ACQUIRED:
Unbilled accounts receivable........... $ 102 $ 18 $ 14
Prepaid expenses....................... 29 2 1
Property and equipment, net............ 3,405 3,088 2,750
Intangible assets, net................. 32,863 33,756 --
------- ------- ------
Total assets to be acquired........ $36,399 $36,864 $2,765
======= ======= ======
LIABILITIES TO BE ASSUMED:
Unearned service revenue............... 166 200 106
------- ------- ------
Total liabilities to be assumed.... 166 200 106
------- ------- ------
Net assets to be acquired........ $36,233 $36,664 $2,659
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
PALO ALTO INTERNET EXCHANGE
COMBINED STATEMENT OF REVENUES AND DIRECT EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
QUARTER QUARTER JUNE 12, 1998 PERIOD FROM FISCAL FISCAL
ENDED ENDED THROUGH DECEMBER 28, YEAR ENDED YEAR ENDED
MARCH 27, MARCH 26, DECEMBER 26, 1997 THROUGH DECEMBER 27, DECEMBER 29,
1999 1998 1998 JUNE 11, 1998 1997 1996
--------- --------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Service revenues....................... $1,534 $ 892 $ 2,630 $1,732 $ 1,895 $ 155
------ ----- ------- ------ ------- -------
Direct expenses:
Cost of revenues..................... 616 817 1,548 1,440 2,579 537
Research and development............. -- 4 9 8 54 599
Selling, general and administrative
expenses........................... 131 83 191 242 700 121
Amortization of intangible assets.... 893 -- 1,944 -- -- --
------ ----- ------- ------ ------- -------
Total direct expenses............ 1,640 904 3,692 1,690 3,333 1,257
------ ----- ------- ------ ------- -------
Excess (shortfall) of revenues
over direct expenses......... $ (106) $ (12) $(1,062) $ 42 $(1,438) $(1,102)
====== ===== ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES
(AMOUNTS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS:
The Palo Alto Internet Exchange ("PAIX" or the "Business") is a business
within the Technology & Corporate Development and Operations Management Services
business units of Compaq Computer Corporation ("Compaq," formerly Digital
Equipment Corporation, "Digital," collectively the "Company"). The Business is a
high-level switching and peering point for global and regional Internet Service
Providers ("ISP") and content providers. The Business features a data center to
provide global services to PAIX customers for transmission of data in
high-volume over the worldwide Internet network. The Business utilizes a highly
redundant fiber-based infrastructure owned by multiple data carriers, including
the 30-mile fiber ring owned by the City of Palo Alto. The Business was started
in 1993 as a research project within the Company and commenced meaningful
operations during fiscal year 1996. The business is engaged primarily in
providing Internet interconnectivity solutions and related services in support
of mission critical Internet operations of its customers.
2. BASIS OF PRESENTATION:
The accompanying Combined Statement of Assets to be Acquired and Liabilities
to be Assumed and Combined Statement of Revenues and Direct Expenses ("the
financial statements") have been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Current Report on Form 8-K of AboveNet Communications, Inc. ("AboveNet").
The Combined Statement of Assets to be Acquired and Liabilities to be Assumed
includes the Business' assets to be sold to and liabilities to be assumed by
AboveNet, in accordance with the Asset Purchase Agreement dated May 21, 1999
(the "Agreement"). Compaq and AboveNet also entered into certain service
contracts and other arrangements that are described in the Agreement. These
arrangements include, but are not limited to, access to the Internet, favorable
pricing terms on such future services, and non-relocation and non-compete
arrangements. The terms of such contracts and other arrangements range from one
to 20 years. The assets to be acquired and liabilities to be assumed include
unbilled accounts receivable, prepaid expenses, property and equipment,
intangibles and unearned service revenue. The Combined Statement of Revenues and
Direct Expenses includes only those revenues and expenses directly related to
the Business to be sold. The financial statements exclude any other activity and
related expense that are not directly attributable to the Business, such as
corporate general and administrative costs, income taxes and interest expense.
The financial statements of the Business are derived from the historic books
and records of Digital through June 11, 1998. As a result of the acquisition of
Digital by Compaq on June 11, 1998, the financial statements of the Business
after the acquisition date are derived from the historic books and records of
Compaq.
As mentioned above, indirect costs allocated to the Business from the
Company, such as certain corporate general and administrative costs, have been
excluded from the financial statements on the basis that such costs are not
direct costs of the Business. However, in determining the Business' direct
expenses, certain allocations were made for expenses incurred by the Company, as
appropriate, that are directly attributed to the services provided to the
Business. These allocations relate primarily to engineering support in
connection with the delivery of services, facility and other occupancy costs,
and other general and administrative functions performed directly on behalf and
for the benefit of the
F-61
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
2. BASIS OF PRESENTATION: (CONTINUED)
Business. Costs for such services have been reflected in the financial
statements on the basis of activity or utilization, estimated support provided
to the Business, or other methods management believe to be reasonable.
Cost of revenues primarily consists of costs relating to facility rent, data
communications and telecommunication expenses, service delivery and engineering
support personnel and depreciation expense.
The financial statements have been prepared in accordance with the Company's
accounting policies and generally accepted accounting principles. However, these
statements do not purport to represent the costs and expenses which may be
incurred by an unaffiliated company to achieve similar results. In addition, the
financial statements do not purport to represent the financial position of the
Business.
FISCAL YEAR
For purposes of these financial statements the fiscal year of PAIX is a
fifty-two week period ending the Saturday nearest the last day of December.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
direct expenses, and related disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Building improvements, computer, telecommunications, and office equipment
and construction-in-progress are stated at cost less depreciation, which is
computed using the straight-line method. Expenditures for improvements which
substantially extend the useful life or increase the capacity of an asset are
capitalized. Ordinary repairs and maintenance are expensed as incurred.
Estimated useful lives for purposes of computing depreciation expense range from
two to 10 years.
INTANGIBLE ASSETS
Intangible assets, which consist of goodwill and customer lists related to
the acquisition of Digital by Compaq, are amortized on a straight-line basis
over 10 years.
REVENUE
Service revenue relating to Internet and colocation service contracts are
recognized over the contract period the services are provided. The Business
recognizes installation and certain other service fees as revenue on a per event
basis. Unearned service revenue represents the unearned portion of prepaid
service from Internet and colocation service contracts with customers. Such
amounts are amortized to revenue over the contract period, which ranges from one
year to three years. The
F-62
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
2. BASIS OF PRESENTATION: (CONTINUED)
Business provides for estimated future losses on Internet and colocation service
contracts, to the extent such losses are probable and estimable.
RESEARCH AND DEVELOPMENT
Research and development costs of the Business are charged to expense in the
period incurred.
LONG-LIVED ASSETS
The Business reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Business sells to customers primarily in the Internet and
Telecommunications industries and customers are primarily located in the United
States. The Company performs ongoing credit evaluations of its customers'
financial condition and maintains adequate provisions for uncollectible amounts
when necessary.
For the periods in the fiscal year ended December 26, 1998, and for the
years ended December 27, 1997 and December 29, 1996, PAIX generated more than
10% of its total revenue from the following customers:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
UUNet...................................................... 12% 19% 35%
BBN\GTE Internetworking.................................... -- -- 14%
Epoch...................................................... -- -- 31%
Genuity.................................................... -- -- 11%
</TABLE>
As of December 26, 1998 and December 27, 1997, customers which comprised 10%
or more of accounts receivable were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
UUNet....................................................... 23% 25%
Epoch....................................................... -- 20%
</TABLE>
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information for the quarters ended March 27, 1999 and
March 26, 1998 is unaudited and has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Results for the
F-63
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
2. BASIS OF PRESENTATION: (CONTINUED)
three months ended March 27, 1999 are not necessarily indicative of results to
be expected for the year ending December 31, 1999.
3. PROPERTY AND EQUIPMENT:
Major classifications of property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 26, DECEMBER 27,
USEFUL LIVES 1998 1997
--------------- ------------ ------------
<S> <C> <C> <C>
Building improvements............... 10 years $2,479 $2,450
Computer equipment.................. 2-3 years 52 87
Office equipment.................... 10 years 6 --
Electrical and telecommunications
equipment......................... 3 years 251 388
Construction in progress............ -- 521 112
------ ------
Less: accumulated depreciation...... (221) (287)
------ ------
$3,088 $2,750
====== ======
</TABLE>
Depreciation expense was approximately $221, $184, $286 and $1 for the
period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 11, 1998, and the fiscal years ended December 27, 1997 and
December 29, 1996, respectively.
4. INTANGIBLE ASSETS:
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 11,
1998 1998
------------ --------
<S> <C> <C>
Goodwill............................................... $27,400 $27,400
Customer lists......................................... 8,300 8,300
Less: accumulated amortization......................... (1,944) --
------- -------
$33,756 $35,700
======= =======
</TABLE>
On June 11, 1998, Compaq consummated its acquisition of Digital and
allocated its purchase price to the assets acquired and liabilities assumed
based on Compaq's estimates of fair value. The fair value assigned to intangible
assets acquired was based on a valuation prepared by an independent third-party
appraisal company and included goodwill and customer lists related to the
Business.
5. COMMITMENTS AND CONTINGENCIES:
The Company, on behalf of the Business, has entered into service contracts
with customers and telecommunications vendors to provide services.
F-64
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
In some instances, the Company provides limited warranties to customers in
connection with Internet and colocation service contracts. To date, costs
incurred in connection with such warranties have been immaterial.
6. LEGAL MATTERS:
The Company is involved in lawsuits, claims, investigations, and proceedings
which are being handled and defended in the ordinary course of business. There
are no such matters pending that the Company and its General Counsel expect to
be material in relation to the Business and no amounts have been accrued in the
financial statements for such matters.
7. RELATED PARTY TRANSACTIONS:
As described in Note 2, the Company incurred expenses for services performed
directly on behalf and for the benefit of the Business. Costs for such services
have been reflected in the accompanying Statement of Revenues and Direct
Expenses on the basis of activity or utilization, estimated support provided to
the Business, or other methods management believe to be reasonable. The cost of
such services is presented as cost of revenue, research and development and
general and administrative.
The Business has no external borrowings and there has been no allocation of
the Company's consolidated borrowings and related interest expense in the
financial statements.
The Business recognized revenue from AboveNet of $66, $36, $22 and $0 for
the period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 11, 1998, and the fiscal years ended December 27, 1997 and
December 29, 1996, respectively. Accounts receivable from AboveNet are $11 and
$4 at December 26, 1998 and December 27, 1997, respectively.
F-65
<PAGE>
- ------------------------------------
- ------------------------------------
10,000,000 SHARES
METROMEDIA FIBER NETWORK, INC.
CLASS A COMMON STOCK
[LOGO]
---------
P R O S P E C T U S S U P P L E M E N T
, 1999
---------
- ------------------------------------
- ------------------------------------
<PAGE>
THE INFORMATION IN THIS PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS SUPPLEMENT IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY
THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED OCTOBER 27, 1999
P R O S P E C T U S S U P P L E M E N T
(TO PROSPECTUS DATED , 1999)
[LOGO]
4,671,000 SHARES
METROMEDIA FIBER NETWORK, INC.
CLASS A COMMON STOCK
$ PER SHARE
--------------
This prospectus supplement relates to the sale of 4,671,000 shares of our
class A common stock beneficially owned and offered by the selling stockholders
identified in this prospectus supplement under the heading "Selling
Stockholders." We will receive no portion of the proceeds from the sale. The
underwriters named in this prospectus supplement may purchase up to 700,650
additional shares of class A common stock from the selling stockholders under
certain circumstances.
The shares of our class A common stock are quoted on The Nasdaq Stock
Market's National Market under the symbol "MFNX." On October 26, 1999, the last
reported sales price for our class A common stock as reported by Nasdaq was
$33 15/16 per share.
--------------
INVESTING IN OUR CLASS A COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS"
BEGINNING ON PAGE S-12 OF THIS PROSPECTUS SUPPLEMENT AND PAGE 3 OF THE
ACCOMPANYING PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus supplement or the accompanying
prospectus. Any representation to the contrary is a criminal offense.
--------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
------------ ------------
<S> <C> <C>
Public Offering Price $ $
Underwriting Discount $ $
Proceeds to the Selling Stockholders (before expenses) $ $
</TABLE>
The underwriters are offering the shares subject to various conditions. The
underwriters expect to deliver the shares to purchasers on or about ,
1999.
--------------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEXu BROWN
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
<PAGE>
, 1999
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS SUPPLEMENT OR THE ACCOMPANYING PROSPECTUS IS ACCURATE AS OF ANY DATE
OTHER THAN THE DATE ON THE FRONT OF THIS PROSPECTUS SUPPLEMENT.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUPPLEMENT
About This Prospectus Supplement............................ S-3
Summary..................................................... S-4
Risk Factors................................................ S-12
Special Note Regarding Forward-Looking Statements........... S-23
Price Range of Class A Common Stock......................... S-25
Dividend Policy............................................. S-25
Use of Proceeds............................................. S-25
Capitalization.............................................. S-26
Selected Consolidated Financial Data........................ S-28
Unaudited Pro Forma Condensed Combining Financial
Information............................................... S-30
Management's Discussion and Analysis of Financial Conditions
Results of Operations..................................... S-35
Business.................................................... S-42
Management.................................................. S-62
Security Ownership.......................................... S-71
Description of Material Indebtedness........................ S-73
Certain Relationships and Related Transactions.............. S-75
Proposed Transactions....................................... S-77
Selling Stockholders........................................ S-79
Description of the New Credit Facility...................... S-80
Certain United States Federal Tax Consequences to Non-United
States Holders of Common Stock............................ S-82
Underwriting................................................ S-85
Shares Eligible for Future Sale............................. S-87
Notice to Canadian Residents................................ S-88
Validity of the Securities.................................. S-89
Experts..................................................... S-90
Where You Can Find More Information......................... S-90
Incorporation of Information We File With the SEC........... S-91
Index to Consolidated Financial Statements.................. F-1
PROSPECTUS
Risk Factors................................................ 3
Special Note Regarding Forward-Looking Statements........... 10
About This Prospectus....................................... 11
Business.................................................... 11
Ratio of Earnings to Fixed Charges and Preferred Stock
Dividends................................................. 12
Use of Proceeds............................................. 12
Description of Debt Securities.............................. 13
Description of Capital Stock................................ 22
Description of Warrants..................................... 28
Selling Shareholders........................................ 29
Plan of Distribution........................................ 29
Validity of Securities...................................... 30
Experts..................................................... 30
Where You Can Find More Information......................... 31
Incorporation of Information We File With the SEC........... 31
</TABLE>
S-2
<PAGE>
------------------------
Certain persons participating in this offering may engage in transactions
that stabilize, maintain or otherwise affect the price of the class A common
stock, including over-allotment, stabilizing and short-covering transactions in
the class A common stock, and the imposition of a penalty bid, during and after
the offering of the class A common stock. Such stabilization, if commenced, may
be discontinued at any time. For a description of these activities, please refer
to the section in this prospectus supplement entitled "Underwriting."
------------------------
ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement contains the terms of this offering. A
description of our capital stock is contained in the attached prospectus. This
prospectus supplement, or the information incorporated by reference in this
prospectus supplement, may add, update or change information in the attached
prospectus. If information in this prospectus supplement, or the information
incorporated by reference in this prospectus supplement, is inconsistent with
the attached prospectus, this prospectus supplement, or the information
incorporated by reference in this prospectus supplement, will apply and will
supersede the information in the attached prospectus.
It is important for you to read and consider all information contained in
this prospectus supplement and the attached prospectus in making your investment
decision. You should also read and consider the information in the documents we
have referred you to in "Where You Can Find More Information."
This prospectus supplement and the attached prospectus do not constitute an
offer or solicitation by anyone in any jurisdiction in which an offer or
solicitation is not authorized or in which the person making an offer or
solicitation is not qualified to do so, or to anyone to whom it is unlawful to
make an offer or solicitation.
S-3
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS
SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS INCORPORATED BY
REFERENCE. BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION
THAT YOU SHOULD CONSIDER BEFORE INVESTING. YOU SHOULD READ THE ENTIRE PROSPECTUS
SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS INCORPORATED BY
REFERENCE CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS" AND THE
FINANCIAL STATEMENTS AND RELATED NOTES TO THOSE STATEMENTS INCLUDED IN THIS
PROSPECTUS SUPPLEMENT, THE ACCOMPANYING PROSPECTUS AND THE DOCUMENTS
INCORPORATED BY REFERENCE. EXCEPT AS OTHERWISE REQUIRED BY THE CONTEXT,
REFERENCES IN THIS PROSPECTUS SUPPLEMENT TO "WE" OR "US" REFER TO THE COMBINED
BUSINESS OF METROMEDIA FIBER NETWORK, INC. AND ALL OF ITS SUBSIDIARIES. THE TERM
"YOU" REFERS TO PROSPECTIVE INVESTORS IN THE SHARES.
THE COMPANY
GENERAL
We provide dedicated fiber optic infrastructure and high-bandwidth Internet
connectivity for our communications intensive customers. We are a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through our acquisition of
AboveNet Communications, Inc. (often referred to as "AboveNet"), we also provide
"one-hop" connectivity that enables mission critical Internet applications to
thrive, as well as high-bandwidth infrastructure, including managed co-location
services.
We currently have operations in, or under construction in, eleven Tier I
cities throughout the United States and seven selected international markets. We
intend to expand our presence to include approximately 50 Tier I and Tier II
markets in the United States and 17 major international markets.
RECENT EVENTS
ACQUISITION OF ABOVENET. On September 8, 1999, we completed the acquisition
of AboveNet for a total purchase price of approximately $1.8 billion. AboveNet
is a leading provider of high performance Internet connectivity solutions for
electronic commerce and other business critical Internet operations and
facilities-based, managed services for customer-owned Web servers and related
equipment, known as co-location services. AboveNet has developed a network
architecture based upon strategically located, fault-tolerant facilities, known
as Internet service exchanges. AboveNet's Internet service exchanges combine
direct access to Internet service providers, (often referred to as "ISPs"), with
co-location services for Internet content providers. As of June 30, 1999,
AboveNet had more than 270 direct public and private data exchange agreements,
known as peering arrangements, including relationships with most major network
providers. AboveNet's network architecture and extensive peering relationships
are designed to reduce the number of network connections or "hops" for data
traveling across the Internet. By having both Internet content providers and
Internet service providers at its Internet service exchanges, AboveNet enables
its Internet service provider customers to provide their users with "one-hop"
connectivity, through AboveNet's local area network, to the Web sites of the
Internet content providers that are co-located at the same facility. AboveNet's
customers include a wide range of Internet service providers, Internet content
providers and Web hosting companies.
INVESTMENT BY BELL ATLANTIC. On October 7, 1999, we entered into a
securities purchase agreement with Bell Atlantic Investments, Inc. (referred to
as "Bell Atlantic"), under which Bell Atlantic would purchase up to
approximately 25.6 million newly issued shares of our class A common stock at a
purchase price of $28.00 per share and a convertible subordinated note of
approximately $975.3 million, which is convertible into shares of our class
A common stock at a conversion price of $34.00 per share. We expect this
transaction, which is subject to customary closing conditions, to be completed
by the end of the first quarter of 2000. Assuming the issuance of the
25.6 million shares of class A common
S-4
<PAGE>
stock and conversion of the convertible subordinated note, this investment would
represent 19.9% of our outstanding shares. Bell Atlantic has also agreed to pay
us $550 million over the next three years in exchange for delivery of fiber
optic facilities over the next five years. The proceeds from these two
transactions will be used to fund the expansion of our network.
NETWORK
Our existing intra-city networks consist of approximately 334,000 fiber
miles covering 680 route miles in six of our announced markets. Our inter-city
network consists of approximately 110,000 fiber miles covering 255 route miles
that we have built between New York City and Washington, D.C. We have also built
or acquired (primarily through fiber swaps) a nationwide dark fiber network
linking our intra-city networks.
In February 1999, we entered into an agreement with Viatel, Inc. and
Carrier 1 Holdings, Ltd. to jointly build a dark fiber inter-city network among
selected cities throughout Germany. Once completed, our German network will
consist of approximately 291,000 fiber miles covering 1,350 route miles
connecting 14 major cities. We have also swapped strands of fiber in the United
States for strands of fiber on the Circe network, which connects a number of
European markets. In addition to our inter-city networks, we are constructing 16
intra-city networks throughout Europe. Separately, we have also entered into a
contract to acquire dark fiber network facilities in Toronto, Canada.
We have designed our networks to provide high levels of reliability,
security and flexibility by virtue of a self-healing synchronous optical network
(often referred to as "SONET") architecture that prevents interruption in
service to our clients by instantaneously rerouting traffic in the event of a
fiber cut. Our advanced network architecture is also capable of supporting
state-of-the-art technologies, including dense wave division multiplexing (often
referred to as "DWDM") which significantly increases the transmission capacity
of a strand of fiber optic cable. Because DWDM can boost transmission capacity
significantly, it has greater relevance on our inter-city routes where we have,
on average, fewer strands of fiber installed than in our intra-city markets. We
install most of our fiber inside high-density polyethylene conduit to protect
the cable and, where practicable, we install additional unused conduits to cost
effectively accommodate future network expansion and eliminate the need for
future construction.
We believe that the market for our services in these areas is characterized
by significant and growing demand for, and limited supply of, fiber optic
capacity. To meet our customers' demand, we tailor the amount of fiber capacity
leased to the needs of our customers. Generally, customers lease fiber optic
capacity from us and connect their own transmission equipment to the leased
fiber, thereby obtaining a high-bandwidth, fixed-cost, secure communications
alternative to the metered communications services offered by traditional
providers. In addition, we believe that we have installation, operating and
maintenance cost advantages per fiber mile relative to our competitors because
we generally install 432 fibers, and have begun installing as many as 864 fibers
per route mile, as compared to the generally lower number of fibers per mile in
existing competitive networks.
We believe the market for our Internet service exchanges is characterized by
significant and growing demand for, and limited access to, highly reliable
Internet connectivity and co-location services. To meet our customers' demands,
we provide scalable connectivity and co-location services that drive our
customers' electronic commerce and other mission critical Internet applications.
Our customers lease bandwidth and co-location space from us to gain highly
reliable, secure and cost effective Internet connectivity. Through our existing
and planned networks, we believe we have the low cost position relative to those
competitors who lease rather than own their networks.
S-5
<PAGE>
CUSTOMERS
We are focused on providing our broadband communications infrastructure and
Internet connectivity services to two main customer groups located in Tier I and
Tier II markets: communications carriers and corporate/government customers.
Our targeted customers include a broad range of companies such as:
- incumbent local exchange carriers (often referred to as "ILECs");
- competitive local exchange carriers (often referred to as "CLECs");
- long distance companies/interexchange carriers (often referred to as
"IXCs");
- paging, cellular and PCS companies;
- cable companies;
- ISPs; and
- Web hosting and e-commerce companies.
Our dark fiber customers typically lease our fiber optic capacity with which
they develop their own communications networks. Leasing our fiber optic capacity
is a low-cost alternative to building their own infrastructure or purchasing
metered services from ILECs or CLECs. Our Internet connectivity and co-location
customers typically lease bandwidth and co-location space which allow them to
provide their Internet related services on a reliable and cost effective basis.
We believe that we are well-positioned to penetrate our target customer base
since we plan to install most of our dark fiber networks and Internet service
exchanges in major markets where these customers are concentrated. We believe
our target customers for our dark fiber and Internet connectivity services are
complementary and will provide significant cross-selling opportunities.
MARKET OPPORTUNITY
We intend to capitalize on the increasing demand for high-bandwidth
dedicated communications services and the limited supply of such transmission
capacity. Based on management experience and industry reports, we believe that
demand for the broadband communications infrastructure afforded by our network
will continue to increase as a result of the following factors:
- the rapid growth of communications traffic, such as data traffic, which
industry research indicates is growing by 35% annually;
- the large number of new carriers which will require significant
transmission capabilities in all sectors of the communications industry,
due in large part to industry deregulation facilitated by the
Telecommunications Act of 1996 (often referred to as the "1996 Telecom
Act");
- the fact that the Regional Bell Operating Companies (often referred to as
the "RBOCs") and other major ILECs will likely need to upgrade to fiber
optic networks with infrastructure similar to ours; and
- the advent of new communications services requiring large amounts of
transmission capacity, such as Internet, intranet and video services.
Based on industry sources, we estimate that the total 1998 market for
communications services in the United States was approximately $237 billion and
will grow to approximately $341 billion by the year 2002. In addition, we
believe that there will be increased demand for our infrastructure due to our
ability to offer fixed-cost pricing which is generally more economical for high
volume users than traditional usage-based pricing. Based on industry sources, we
estimate that worldwide Internet revenues for 1998 were approximately
$20 billion, and will grow to approximately $83 billion by the year 2002. We
expect continued rapid growth in Internet revenues as Internet use increases and
electronic commerce applications gain widespread acceptance.
S-6
<PAGE>
BUSINESS STRATEGY
Our objective is to become the preferred facilities-based provider of
broadband communications infrastructure and Internet connectivity solutions to
communications carriers, corporations and government agencies, in our target
markets. The following are the key elements of our strategy to achieve this
objective:
ESTABLISH OUR COMPANY AS THE PREFERRED CARRIERS' CARRIER OF BROADBAND
COMMUNICATIONS
INFRASTRUCTURE AND INTERNET CONNECTIVITY SOLUTIONS
We lease broadband communications infrastructure on a fixed-cost basis to
various communications carriers, thus enabling them to compete in markets which
were previously difficult to penetrate due to limited and/or costly access to
high-bandwidth communications infrastructure. We lease bandwidth and
co-location space to various Internet service providers enabling them to provide
reliable, high-quality Internet access services to their customers. We also
believe that carrier customers may be more likely to lease services from us,
rather than from a competitor, since we currently have no plans to offer
competing metered communications or retail Internet connectivity services.
POSITION OUR COMPANY AS THE PREFERRED PROVIDER OF BROADBAND COMMUNICATIONS
INFRASTRUCTURE AND
INTERNET CONNECTIVITY SERVICES TO CORPORATE AND GOVERNMENT CUSTOMERS
Our target customers for broadband communications infrastructure are those
with significant transmission needs or who require a high degree of security.
Our target customers for Internet connectivity services are those who require
reliable, secure and cost effective connectivity to the Internet to drive
electronic commerce and other mission critical business Internet applications.
In many cases, we believe our communications infrastructure and Internet
connectivity customer bases are complementary and will create significant cross
selling opportunities.
REPLICATE SUCCESSFUL BUSINESS MODEL IN NEW MARKETS
We seek to leverage the success we have demonstrated in our existing markets
by replicating our network architecture in a number of additional markets.
Specifically, we intend to:
- complete the construction of a total of approximately 50 intra-city
networks in Tier I and Tier II markets;
- replicate our successful domestic strategy in selected international
markets; and
- deploy Internet service exchanges in selected U.S. and international
markets.
CREATE A LOW COST POSITION
We believe that we have established a low cost position relative to other
communications carriers primarily because we install trunks with substantially
more fibers per route mile as well as spare conduits, thereby reducing the cost
per fiber mile to construct, upgrade and operate our networks. We believe that
we have established the low cost position relative to other Internet
connectivity providers who lease rather than own their networks. Our low cost
position should allow us to remain price competitive with other providers of
broadband communications infrastructure and Internet connectivity services and
to provide customers a cost effective alternative to constructing their own
networks or Internet connectivity facilities.
UTILIZE FIBER SWAPS AND STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF OUR
NETWORKS
We have completed a number of fiber swaps to date and will continue to
explore strategic opportunities to expand the reach of our networks at little
incremental cost. We also plan to enter into
S-7
<PAGE>
strategic relationships, such as our joint build arrangement with Viatel in
Europe, to cost effectively expand our network footprint.
EXPAND PRODUCT AND SERVICE OFFERINGS TO UTILIZE DARK FIBER NETWORK CAPACITY
We intend to identify additional uses for our dark fiber network that will
drive new revenue opportunities and cost synergies. We may develop these
applications internally or by acquiring them through strategic acquisitions,
although none are currently planned. As was the case with our acquisition of
AboveNet, we intend to continue to serve carriers and large corporate and
government customers with regard to their bandwidth intensive communications
needs.
INSTALL TECHNOLOGICALLY ADVANCED NETWORKS AND INTERNET SERVICE EXCHANGES
We have installed a technologically advanced network based on a self-healing
SONET architecture that we believe provides the high levels of reliability,
security, and flexibility that our target customers typically demand. Our
Internet service exchanges provide fault tolerant facilities designed to enable
the uninterrupted operations necessary for mission critical Internet business
applications. Furthermore, our proprietary software monitors network connection
for latency and packet loss, thereby allowing us to automatically reroute
traffic to avoid Internet congestion points.
BUILD ON MANAGEMENT EXPERIENCE AND METROMEDIA COMPANY RELATIONSHIP
Our management team and board of directors include individuals with
communications industry expertise and extensive experience in network design,
construction, operations and sales. Our Chief Executive Officer and founder,
Stephen A. Garofalo, has approximately 25 years of experience in the cable
installation business. Howard Finkelstein, our President and Chief Operating
Officer, served in various capacities in Metromedia Company over a period of
16 years, including 9 years as president of Metromedia Company's long distance
telephone company, until its merger with MCI/WorldCom, Inc. in 1993. We also
benefit from the communications industry expertise and corporate governance
experience of John W. Kluge, Stuart Subotnick and David Rockefeller. As the
owner of all of our class B common stock, Metromedia Company and its general
partners control our board of directors and all stockholder decisions and, in
general, determine the outcome of any corporate transaction or other matters
submitted to the stockholders for approval. Sherman Tuan and David Rand have
joined our board of directors following the acquisition of AboveNet and have
extensive experience with Internet related ventures. Please refer to the
sections in this prospectus supplement entitled "Risk Factors--Metromedia
Company Effectively Controls Our Company and Has the Power to Cause or Prevent a
Change of Control" and "Certain Relationships and Related Transactions."
------------------------
We were founded in 1993 and are a Delaware corporation. Our principal
executive offices are located at One North Lexington Avenue, White Plains, New
York 10601. Our telephone number is (914) 421-6700.
S-8
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Class A common stock offered by the selling
stockholders............................... 4,671,000 shares
Class A common stock outstanding after the
offering (1)(2)............................ 202,152,336 shares
Nasdaq National Market Symbol................ MFNX
</TABLE>
- ------------------------
(1) Assumes that the underwriters' option to purchase up to an additional
700,650 shares of class A common stock from the selling stockholders to
cover over-allotments is not exercised.
(2) Based on 198,999,336 shares of class A common stock which were outstanding
as of October 26, 1999. Excludes 47,713,379 shares of class A common stock
issuable upon the exercise of options and warrants outstanding immediately
after the offering. Also excludes (i) 25.6 million shares of class A common
stock that may be issued to Bell Atlantic under the securities purchase
agreement described below and (ii) an additional 28.7 million shares of
class A common stock that may be issuable upon conversion of a
$975.3 million convertible subordinated note to be purchased by Bell
Atlantic under the securities purchase agreement. Closing of this
transaction is subject to a number of customary closing conditions. See
"Risk Factors--Failure to Consummate the Bell Atlantic Transaction May Cause
Us to Seek Alternative Financing."
PROPOSED OFFERINGS
Concurrently with this offering described in this prospectus supplement, we
intend to issue $ million of % Senior Notes due 2009 and [EURO]
million of % Senior Notes due 2009, under an indenture between us and The Bank
of New York, as trustee. These notes will mature on December 15, 2009. Interest
on the Dollar notes will accrue at % per annum and interest on the Euro notes
will accrue at % per annum. In each case, interest will be payable
semiannually in arrears on June 15 and December 15 of each year.
In addition, concurrently with this offering, some of our stockholders,
including certain of the selling stockholders, intend to enter into prepaid
forward contracts with DECS Trust VI, under which DECs Trust VI will agree to
purchase at , 2002 (which may be extended to , 2003) from
those selling stockholders an aggregate of up to 10,000,000 shares of class A
common stock (excluding the over-allotment option) beneficially owned by those
selling stockholders subject to the terms and conditions set forth in those
contracts. Until such future dates, these selling stockholders will continue to
beneficially own and vote these shares of our common stock. We understand that
DECS Trust VI will concurrently sell an aggregate of 10,000,000 DECS securities
(excluding the over-allotment option). We will receive no portion of the
proceeds from these transactions. Following consummation of the offering of
shares of class A common stock described in this prospectus supplement and the
future sale of the shares of class A common stock to be purchased by the DECS
Trust VI, each selling stockholder will continue to beneficially own at least
85% of the shares of class A common stock owned before consummation of these
offerings. Please refer to the section in the prospectus supplement entitled
"Recent and Proposed Transactions."
Neither of the transactions described above nor the offering described in
this prospectus supplement is conditoned upon any of the other transactions.
RISK FACTORS
You should consider carefully the information set forth in the section
entitled "Risk Factors" beginning on page S-13 of this prospectus supplement and
on page 3 of the accompanying prospectus and all the other information provided
to you in this prospectus supplement, the accompanying prospectus and the
documents incorporated by reference in deciding whether to invest in the shares.
S-9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data presented below for the
years ended December 31, 1996, 1997 and 1998 have been derived from our
consolidated financial statements and the related notes included in this
prospectus supplement beginning on page F-1. Our consolidated financial
statements for the years ended December 31, 1996, 1997 and 1998 have been
audited by Ernst & Young LLP, independent auditors. The summary consolidated
financial data for the six months ended June 30, 1998 and 1999 and the summary
historical balance sheet data as of June 30, 1999 have been derived from our
unaudited consolidated financial statements, which we believe include all
adjustments necessary for a fair presentation of the financial condition and
results of operations for those periods. The results of operations for interim
periods are not necessarily indicative of the results for a full year's
operations.
The summary unaudited pro forma statements of operations for the year ended
December 31, 1998 and for the six months ended June 30, 1999 give effect to our
acquisition of AboveNet and AboveNet's acquisition of Palo Alto Internet
Exchange as if they had been consummated on January 1, 1998. The summary
unaudited pro forma balance sheet as of June 30, 1999 gives pro forma effect to
the following transactions:
- our acquisition of AboveNet as if it had been consummated on June 30,
1999;
- the transaction referred to above and the proposed offering of our senior
notes due 2009, as if they had been consummated on June 30, 1999; and
- the transactions referred to above and the purchase by Bell Atlantic of
shares of our class A common stock and the convertible subordinated note,
which purchase has not yet been consummated and is subject to customary
closing conditions, as if they had been consummated on June 30, 1999.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable at the time made. The summary
unaudited pro forma financial data do not purport to present our financial
position or results of operations had the transactions occurred on the dates
specified, nor are they necessarily indicative of the financial position or
results of operations that may be achieved in the future.
As you read the summary consolidated financial data, please refer to the
following: "Risk Factors--Failure to Consummate the Bell Atlantic Transactions
May Cause Us to Seek Alternative Financing," "Unaudited Pro Forma Condensed
Combining Financial Information," "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Business," the
consolidated financial statements and the related notes of our company, AboveNet
and Palo Alto Internet Exchange and the other financial data appearing in this
prospectus supplement.
S-10
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------ --------------
PRO FORMA PRO FORMA
FOR ABOVENET FOR ABOVENET
AQUISITION ACQUISITION
1996 1997 1998 1998 1998 1999 1999
-------- -------- -------- ------------ -------- -------- ------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues............................ $ 236 $ 2,524 $36,436 $ 47,575 $ 9,133 $ 38,673 $ 51,366
Expenses:
Cost of sales..................... 699 3,572 13,937 24,071 4,553 14,819 30,714
Selling, general and
administrative.................. 2,070 6,303 14,712 23,005 5,914 13,786 26,396
Depreciation and amortization..... 613 757 1,532 80,105 440 5,058 45,602
Consulting and employment
incentives...................... 3,652 19,218 3,648 6,044 3,595 -- 519
-------- -------- ------- -------- ------- -------- --------
(Loss) income from operations....... (6,798) (27,326) 2,607 (85,650) (5,369) 5,010 (51,865)
Interest income (expense), net...... (3,561) 1,067 1,927 1,735 3,564 (16,895) (15,310)
(Loss) from joint venture........... -- -- (146) (146) (251) (393) (593)
Income taxes........................ -- -- 3,402 -- -- -- --
-------- -------- ------- -------- ------- -------- --------
Net (loss) income................... $(10,359) $(26,259) $ 986 $(84,061) $(2,056) $(12,278) $(67,768)
======== ======== ======= ======== ======= ======== ========
Net (loss) income applicable to
common stockholders per share..... $ (0.14) $ (0.28) $ 0.01 $ (0.37) $ (0.01) $ (0.06) $ (0.29)
======== ======== ======= ======== ======= ======== ========
Weighted average number of shares
outstanding....................... 71,716 94,894 186,990 228,584 185,616 189,098 230,692
======== ======== ======= ======== ======= ======== ========
Ratio of earnings to fixed
charges(1)........................ -- -- 1.61 -- -- -- --
EBITDA(2)........................... $ (6,185) $(26,569) $ 3,993 $ (5,691) $(5,180) $ 9,675 $ (6,856)
Adjusted EBITDA(2).................. $ (2,533) $ (7,351) $ 7,641 $ 353 $(1,585) $ 9,675 $ (6,337)
Cash dividends per share............ $ -- $ -- $ -- $ -- $ -- $ -- $ --
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
------------------------------------------------------------------
PRO FORMA PRO FORMA FOR
PRO FORMA FOR FOR THE SENIOR BELL ATLANTIC
ACTUAL ABOVENET ACQUISITION NOTES OFFERING INVESTMENT
---------- -------------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash............................................. $ 341,897 $ 537,768 $ 1,117,768 $ 2,808,676
Pledged securities(3)............................ 63,142 63,142 63,142 63,142
Property and equipment, net...................... 421,712 481,208 481,208 481,208
Total assets..................................... 1,034,694 2,882,533 3,482,533 5,173,441
Long-term debt................................... 673,202 694,791 1,294,791 2,270,072
Total liabilities................................ 891,905 962,080 1,562,080 2,537,361
Stockholders' equity............................. 142,789 1,920,453 1,920,453 2,636,080
</TABLE>
(1) Earnings were insufficient to cover fixed charges in the years ended
December 31, 1996 and 1997 and for the six months ended June 30, 1998 and
1999. The deficiency was $10,359,000, $26,259,000, $2,056,000, and
$12,278,000 for the years ended December 31, 1996 and 1997 and for the six
months ended June 30, 1998 and 1999, respectively. Pro forma earnings were
insufficient to cover the pro forma fixed charges in the year ended
December 31, 1998 and for the six months ended June 30, 1999. The pro forma
deficiency was $84,061,000 and $67,768,000 for the year ended December 31,
1998 and the six months ended June 30, 1999, respectively.
(2) "EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense and all depreciation and amortization expense. "Adjusted
EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense, depreciation and amortization and non-cash employment and
consulting incentives and settlements. You should not think of EBITDA and
Adjusted EBITDA as alternative measures of operating results or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles). We have included EBITDA and Adjusted EBITDA
because they are widely used financial measures of the potential capacity of
a company to incur and service debt. Our reported EBITDA and Adjusted EBITDA
may not be comparable to similarly titled measures used by other companies.
(3) Represents amounts deposited with the security agent pursuant to a security
agreement to make payments of interest through May 15, 2000 on our 10%
Senior Notes due 2008.
S-11
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION BELOW IN ADDITION TO ALL OTHER
INFORMATION PROVIDED TO YOU IN THIS PROSPECTUS SUPPLEMENT, THE ACCOMPANYING
PROSPECTUS AND THE DOCUMENTS INCORPORATED BY REFERENCE IN DECIDING WHETHER TO
INVEST IN THE SHARES OF OUR CLASS A COMMON STOCK, INCLUDING INFORMATION IN THE
SECTION ENTITLED "SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS."
RISK FACTORS RELATING TO OUR BUSINESS
WE HAVE A LIMITED HISTORY OF OPERATIONS
You will have limited historical financial information upon which to base
your evaluation of our performance. Our company was formed in April 1993 and has
a limited operating history. We currently have a limited number of customers and
are still in the process of building many of our networks. Accordingly, you must
consider our prospects in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development.
WE EXPECT TO CONTINUE TO INCUR NET LOSSES
In connection with the construction of our networks, we have incurred
substantial net losses and have not generated positive cash flow from
operations. There can be no assurance that we will generate net income or that
we will sustain positive cash flow in the future.
We cannot assure you that we will succeed in establishing an adequate
revenue base or that our services will generate profitability. In connection
with the construction of our networks, we have incurred substantial losses. We
expect to continue incurring losses while we concentrate on the development and
construction of our networks and until our networks have established a
sufficient revenue-generating customer base. We also expect to incur losses
during the initial startup phases of any services that we may provide. We expect
to continue experiencing net operating losses for the foreseeable future.
Continued losses may prevent us from pursuing our strategies for growth and
could cause us to be unable to meet our debt service obligations, capital
expenditure requirements or working capital needs.
WE HAVE SUBSTANTIAL DEBT WHICH MAY LIMIT OUR ABILITY TO BORROW, RESTRICT THE USE
OF OUR CASH FLOWS AND CONSTRAIN OUR BUSINESS STRATEGY, AND WE MAY NOT BE ABLE
TO MEET OUR DEBT OBLIGATIONS
LARGE AMOUNT OF DEBT
We have, and will continue to have after the proposed offering of senior
notes due 2009, which offering is expected to close concurrently with the
offering described in this prospectus supplement, substantial debt and debt
service requirements. Following the proposed offering of the senior notes due
2009, we will have total debt of approximately $1.3 billion. In addition, the
purchase by Bell Atlantic of a convertible subordinated note will increase our
total debt to approximately $2.3 billion. As the indentures governing our debt
allow us to borrow additional amounts in certain cases to finance the
construction and improvement of our networks, we intend to explore market
conditions in order to obtain additional financing, including additional
long-term fixed-rate financing or senior revolving credit facilities.
CONSEQUENCES OF DEBT
Our substantial debt has important consequences, including:
- our ability to borrow additional amounts for working capital, capital
expenditures or other purposes is limited;
- a substantial portion of our cash flow from operations is required to make
debt service payments; and
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- our leverage could limit our ability to capitalize on significant business
opportunities and our flexibility to react to changes in general economic
conditions, competitive pressures and adverse changes in government
regulation.
You should be aware that our ability to repay or refinance our debt depends
on our successful financial and operating performance and on our ability to
successfully implement our business strategy. Unfortunately, we cannot assure
you that we will be successful in implementing our strategy or in realizing our
anticipated financial results. You should also be aware that our financial and
operational performance depends upon a number of factors, many of which are
beyond our control. These factors include:
- the economic and competitive conditions in the telecommunications network
and Internet-related industries;
- any operating difficulties, increased operating costs or pricing pressures
we may experience;
- the passage of legislation or other regulatory developments that may
adversely affect us;
- any delays in implementing any strategic projects;
- our ability to complete our networks on time and in a cost-effective
manner; and
- our ability to apply our business strategies in foreign cities.
We cannot assure you that our cash flow and capital resources will be
sufficient to repay our existing indebtedness and any indebtedness we may incur
in the future, or that we will be successful in obtaining alternative financing.
In the event that we are unable to repay our debts, we may be forced to reduce
or delay the completion or expansion of our networks, sell some of our assets,
obtain additional equity capital or refinance or restructure our debt. If we are
unable to meet our debt service obligations or comply with our covenants, a
default under our existing debt agreements would result. To avoid a default, we
may need waivers from third parties, which might not be granted. You should also
read the information we have included in this prospectus supplement in the
sections entitled "--Risk Factors Relating to the Notes," "Description of
Material Indebtedness," "Recent and Proposed Transactions" and
"Business--Business Strategy."
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY BECAUSE WE
DEPEND ON FACTORS BEYOND OUR CONTROL, WHICH COULD ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS
Our future largely depends on our ability to implement our business strategy
and proposed expansion in order to create the new business and revenue
opportunities. Our results of operations will be adversely affected if we cannot
fully implement our business strategy. Successful implementation depends on
numerous factors beyond our control, including economic, competitive and other
conditions and uncertainties, the ability to obtain licenses, permits,
franchises and rights-of-way on reasonable terms and conditions and the ability
to hire and retain qualified management personnel.
A CHANGE IN ACCOUNTING STANDARDS MAY REQUIRE US TO CHANGE OUR TIMING OF
RECOGNIZING REVENUES
Effective June 30, 1999, the Financial Accounting Standards Board issued
FASB Interpretation No. 43 "Real Estate Sales" ("FIN 43") which requires that
sales of integral equipment be accounted for in accordance with real estate
accounting rules. We believe that the SEC may classify dark fiber cables in the
ground as integral equipment as defined in FIN 43. This change in the accounting
for dark fiber sales would not change any of the economics of the contracts. It
would require us, however, to recognize the revenue from some sales contracts as
operating leases over the term of the contract as opposed to the current method
of recognizing revenue during the period over which we deliver the fiber. As a
result, this change in accounting treatment would reduce the revenue and income
that we would recognize in the earlier years of the contract and spread it out
over the life of the contract regardless of when the cash was received or the
delivery of the fiber took place. Please refer to "Management's Discussion and
Analysis of Financial Condition and Results of Operations--General."
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FAILURE TO CONSUMMATE THE BELL ATLANTIC TRANSACTIONS MAY CAUSE US TO SEEK
ALTERNATIVE FINANCING
In connection with Bell Atlantic's investment, we expect to receive
approximately $1.7 billion in net proceeds from Bell Atlantic for the purchase
of shares of our class A common stock and a convertible subordinated note. In
addition, Bell Atlantic has agreed to purchase a minimum of $550.0 million of
fiber optic facilities payable over the next three years. We plan to use the net
proceeds from the Bell Atlantic transactions to accelerate the build out of our
nationwide dark fiber infrastructure as well as to enter new markets in the
United States and internationally. If Bell Atlantic's investment, which is
subject to customary closing conditions, does not close, we would need to obtain
alternative sources of financing to complete the construction of our networks,
which may not be available on comparable terms, if at all. Locating an
alternative financing source could slow our growth and have a material adverse
affect on us.
WE CANNOT BE CERTAIN THAT WE WILL BE SUCCESSFUL IN INTEGRATING ABOVENET INTO OUR
BUSINESS
We believe that our acquisition of AboveNet will result in benefits to the
combined companies, including the expansion of our product and service offerings
and the combination of our fiber optic network with AboveNet's Internet
connectivity solutions. If we are not able to effectively integrate our
technology, operations and personnel in a timely and efficient manner, then the
benefits of our acquisition will not be realized and, as a result, our operating
results may be adversely affected. In particular, if the integration is not
successful:
- we may lose key personnel; and
- we may not be able to retain AboveNet's customers.
In addition, the attention and effort devoted to the integration of the two
companies will significantly divert management's attention from other important
issues, and could significantly harm the combined companies' business and
operating results.
WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY COMPLETE THE CONSTRUCTION OF OUR
NETWORKS
The construction of future networks and the addition of Internet service
exchange facilities entail significant risks, including management's ability to
effectively control and manage these projects, shortages of materials or skilled
labor, unforeseen engineering, environmental or geological problems, work
stoppages, weather interference, floods and unanticipated cost increases. The
failure to obtain necessary licenses, permits and authorizations could prevent
or delay the completion of construction of all or part of our networks or
increase completion costs. In addition, AboveNet's establishment and maintenance
of interconnections with other network providers at various public and private
points is necessary for AboveNet to provide cost efficient services. We cannot
assure you that the budgeted costs of our current and future projects will not
be exceeded or that these projects will commence operations within the
contemplated schedules, if at all.
WE CANNOT ASSURE YOU THAT A MARKET FOR OUR CURRENT OR FUTURE SERVICES WILL
DEVELOP
The practice of leasing dark fiber, which is fiber optic cable without any
of the electronic or optronic equipment necessary to use the fiber for
transmission, is not widespread and we cannot assure you that the market will
develop or that we will be able to enter into contracts, comply with the terms
of these contracts or maintain relationships with communications carriers and
corporate and government customers. We also cannot assure you that these
contracts or relationships will be on economically favorable terms or that
communications carriers and corporate and government customers will not choose
to compete against, rather than cooperate with us. If we are unable to enter
into contracts, comply with the terms of the contracts or maintain relationships
with these constituencies, our operations would be materially and adversely
affected. We cannot predict whether providing services to governments will
evolve into a significant market because governments usually already control
existing rights-of-way and often build their own communications infrastructure.
We will need to
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strengthen our marketing efforts and increase our staff to handle future
marketing and sales requirements. If we fail to obtain significant, widespread
commercial and public acceptance of our networks and access to sufficient
buildings our visibility in the telecommunications market could be jeopardized.
We cannot assure you that we will be able to secure customers for the commercial
use of our proposed networks or access to such buildings in each market. In
addition, the market for co-location and Internet services, which are offered by
AboveNet, is new and evolving. We cannot assure you that AboveNet's services
will achieve widespread acceptance in this new market. Further, AboveNet's
success depends in large part on growth in the use of the Internet. The growth
of the Internet is highly uncertain and depends on a variety of factors.
We may expand the range of services that we offer. These services may
include assisting customers with the integration of their leased dark fiber with
appropriate electronic and optronic equipment by facilitating the involvement of
third party suppliers, vendors and contractors. We cannot assure you that a
market will develop for our new services, that implementing these services will
be technically or economically feasible, that we can successfully develop or
market them or that we can operate and maintain our new services profitably.
SEVERAL OF OUR CUSTOMERS MAY TERMINATE THEIR AGREEMENTS WITH US IF WE DO NOT
PERFORM BY SPECIFIED TIMES
We currently have some contracts to supply leased fiber capacity which allow
the lessee to terminate the contracts and/or provide for liquidated damages if
we do not supply the stated fiber capacity by a specified time. Terminating any
of these contracts could adversely affect our operating results.
WE MAY BE UNABLE TO RAISE THE ADDITIONAL FINANCING NECESSARY TO COMPLETE THE
CONSTRUCTION OF OUR NETWORKS, WHICH WOULD ADVERSELY AFFECT OUR LONG-TERM
BUSINESS STRATEGY
We may need significant amounts of additional capital to complete the
build-out of our planned fiber optic communications networks, to expand
AboveNet's network infrastructure and to meet our long-term business strategies,
including expanding our networks to additional cities and constructing our
networks in Europe. If we need additional funds, our inability to raise them
will have an adverse effect on our operations. If we decide to raise additional
funds by incurring debt, we may become more leveraged and subject to additional
or more restrictive financial covenants and ratios. In addition, if we issue
equity securities or securities convertible or exchangeable into our equity
securities, current stockholders may face dilution.
Our ability to arrange financing and the cost of financing depends upon many
factors, including:
- general economic and capital markets conditions generally, and in
particular the non-investment grade debt market;
- conditions in the telecommunications and Internet markets;
- regulatory developments;
- credit availability from banks or other lenders;
- investor confidence in the telecommunications and Internet industries and
in us;
- the success of our fiber optic communications network and Internet
services; and
- provisions of tax and securities laws that are conductive to raising
capital.
COMPETITORS OFFER SERVICES SIMILAR TO OURS IN OUR CURRENT OR PLANNED MARKETS
WHICH WOULD AFFECT OUR RESULTS OF OPERATIONS
The telecommunications industry and AboveNet's business are extremely
competitive, particularly with respect to price and service, which may adversely
affect our results of operations. A significant
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increase in industry capacity or reduction in overall demand would adversely
affect our ability to maintain or increase prices. In the telecommunications
industry, we compete against incumbent local exchange carriers, which have
historically provided local telephone services and currently dominate their
local telecommunications markets, and competing carriers in the local services
market. In addition to these carriers, several other potential competitors, such
as facilities-based communications service providers, cable television
companies, electric utilities, microwave carriers, satellite carriers, wireless
telephone system operators and large end-users with private networks, are
capable of offering, and in some cases offer, services similar to those offered
by us. Furthermore, several of these service providers, such as wireless service
providers, could build wireless networks more rapidly and at lower cost than
fiber optic networks. Additionally, the business in which AboveNet competes is
highly competitive due to a lack of barriers to entry and high price
sensitivity. Many of our competitors have greater financial, research and
development and other resources than we do.
Some of our principal competitors already own fiber optic cables as part of
their telecommunications networks. Accordingly, any of these carriers, some of
which already have franchise and other agreements with local and state
governments and substantially greater resources and more experience than us,
could directly compete with us in the market for leasing fiber capacity, if they
are willing to offer this capacity to their customers. In addition, some
communications carriers and local cable companies have extensive networks in
place that could be upgraded to fiber optic cable, as well as numerous personnel
and substantial resources to begin construction to equip their networks. If
communications carriers and local cable companies decide to equip their networks
with fiber optic cable, they could become significant competitors. Our franchise
and other agreements with the city of New York and other local and state
governments are not exclusive. Potential competitors with greater resources and
more experience than us could enter into franchise and other agreements with
local and state governments and compete directly with us. Other companies may
choose to compete with us in our current or planned markets, including Europe,
by leasing fiber capacity, including dark fiber, to our targeted customers. This
additional competition could materially and adversely affect our operations.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS AND ARE MORE VULNERABLE TO CHANGING
ECONOMIC CONDITIONS AND CONSUMER PREFERENCES
We are particularly dependent on a limited number of customers. In addition,
AboveNet has a long sales cycle. We are, therefore, more susceptible to the
impact of poor economic conditions than our competitors with a more balanced mix
of business.
REGULATION OF THE TELECOMMUNICATIONS INDUSTRY MAY LIMIT THE DEVELOPMENT OF OUR
NETWORKS AND AFFECT OUR COMPETITIVE POSITION
Existing and future government laws and regulations may influence how we
operate our business, our business strategy and ultimately, our viability. U.S.
Federal and state telecommunications laws and the laws of foreign countries in
which we operate directly shape the telecommunications market. Consequently,
regulatory requirements and/or changes could adversely affect our operations and
also influence the market for Internet, web hosting and related services.
However, we cannot predict the future regulatory framework of our business.
U.S. LAWS MAY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS BY REGULATING
OUR OPERATIONS AND OUR CUSTOMERS' OPERATIONS
U.S. Federal telecommunications law imposes legal requirements on common
carriers who engage in interstate or foreign communication by wire or radio, and
on telecommunications carriers. Should these regulations be applied to us, they
may have a material adverse impact on our business and results of operation. If
providing dark fiber facilities or related services provided by us were deemed
to be a telecommunications service, then regulations, both Federal and state,
applicable to telecommunications carriers might apply to us. This could subject
the revenues we received from facility leases in interstate
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commerce to assessment by the Federal Communications Commission Universal
Service Fund and the offering of those facilities or services would be subject
to common carrier regulation. In addition, our customers and, in the case of
Bell Atlantic, one of our potential shareholders, are local exchange carriers or
long distance carriers, subject to regulation by Federal Communications
Commission. Our business may be affected by regulations applicable to these
telecommunications carriers. For example, the Federal Communications Commission
has recently taken steps, and may take further steps, to reduce the access
charges, the fees paid by long distance carriers to local exchange carriers for
originating and terminating long distance calls on the incumbent local exchange
carriers' local networks, and to give the local exchange carriers greater
flexibility in setting these charges. While we cannot predict the precise effect
reduction in access charge will have on our operations, the reduction will
likely make it more attractive for long distance carriers to use local exchange
carriers facilities, rather than our fiber optic telecommunications network. A
recent decision by the Federal Communications Commission to require unbundling
of incumbent local exchange carriers' dark fiber could decrease the demand for
our dark fiber by allowing our potential customers to obtain dark fiber from
incumbent local exchange carriers at cost-based rates, and thereby have an
adverse effect on the results of our operations.
STATES LEGISLATION AFFECTS OUR PRICING POLICIES AND OUR COSTS
Our offering of transmission services, which is different from dark fiber
capacity, may be subject to regulation in each state to the extent that these
services are offered for intrastate use, and this regulation may have an adverse
effect on the results of our operations. We cannot assure you that these
regulations, if any, as well as future regulatory, judicial, or legislative
action will not have a material adverse effect on us. In particular, state
regulators have the authority to determine both the rates we will pay to
incumbent local exchange carriers for certain interconnection arrangements such
as physical collocation, and the prices that incumbent local exchange carriers
will be able to charge our potential customers for services and facilities that
compete with our services. We will also incur costs in order to comply with
regulatory requirements such as the filing of tariffs, submission of periodic
financial and operational reports to regulators, and payment of regulatory fees
and assessments, including contributions to state universal service funds. In
some jurisdictions, our pricing flexibility for intrastate services may be
limited because of regulation, although our direct competitors will be subject
to similar restrictions.
LOCAL GOVERNMENTS' CONTROL OVER RIGHTS-OF-WAY CAN LIMIT THE DEVELOPMENT OF
OUR NETWORKS
Local governments exercise legal authority that may have an adverse effect
on our business because of our need to obtain rights-of-way for our fiber
network. While local governments may not prohibit persons from providing
telecommunications services nor treat telecommunication service providers in a
discriminatory manner, they can affect the timing and costs associated with our
use of public rights-of-way.
THE REGULATORY FRAMEWORK FOR OUR INTERNATIONAL OPERATIONS IS EXTENSIVE AND
CONSTANTLY CHANGING, ADDING UNCERTAINTIES TO OUR PLANNED EXPANSION INTO
FOREIGN COUNTRIES
Various regulatory requirements and limitations also will influence our
business as we attempt to enter international markets. Regulation of the
international telecommunications industry is changing rapidly. We are unable to
predict how the Federal Communications Commission and foreign regulatory bodies
will resolve the various pending international policy issues and the effect of
such resolutions on us. Our US/UK undersea cable joint venture is a U.S.
international common carrier subject to U.S. regulation under Title II of the
Communications Act of 1934. We are also licensed as a U.S. international common
carrier subject to U.S. regulation under Title II of the Communications Act of
1934. Our U.K. joint venture is, and we also are, required, under Sections 214
and 203 of the Communications Act of 1934, respectively, to obtain authorization
and file an international service
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tariff containing rates, terms and conditions before initiating service.
International carriers are also subject to certain annual fees and filing
requirements such as the requirement to file contracts with other carriers,
including foreign carrier agreements, and reports describing international
circuit, traffic and revenue data service. So long as our U.K. joint venture and
we operate as international common carriers, they will also be required to
comply with the rules of the Federal Communications Commission. The
international services provided by our U.K. joint venture are and our
international services are also subject to regulation in the United Kingdom and
other European jurisdictions in which we may operate. National regulations of
relevant European and other foreign countries, as well as policies and
regulations on the European Union and other foreign governmental level, impose
separate licensing, service and other conditions on our foreign joint ventures
and our international service operations, and these requirements may have a
material adverse impact on us.
OUR FRANCHISES, LICENSES OR PERMITS COULD BE CANCELED OR NOT RENEWED, WHICH
WOULD IMPAIR THE DEVELOPMENT OF MAJOR MARKETS FOR OUR SERVICES
Termination or non-renewal of our franchise with the city of New York or of
certain other rights-of-way or franchises that we use for our networks would
have a material adverse effect on our business, results of operations and
financial condition. We will also need to obtain additional franchises, licenses
and permits for our planned intracity networks, intercity networks and
international networks. We cannot assure you that we will be able to maintain on
acceptable terms our existing franchises, licenses or permits or to obtain and
maintain the other franchises, licenses or permits needed to implement our
strategy.
WE MAY NOT BE ABLE TO OBTAIN AND MAINTAIN THE RIGHTS-OF-WAY AND OTHER PERMITS
NECESSARY TO IMPLEMENT OUR BUSINESS STRATEGY
We must obtain additional rights-of-way and other permits from railroads,
utilities, state highway authorities, local governments and transit authorities
to install underground conduit for the expansion of our intracity networks,
intercity networks and international networks. We cannot assure you that we will
be successful in obtaining and maintaining these right-of-way agreements or
obtaining these agreements on acceptable terms. Some of these agreements may be
short-term or revocable at will, and we cannot assure you that we will continue
to have access to existing rights-of-way after they have expired or terminated.
If any of these agreements were terminated or could not be renewed and we were
forced to remove our fiberoptic cable from under the streets or abandon our
networks, the termination could have a material adverse effect on our
operations. In addition, landowners have asserted that railroad companies and
others to whom they granted easements to their properties are not entitled as a
result of these easements to grant rights of way to telecommunications
providers. If these disputes are resolved in the landowners' favor, we could be
obligated to make substantial lease payments to these landowners for the lease
of these rights of way. More specifically, our New York/ New Jersey network
relies upon, and our planned expansions into Long Island and Westchester County
will rely upon, right-of-way agreements with Bell Atlantic Corporation and our
subsidiary, Empire City Subway Company (Ltd.). The current agreements may be
terminated at any time without cause with three months notice. In case of
termination, we may be required to remove our fiber optic cable from the
conduits or poles of Bell Atlantic. This termination would have a material
adverse effect on our operations.
RAPID TECHNOLOGICAL CHANGES COULD AFFECT THE CONTINUED USE OF FIBER OPTIC CABLE
AND OUR RESULTS OF OPERATIONS
The telecommunications industry is subject to rapid and significant changes
in technology that could materially affect the continued use of our services,
including our fiber optic cable and Internet connectivity services. We cannot
predict the effect of technological changes on our business. We also
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cannot assure you that technological changes in the communications industry and
Internet-related industry will not have a material adverse effect on our
operations.
WE MAY EXPERIENCE RISKS AS A RESULT OF EXPANDING OUR NETWORKS INTO EUROPEAN AND
OTHER FOREIGN COUNTRIES, WHICH MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
Our strategy includes expanding our services to provide fiber optic cable
and developing regional Internet services exchange facilities in Europe,
particularly Austria, Germany and the United Kingdom. The following are risks we
may experience as a result of doing business in Germany, the United Kingdom and
other foreign countries in which we may expand our networks:
- difficulties in staffing and managing our operations in foreign countries;
- longer payment cycles;
- problems in collecting accounts receivable;
- fluctuations in currency exchange rates;
- delays from customs brokers or government agencies encountered as a result
of exporting fiber from the United States to Germany, the United Kingdom
or other countries in which we may operate; and
- potentially adverse consequences resulting from operating in multiple
countries such as Germany and the United Kingdom, each with their own laws
and regulations, including tax laws and industry related regulations.
We cannot assure you that we will be successful in overcoming these risks or
any other problems arising because of expansion into Europe and other foreign
countries.
WE MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY, MANAGE AND ASSIMILATE FUTURE
ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES, WHICH WOULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS
We have in the past, and may in the future, acquire, make investments in, or
enter into strategic alliances, including joint ventures in which we hold less
than a majority interest, with companies which have customer bases, switching
capabilities, existing networks or other assets in our current markets or in
areas into which we intend to expand our networks. Any acquisitions,
investments, strategic alliances or related efforts will be accompanied by risks
such as:
- the difficulty of identifying appropriate acquisition candidates;
- the difficulty of assimilating the operations of the respective entities;
- the potential disruption of our ongoing business;
- the potential inability to control joint ventures in which we hold less
than a majority interest;
- the inability of management to capitalize on the opportunities presented
by acquisitions, investments, strategic alliances or related efforts;
- the failure to successfully incorporate licensed or acquired technology
and rights into our services,
- the inability to maintain uniform standards, controls, procedures and
policies, and
- the impairment of relationships with employees and customers as a result
of changes in management.
We cannot assure you that we would be successful in overcoming these risks
or any other problems encountered with such acquisitions, investments, strategic
alliances or related efforts.
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IN THE TELECOMMUNICATIONS INDUSTRY, CONTINUED PRICING PRESSURES FROM OUR
COMPETITORS AND AN EXCESS OF NETWORK CAPACITY CONTINUE TO CAUSE PRICES FOR OUR
SERVICES TO DECLINE
We anticipate that prices for our services specifically, and transmission
services in general, will continue to decline over the next several years due
primarily to the following:
- price competition as various network providers continue to install
networks that might compete with our networks,
- recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber, and
- strategic alliances or similar transactions, such as long distance
capacity purchasing alliances among regional Bell operating companies,
that increase the parties' purchasing power.
WE MAY EXPERIENCE ADDITIONAL RISKS AS A RESULT OF ABOVENET'S CO-LOCATION AND
INTERNET CONNECTIVITY SERVICES
The legal landscape that governs AboveNet has yet to be interpreted or
enforced. Regulatory issues for AboveNet's industry include property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy. AboveNet's business may be adversely affected by the
adoption and interpretation of any future or currently existing laws and
regulations. AboveNet has no patented technology and relies on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect certain proprietary rights in its
technology. AboveNet's business may be adversely affected by a claim that it is
infringing the proprietary rights of others.
Despite AboveNet's design and implementation of a variety of network
security measures, unauthorized access, computer viruses, accidental or
intentional action and other disruptions could occur. In addition, we may incur
significant costs to prevent breaches in AboveNet's security or to alleviate
problems caused by those breaches. The law relating to the liability of online
services companies and Internet access providers of information carried on or
disseminated through their networks is currently unsettled. It is possible that
claims could be made against online services companies, co-location companies
and Internet access providers. We may need to implement measures to reduce our
exposure to this potential liability which may require the expenditure of
substantial resources. The increased attention focused upon liability issues as
a result of lawsuits, new laws and legislative proposal could impede the growth
of Internet use.
In addition, some of AboveNet's customers have sent unsolicited commercial
E-mails from servers co-located at its facilities to massive numbers of people.
This practice known as "spamming" can lead to complaints against service
providers that enable such activities, such as AboveNet. In addition,
legislation has recently been passed that prohibits "spamming."
ABOVENET DEPENDS ON THE GROWTH AND PERFORMANCE OF THE INTERNET
AboveNet's success will depend in large part on growth in the use of the
Internet. Growth of the Internet depends on many factors, including security,
reliability, cost, ease of access, quality of service and bandwidth. The recent
growth of the Internet has placed strain on the Internet, necessitating upgrades
to its infrastructure. Any perceived or actual weakening in the performance of
the Internet could undermine AboveNet's services, which are dependent on third
parties. AboveNet's ability to attract new customers similarly depends on a
variety of factors, including the ability to provide continuous service. In
addition, AboveNet's customers might terminate or decide not to renew
commitments to use its services. AboveNet must continue to expand and adapt its
network infrastructure as the number of its users grows, as its users place
increasing demands on it, and as requirements change.
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OUR BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL THE LOSS OF WHOM COULD
ADVERSELY AFFECT OUR BUSINESS.
Our business is managed by a small number of key management and operating
personnel. We believe that the success of our business strategy and our ability
to operate profitably depend on the continued employment of our senior
management team led by Stephen A. Garofalo, Chief Executive Officer and Chairman
of the Board of Directors. Our business and financial results could be
materially affected if Mr. Garofalo or other members of our senior management
team became unable or unwilling to continue in their present positions.
METROMEDIA COMPANY EFFECTIVELY CONTROLS OUR COMPANY AND HAS THE POWER TO CAUSE
OR PREVENT A CHANGE OF CONTROL
Metromedia Company and one of its general partners currently own 100% of our
class B common stock, which currently represents approximately 63% of the total
voting power and also is entitled to elect 75% of the members of our board of
directors. Accordingly, Metromedia Company is able to control the board of
directors and all stockholder decisions and, in general, to determine the
outcome of any corporate transaction or other matter submitted to the
stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets, without the consent of our other
stockholders. In addition, Metromedia Company has the power to prevent or cause
a change in control of our company.
WE ARE INVOLVED IN A LEGAL PROCEEDING WHICH COULD ADVERSELY AFFECT OUR FINANCIAL
CONDITION
We are involved in a legal proceeding in connection with the sale of 900,000
shares (not adjusted for stock splits) of our class A common stock. Please refer
to the section in this prospectus supplement entitled "Business--Legal
Proceedings."
If we are unsuccessful in defending against the allegations made in this
proceeding, an award of the magnitude being sought in this legal proceeding
could have a material adverse effect on our financial condition and results of
operations. We intend to vigorously defend this action because we believe that
we acted appropriately in connection with the matters at issue in this case.
However, we cannot assure you that we will not determine that the advantages of
entering into a settlement outweigh the risk and expense of protracted
litigation or that ultimately we will be successful in defending against these
allegations.
FAILURES TO ADDRESS THE YEAR 2000 PROBLEM MAY CAUSE DISRUPTIONS IN THE OPERATION
OF OUR NETWORKS AND OUR SERVICES TO CUSTOMERS
Many computer systems and software products will not function properly in
the year 2000 and beyond due to a once-common programming standard that
represents years using two digits. This problem is often referred to as the year
2000 problem. It is possible that our currently installed computer systems,
software products or other information technology systems, including imbedded
technology, or those of our suppliers, contractors, or major systems developers
working either alone or in conjunction with other softwares or systems, will not
properly function in the year 2000 because of the year 2000 problem. If we or
our customers, suppliers, contractors, and major systems developers are unable
to address their year 2000 issues in a timely manner, a material adverse effect
on our results of operations and financial condition could result. We are
currently working to evaluate and resolve the potential impact of the year 2000
on our processing of date-sensitive information and network systems. We have
contacted all our significant suppliers, contractors and major systems
developers to determine our vulnerability to their year 2000 situations. We
cannot assure you that the year 2000 problem will only have a minimal cost
impact or that other companies will convert their systems on a timely basis and
that their failure will not have an adverse effect on our systems.
S-21
<PAGE>
RISK FACTORS RELATING TO OUR CLASS A COMMON STOCK
THE STOCK PRICE OF OUR CLASS A COMMON STOCK MAY BE VOLATILE
The market price of our class A common stock is subject to fluctuations in
response to various factors and events, including the liquidity of the market
for the class A common stock, variations in our quarterly operating results,
regulatory or other changes, both domestic and international, affecting the
telecommunications and Internet-related industries generally or us specifically,
announcements of business developments by us or our competitors, changes in
operating results and changes in general market conditions.
SHARES ELIGIBLE FOR FUTURE SALE MAY HAVE A POTENTIAL ADVERSE EFFECT ON OUR STOCK
PRICE
Sales of a substantial number of shares of our class A common stock in the
public market, or the perception that sales may occur, could adversely effect
prevailing market prices for the class A common stock and our ability to raise
capital in the future. As of October 26, 1999, there were 198,999,336 shares of
class A common stock outstanding and 33,769,272 shares of class B common stock
(which are convertible into class A common stock on a one-for-one basis)
outstanding. All of the shares of class B common stock are currently owned by
persons who are affiliates. In addition, as of October 26, 1999, 50,866,379
shares of class A common stock are issuable upon the exercise of outstanding
options and warrants.
The stockholders listed in the table under "Selling Stockholders" and
certain other stockholders have agreed with the underwriters, subject to certain
exceptions, not to directly or indirectly offer, pledge, sell, contract to sell,
grant any option to purchase or otherwise transfer or dispose of, without the
prior written consent of Salomon Smith Barney Inc., any common stock, or any
securities convertible into or exchangeable or exercisable for common stock or
enter into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any common stock, for a
period of 90 days after the date of this prospectus supplement, except for the
shares of class A common stock subject to the forward contracts with DECS
Trust VI. Upon the expiration of such 90-day period, such shares of common stock
may be sold by such stockholders under Rule 144, pursuant to registration rights
granted by us or without registration, as the case may be.
On October 7, 1999, we entered into a securities purchase agreement with
Bell Atlantic Investments, Inc. (referred to as "Bell Atlantic") under which
Bell Atlantic would purchase up to 25.6 million newly issued shares of our class
A common stock at a purchase price of $28.00 per share and a convertible
subordinated note of approximately $975.3 million, which is convertible into
shares of our class A common stock at a conversion price of $34.00 per share. We
expect this transaction, which is subject to customary closing conditions, to be
completed by the end of the first quarter of 2000.
Concurrently with this offering, some of our shareholders intend to enter
into prepaid forward contracts with DECS Trust VI, under which DECS Trust VI
will agree to purchase in the future up to 10 million shares of class A common
stock (excluding the over-allotment option) owned by those selling stockholders.
See "Proposed Transactions."
No prediction can be made as to the effect, if any, that sales of shares of
class A common stock or the availability of those shares for sale will have on
the market prices prevailing from time to time. Nevertheless, the possibility
that substantial amounts of class A common stock, including those shares into
which the class B common stock is convertible, may be sold in the public market
may adversely affect prevailing market prices for the class A common stock and
impair our ability to raise equity capital in the future.
WE DO NOT ANTICIPATE PAYING CASH DIVIDENDS
We anticipate that all of our earnings in the foreseeable future, if any,
will be retained to finance the continued growth and expansion of our business
and have no current intention to pay cash dividends on our class A common stock.
See "Dividend Policy."
S-22
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus supplement under the
sections entitled "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" are
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. They include
statements about our expectations, beliefs, plans, objectives, assumptions or
future events or performance. These statements are often, but not always, made
through the use of words or phrases such as "will likely result," "expect,"
"will continue," "anticipate," "estimate," "intends," "plan," "projection,"
"would," and "outlook." These forward-looking statements are based on our
expectations and are subject to a number of risks and uncertainties. Certain of
these risks and uncertainties are beyond our control. In this prospectus
supplement, we have described our current network and our anticipated program of
network expansion. However, there is no assurance that we will be able to
implement our proposed business strategy. Our actual results may differ
materially from those suggested by these forward-looking statements for various
reasons, including those discussed under the sections entitled "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Some of the key factors that have a direct bearing
on our results of operations are:
- general economic and business conditions;
- competition in the telecommunications industry;
- industry capacity;
- success of acquisitions and operating initiatives, including our ability
to successfully integrate our acquisitions;
- management of growth;
- dependence on senior management;
- brand awareness;
- general risks of the telecommunications industries;
- development risks;
- risks relating to the availability of financing;
- the existence or absence of adverse publicity;
- changes in business strategy or development plans;
- 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;
- costs and other effects of legal and administrative proceedings;
- changes in marketing and technology; and
- changes in political, social and economic conditions, especially with
respect to our foreign operations, and other factors referenced in this
prospectus supplement.
These factors and the risk factors referred to above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements made by us. You should not place undue reliance on
any such forward-looking statements. Further, any forward-looking statement
S-23
<PAGE>
speaks only as of the date on which it is made and we undertake no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which such statement is made or to reflect the
occurrence of unanticipated events. New factors emerge from time to time, and it
is not possible for us to predict which will arise. In addition, we cannot
assess the impact of each factor on our business or the extent to which any
factor, or combination of factors, may cause actual results to differ materially
from those contained in any forward-looking statements.
For a discussion of important risks of an investment in our securities,
including factors that could cause actual results to differ materially from
results referred to in the forward-looking statements, see "Risk Factors." You
should carefully consider the information set forth under the caption "Risk
Factors." In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in or incorporated by reference in this
prospectus supplement might not occur.
S-24
<PAGE>
PRICE RANGE OF CLASS A COMMON STOCK
Our class A common stock is quoted on The Nasdaq Stock Market's National
Market under the symbol "MFNX." The following table sets forth for the periods
indicated the high and low sale prices of the class A common stock as reported
by Nasdaq for the fiscal periods indicated. All share prices give effect to our
stock splits.
<TABLE>
<CAPTION>
HIGH LOW
------------------- -------------------
<S> <C> <C>
1997
Fourth Quarter............................................ 3 3/32 1 3/4
1998
First Quarter............................................. 5 7/16 1 59/64
Second Quarter............................................ 5 29/32 3 3/16
Third Quarter............................................. 9 1/16 4 7/32
Fourth Quarter............................................ 19 1/16 5 7/8
1999
First Quarter............................................. 28 5/8 16 7/8
Second Quarter............................................ 47 9/16 26 9/16
Third Quarter............................................. 41 1/4 21 1/8
Fourth Quarter (through October 26, 1999)................. 38 3/8 23 3/4
</TABLE>
On October 26, 1999, the last reported sale price of the class A common
stock as reported by Nasdaq was $33 15/16. As of October 25, 1999, there were
approximately 361 holders of record of the class A common stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our class A common
stock and do not expect to do so in the foreseeable future. We anticipate that
all future earnings, if any, generated from operations will be retained to
finance the expansion and continued development of our business. Any future
determination with respect to the payment of dividends will be within the sole
discretion of our board of directors and will depend upon, among other things,
our earnings, capital requirements, the terms of our then existing indebtedness,
applicable requirements of the Delaware General Corporation Law, general
economic conditions and other factors considered relevant by the our board of
directors.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
class A common stock by the selling stockholders (other than the exercise price
paid to us for options which are converted into shares of class A common stock
prior to this offering).
S-25
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of June 30, 1999:
- on a historical basis;
- on a pro forma basis to reflect our acquisition of AboveNet, as if this
acquisition had been consummated on June 30, 1999;
- on a pro forma basis to reflect the transaction described above and the
proposed offering of the senior notes due 2009, which offering is expected
to concurrently close with the offering described in this prospectus
supplement, as if they had been consummated on June 30, 1999; and
- on a pro forma basis to reflect the transactions described above and the
purchase by Bell Atlantic of shares of our class A common stock and the
convertible subordinated note, which has not yet been consummated and is
subject to customary closing conditions, as if they had been consummated
on June 30, 1999.
You should read this table together with the consolidated financial
statements and related notes of our company, AboveNet and Palo Alto Internet
Exchange included in this prospectus supplement beginning on page F-1 and the
information in the sections entitled "Risk Factors--Failure to Consummate the
Bell Atlantic Transactions May Cause Us to Seek Alternative Financing,"
"Unaudited Pro Forma Condensed Combining Financial Information" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------------------------------------------------
PRO FORMA PRO FORMA FOR
PRO FORMA FOR FOR THE SENIOR BELL ATLANTIC
ACTUAL ABOVENET ACQUISITION NOTES OFFERING INVESTMENT
-------- -------------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents.................. $341,897 $ 537,768 $1,117,768 $2,808,676
======== ========== ========== ==========
Pledged securities (1)..................... $ 63,142 $ 63,142 $ 63,142 $ 63,142
======== ========== ========== ==========
Debt:
Capital lease obligations less current
portion................................ $ 23,202 $ 28,375 $ 28,375 $ 28,375
New credit facility (2).................. -- -- -- --
10% Senior Notes due 2008................ 650,000 650,000 650,000 650,000
Senior Notes due 2009 offered
concurrently........................... -- -- 600,000 600,000
6.15% Convertible Subordinated Note to be
issued to Bell Atlantic................ -- -- -- 975,281
Other less current portion............... -- 16,416 16,416 16,416
-------- ---------- ---------- ----------
Total debt............................... 673,202 694,791 1,294,791 2,270,072
-------- ---------- ---------- ----------
</TABLE>
S-26
<PAGE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
----------------------------------------------------------------
PRO FORMA PRO FORMA FOR
PRO FORMA FOR FOR THE SENIOR BELL ATLANTIC
ACTUAL ABOVENET ACQUISITION NOTES OFFERING INVESTMENT
-------- -------------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Stockholders' equity
Class A common stock, $.01 par value;
2,404,031,240 shares authorized;
156,293,412 shares issued and
outstanding, actual; and 197,887,552
shares issued and outstanding, pro
forma for AboveNet acquisition and
pro forma for the offering;
223,442,661 shares issued and
outstanding, pro forma for Bell
Atlantic investment.................. 1,563 1,979 1,979 2,235
Class B common stock, $.01 par value;
522,254,782 shares authorized;
33,769,272 shares issued and
outstanding, actual and pro forma for
AboveNet acquisition, pro forma for
the offering and pro forma for Bell
Atlantic investment.................. 338 338 338 338
Additional paid-in capital................. 200,370 1,977,618 1,977,618 2,692,989
Accumulated deficit........................ (54,515) (54,515) (54,515) (54,515)
Cumulative comprehensive loss.............. (4,967) (4,967) (4,967) (4,967)
-------- ---------- ---------- ----------
Total stockholders' equity........... 142,789 1,920,453 1,920,453 2,636,080
-------- ---------- ---------- ----------
Total capitalization....................... $815,991 $2,615,244 $3,215,244 $4,906,152
======== ========== ========== ==========
</TABLE>
- ------------------------
(1) Represents amounts deposited with the security agent pursuant to a security
agreement to make payments of interest through May 15, 2000 on our 10%
Senior Notes due 2008.
(2) We have obtained a commitment from a lender for a senior secured credit
facility which provides for a maximum amount of $150.0 million. We
anticipate that we will not consummate the new credit facility
simultaneously with the consummation of the offering of the notes. For a
description of the new credit facility, please refer to the section in this
prospectus supplement entitled "Description of the New Credit Facility."
S-27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Our selected consolidated financial data presented below and for the years
ended December 31, 1996, 1997 and 1998 have been derived from our consolidated
financial statements and the related notes included in this prospectus
supplement beginning on page F-1. Our consolidated financial statements as of
and for the years ended December 31, 1996, 1997 and 1998 have been audited by
Ernst & Young LLP, independent auditors. The selected financial data presented
below as of and for the years ended December 31, 1994 and 1995 have been derived
from our audited financial statements which are not included in this prospectus
supplement. The selected consolidated financial data and balance sheet data as
of and for the six months ended June 30, 1999 and the selected consolidated
financial data for the six months ended June 30, 1998 have been derived from our
unaudited consolidated financial statements, which we believe include all
adjustments necessary for a fair presentation of the financial condition and
results of operations for such periods. The results of operations for interim
periods are not necessarily indicative of the results for a full year's
operations.
The selected unaudited pro forma balance sheet as of June 30, 1999 gives pro
forma effect to the following transactions:
- our acquisition of AboveNet, as if it had been consummated on June 30,
1999;
- the transaction referred to above and the proposed offering of the senior
notes due 2009, which offering is expected to close concurrently with the
offering described in this prospectus supplement, as if they had been
consummated on June 30, 1999; and
- the transactions referred to above and the purchase by Bell Atlantic of
shares of our class A common stock and the convertible subordinated note,
which purchase has not yet been consummated and is subject to customary
closing conditions, as if they had been consummated on June 30, 1999.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable at the time made. The selected
unaudited pro forma balance sheet data does not purport to present our financial
position had the transactions occurred on the dates specified, nor are they
necessarily indicative of the financial position that may be achieved in the
future.
As you read the selected consolidated financial data, please refer to the
following: "Risk Factors--Failure to Consummate the Bell Atlantic Transactions
Cause Us to Seek Alternative Financing," "Unaudited Pro Forma Condensed
Combining Financial Information," "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
S-28
<PAGE>
"Business," the consolidated financial statements and the related notes of our
company, AboveNet and Palo Alto Internet Exchange and the other financial data
appearing in this prospectus supplement.
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------------------------------------- -------------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- -------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue........................................ $ -- $ 56 $ 236 $ 2,524 $ 36,436 $ 9,133 $ 38,673
Expenses:
Cost of sales................................ -- -- 699 3,572 13,937 4,553 14,819
Selling, general and administrative.......... 874 3,886 2,070 6,303 14,712 5,914 13,786
Depreciation and amortization................ -- 162 613 757 1,532 440 5,058
Consulting and employment incentives......... -- -- 3,652 19,218 3,648 3,595 --
------- ------- -------- -------- -------- ------- --------
(Loss) Income from operations.................. (874) (3,992) (6,798) (27,326) 2,607 (5,369) 5,010
Interest income (expense), net................. -- (327) (3,561) 1,067 1,927 3,564 (16,895)
(Loss) from joint venture...................... -- -- -- -- (146) (251) (393)
Income taxes................................... -- -- -- -- 3,402 -- --
------- ------- -------- -------- -------- ------- --------
Net (loss) income.............................. $ (874) $(4,319) $(10,359) $(26,259) $ 986 $(2,056) $(12,278)
======= ======= ======== ======== ======== ======= ========
Net (loss) income applicable to common
stockholders per share........................ $ (0.02) $ (0.09) $ (0.14) $ (0.28) $ 0.01 $ (0.01) $ (0.06)
======= ======= ======== ======== ======== ======= ========
Weighted average number of shares
outstanding................................... 46,672 49,658 71,716 94,894 186,990 185,616 189,098
======= ======= ======== ======== ======== ======= ========
Ratio of earnings to fixed charges (1)......... -- -- -- -- 1.61 -- --
EBITDA (2)..................................... $ (874) $(3,830) $ (6,185) $(26,569) $ 3,993 $(5,180) $ 9,675
Adjusted EBITDA (2)............................ $ (874) $(3,830) $ (2,533) $ (7,351) $ 7,641 $(1,585) $ 9,675
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
--------------------------------------------------------------
PRO FORMA
FOR PRO FORMA FOR PRO FORMA FOR
ABOVENET THE SENIOR BELL ATLANTIC
ACTUAL ACQUISITION NOTES OFFERING INVESTMENT
------------- ------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash................................................. $ 341,897 $ 537,768 $1,117,768 $2,808,676
Pledged securities (3)............................... 63,142 63,142 63,142 63,142
Property and equipment, net.......................... 421,712 481,208 481,208 481,208
Total assets......................................... 1,034,694 2,882,533 3,482,533 5,173,441
Long-term debt....................................... 673,202 694,791 1,294,791 2,270,072
Total liabilities.................................... 891,905 962,080 1,562,080 2,537,361
Stockholders' equity................................. 142,789 1,920,453 1,920,453 2,636,080
</TABLE>
(1) Earnings were insufficient to cover fixed charges in the years ended
December 31, 1994, 1995, 1996 and 1997 and for the six months ended
June 30, 1998 and 1999. The deficiency was $874,000, $4,319,000,
$10,359,000, $26,259,000, $2,056,000, and $12,278,000 for the periods ended
December 31, 1994, 1995, 1996, and 1997 and for the six months ended
June 30, 1998 and 1999, respectively.
(2) "EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense and all depreciation and amortization expense. "Adjusted
EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense, depreciation and amortization and non cash employment and
consulting incentives and settlements. You should not think of EBITDA and
Adjusted EBITDA as alternative measures of operating results or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles). We have included EBITDA and Adjusted EBITDA
because they are widely used financial measures of the potential capacity of
a company to incur and service debt. Our reported EBITDA and Adjusted EBITDA
may not be comparable to similarly titled measures used by other companies.
(3) Represents amounts deposited with the security agent pursuant to a security
agreement to make payments of interest through May 15, 2000 on our 10%
Senior Notes due 2008.
S-29
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
The following unaudited pro forma condensed combining financial information
illustrates the effect of the merger of AboveNet with our wholly-owned
subsidiary under the terms of the merger agreement, dated June 22, 1999. Under
the terms of the merger agreement, the holders of AboveNet common stock received
1.175 shares of our class A common stock for each share of AboveNet common
stock. The share price used to determine the acquisition cost was derived from
taking the average of the closing price of our class A common stock for the two
days prior to and subsequent to the announcement of the proposed merger, which
was June 23, 1999.
On June 21, 1999, AboveNet acquired the assets and assumed obligations
related to the Palo Alto Internet Exchange from Compaq Computer Corporation
("Compaq") for approximately $76.5 million, consisting of $70 million in cash,
an obligation to provide various services to Compaq with a value currently
estimated to be approximately $5 million and expenses of approximately
$1.5 million.
The unaudited pro forma condensed combining financial information presented
herein gives effect to our acquisition of AboveNet and AboveNet's acquisition of
Palo Alto Internet Exchange. The unaudited pro forma condensed combining
financial information is based on the historical financial statements of
Metromedia, AboveNet and Palo Alto Internet Exchange.
AboveNet has a fiscal year end of June 30. The unaudited historical
financial information for AboveNet for the year ended December 31, 1998 consists
of the period from January 1, 1998 to June 30, 1998 combined with the period
from July 1, 1998 to December 31, 1998 derived from AboveNet's historical
unaudited financial statements.
The unaudited pro forma condensed combining statements of operations for the
six months ended June 30, 1999 and for the year ended December 31, 1998 give
effect to the above transactions as if they had been consummated on January 1,
1998. The unaudited pro forma condensed combining balance sheets, as of
June 30, 1999, give effect to our acquisition of AboveNet as if it had been
consummated on June 30, 1999.
ACCOUNTING TREATMENT
We plan to record the acquisition of AboveNet using the purchase method of
accounting. Accordingly, the assets acquired and liabilities assumed will be
recorded at their estimated fair values, which are subject to further adjustment
based upon appraisals and other analyses.
AboveNet recorded the acquisition of Palo Alto Internet Exchange using the
purchase method of accounting. Accordingly, the assets acquired and obligations
assumed have been recorded at their estimated fair values, which are subject to
further adjustments based upon appraisals and other analyses.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable at the time made. The unaudited pro
forma condensed combining financial statements do not purport to present our
financial position or results of operations had the acquisitions occurred on the
dates specified, nor are they necessarily indicative of the financial position
or results of operations that may be achieved in the future. The unaudited pro
forma condensed combining statements of operations do not reflect any
adjustments for synergies that we expect to realize following consummation of
the acquisitions. No assurances can be made as to the amount of cost savings or
revenue enhancements, if any, that may be realized.
The unaudited pro forma condensed combining financial statements should be
read in conjunction with the consolidated financial statements and notes of our
company, AboveNet and Palo Alto Internet Exchange.
S-30
<PAGE>
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
METROMEDIA METROMEDIA
ABOVENET PAIX PRO FORMA FIBER FIBER
HISTORICAL HISTORICAL ADJUSTMENTS ABOVENET HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 9,522 $3,171 $ -- $ 12,693 $ 38,673 $ -- $ 51,366
Expenses:
Cost of sales........... 13,882 2,013 -- 15,895 14,819 -- 30,714
Selling, general and
administrative........ 12,309 301 -- 12,610 13,786 -- 26,396
Consulting and
employment
incentives............ 519 -- -- 519 -- -- 519
Depreciation and 3,485 (1) (3,485)(2)
amortization.......... 2,209 1,696 (1,696)(1) 5,694 5,058 38,335 (3) 45,602
-------- ------ ------- -------- -------- -------- --------
Income (loss) from
operations............ (19,397) (839) (1,789) (22,025) 5,010 (34,850) (51,865)
Other income (expense):
Interest income......... 2,665 -- -- 2,665 13,512 -- 16,177
Interest expense........ (1,080) -- -- (1,080) (30,407) -- (31,487)
Loss in joint venture... (200) -- -- (200) (393) -- (593)
-------- ------ ------- -------- -------- -------- --------
Net loss before income
taxes................. (18,012) (839) (1,789) (20,640) (12,278) (34,850) (67,768)
Income taxes............ -- -- -- -- -- -- --
-------- ------ ------- -------- -------- -------- --------
Net loss................ $(18,012) $ (839) $(1,789) $(20,640) $(12,278) $(34,850) $(67,768)
======== ====== ======= ======== ======== ======== ========
Net loss per
share--basic.......... $ (0.06) $ (0.29)
======== ========
Net loss per share--
diluted............... n/a n/a
======== ========
Weighted average number
of shares
outstanding--basic
(4)................... 189,098 230,692
======== ========
Weighted average number
of shares
outstanding--
diluted............... n/a n/a
======== ========
</TABLE>
(SEE THE ACCOMPANYING NOTES ON PAGE S-36)
S-31
<PAGE>
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
METROMEDIA METROMEDIA
ABOVENET PAIX PRO FORMA FIBER FIBER
HISTORICAL HISTORICAL ADJUSTMENTS ABOVENET HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue........................... $ 6,777 $ 4,362 $ -- $ 11,139 $36,436 $ -- $ 47,575
Expenses:
Cost of sales..................... 7,551 2,583 -- 10,134 13,937 -- 24,071
Selling, general and
administrative.................. 7,843 450 -- 8,293 14,712 -- 23,005
Consulting and employment
incentives...................... 2,396 -- -- 2,396 3,648 -- 6,044
(1,944)(1) (6,970)(2)
Depreciation and amortization..... 1,497 2,349 6,970 (1) 8,872 1,532 76,671 (3) 80,105
-------- ------- ------- -------- ------- -------- --------
Income (loss) from operations..... (12,510) (1,020) (5,026) (18,556) 2,607 (69,701) (85,650)
Other income (expense):
Interest income................... 337 -- -- 337 8,788 -- 9,125
Interest expense.................. (529) -- -- (529) (6,861) -- (7,390)
Loss in joint venture............. -- -- -- -- (146) -- (146)
-------- ------- ------- -------- ------- -------- --------
Net income (loss) before income
taxes........................... (12,702) (1,020) (5,026) (18,748) 4,388 (69,701) (84,061)
Income taxes...................... -- -- -- -- 3,402 (3,402)(5) --
-------- ------- ------- -------- ------- -------- --------
Net income (loss)................. $(12,702) $(1,020) $(5,026) $(18,748) $ 986 $(66,299) $(84,061)
======== ======= ======= ======== ======= ======== ========
Net income (loss) per share --
basic........................... $ 0.01 $ (0.37)
======= ========
Net income (loss) per share --
diluted......................... 0.01 n/a
======= ========
Weighted average number of shares
outstanding -- basic(4)......... 186,990 228,584
======= ========
Weighted average number of shares
outstanding -- diluted.......... 219,524 n/a
======= ========
</TABLE>
(SEE THE ACCOMPANYING NOTES ON PAGE S-36)
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<PAGE>
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEETS
(UNAUDITED)
JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
METROMEDIA METROMEDIA
ABOVENET FIBER FIBER
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................. $220,871 $ 341,897 $ (25,000)(2) $ 537,768
Short-term investments..................... -- 19,716 -- 19,716
Pledged securities......................... -- 63,142 -- 63,142
Accounts receivable........................ 3,355 86,258 -- 89,613
Other current assets....................... 3,850 2,761 -- 6,611
-------- ---------- ---------- ----------
Total current assets......................... 228,076 513,774 (25,000) 716,850
Fiber optic transmission network and related
equipment, net............................. 12,905 417,803 -- 430,708
Property and equipment, net.................. 46,591 3,909 -- 50,500
Restricted cash.............................. 21,476 51,920 25,000 (2) 98,396
Other assets................................. 5,377 47,288 -- 52,665
Intangible assets............................ 69,474 -- (69,474)(2) 1,533,414
1,533,414 (2)
-------- ---------- ---------- ----------
Total assets................................. $383,899 $1,034,694 $1,463,940 $2,882,533
======== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 13,593 $ 7,276 $ -- $ 20,869
Accrued expenses........................... 2,122 134,736 20,000 (2) 156,858
Current portion of deferred revenue........ 2,511 8,106 -- 10,617
Current portion of long-term obligations... 5,985 55 -- 6,040
-------- ---------- ---------- ----------
Total current liabilities.................... 24,211 150,173 20,000 194,384
Deferred revenue............................. 4,375 68,530 -- 72,905
Notes payable................................ -- 650,000 -- 650,000
Capital lease obligation, net of current
portion.................................... 5,173 23,202 -- 28,375
Long-term obligations........................ 16,416 -- -- 16,416
Total stockholders' equity................... 333,724 142,789 1,443,940 (2) 1,920,453
-------- ---------- ---------- ----------
Total liabilities and stockholders' equity... $383,899 $1,034,694 $1,463,940 $2,882,533
======== ========== ========== ==========
</TABLE>
(SEE THE ACCOMPANYING NOTES ON PAGE S-36)
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<PAGE>
METROMEDIA FIBER NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
(1) Reflects adjustments related to the acquisition by AboveNet of Palo Alto
Internet Exchange at January 1, 1998 for the income statements as follows:
(i) the elimination of Palo Alto Internet Exchange historical intangible
asset amortization; and
(ii) the addition of amortization of the excess of cost over net tangible
assets acquired of Palo Alto Internet Exchange ($69.7 million) over
10 years.
(2) Reflects our acquisition of AboveNet at June 30, 1999 for the balance sheet
and January 1, 1998 for the income statements as follows:
(i) the issuance of approximately 41.6 million shares of our class A common
stock in exchange for shares of AboveNet common stock at a ratio of
1.175;
(ii) the placement of cash into a restricted account to secure AboveNet's
renegotiated credit facility;
(iii) the elimination of AboveNet's historical net tangible assets acquired;
and
(iv) issuance of shares of our class A common stock:
<TABLE>
<S> <C> <C>
Number of shares issued to acquire AboveNet..... 41,594,140
Per share price of stock........................ $ 40.36
----------
Value of shares issued.......................... $1,678,739,000
Value of our company's options and warrants
issued in exchange for AboveNet's options and
warrants....................................... 98,925,000
Transaction costs............................... 20,000,000
--------------
Total acquisition cost.......................... 1,797,664,000
AboveNet's net tangible assets acquired......... 264,250,000
--------------
Excess of cost over net tangible assets
acquired....................................... $1,533,414,000
==============
</TABLE>
We have made a preliminary allocation to intangible assets of excess cost
over estimated net tangible assets acquired as AboveNet's tangible assets
and liabilities are estimated to approximate fair value. However, there can
be no assurance that the actual allocation will not differ significantly
from the pro forma allocation.
(3) Reflects amortization of the excess of cost over net tangible assets
acquired in the merger by use of the straight-line method over 20 years.
(4) The average common shares outstanding used in calculating pro forma loss per
common share are calculated assuming that the estimated number of shares of
our class A common stock to be issued in the merger were outstanding from
the beginning of the periods presented.
(5) Reflects the adjustment of the tax provision.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING INFORMATION TOGETHER WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED IN THIS PROSPECTUS
SUPPLEMENT BEGINNING ON PAGE F-1. CERTAIN STATEMENTS IN THIS SECTION ARE
"FORWARD-LOOKING STATEMENTS." YOU SHOULD READ THE INFORMATION UNDER "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS" FOR SPECIAL INFORMATION ABOUT OUR
PRESENTATION OF FORWARD-LOOKING INFORMATION.
GENERAL
We provide dedicated fiber optic infrastructure and high-bandwidth Internet
connectivity for our communications intensive customers. We are a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through our acquisition of
AboveNet, we also provide "one-hop" connectivity that enables mission critical
Internet applications to thrive, as well as high-bandwidth infrastructure,
including managed co-location services.
We currently have operations in, or under construction in, eleven Tier I
cities throughout the United States and seven selected international markets. We
intend to expand our presence to include approximately 50 Tier I and Tier II
markets in the United States and 17 major international markets.
Our existing intra-city networks consist of approximately 334,000 fiber
miles covering 680 route miles in six of our announced markets. Our inter-city
network consists of approximately 110,000 fiber miles covering 255 route miles
that we have built between New York City and Washington, D.C. We have also built
or acquired (primarily through fiber swaps) a nationwide dark fiber network
linking our intra-city networks.
In February 1999, we entered into an agreement with Viatel, Inc. and
Carrier 1 Holdings, Ltd. to jointly build a dark fiber inter-city network among
selected cities throughout Germany. Once completed, our German network will
consist of approximately 291,000 fiber miles covering 1,350 route miles
connecting 14 major cities. We have also swapped strands of fiber in the United
States for strands of fiber on the Circe network, which connects a number of
European markets. In addition to our inter-city networks, we are constructing 16
intra-city networks throughout Europe. Separately, we have also entered into a
contract to acquire dark fiber network facilities in Toronto, Canada.
On September 8, 1999, we consummated the merger between our wholly-owned
subsidiary and AboveNet. The holders of AboveNet common stock received 1.175
shares of our class A common stock for each share of AboveNet common stock.
AboveNet is a leading provider of facilities-based, managed services for
customer-owned Web servers and related equipment, known as co-location, and high
performance Internet connectivity solutions for electronic commerce and other
business critical Internet operations.
On October 7, 1999, we entered into a securities purchase agreement with
Bell Atlantic, under which Bell Atlantic would purchase up to approximately
25.6 million newly issued shares of our class A common stock at a purchase price
of $28.00 per share and a convertible subordinated note of approximately
$975.3 million, which is convertible into shares of our class A common stock at
a conversion price of $34.00 per share. We expect this transaction, which is
subject to customary closing conditions, to be completed by the end of the first
quarter of 2000. Assuming the issuance of the 25.6 million shares of class A
common stock and conversion of the convertible subordinated note, this
investment would represent 19.9% of our outstanding shares. Bell Atlantic has
also agreed to pay us $550 million over the next three years in exchange for
delivery of fiber optic facilities over the next five years. The proceeds from
these two transactions will be used to fund the expansion of our network.
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<PAGE>
Most of our contracts are operating leases under which we recognize
recurring monthly revenues. Under other contracts we recognize revenue from the
sale of fiber. Effective June 30, 1999, the Financial Accounting Standards Board
issued FASB Interpretation No. 43 "Real Estate Sales" ("FIN 43") which requires
that sales of integral equipment be accounted for in accordance with real estate
accounting rules. We believe that the SEC may classify dark fiber cables in the
ground as integral equipment as defined in FIN 43. This change in the accounting
for dark fiber sales would not change any of the economics of the contracts. It
would require us, however, to recognize the revenue from some sales contracts as
operating leases over the term of the contract as opposed to the current method
of recognizing revenue during the period over which we deliver the fiber. As a
result, this change in accounting treatment would reduce the revenue and income
that we would recognize in the earlier years of the contract and spread it out
over the life of the contract regardless of when the cash was received or the
delivery of the fiber took place.
By way of example, if we enter into an agreement for a 25 year lease for
dark fiber with a customer who pays $100.0 million in cash when the contract is
signed, we previously would have recorded average revenues of $20.0 million over
the 5 years during which we delivered the dark fiber. By contrast, if we are
required to use real estate accounting rules in accordance with FIN 43, although
we would receive a cash payment of $100 million when the contract is signed, we
might be required to recognize revenue of $4.0 million per year over the 25 year
term of the contract.
STOCK SPLITS
On August 28, 1998, December 22, 1998, and May 19, 1999, we completed
two-for-one stock splits of our class A common stock and class B common stock in
the form of 100 percent stock dividends to all stockholders of record as of
specified dates.
All share and per share amounts presented herein give retroactive effect to
the stock dividends. As of October 26, 1999, adjusted for the effect of the
stock dividends, we had 198,999,336 shares of class A common stock outstanding
and 33,769,272 shares of class B common stock outstanding.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
(HISTORICAL)
REVENUES. Revenues for the six months ended June 30, 1999 were $38.7
million or 325% greater than revenues of $9.1 million for the same period in
1998. The increase for the six months ended June 30, 1999, compared with the six
months ended June 30, 1998, reflected higher revenues associated with
commencement of service to an increased total number of customers, as well as
revenue recognized related to capital leases of portions of our network and
sales of portions of our network through joint-build agreements.
COST OF SALES. Cost of sales for the six months ending June 30, 1999 was
$14.8 million or greater than a 222% increase over cost of sales of $4.6 million
for the same period in 1998. Cost of sales increased due to costs associated
with the commencement of service to customers, as well as higher fixed costs
associated with the build-out of our network. Cost of sales as percentages of
revenues for the first six months of 1999 and 1998 were 38% and 50%
respectively, declining as a result of the significant increase in the number of
customers and revenues associated with those customers, coupled with a slower
growth in costs associated with these revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for the six months ended June 30, 1999 were $13.8
million or 134% greater than selling, general and administrative expenses of
$5.9 million for the same period in 1998. The increase in selling, general and
administrative expenses resulted primarily from increased overhead to
accommodate our network
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<PAGE>
expansion. As a percentage of revenue, selling, general and administrative
expenses decreased to 36% of revenue for the six months ended June 30, 1999,
from 65% for the comparable period in 1998.
SETTLEMENT AGREEMENT. We recorded $3.4 million for a settlement agreement
in the six months ended June 30, 1998. The amount represented the expense
associated with the issuance of stock options and payment of cash related to a
settlement agreement.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization for the six
months ended June 30, 1999 was $5.1 million or 1175% greater than depreciation
and amortization of $0.4 million for the same period ended June 30, 1998. The
increase in depreciation and amortization expense resulted from increased
investment in our completed fiber optic network and additional property and
equipment acquired.
INCOME (LOSS) FROM OPERATIONS. Income from operations for the six months
ended June 30, 1999, income from operations was $5.0 million, or a $10.4 million
improvement over the $5.4 million loss for the comparable period in 1998. The
improvement in income from operations for the six month period over the previous
year was attributable to the increase in revenue as well as a reduction, as a
percentage of sales, in cost of goods sold, selling, general and administrative
expenses and depreciation. In addition, the 1998 amount included the settlement
agreement, mentioned above.
INTEREST INCOME. Interest income for the six months ended June 30, 1999 was
$13.5 million or 275% greater than interest income of $3.6 million for the same
period in 1998. Interest income increased in the period as a result of the
investment of our excess cash received as proceeds from the issuance and sale of
our 10% senior notes in November 1998.
INTEREST EXPENSE. Interest expense for the six months ended June 30, 1999
was $30.4 million, compared with $12,000 during the same period of 1998. The
increase in interest expense reflects the cost of additional debt acquired
related to the issuance and sale of 10% senior notes in November 1998.
LOSS FROM JOINT VENTURE. For the six months ended June 30, 1999 we recorded
a $0.4 million loss from joint venture compared to $0.3 million loss for the
same period in 1998.
NET LOSS. Net loss for the six months ended June 30, 1999 was $12.3 million
or 486% greater than a net loss of $2.1 million for the same period in 1998. For
the six months ended June 30, 1999 and 1998, the basic net loss per share, after
the stock split, was $0.06 and $0.01, respectively. The net losses were
primarily attributable to the increase in net interest expense related to the
issuance and sale of our 10% senior notes in November 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for 1998 were $36.4 million or 1,356% greater than
revenues of $2.5 million for 1997. The increase in revenue for 1998 versus 1997
reflected higher revenues associated with commencement of service to an
increased total number of customers, as well as revenue recognized related to
grants of indefeasible rights of use to portions of our network and sales of
dark fiber classified as sales type leases.
COST OF SALES. Cost of sales was $13.9 million in 1998, a 286% increase
over cost of sales of $3.6 million in 1997. Cost of sales increased for 1998 as
compared to 1997 due to costs associated with the commencement of service to
customers, higher fixed costs associated with the operation of our network in
service and the allocated costs of the network related to revenue recognized for
grants of indefeasible rights of use to portions of our network and sales type
leases of portions of our dark fiber classified as capital leases. Costs of
sales, as percentages of revenue for 1998 and 1997 were 38% and
S-37
<PAGE>
142%, 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 for 1998 were $14.7 million or 133% greater than
selling, general and administrative expenses of $6.3 million during 1997. The
increase in selling, general and administrative expenses for 1998 as compared to
1997 resulted primarily from increased overhead to accommodate our network
expansion.
CONSULTING AND EMPLOYMENT INCENTIVES EXPENSE. Consulting and employment
incentives expense for 1998 were $0.2 million compared with $19.2 million for
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 1998, the amount recorded reflects
amortization for the unvested component of options issued in 1997 to key
employees.
SETTLEMENT AGREEMENT. We recorded $3.4 million for a settlement agreement
in 1998. The amount was recorded in the first quarter of 1998 for the expense
associated with the issuance of stock options and payment of cash related to a
settlement agreement.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for 1998 was $1.5 million or 88% greater than depreciation and
amortization expense of $0.8 million during 1997. The increases in depreciation
and amortization expense resulted from increased investment in our completed
fiber optic network and property and equipment.
INTEREST INCOME (EXPENSE). Interest income for 1998 was $8.8 million or
389% greater than interest income of $1.8 million during 1997. Interest income
during 1998 was derived from investment of our excess cash received as proceeds
from our initial public offering in October 1997 and the additional cash
received in November 1998 from the proceeds of our $650 million note issuance.
Interest expense increased in 1998 to $6.9 million as compared to $0.7 million
for 1997. The increase in interest expense reflects interest accrued for the
senior notes issued in November 1998.
INCOME (LOSS) FROM JOINT VENTURE. We recorded a $0.1 million loss from our
50% share of the ION joint venture's loss for 1998. The loss primarily
represents startup costs and operating activities for the joint venture.
INCOME TAXES. We recorded a provision for income taxes for 1998 in the
amount of $3.4 million. This represents an estimated effective tax rate, for
federal and state taxes, of 77.5%.
NET INCOME (LOSS). Net income was $1.0 million for 1998, as compared to a
net loss of $26.3 million for 1997. For 1998, basic net income per share was
$0.01 as compared to a basic net loss per share of $0.28 for 1997. On a diluted
basis, net income per share for 1998 was $0.01.
The improvements in results for 1998 were primarily attributable to the
growth of revenues and the improvements in gross margins, as noted above, as
well as the increase in net interest income related to the investment made by
Metromedia Company and the funds raised through our initial public offering as
compared to net interest expense.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES. Revenues for 1997 were $2.5 million, a 1,150% increase as
compared to 1996 revenues of $0.2 million. The revenue increase was generated by
one-time revenues associated with commencement of services to customers as well
as increased recurring lease revenues, which reflects the growth in the number
of our customers.
COST OF SALES. Cost of sales for 1997 was $3.6 million, an increase of 414%
as compared to the $0.7 million that was recorded as cost of sales in 1996. The
increase in cost of sales was associated with
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<PAGE>
the increased revenues. Cost of sales as a percentage of revenues improved to
142% in 1997 from 296% in 1996. The improvement in cost of sales as a percentage
of revenues reflects the increases in revenue outdistancing the increases in
cost, as the components of cost were mostly of a fixed nature.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1997 was $6.3 million or 200% greater than selling,
general and administrative expenses of $2.1 million in 1996. This increase
resulted primarily from increased legal expenses as a result of our increased
business activities and the increased staffing to accommodate our anticipated
growth.
CONSULTING AND EMPLOYMENT INCENTIVES EXPENSE. Consulting and employment
incentives expense for 1997 was $19.2 million or 419% greater than consulting
and employment incentives expenses of $3.7 million in 1996. The 1997 expense
represents the value of stock options issued to key employees, officers,
directors and consultants in order to attract or retain their services. The
amount recorded in 1996 reflects the expense associated with issuance of stock
and warrants to consultants in consideration for services rendered.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense was $0.8 million in 1997 as compared to $0.6 million in 1996. The
increase in depreciation and amortization expense resulted from increased
investment in our fiber optic network.
INTEREST INCOME (EXPENSE). We had interest income of $1.8 million in 1997
as compared to no interest income during 1996. The interest income in 1997 arose
from the investment of our excess cash during the year. In 1996, we had no
excess cash to invest and, accordingly, earned no interest income. Interest
expense (including financing costs) decreased in 1997 to $0.7 million from $3.6
million in 1996. The decrease in interest expense reflects the repayment of all
of our debt during the year with the proceeds of the investment made by
Metromedia Company, as well as lower financing costs.
NET LOSS. We recorded a net loss of $26.3 million in 1997 as compared to a
net loss of $10.4 million in 1996. The increase in the net loss was primarily
attributable to costs associated with organizing to meet our growth objectives.
In particular, such costs include the consulting and employment incentive,
described above, to attract and retain key employees, officers and directors, as
well as increased overhead to meet our growth objectives.
LIQUIDITY AND CAPITAL RESOURCES
Our initial public offering, on October 28, 1997, of 72,864,000 shares of
class A common stock generated net proceeds of $133.9 million, after deducting
the underwriters' commission and expenses relating to such initial public
offering. In addition, on November 25, 1998, we issued and sold 10% Senior Notes
due 2008 which generated net proceeds of $630.0 million, after deducting the
underwriters' commission and related expenses. On October 7, 1999, we entered
into a securities purchase agreement with Bell Atlantic, under which Bell
Atlantic would purchase shares of our class A common stock and a convertible
subordinated note. We expect that this transaction, which is subject to
customary closing conditions, will close by the end of the first quarter of 2000
and generate net proceeds of approximately $1.7 billion. In addition, Bell
Atlantic has agreed to purchase a minimum of $550 million of fiber optic
facilities payable over the next three years.
For the six months ended June 30, 1999, our operating activities generated
$21.0 million of cash, compared with $13.3 million during the comparable period
in 1998. For the six months ended June 30, 1999, we used $235.5 million of cash
for investing activities compared with $32.3 million for the same period in
1998. This increase was due primarily to investments in the expansion of our
networks and related construction in progress, the restriction of cash as
security for letters of credit in connection with our German network build, and
the acquisition of dark fiber infrastructure in certain markets in Texas. For
the six months ended June 30, 1999, we made net payments of $13.0 million of
cash from financing activities, compared to $0.8 million of net proceeds from
the issuance of common stock in
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<PAGE>
1998, which was primarily attributable to the payment relating to the
acquisition of the dark fiber infrastructure in Texas market.
We anticipate that we will continue to incur net operating losses as we
expand and complete our existing networks, construct additional networks and
market our services to an expanding customer base. We anticipate spending
approximately $3.4 billion through the year ended December 31, 2001 on the
build-out of our fiber optic networks and Internet service exchanges in 50
Tier I and Tier II markets in the United States and in 17 major international
markets. We believe that the net proceeds from the investment by Bell Atlantic,
the net proceeds from the proposed issuance and sale of the senior notes due
2009, which proposed issuance and sale is expected to close concurrently with
the offering described in this prospectus supplement, cash on hand, the proceeds
from the new credit facility, vendor financing and cash generated by operations
(including advance customer payments), will enable us to fully fund the planned
build-out of our networks and our other working capital needs through the year
ended December 31, 2001. The indentures governing our debt permit us to incur
additional indebtedness to finance the engineering, construction, installation,
acquisition, lease, development or improvement of telecommunications assets. As
a result, we may also consider from time to time private or public sales of
additional equity or debt securities, entering into other credit facilities and
financings, depending upon market conditions, in order to finance the continued
build-out of our network. We cannot assure you that we will be able to
successfully consummate any such financing on acceptable terms or at all.
We expect to continue to experience negative cash flows for the foreseeable
future. In addition, our acquisition of AboveNet will cause us to record
approximately $1.5 billion in goodwill and other intangible assets, to be
amortized over periods of up to twenty years. Accordingly, we expect to report
further net operating losses for the foreseeable future.
YEAR 2000 SYSTEM MODIFICATIONS
We are currently working to evaluate and resolve the potential impact of the
Year 2000 on our processing of date-sensitive information and network systems.
The Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the year 2000, which could result in
miscalculations or system failures resulting from recognition of a date using
"00" as the year 1900 rather than the year 2000.
We have delegated responsibility to a group of executives to coordinate the
identification, evaluation and implementation of changes to computer systems and
applications necessary to achieve our goal of a Year 2000 date conversion which
would minimize the effect on our customers and avoid disruption to business
operations. We are also focusing on hardware and software tools, programming and
outside forces that may affect our operations, including our vendors, banks and
utility companies. Our analysis of the Year 2000 threat is ongoing and will be
continuously updated throughout 1999 as necessary.
For Metromedia Fiber, we have developed a questionnaire and project plan to
be completed by our systems and operating personnel to identify all business and
computer applications so that we can identify potential compliance problems. We
have initiated communications with our significant customers, suppliers,
contractors and major systems developers to determine their plans to remedy any
Year 2000 issues that arise in their business with us. We have compiled a
database of information based upon these responses. To the extent problems are
identified, we will implement corrective procedures where necessary, then test
the applications for Year 2000 compliance. We expect to complete this project
prior to January 1, 2000.
Based on preliminary data, our estimate is that the Year 2000 effort will
have a nominal cost impact, although we can make no assurances as to the
ultimate cost of the Year 2000 effort or the total cost of information systems.
Such costs will be expensed as incurred, except to the extent such costs are
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<PAGE>
incurred for the purchase or lease of capital equipment. We expect to make some
of the necessary modifications through our ongoing investment in system
upgrades. We believe that our exposure to this issue, based on our internal
systems, is somewhat limited by the fact that substantially all of our existing
systems have been purchased or replaced since 1997.
As of June 30, 1999, we had incurred nominal consulting costs in respect of
our Year 2000 conversion effort. We have not deferred any other information
systems projects due to the Year 2000 efforts. We expect that the source of
funds for Year 2000 costs will be cash on hand. Accordingly, we are devoting the
necessary resources to resolve all significant Year 2000 issues.
If our customers, suppliers, contractors or major systems developers are
unable to resolve Year 2000 processing issues in a timely manner, a material
adverse effect on our results of operations and financial condition could
result.
AboveNet's Year 2000 readiness review includes assessment, implementation,
testing and contingency planning. To date, AboveNet has evaluated its internally
developed software and believes that this software is Year 2000 compliant.
However, AboveNet utilizes software and hardware developed by third parties both
for its network and internal information systems. AboveNet has not done any
testing of such third party software to determine if such software is Year 2000
compliant. AboveNet has sought assurances from some of its vendors, and intends
to continue to seek assurances from others, that such vendors' products are or
will be Year 2000 compliant.
AboveNet expects to continue assessing and testing its internal information
technology and non-information technology systems. AboveNet is not currently
aware of any material operations issues or costs associated with preparing its
internal information technology and non-information technology systems for the
Year 2000. However, AboveNet may experience material unanticipated problems and
costs caused by undetected errors or defects in the technology used in its
internal information technology and non-information technology systems.
Based upon the public filings and press releases of AboveNet's equipment,
telecommunications and data communications providers, AboveNet is aware that all
such providers are in the process of reviewing and implementing their own Year
2000 compliance programs. Since AboveNet does not believe that it will be
afforded the opportunity to test the systems of these providers, AboveNet will
seek assurances from them that they are Year 2000 compliant. If AboveNet's
primary vendors experience business interruptions as a result of the failure to
achieve Year 2000 compliance, AboveNet's ability to provide Internet
connectivity could be impaired, which could have a material adverse effect on
AboveNet's business, results of operations and financial condition.
AboveNet does not currently have any information regarding the Year 2000
status of its customers, most of whom are private companies. However, AboveNet
is in the process of developing a plan to survey all of its customers regarding
their Year 2000 compliance. As in the case with similarly situated companies, if
its customers experience Year 2000 problems, which result in business
interruptions or otherwise impact their operations, AboveNet could experience a
decrease in the demand for its services, which could have a material adverse
impact on its business, results of operations and financial condition.
AboveNet has not incurred any significant expenses to date associated with
its Year 2000 plan and is not aware of any material costs associated with its
anticipated Year 2000 efforts. AboveNet believes that a material loss of
revenues would arise if its major customers or providers fail to achieve Year
2000 readiness. AboveNet has not yet developed a comprehensive contingency plan
to address the issues which could result from such failure.
This constitutes a Year 2000 Readiness Disclosure Statement, and the
statements are subject to the Year 2000 Information and Readiness Disclosure
Act. We hereby claim the protection of this act for this prospectus supplement
and all information contained herein.
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BUSINESS
GENERAL
We provide dedicated fiber optic infrastructure and high-bandwidth Internet
connectivity for our communications intensive customers. We are a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through our acquisition of
AboveNet, we also provide "one-hop" connectivity that enables mission critical
Internet applications to thrive, as well as high-bandwidth infrastructure,
including managed co-location services.
THE INTRA-CITY NETWORKS. Our existing intra-city networks consist of
approximately 334,000 fiber miles covering 680 route miles in six of our
announced markets. We are currently planning to expand our existing local
intra-city networks in these metropolitan areas, and to construct additional
intra-city networks in approximately 40 additional Tier I and Tier II markets in
the United States.
THE INTER-CITY NETWORKS. Our inter-city network currently consists of 255
route miles, or approximately 110,000 fiber mile network segment that we have
built between New York City and Washington, D.C. We have also obtained,
primarily through exchanges of fiber capacity or "fiber swaps" with other
carriers, a nationwide fiberoptic network.
THE INTERNATIONAL NETWORKS. In addition to our domestic build-up, we intend
to expand our international presence to include approximately 17 major markets.
In February 1999, we entered into an agreement with Viatel, Inc. and Carrier 1
Holdings, Ltd. to jointly build a dark fiber inter-city network between selected
cities throughout Germany. Once completed, the German network will consist of
approximately 291,000 fiber miles covering 1,350 route miles connecting 14 major
cities. We have also swapped strands of fiber in the United States for strands
of fiber on the Circe network, which connects a number of European markets. In
addition to our inter-city networks, we are constructing 16 intra-city networks
throughout Europe. Separately, we have also entered into a contract to acquire
dark fiber network facilities in Toronto, Canada.
INTERNET CONNECTIVITY. Through our acquisition of AboveNet, we are a
leading provider of high performance Internet connectivity services to a wide
range of Internet service providers, Internet content providers and Web hosting
companies and facilities based, managed co-location services. Our Internet
exchange server facilities provide high performance, reliable and scalable
solutions for electronic commerce and other business critical applications.
AboveNet developed a network architecture based upon strategically located,
fault-tolerant Internet exchange servers. We currently operate two Internet
service exchange campuses, located near two of the major Internet access points,
metropolitan area exchange (often referred to as "MAE") West and MAE East, using
our suite of sophisticated network management and remote monitoring tools. We
believe that our centralized network architecture provides enhanced connectivity
while eliminating the need to build numerous geographically dispersed data
centers. AboveNet's Internet service exchange model offers customers the
benefits of combining direct Internet service providers access with co-location
services for Internet content providers. As of June 30, 1999, AboveNet had more
than 270 direct public and private data exchange agreements, known as peering
arrangements, including relationships with most major network providers. The
convergence of content providers and Internet service providers at our Internet
service exchanges enables Internet service provider customers to provide their
users with "one hop" connectivity, through our local area network, to the Web
sites of the Internet content providers that are co-located at the same site.
This direct connectivity minimizes the risk of delays and data loss often
encountered in the transmission of data over the public Internet infrastructure.
CUSTOMERS. We are focused on providing our broadband communications
infrastructure and Internet connectivity services to two main customer groups
located in Tier I and Tier II markets: communications carriers and
corporate/government customers.
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Our targeted customers include a broad range of companies such as:
- ILECs;
- CLECs;
- long distance companies/IXCs;
- paging, cellular and PCS companies;
- cable companies;
- ISPs; and
- Web hosting and e-commerce companies.
Our dark fiber customers typically lease our fiber optic capacity with which
they develop their own communications networks. Leasing our fiber optic capacity
is a low-cost alternative to building their own infrastructure or purchasing
metered services from ILECs or CLECs. Our Internet connectivity and co-location
customers typically lease bandwidth and co-location space which allow them to
provide their Internet related services on a reliable and cost effective basis.
We believe that we are well-positioned to penetrate our target customer base
since we plan to continue to install most of our dark fiber networks and
Internet service exchanges in major markets where these customers are
concentrated. We believe our target customers for our dark fiber and Internet
connectivity are complementary and will provide significant cross selling
opportunities.
NETWORK INFRASTRUCTURE. We have designed our networks to provide high
levels of reliability, security and flexibility by virtue of a self-healing
SONET architecture that prevents interruption in service to our clients by
instantaneously rerouting traffic in the event of a fiber cut. Our advanced
network architecture is also capable of supporting state-of-the-art
technologies, including DWDM (dense wave division multiplexing) which
significantly increases the transmission capacity of a strand of fiber optic
cable. Because DWDM can boost transmission capacity significantly, it has
greater relevance on our inter-city routes where we have, on average, fewer
strands of fiber installed than in our intra-city markets. Where practicable, we
install additional unused conduits to cost effectively accommodate future
network expansion and eliminate the need for future construction.
MARKET OPPORTUNITY. We believe that the market for our dark fiber services
is characterized by significant and growing demand for, and limited supply of,
fiber optic capacity. To meet our customers' demand, we tailor the amount of
fiber capacity leased to the needs of our customers. Generally, customers lease
fiber optic capacity from us and connect their own transmission equipment to the
leased fiber, thereby obtaining a high-bandwidth, fixed-cost, secure
communications alternative to the metered communications services offered by
traditional providers. In addition, we believe that we have installation,
operating and maintenance cost advantages per fiber mile relative to our
competitors because we generally install 432 fibers, and have begun installing
as many as 864 fibers, per route mile, as compared to the generally lower number
of fibers per mile in existing competitive networks.
We believe the market for our Internet service exchanges is characterized by
significant and growing demand for, and limited access to, highly reliable
Internet connectivity and co-location services. To meet our customers' demands,
we provide scalable connectivity and co-location services that drive our
customers' electronic commerce and other mission critical Internet applications.
Our customers lease bandwidth and co-location space from us to gain highly
reliable, secure and cost effective Internet connectivity. Through our existing
and planned networks, we believe we have the low cost position relative to those
competitors who lease rather than own their networks.
MANAGEMENT EXPERTISE. We benefit from the support of our controlling
stockholder Metromedia Company and anticipate similar benefits from our
anticipated investment by Bell Atlantic. On April 30, 1997, Metromedia Company
and certain of its affiliates made a substantial equity investment in our
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company (the "Metromedia Investment"). As a result, Metromedia Company and its
partners own all of our outstanding shares of class B common stock, par value
$.01 per share. Our class B common stock is entitled to 10 votes per share and
to vote separately to elect at least 75% of the members of the Board of
Directors. As of September 30, 1999, Metromedia Company and its partners own and
control approximately 63% of the outstanding voting power of our company.
RECENT TRANSACTIONS. On October 7, 1999, we entered into a securities
purchase agreement with Bell Atlantic, under which Bell Atlantic Investments
would purchase up to approximately 25.6 million newly issued shares of our class
A common stock at a purchase price of $28.00 per share and a convertible
subordinated note of approximately $975.3 million, which is convertible into
shares of our class A common stock at a conversion price of $34.00 per share.
This transaction, which is subject to customary closing conditions, is expected
to be completed by the end of the first quarter of 2000. Assuming the issuance
of the 25.6 million shares of class A common stock and conversion of the
convertible subordinated note, this investment would represent 19.9% of our
outstanding shares. Bell Atlantic has also agreed to pay us $550 million over
the next three years in exchange for delivery of fiber optic facilities over the
next five years. The proceeds from these two transactions will be used to fund
the expansion of our network.
BUSINESS STRATEGY
Our objective is to become the preferred facilities-based provider of
broadband communications infrastructure and Internet connectivity solutions to
communications carriers, corporations and government agencies, in our target
markets. The following are the key elements of our strategy to achieve this
objective:
ESTABLISH THE COMPANY AS THE PREFERRED CARRIERS' CARRIER OF BROADBAND
COMMUNICATIONS INFRASTRUCTURE AND INTERNET CONNECTIVITY SOLUTIONS
- Lease broadband communications infrastructure on a fixed cost basis
- Enable carriers to penetrate markets previously too costly to build or
purchase
- Allow customers to bypass the ILECs and CLECs
- Continue to differentiate ourselves as the only company whose principal
business is providing dark fiber on a fixed cost basis
- Lease high-bandwidth long haul capacity to provide seamless connectivity
between our intra-cities
- Provide Internet connectivity services through leasing bandwidth and
co-location space to ISPs
- Enable ISPs to provide reliable, high-quality Internet access services
- Capitalize on the fact that we do not offer competing metered
communications or retail Internet connectivity solutions in competition
with our carrier and ISP customers
POSITION THE COMPANY AS THE PREFERRED PROVIDER OF BROADBAND COMMUNICATIONS
INFRASTRUCTURE AND INTERNET CONNECTIVITY SERVICES TO CORPORATE AND GOVERNMENT
CUSTOMERS
- Target broadband communications infrastructure customers with significant
transmission and high security needs
- Provide scalable services for customers seeking lower broadband
transmission capacity
- Offer our dark fiber services on a fixed cost rather than metered basis,
to provide a more economical solution to our customers
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- Target Internet connectivity customers who require reliable, secure and
cost effective connectivity to the internet to drive their electronic
commerce and other mission critical business Internet applications
- Capitalize on the complementary customer bases for our Infrastructure and
Internet connectivity services through effective cross selling
REPLICATE SUCCESSFUL BUSINESS MODEL IN NEW MARKETS
- Leverage our success in existing markets by replicating our network
architecture in a number of additional markets
- Rapidly roll out our U.S. network to a total of approximately 50
intra-city networks in Tier I and Tier II markets
- Expand our international market coverage to a total of approximately 17
markets
- Deploy Internet service exchanges in selected U.S. and international
markets, replicating the successful AboveNet design
CREATE A LOW COST POSITION
- Provide our customers a cost effective alternative to constructing their
own networks and Internet connectivity facilities
- Install trunks with up to 864 fibers per route mile, which is
substantially more fiber than our competitors, reducing our per mile cost
to construct, upgrade and operate our networks
- Capitalize on the operating and maintenance cost advantages generated by
our newly constructed networks, with advanced fiber optic technology
- Create first mover advantages for us versus new entrants by securing
rights of way and building our networks quickly
- Install spare conduit where practical to reduce expansion and upgrade
costs in the future and provide significant excess capacity
- Establish a low cost advantage for our Internet connectivity services by
utilizing our own network rather than leasing capacity like some of our
competitors
- Use our low cost position to remain price competitive with other providers
of broadband communications infrastructure and Internet connectivity
services
UTILIZE FIBER SWAPS AND STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF OUR
NETWORKS
- Opportunistically utilize fiber swaps, as we have in the past, to expand
our network reach at little incremental cost
- Enter into strategic relationships, such as our joint build arrangement
with Viatel, to cost effectively expand our network footprint
EXPAND PRODUCT AND SERVICE OFFERINGS TO UTILIZE DARK FIBER NETWORK CAPACITY.
- Vertically expand our service offering by identifying additional uses for
our dark fiber network, such as with the AboveNet acqusition, that will
drive new revenue opportunities and cost synergies
- Maintain our competitive advantage by offering services that do not
directly compete with our carrier customers
- Focus on serving our carrier and large corporate/government customers'
bandwidth intensive communications needs
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INSTALL TECHNOLOGICALLY ADVANCED NETWORKS AND INTERNET SERVICE EXCHANGES
- Continue to install a technologically advanced network based on
self-healing SONET architecture
- Use our self-healing SONET architecture to minimize the interruption to
service caused by fiber cuts
- Construct our networks to deliver the high levels of reliability, security
and flexibility that our customers demand
- Continually monitor and maintain quality control over our networks on a
24-hour basis
- Continue to ensure our network is capable of providing the highest
commercially available capacity transmission (OC-192) to support capacity
intensive data applications such as Frame Relay, ATM and Internet
applications
- Provide fault tolerant Internet service exchange facilities designed to
enable the uninterrupted operations necessary for mission critical
business applications
- Use our proprietary software to monitor our network connections for
latency and packet loss and automatically reroute Internet traffic to
avoid Internet congestion points
BUILD ON MANAGEMENT EXPERIENCE AND METROMEDIA COMPANY RELATIONSHIP
- Leverage the communications industry knowledge and sales expertise of our
management team and board of directors including:
- Stephen Garofalo, our Chief Executive Officer and founder, who has
approximately 25 years of experience in the cable installation business
- Howard M. Finkelstein, our President and Chief Operating Officer, who
served in various capacities in Metromedia Company and its affiliates over
a period of 16 years, including 9 years as President of Metromedia
Company's long distance telephone company, until its merger with
MCI/WorldCom, Inc. in 1993
- David Rand and Sherman Tuan who joined our Board of Directors following
the acquisition of AboveNet and have extensive experience with Internet
related ventures
- John W. Kluge, Stuart Subotnick and David Rockefeller, each of whom bring
extensive communications industry expertise and corporate governance
experience
BUILD-OUT OF NETWORKS
We have concentrated on developing and constructing our networks. We have
either obtained or are currently pursuing the acquisition of necessary licenses,
franchises and rights-of-way to construct these networks. In constructing our
fiber optic networks, we seek to create strategic alliances with the engineering
and construction management firms that have been engaged to develop routes,
easements and manage deployment plans. Firms with whom we are allied in this
regard have deployed local loop network infrastructure for RBOCs as well as for
CLECs. Though we anticipate to outsource much of the actual construction to
various construction firms, we maintain strict oversight of the design and
implementation of our fiber optic communications networks. We utilize only
advanced commercially available fiber. We have ordered a substantial portion of
our fiber optic cable from Lucent Technologies, Inc. However, we believe that we
could obtain advanced fiber from other suppliers on acceptable terms.
Our existing intra-city networks currently consist of approximately 334,000
fiber miles covering 680 route miles in six of our announced markets. Our
inter-city network consists of approximately 110,000 fiber miles covering 255
route miles that we have built between New York City and Washington D.C. We have
also built or acquired, primarily through fiber swaps, a nationwide dark fiber
network linking our intra-city networks.
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We have entered into a forty year agreement with a subsidiary of Racal, a
United Kingdom manufacturer of electronics and other equipment and a provider of
telecommunications services, to create ION, a joint venture in which we hold a
50% equity interest. ION has obtained transatlantic fiber optic cable rights on
Gemini and AC-1 which link our New York network to London, England. Through ION,
we are able to offer our customers seamless broadband transatlantic
communications services between New York and London. Under the ION joint venture
agreement, each party may contribute additional capital as agreed by the
parties. In May 1998, ION was awarded a 25 year term contract in excess of $25
million from a leading provider of undersea cable capacity to provide inland
capacity services from such provider's undersea cable landing stations in the
U.K. and the U.S.
We have also entered into an agreement with Carrier 1 Holdings, Ltd and
Viatel, Inc., to develop jointly approximately 291,000 fiber miles covering
1,350 route miles that will connect 14 of Germany's largest cities such as
Hamburg, Berlin, Munich, Frankfurt and Dusseldorf. We have also signed an
agreement with Viatel pursuant to which we would receive the right to use
approximately 3,880 fiber miles covering approximately 970 route miles on
Viatel's network in France, Germany, The Netherlands and the United Kingdom. Our
networks will be high-capacity broadband networks capable of supporting
high-quality voice, video, internet protocol and data traffic and built using a
self-healing SONET architecture.
THE ABOVENET INTERNET SERVICE EXCHANGE
Our Internet service exchanges provide co-location services, Internet
connectivity services, network management services and tools. Our Internet
service exchanges are designed to provide customers with the high performance,
scalability, connectivity, security, reliability and expertise they need to
enhance their business critical Internet applications. We create solutions for
our customers based on their specific business and technical requirements,
modifying the services as each customer's needs evolve. Our Internet related
services are primarily delivered through centralized campuses located near MAE
West and MAE East. Our New York facility is connected to our facility located
near MAE East by high speed, high capacity fiber optic cable. This facility is
intended to facilitate access to European Internet traffic. Our management
services and tools enable us and our customers to continuously manage their
Internet operations jointly, proactively and remotely.
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INTERNET CONNECTIVITY
Our Internet connectivity services are designed to meet the requirements of
high bandwidth, business critical Internet operations by providing highly
reliable, scalable, non-stop and uncongested operations. On June 30, 1999,
AboveNet had peering relationships with more than 270 network providers,
covering over 700 peering points. Any failure by AboveNet to maintain and
increase peering relationships would have a material adverse effect on our
business, results of operations and financial condition.
Our network is designed to minimize the likelihood of service interruptions.
Each ISX has multiple physical fiber paths into the facility. We maintain
multiple network links from multiple vendors and regularly check that our
network traffic traverses physically separated paths. This network architecture
enhances the availability of a customer's site, even in the event of a link
failure. In addition, since our customers' Internet operations often experience
network traffic spikes due to promotions or events, we have a policy of
maintaining significant excess capacity. We might not be able to expand or adapt
our telecommunications infrastructure to meet additional demand or our
customers' changing requirements on a timely basis and at a commercially
reasonable cost, or at all.
Our Internet connectivity services are also designed to reduce latency and
to enhance network performance. Our engineering personnel continuously monitor
traffic patterns and congestion points throughout the Internet and dynamically
reroute traffic flows to improve end-user response times. We also enhance
network performance by maintaining what we believe is among the largest number
of direct public and private network peering interconnections in the industry.
For customers seeking a direct communications link to the site of another
customer that is located at the same ISX, we offer highly secure, fast and
efficient cross-connections.
CO-LOCATION SERVICES
We provide co-location services designed to meet the demands of
sophisticated, multi-vendor business critical Internet operations. We support
most leading Internet hardware and software system vendor platforms, including
those from Ascend Communications, Inc., Nortel Networks, Cisco Systems, Inc.,
Compaq Computer Corporation, Dell Computer Corporation, EMC Corporation,
Hewlett-Packard Company, International Business Machines Corporation, Lucent
Technologies Inc., Microsoft Corporation, Apple Computer, Inc., Network
Appliance, Inc., Silicon Graphics Inc., Sun Microsystems Inc. and 3Com
Corporation. This multi-vendor compatibility enables our customers to retain
control over their choice of technical solution and to integrate their Internet
operations into our existing information technology architecture. Because
business critical Internet operations are dynamic and often require timely
hardware and software upgrades to maintain targeted service levels, customers
have twenty-four hours a day, seven days a week physical and remote access to
the ISX facilities. Additional space and electrical power can be added as needed
in order to provide our customers with access to additional server co-location
services. Customers install and manage their own hardware and software at our
facilities. We do not provide any Web hosting services.
MANAGEMENT SERVICES AND TOOLS
Our management services and tools support business critical Internet
operations by providing the customer with detailed monitoring, reporting and
management tools to control their hardware, network, software and application
environments. Through our network management services and tools, customers are
able to remotely manage their business critical Internet operations housed at
our ISX facilities. We believe that this provides an important advantage to
enterprises that seek to outsource a portion of their Internet operations and to
link the management of the outsourced operations with in-house operations. Our
proactive management services and tools enable us to identify and resolve
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hardware, software, network and application problems, often before the customer
is aware that a problem exists.
INTERNATIONAL INTERNET SERVICE EXCHANGES
We are seeking to create a global network by investing in joint ventures and
foreign companies that can develop regional Internet service exchanges
internationally. In March 1999, AboveNet entered into agreements with local
partners to establish regional Internet service exchanges in Austria, Germany
and the United Kingdom. We intend to continue to expand our European network
through additional investments in joint ventures in other major business centers
and countries with high levels of Internet traffic. We plan to leverage our
communications infrastructure in Europe, in a similar manner to our market
entrants in the future. We believe that participants in this market must grow
rapidly and achieve a significant presence in the market in order to compete
effectively. We believe that the principal competitive factors in our market are
uncongested connectivity, quality of facilities, level of customer service,
price, the financial stability and credibility of the provider, brand name and
the availability of network management tools. We might not have the resources or
expertise to compete successfully in the future.
TECHNOLOGY
Our networks consist of fiber optic communications networks which allow for
high speed, high quality transmission of voice, data and video. Fiber optic
systems use laser-generated light to transmit voice, data and video in digital
formats through ultra-thin strands of glass. Fiber optic systems are generally
characterized by large circuit capacity, good sound quality, resistance to
external signal interference and direct interface to digital switching equipment
or digital microwave systems. We plan to install backbone fiber optic cables
containing up to 864 fiber optic strands, which have significantly greater
bandwidth than traditional analog copper cables. Using current electronic
transmitting devices, a single pair of glass fibers used by our network can
transmit up to 8.6 gigabits of data per second or the equivalent of
approximately 129,000 simultaneous voice conversations, which is substantially
more than traditional analog copper cable installed in many current
communications networks. We believe that continuing developments in compression
technology and multiplexing equipment will increase the capacity of each fiber
optic strand, thereby providing more bandwidth carrying capacity at relatively
low incremental costs. Our network is capable of using the highest commercially
available capacity transmission (OC-192) and thereby can handle advanced,
capacity-intensive data applications such as voice over Internet Protocol, video
teleconferencing, Frame Relay, ATM, multimedia and Internet-related
applications. In our intra-city networks, we offer end-to-end fiber optic
capacity, capable of utilizing SONET capable ring architecture, which has the
ability to route customer traffic in either direction around its ring design
thereby assuring that fiber cuts do not interrupt service to customers on our
networks. Our networks are also capable of supporting dense wave division
multiplexing (often referred to as "DWDM"). Currently, a state-of-the-art
network operating system continuously monitors and maintains quality control of
networks on a 24-hour basis, alerts us of any degradation or loss of fiber
capacity and pinpoints the location of such degradation. This network operating
system also enables us to repair or replace impaired fiber without any loss of
service. In addition, the monitoring system automatically reroutes traffic in
the event of a catastrophic break in the system, enabling us to ensure that our
customers obtain continuous service.
Our connectivity services utilize our proprietary ASAP technology to enhance
Internet connectivity by monitoring all of our direct and indirect network
connections for congestion. ASAP automatically monitors all of our major
providers' and peers' direct and indirect connections on a real-time 24-hour
basis to identify congestion. If packet loss and congestion is detected on any
of the links that directly affect customers' performance, our network engineers
are able to dynamically reroute traffic
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temporarily away from the problem link. This functionality is particularly
important for emerging applications such as audio and video streaming and voice
over the Internet.
FRANCHISE, LICENSE AND RELATED AGREEMENTS
When we decide to build a fiber optic communications network, our corporate
development staff seeks to obtain the necessary rights-of-way and governmental
authorizations. In some jurisdictions, a construction permit is all that is
required. In other jurisdictions, a license agreement, permit or franchise is
also required. Such licenses, permits and franchises are generally for a term of
limited duration. Where possible, rights-of-way are leased under multi-year
agreements with renewal options and are generally non-exclusive. We lease
underground conduit and pole space and other rights-of-way from entities such as
ILECs, utilities, railroads, IXCs, state highway authorities, local governments
and transit authorities. We strive to obtain rights-of-way that afford us the
opportunity to expand our communications networks as business develops.
SALES AND MARKETING
Our sales and marketing strategy includes:
- positioning ourselves as the preferred facilities based provider of
broadband communications infrastructure and Internet connectivity
services;
- focusing on high dollar volume corporate and government customers;
- emphasizing the cost advantages which will allow us to lease our fiber
optic infrastructure at fixed prices which represent potentially
significant savings for our large volume carrier and corporate customers
relative to their present build or buy alternatives;
- achieve broad market penetration and increase brand recognition for our
Internet connectivity services among Internet service providers, Internet
content providers and Web hosting companies; and
- identify opportunities to cross sell our Internet connectivity services to
our complementary infrastructure customer base.
We also believe that communications carriers and corporate and government
customers will be attracted to our dark fiber product and our unmetered pricing
structure. Dark fiber is installed fiber optic cable which is not otherwise
carrying a signal originated by the service provider, such as our company, but
which will carry a signal generated by the customer. We intend initially to
centralize our sales and marketing efforts on carrier customers through a
national sales team and we are currently in the process of hiring additional
sales professionals to focus on these customers. As we have constructed fiber
optic networks in new cities, we have hired sales forces in these areas to
target regional corporate, government and to a lesser extent carrier customers
and we plan to continue this strategy.
For our Internet connectivity services, we have developed a two-tiered sales
strategy to target leading Internet service providers, Internet content
providers and Web hosting companies through direct sales and channel
relationships. We maintain a direct sales force of highly trained individuals in
San Jose, California and Vienna, Virginia. Our sales force is supported by our
sales engineers and, in many circumstances, by our senior management. We are
also seeking to develop relationships with potential channel partners including
hardware vendors, value added resellers, system integrators, application hosting
and Web hosting companies in order to leverage their sales organizations.
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COMPETITION
Fiber optic systems are currently under construction both locally and
nationally. In New York City, for example, several franchisees have been granted
the right to install and operate a telecommunications network within the city.
Development of fiber optic networks is also continuing on a national scale. The
construction of these networks enables their owners to lease access to their
networks to other communications carriers or large corporate or government
customers seeking high bandwidth capacity, without these customers having to
incur costly expenditures associated with building networks of their own.
Alternatively, some network owners may choose to use their infrastructure to
provide switched voice and data services, competing directly with ILECs and
IXCs. Currently, we do not provide such services or plan to provide such
services.
In the cities where we plan to deploy fiber optic communications networks,
we face significant competition from the ILECs, which currently dominate their
local communications markets. We also face competition from CLECs and other
potential competitors in these markets and will face competition in the cities
in which we plan to build our networks. Many of our competitors have financial,
management and other resources substantially greater than ours, as well as other
competitive advantages over us, including established reputations in the
communications market.
Various communications carriers already own fiber optic cables as part of
their communications networks. Accordingly, each of these carriers could, and
some do, compete directly with us in the market for leasing fiber capacity. In
addition, although CLECs generally provide a wider array of services to their
customers than we presently provide to our customers, CLECs nevertheless
represent an alternative means by which our potential customer could obtain
direct access to an IXC POP or other site of the customer's choosing. Thus,
CLECs could compete with us.
Some communications carriers and local cable companies have extensive
networks in place that could be upgraded to fiber optic cable, as well as
numerous personnel and substantial resources to undertake the requisite
construction to so equip their networks. To the extent that communications
carriers and local cable companies decide to equip their networks with fiber
optic cable, they are potential direct competitors provided that these
competitors are willing to offer this capacity to all of their customers.
We believe that as competition in the local exchange market develops, a
fundamental division between the needs of corporate, governmental and
institutional end users and residential end users will drive the creation of
differentiated communications services and service providers. We believe that
the CLECs, IXCs, ISPs, wireless carriers and corporate and government customers
on which we focus will have distinct requirements, including maximum
reliability, consistent high quality transmissions, capacity for high-speed data
transmissions, diverse routing and responsive customer service. We believe that
we will be able to satisfy the needs of such customers.
Our Internet connectivity services business is intensely competitive. There
are few substantial barriers to entering the co-location service business, and
we expect that we will face additional competition from existing competitors and
new market entrants in the future. We believe that participants in this market
must grow rapidly and achieve a significant presence in the market in order to
compete effectively. We believe that the principal competitive factors in this
market are uncongested connectivity, quality of facilities, level of customer
service, price, the financial stability and credibility of the provider, brand
name and the availability of network management tools. AboveNet might not have
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the resources or expertise to compete successfully in the future. Our current
and potential competitors in this market include:
- providers of co-location services, such as Exodus Communications, Inc.,
Frontier Corporation, which has entered into an agreement to be acquired
by Global Crossing Ltd., Hiway Technologies, Inc., which was acquired by
Verio Inc., and Globix Corporation;
- national and regional ISPs, such as Concentric Network Corporation,
PSINet, Inc., MCI WorldCom and certain subsidiaries of GTE Corporation;
- global, regional and local telecommunications companies, such as Sprint,
MCI WorldCom and Regional Bell Operating Companies, some of whom supply
capacity to AboveNet; and
- large information technology outsourcing firms, such as International
Business Machines Corporation and Electronic Data Systems.
REGULATION
As a provider of communications facilities, we are subject to varying
degrees of regulation in each of the jurisdictions in which we operate. In the
United States, some aspects of our services are regulated by the Federal
Communications Commission (the "FCC") and various state regulatory bodies. In
some local jurisdictions, we must obtain approval to operate or construct our
networks. In other countries where we operate we may also be subject to
regulations by the agencies having jurisdiction over the provision of
telecommunications services.
FEDERAL
In the United States, federal telecommunications law directly shapes the
market in which we compete. We offer two types of services--the leasing of dark
fiber and the provision of telecommunications transmission services--that are
subject to varying degrees of regulation by the FCC pursuant to the provisions
of the Communications Act of 1934, as amended, including by the
Telecommunications Act of 1996 (the "Communications Act"), and the FCC
regulations implementing and interpreting the Communications Act.
The Communications Act imposes legal requirements on "common carriers" who
engage in "interstate or foreign communication by wire or radio" and on
"telecommunications carriers." Telecommunications carriers, or common carriers,
are providers of telecommunications services, which is defined by the
Communications Act as the offering of telecommunications for a fee "directly to
the public" or to all potential users of an indiscriminate basis subject to
standardized rates, terms, and conditions.
DARK FIBER LEASING. We believe that we are not a "telecommunications
carrier" or "common carrier" with respect to our leasing of dark fiber
facilities, and therefore that our dark fiber activities are not subject to
special legal requirements applicable to such carriers. First, we do not believe
that the leasing of dark fiber is a "telecommunications service" that is subject
to FCC regulation. The FCC generally regulates "communication by wire or radio"
or the "transmission" of "information of the users' choosing," neither of which
describes the leasing of dark fiber facilities. Second, we do not offer dark
fiber facilities as a common carrier, I.E., to all potential users on an
indiscriminate basis. Instead, we enter into individualized negotiations on a
selective basis with prospective lessees of our dark fiber facilities to
determine whether and on what terms to serve each potential lessee. Our dark
fiber offerings should therefore not be subject to the common carrier
jurisdiction of the FCC or to the common carrier provisions of the
Communications Act.
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If our offering of dark fiber facilities were deemed to constitute
"telecommunications," then our revenues from such leases to end users (but not
to other telecommunication carriers), whether or not provided on a common
carrier basis, would become subject to assessment for the FCC's Universal
Service Fund, a fund that was established by the FCC pursuant to the
Telecommunications Act of 1996 (the "1996 Act") to assist in ensuring the
universal availability of basic telecommunications services at affordable
prices, and other FCC assessments. The FCC announced that the rate of assessment
will be approximately 3.9% of gross interstate and 1% of gross intra-state
end-user revenues for the third quarter of 1999. On July 30, 1999, the U.S.
Court of Appeals for the Fifth Circuit upheld in part the FCC's order but
determined that assessments must be limited to interstate revenues. We cannot
predict the effect of this ruling on the rate of assessment, or what rates of
assessment will apply in future years. We may also be liable for assessments by
state commissions for state universal service programs.
TRANSMISSION SERVICES. With respect to our offering of telecommunications
services, however, we will likely operate as a common carrier, offering such
transmission services to all potential users indiscriminately, and therefore
will be subject to the regulatory requirements applicable to common carriers and
to telecommunications carriers. For example, we will be required, with respect
to our transmission services, to (1) provide such services indiscriminately upon
any reasonable request; (2) charge rates and adopt practices, classifications
and regulations that are just and reasonable; and (3) avoid unreasonable
discrimination in charges, practices, regulations, facilities and services. We
may also be required to file tariffs setting forth the rates for our services.
Under current FCC policies, these regulatory requirements should not impose any
substantial burdens on us. The FCC has recently determined, for example, that
providers of "access" services (intracity transmission services used to
originate and/or terminate interstate and foreign communications) need not file
tariffs and may offer such services to customers on a private, contractual
basis. Our revenues from transmission services will also be subject to FCC
Universal Service Fund assessments as discussed above, to the extent that these
services are purchased by end users. Since the revenues of our competitors will
be subject to comparable assessments, this should not reduce our
competitiveness. Also, being regulated as a "telecommunications carrier" will
give us certain legal benefits. In particular, we will be entitled, like other
competitive local exchange carriers (often referred to as "CLECs"), to insist
upon access to the existing telecommunications infrastructure by interconnecting
our fiber-optic networks with incumbent local exchange carriers (often referred
to as "ILECs") central offices and other facilities. Under the 1996 Telecom Act,
ILECs must, among other things: (i) allow interconnection at any technically
feasible point and provide service equal in quality to that provided to others,
(ii) provide unbundled access to network elements, and (iii) provide access to
their poles, ducts, conduits and other rights-of-way. Our rights as a CLEC may
not extend to cover our dark fiber business (unless our dark fiber business is
considered a telecommunications service). Accordingly, an ILEC may refuse to
interconnect with (or provide the collocation described below) us other than in
connection with our transmission services business.
ILECs must also provide "physical collocation" for other telecommunications
carriers. Physical collocation is an offering by an ILEC that enables another
telecommunications carrier to enter the ILEC's premises to install, maintain and
repair its own equipment that is necessary for interconnection or access to the
ILEC's network elements. An ILEC is required to allocate reasonable amounts of
space to carriers on a first-come first-served basis. If space limitations or
practical or technical reasons prohibit physical collocation, an ILEC must offer
"virtual collocation," by which the other carrier may specify ILEC equipment to
be dedicated to its use and electronically monitor and control communications
terminating in such equipment. We intend, in some instances, to collocate
portions of our network on the premises of certain ILECs. Our ability to do this
on a cost-effective basis will depend on the rates, terms and conditions
established for collocation, which will be established by state regulators in
arbitration proceedings and therefore may vary from one state to the next.
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The FCC has responsibility under the 1996 Telecom Act's interconnection
provisions to determine what elements of an ILEC's network must be provided to
competitors on an unbundled basis. The FCC declared dark fiber an unbundled
network element under these provisions. The FCC's requirements for unbundling
were overturned by the Supreme Court, which ordered the FCC to re-evaluate the
standard it uses to determine which network elements need to be unbundled. In
response, the FCC recently issued an order affirming all but one of the network
elements and also stating for the first time that ILECs must provide access to
dark fiber as a separate element. In addition, federal district courts in a
number of jurisdictions have interpreted the 1996 Telecom Act to include dark
fiber as a network element, which must be unbundled. The FCC decision to treat
dark fiber as an unbundled element, as well as these court rulings, could
decrease the demand for dark fiber provided by us because our potential
customers will be able to obtain dark fiber from ILECs at cost-based rates. In
addition, the FCC has announced that state commissions may decide to add network
elements to the FCC's list of elements that are required to be unbundled by
carriers.
ILECs, CLECs and inter-exchange carriers (often referred to as "IXCs") are
subject to other requirements under the Communications Act, the FCC regulations
and additional federal telecommunications laws. These requirements may affect
our business by virtue of the inter-relationships that exist among us and many
of these regulated telecommunications carriers. For example, the FCC recently
issued an order requiring, among other things, that access charges (fees charged
by ILECs to IXCs for use of local telephone facilities for the origination and
termination of long-distance calls) shift in part from being usage driven to a
fixed flat cost-based structure. The FCC recently issued an order granting ILECs
greater pricing flexibility for their access services (both switched and
non-switched), which may permit the ILECs to compete more effectively against
some of our service offerings. While it is not possible to predict the precise
effect the access charge changes will have on our business or financial
condition, the reforms will reduce access charges paid by IXCs, likely making
the use of ILEC facilities by IXCs more attractive, which could have a material
adverse effect on the use of our fiber optic telecommunications networks by
IXCs. Bell Atlantic's proposed investment could subject us to additional
regulation by the FCC. Bell Atlantic is an ILEC and pursuant to the
Communications Act may not provide long distance service within its geographic
region until certain conditions are met. Companies in which an ILEC owns greater
than a ten percent ownership interest are subject to the same prohibitions. If
such prohibitions applied to us it would have a material adverse effect on our
business. For that reason, our agreement with Bell Atlantic prohibits it from
owning more than ten percent of us until the long-distance prohibitions no
longer apply to Bell Atlantic and its affiliates.
STATE
The 1996 Telecom Act prohibits state and local governments from enforcing
any law, rule or legal requirement that prohibits, or has the effect of
prohibiting, any person from providing any interstate or intrastate
telecommunications service. Nonetheless, this provision of the 1996 Telecom Act
should enable us and our customers to provide telecommunications services in
states that previously prohibited competitive entry.
However, states retain jurisdiction, under the 1996 Telecom Act to, adopt
regulations necessary to preserve universal service, protect public safety and
welfare, manage public rights of way, ensure the continued quality of
communications services and safeguard the rights of consumers.
States continue to determine the rates that ILECs can charge for most of
their intrastate services. They are also responsible for mediating and
arbitrating ILEC interconnection arrangements with other carriers if voluntary
agreements are not reached. Accordingly, state involvement in local
telecommunications services is substantial.
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Each state (and the District of Columbia, which is treated as a state for
the purpose of regulation of telecommunications services) has its own statutory
scheme for regulating providers of telecommunications services of they are
"common carriers" or "public utilities". As with the federal regulatory scheme,
we believe that the offering of dark fiber facilities does not make us of common
carrier or public utility so we would not be subject to this type of regulation
in most jurisdictions in which we currently have or plan to construct
facilities. Our offering of transmission services (as distinct from dark fiber
capacity), however, will likely be subject to regulation in each of these
jurisdictions to the extent that these services are offered for intra-state use.
Even though our facilities will be physically located in individual states, we
anticipate that most customers will use our facilities and services for the
purpose of originating and/or terminating interstate and foreign communications.
Under current FCC policies, any dedicated transmission service or facility that
is used more than 10% of the time for the purpose of inter-state or foreign
communication is subject to FCC jurisdiction to the exclusion of any state
regulation.
State regulation of the telecommunications industry is changing rapidly, and
the regulatory environment varies substantially from state to state. Our
subsidiaries are currently authorized to provide intrastate telecommunications
services in California, Colorado, Connecticut, Delaware, District of Columbia,
Florida, Georgia, Illinois, Maryland, Massachusetts, Missouri, New Jersey, New
York, Oregon, Pennsylvania, Rhode Island, Texas, Virginia, Washington and have
applications pending in Arizona, Minnesota and Ohio. At present, we do not
anticipate that the regulatory requirements to which we will be subject in the
states in which we currently intend to operate will have any material adverse
effect on our operations. These regulations may require, among other things,
that we obtain certification to operate, and that we provide notification of, or
obtain authorization for, certain corporate transactions, such as the
transaction with Bell Atlantic. In any event, we will incur certain costs to
comply with these and other regulatory requirements such as the filing of
tariffs, submission of periodic financial and operational reports to regulators,
and payment of regulatory fees and assessments, including contributions to state
universal service programs. In some jurisdictions, our pricing flexibility for
intra-state services may be limited because of regulation, although our direct
competitors will be subject to similar restrictions. However, we make no
assurances that future regulatory, judicial, or legislative action will not
materially adversely affect us.
Bell Atlantic recently filed an application with the FCC to provide long
distance service in New York on the grounds that it provides access and
interconnection to its network facilities for the network facilities of one or
more unaffiliated competing providers of telecommunications services. The FCC
has until the end of 1999 to approve the application. We hope that Bell Atlantic
will be a significant customer of ours when it enters the long distance market.
LOCAL
In addition to federal and state laws, local governments exercise legal
authority that affect our business. For example, local governments, such as the
City of New York, typically retain the ability to manage public rights-of-way,
subject to the limitation that local governments may not prohibit persons from
providing telecommunications services and local governments may not treat
telecommunication service providers in a discriminatory manner. Because of the
need to obtain approvals, local authorities affect the timing and costs
associated with our use of public rights-of-way. In addition, some local
authorities must approve or be notified of certain corporate transactions, such
as the Bell Atlantic transaction. These regulations may have an adverse effect
on our business.
FEDERAL REGULATION OF INTERNATIONAL SERVICE
Various regulatory requirements and limitations also will influence our
business as we enter the market for international telecommunications service. We
have entered into a 50/50 joint venture, ION, with a subsidiary of Racal that
contemplates jointly acquiring and selling international, facilities-based
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telecommunications capacity between the U.S. and the United Kingdom and possibly
between the U.S. and other markets. ION is a U.S. international common carrier
subject to U.S. regulation under Title II of the Communications Act, and, we are
also a U.S. international common carrier subject to the same regulations. Under
current FCC rules, international carriers that do not exercise market power and
that are not affiliated with dominant foreign carriers (carriers possessing
market power in their local markets) are subject to relatively relaxed U.S.
regulation as nondominant international carriers. As a non-dominant common
carrier, ION and we are subject to, among other policies, the common carrier
obligation of nondiscrimination. In addition, FCC rules prohibit U.S. carriers
from bargaining for special concessions from certain foreign partners. ION and
we are required, under Sections 214 and 203 of the Communications Act to obtain
authorization and file an international service tariff containing rates, terms
and conditions prior to initiating service. As a nondominant carrier, ION and we
are eligible to seek "global" authorization under Section 214 to operate as
facilities-based and/or resale carrier. International carriers are also subject
to certain annual fees and filing requirements, such as the requirement to file
contracts with other carriers, including foreign carrier agreements, and reports
setting forth international circuit, traffic and revenue data. Failure to obtain
an appropriate U.S. license for international service or the revocation of a
license could materially adversely affect our future operations.
Until recently, international common carriers were also required to comply
with the FCC's International Settlements Policy which defines the permissible
boundaries for U.S. carriers and their foreign correspondents to settle the cost
of terminating each other's traffic over their respective networks. The FCC,
however, recently decided that it is no longer necessary to apply the
International Settlement Policy rules to U.S. carrier arrangements with
non-dominant foreign carriers and with arrangements with all foreign carriers in
competitive foreign markets. Since the U.S.-UK route has been declared
competitive by the FCC, we and ION will not have to comply with the
International Settlement Policy.
The FCC has also made significant changes to other aspects of its
international regulatory regime that facilitate our international operations.
For example, it has approved the provisions of switched services over private
lines ("ISR") interconnected with the public switched network between the United
States and 22 other countries, including the UK and Germany. Recently, the FCC
took steps to streamline the application process for authority to provide
international services, relaxing further the rules for almost all international
services to almost all countries (with China, Taiwan, Russia, Saudi Arabia, the
notable exceptions). The FCC continues to refine its international service
rules to promote competition, reflect and encourage liberalization in foreign
countries, and reduce accounting rates toward cost. We are unable to predict how
the FCC will resolve the various pending international policy issues and the
effect of such resolutions on us.
REGULATION OF INTERNATIONAL OPERATIONS
Our international services are also subject to regulation in other countries
where we operate. Such regulation, as well as policies and regulations on the
European Union level, may impose separate licensing, service and other
conditions on our international service operations, and these requirements may
have a material adverse effect on our ability to operate. In addition to our
joint venture, ION, we have entered into a joint venture with Carrier 1 and
Viatel to develop a fiber network linking Germany's main cities. We also have an
agreement with Viatel to use Viatel's network in France, Germany, the UK and the
Netherlands. The following discussion is intended to provide a general outline
of certain regulations and current regulatory posture in certain foreign
jurisdictions in which we currently operate or intend to operate, and is not
intended as a comprehensive discussion of such regulations or regulatory
posture. Local laws and regulations differ significantly among these
jurisdictions, and, within such jurisdictions, the interpretation and
enforcement of such laws and regulations can be unpredictable.
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THE EUROPEAN UNION
The European Union (the "EU") was established by the Treaty of Rome and
subsequent treaties. EU member states are required to implement directives
issued by the European Commission (the "EC") and the European Council by passing
national legislation. The EC and European Council have issued a number of key
directives establishing basic principles for the liberalization of the EU
telecommunications market. This basic framework has been advanced by a series of
harmonization directives, which include the so-called Open Network Provision
directives and the Licensing Directive of April 1997 and the Interconnection
Directive of June 1997, which address the procedures for granting license
authorizations and conditions applicable to such licenses and the
interconnection of networks and the interoperability of services as well as the
achievement of universal service. The Licensing Directive sets out framework
rules for the procedures associated with the granting of national authorizations
for the provision of telecommunications services and for the establishment or
operation of any infrastructure for the provision of telecommunications
services. It distinguishes between "general authorizations," which should
normally be easier to obtain since they do not require an explicit decision by
the national regulatory authority, and "individual licenses." EU member states
may impose individual license requirements for the establishment and operation
of public telecommunications networks and for the provision of voice telephony,
among other things. Consequently, ION's operations in the U.K., our operation
with respect to the German Network and European Network and our proposed
operations may require that ION or the Company, respectively, be subject to an
individual licensing system rather than to a general authorization in the
majority of EU member states. In some countries where we operate, we may also be
required to contribute to a fund for the provision of universal service. The
United Kingdom and each other EU member state in which ION currently conducts or
we conduct our business has a different regulatory regime and such differences
are expected to continue. The requirement that ION, our former joint venture, or
we obtain necessary approvals varies considerably from country to country.
UNITED KINGDOM
The Telecommunications Act of 1984 (the "U.K. Act") provides a licensing and
regulatory framework for telecommunications activities in the United Kingdom.
The Secretary of State for Trade and Industry at the Department of Trade and
Industry (the "Secretary of Trade") is responsible for granting licenses under
the U.K. Act and for overseeing telecommunications policy, while the Director
General of Telecommunications (the "Director General") and his office (the
Office of Telecommunications ("OFTEL")) are responsible, among other things, for
enforcing the terms of such licenses. Operators wishing to use their own
facilities to provide international services were until recently required to
obtain an International Facilities License ("IFL"). An IFL authorized the
running of telecommunication systems within the U.K. and permitted the licensee
to connect U.K. systems to overseas systems, and to offer international
services. ION obtained an IFL on December 9, 1998.
On September 27, 1999, the Telecommunications (licence Modification) (Fixed
Voice Telephony and International Facilities Operator Licences) Regulations 1999
(the "Regulations") came into force. The Regulations implemented the
requirements of the Licensing Directive and converted existing IFLs, into Public
Telecommunications Operator Licenses ("PTO Licenses") which now include an
authorization for the provision of international facilities. Under its new PTO
License, ION is also entitled to offer domestic telecommunications services.
Metromedia Fiber Network UK Limited ("MFN UK"), which was incorporated by us in
the United Kingdom on March 4, 1999 was awarded a PTO license on October 7,
1999. MFN UK will be used as the operating company in the United Kingdom and has
been granted code powers which gives it statutory rights of way over land which
overide private rights.
With effect from June 30, 1999, it is no longer necessary to hold an
individual telecommunications license to have interconnection rights. Similarly,
it is no longer necessary for an operator to build its
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own infrastructure to be included within the "Annex II list" of operators with
rights and obligations to interconnect pursuant to the Interconnection
Directive. Any operator who appears on the Annex II list on the OFTEL web-site
(www.oftel.gov.uk) has the right to negotiate interconnection as well as a
corresponding obligation to negotiate interconnection with any other operator in
Annex II. The terms, conditions and charges to be applied to interconnection
between operators who do not have significant market power are not specifically
regulated and are therefore subject to commercial agreement. All Annex II
operators are eligible to benefit from the terms and conditions and charges
which fixed-line operators with significant market power are obliged to offer by
the Interconnection Directive. In the United Kingdom, British Telecommunications
and Kingston Communications have significant market power for the provision of
fixed networks and services and leased lines. ION is included in the Annex II
list of operators on OFTEL's web-site and therefore has a right coupled with a
corresponding obligation to negotiate interconnection with any other operator on
the Annex II list. MFN UK is not currently included in the Annex II list but may
apply to OFTEL to be included in the list.
The U.K. Government passed a Competition Act in November 1998 which grants
concurrent powers to the industry specific regulators and the Director General
of Fair Trading for the enforcement of prohibitions against anti-trust behavior
modeled on Articles 81 and 82 of the Treaty of Rome. The Act introduces into
U.K. legislation prohibitions on the abuse of a dominant position and anti-
competitive agreements, and provides for third party rights of action, stronger
investigative powers, interim measures and effective enforcement powers. The
prohibitions are expected to come into force on March 1, 2000. The Act gives the
Director General power to exercise concurrent powers with the Director General
of Fair Trading in relation to "commercial activities connected with
telecommunications." The Act enables third parties to bring enforcement actions
directly against telecommunications operators who are in breach of the
prohibitions contained in the Act and seek damages rather than have to wait for
the Director General to issue an enforcement order. Depending on how these
provisions of the Act are implemented, it may give us and our competitors
greater ability to challenge anti-competitive behavior in the U.K.
telecommunications market.
GERMANY
The German Telecommunications Act of July 25, 1996 (the "German
Telecommunications Act") liberalized all telecommunications activities. Under
the German Telecommunications Act, voice telephony was liberalized as of January
1, 1998. The German Telecommunications Act has been complemented by several
Ordinances. The most significant Ordinances concern license fees, rate
regulation, interconnection, universal service, frequencies and customer
protection. Under the German regulatory scheme, licenses can be granted within
four license classes. A license is required for operation of transmission lines
that extend beyond the limits of a property and that are used to provide
telecommunications services for the general public. The licenses required for
the operation of transmission lines are divided into 3 infrastructure license
classes: mobile telecommunications (license class 1); satellite (license class
2); and telecommunications services for the general public (license class 3).
The provision of dark fiber does not require a license. Beside the
infrastructure licenses, an additional license is required for provision of
voice telephony services on the basis of self-operated telecommunications
networks (license class 4). A class 4 license does not include the right to
operate transmission lines. According to the License Fees Ordinance, a
nationwide class 4 license costs a one-time fee of DM 3,000,000. The costs for a
territorial class 3 license will be determined by the Regulierungsbehorde fur
Telekommunikation und Post (the "RegTP") and is dependent on the population and
the geographical area covered by the territorial class 3 license. A nationwide
territorial class 3 license costs DM 10,600,000. The Administrative Court of
Cologne held in a preliminary ruling that there is a high probability that the
license fees are excessive and that therefore the Ordinance might be void. The
RegTP does not invoice any license fees at the present time in view of the
pending administrative court procedure. Since we have not yet received a license
fee order, it is presently unclear what the amount of our license fee will be.
Licensees that operate transmission lines crossing
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the boundary of a property have the right to install transmission lines on, in
and above public roads, squares, bridges and public waterways without payment;
however, when installing transmission lines a planning agreement must be
obtained from the relevant authorities.
A company which operates a public telecommunications network has the right
to receive favorable interconnection rates from Deutsche Telekom, as a dominant
carrier. If the company does not agree with the offered rates or Deutsche
Telekom refuses to interconnect for whatever reason, the company can refer the
case to the RegTP which shall decide upon the request for interconnection within
a period of six weeks; if the RegTP decides to extend this deadline, it must at
the latest decide within ten weeks of the request. Whether, and under which
conditions, carrier to carrier operators will receive favorable interconnection
rates or less favorable "special network access rates" from Deutsche Telekom
depends on whether they operate a "public telecommunications network."
According to the regulatory authority, a public telecommunication network
consists of at least one switch and three transmission lines. Therefore, a
carrier with this minimal network configuration has the right to interconnect
with Deutsche Telekom or other operators of public telecommunications networks.
Deutsche Telekom has terminated its Interconnection Agreements with most of the
carriers and is now imposing, in its new standard interconnection contracts,
additional interconnection conditions. Deutsche Telekom demands inter alia, that
carriers which do not meet certain minimum traffic requirements must pay a
stipulated penalty. In addition, Deutsche Telekom requests a minimum lease
period for interconnection access points (often referred to as "ICA") of
24 months. If traffic at one point of interconnection exceeds 48.8 Erlang,
Deutsche Telekom requests the establishment of additional points of
interconnection up to a maximum of 23 points of interconnection. It is presently
unclear whether or not these and other interconnection conditions will be upheld
by the regulatory authority or the courts.
The rates of Deutsche Telekom's services in conjunction with interconnection
and special network access are subject to regulatory approval; this approval is
typically granted for a limited period of time. The current approval expires on
December 31, 1999. It is uncertain which interconnection rates will apply to the
next year.
Licensed operators are under an obligation to present their standard terms
and conditions (with regard to the provision of telecommunications services for
the public) to the RegTP. The RegTP may, based upon certain criteria decide not
to accept these terms and conditions. We may become subject to universal service
financing obligations. Currently, it is unlikely that the universal service
financing system will be implemented in Germany in the foreseeable future. These
obligations do not apply as far as the provision of mere dark fiber is
concerned.
Metromedia Fiber Network GmbH has obtained a class 3 license for the whole
territory of Germany. In addition, Metromedia Fiber Network GmbH has concluded
frameworks agreements with the cities of Frankfurt, Stuttgard and Cologne on the
conditions and procedures for obtaining the necessary planning agreements with
the city authorities.
OTHER EUROPEAN COUNTRIES
In addition to our United Kingdom and German operations, we have
incorporated local subsidiaries in Belgium, France and The Netherlands. We are
currently in the process of incorporating local subsidiaries in Austria, The
Czech Republic, France, Hungary, Ireland, Italy, Japan, Spain and Switzerland.
In the Netherlands, the local subsidiary has registered with the Dutch
regulator. We are in the process of applying, through our local subsidiaries,
for necessary licenses and registrations in the other above mentioned countries
to enable us to provide dark fiber and DWDM services.
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EMPLOYEES
As of September 30, 1999, we employed 529 people, including 262 in
engineering and construction, 168 in sales and marketing and 99 in
administration. Our employees are not represented by any labor union. We
consider our relationship with employees to be good.
PROPERTIES
Our principal properties currently are the NY Network and its component
assets. We own substantially all of the communications equipment required for
our business. Our installed fiber optic cable is laid under the various
rights-of-way held by us. Please refer to the section of this prospectus
supplement entitled "--Build-out of Networks--Rights-of-Way." Our other fixed
assets are located at various leased locations in the geographic areas that we
serve. Our executive and administrative offices are located at our principal
office at One North Lexington Avenue, White Plains, New York. We lease this
space (currently approximately 21,000 square feet) under an agreement that
expires in March 2003. Our sales offices are located at 685 Third Avenue, New
York, New York. We lease this space (approximately 9,670 square feet) under an
agreement that expires in September 2003. We lease additional space (currently
8,710 square feet) at 60 Hudson Street, New York, New York, from Hudson
Telegraph Associates under an agreement that expires in March 2010.
AboveNet's executive and administrative offices are located at 50 West San
Fernando Street, San Jose, California. We lease this space (approximately 19,850
square feet) under an agreement that expires in February 2008. Palo Alto
Internet Exchange's executive and administrative offices are located at 285
Hamilton Avenue, Palo Alto, California (approximately 5,130 square feet) under
an agreement that expires in January 2007. In addition, AboveNet and Palo Alto
Internet Exchange lease various co-location facilities in California, Virginia
and New York that range from 10,000 to 29,000 square feet under agreements that
expire within the next 10 to 20 years.
LEGAL PROCEEDINGS
On or about October 20, 1997, VCNY commenced an action against us, 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, VCNY filed an amended
complaint. On or about July 2, 1999, VCNY filed a second amended complaint. In
its complaint, as amended, VCNY alleges seven causes of action in connection
with its sale 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 seven causes of action include: (i) violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated under such Act;
(ii) fraud and fraudulent concealment; (iii) breach of fiduciary duty;
(iv) negligent misrepresentation and omission; and (v) breach of contract. VCNY
is seeking, among other things, rescission of the VCNY Sale, or alternatively,
damages in an amount which cannot currently be ascertained but VCNY contends to
be in excess of $460 million, together with interest. VCNY is also seeking
unspecified punitive damages, reasonable legal fees and the cost of this action.
All the defendants, including us and Stephen A. Garofalo, have moved for summary
judgment on VCNY's second amended complaint.
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).
Mr. Contardi alleges a cause of action for, among other things, breach of a
finder's fee agreement entered into between Mr. Sahagen and Mr. Contardi on or
about November 14, 1996 and breach of an implied covenant of good faith and fair
dealing
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contained in the finder's fee agreement. Mr. Contardi is seeking, among other
things, a number of shares of the Company which we cannot currently ascertain
but believe to be approximately 112,500 shares (calculated as of the date on
which the complaint was filed) or damages in an amount which we cannot currently
ascertain but believe to be approximately $4.9 million (calculated as of the
date on which the complaint was filed) and all costs and expenses incurred by
him in this action. We have filed an answer to the complaint and have raised
affirmative defenses. We have moved for summary judgment on the complaint.
We intend to vigorously defend both these actions because we believe that we
acted appropriately in connection with the matters at issue in these two cases.
However, we can make no assurances that we will not determine that the
advantages of entering into a settlement outweigh the risk and expense of
protracted litigation or that ultimately we will be successful in defending
against these allegations. If we are unsuccessful in defending against these
allegations, an award of the magnitude being sought in the VCNY Litigation would
have a material adverse effect on our financial condition or results of
operations.
We were a defendant in Howard Katz, et al. v. Metromedia Fiber Network,
Inc., et al., No. 97 Civ. 2764 (the "Katz Litigation"). In their second amended
complaint, Howard Katz, Realprop Capital Corporation and Evelyn Katz
(collectively, the "Katz Entities") alleged causes of action against our
company, Stephen A. Garofalo, Peter Sahagen, Peter Silverman, Silverman,
Collura, Chernis & Balzano, P.C. and Metromedia Company, in connection with the
repurchase of the Katz Securities, as defined, for, among other things, common
law fraud, violations of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated under such Act, breach of fiduciary duty and
negligent misrepresentation. In March 1998, we entered into a settlement
agreement with the Katz Entities which, among others, settled and resulted in
the dismissal of the Katz Litigation.
In addition, we are subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, we
believe that none of such current claims, or proceedings, individually or in the
aggregate, including the VCNY Litigation and the Contardi litigation, will have
a material adverse effect on our financial condition or results of operations,
although we can make no assurances in this regard.
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MANAGEMENT
The directors and executive officers of our company and their ages as of the
date of this prospectus supplement are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ---- -------- -------------
<S> <C> <C>
Stephen A. Garofalo........ 48 Chairman of the Board and Chief Executive Officer
Howard M. Finkelstein...... 46 President, Chief Operating Officer and Director
Vincent A. Galluccio....... 53 Senior Vice President and Director
Gerard Benedetto........... 42 Senior Vice President--Chief Financial Officer
Nicholas M. Tanzi.......... 40 Senior Vice President--Sales and Marketing
Silvia Kessel.............. 49 Executive Vice President and Director
John W. Kluge.............. 85 Director
David Rand................. 36 Director; Chief Technology Officer of AboveNet
David Rockefeller.......... 83 Director
Stuart Subotnick........... 56 Director
Sherman Tuan............... 45 Director; Chief Executive Officer of AboveNet
Arnold L. Wadler........... 56 Executive Vice President, General Counsel, Secretary and
Director
Leonard White.............. 60 Director
</TABLE>
STEPHEN A. GAROFALO founded our company in April 1993. Mr. Garofalo has been
serving as Chairman of the Board of Directors since our inception and as Chief
Executive Officer since October 1996. Mr. Garofalo served as President from 1993
to 1996 and as Secretary from 1993 to 1997. From 1979 to 1993 Mr. Garofalo
served as president and chief executive officer of F. Garofalo Electric Co.,
Inc., an electrical contractor.
HOWARD M. FINKELSTEIN has been President, Chief Operating Officer and a
Director of our company since April 1997. Prior to joining our company,
Mr. Finkelstein was employed by various affiliates of Metromedia Company for 16
years. His most recent position was as executive vice president and chief
operating officer of Metromedia International Telecommunications, Inc. From 1984
to 1993, Mr. Finkelstein served as president of Metromedia Communications
Corporation, a national long distance telecommunications carrier. In addition,
Mr. Finkelstein served as executive vice president and chief operating officer
of Metromedia Restaurant Group from 1993 to 1995. Mr. Finkelstein is a director
of Multimedia Medical Systems, Incorporated, a privately held company.
VINCENT A. GALLUCCIO has been a Director of our company since
February 1997. Prior to joining our company, Mr. Galluccio served as president
of ION since February 1998 and as a senior vice president since December 1995.
From January 1992 to October 1994, Mr. Galluccio was employed by British
Telecommunications plc, as a global sales manager for network outsourcing
operations. Prior to joining British Telecommunications plc, Mr. Galluccio spent
25 years with International Business Machines Corporation in various sales,
marketing and business development positions and was involved in both domestic
and world trade assignments.
GERARD BENEDETTO has been Senior Vice President--Chief Financial Officer
since February 1998. From July 1995 to January 1998, he was vice
president--chief accounting officer at Metromedia International
Telecommunications, Inc. From October 1993 to July 1995, he was vice
president--chief financial officer at Metromedia Restaurant Group. From
February 1985 to October 1993, he was vice president--chief financial officer at
Metromedia Communications Corporation.
NICHOLAS M. TANZI has been Senior Vice President--Sales and Marketing since
August 1997. From March 1995 to July 1997, he served as vice
president--enterprise networks division at Fujitsu Business Communications
Systems. From April 1993 to February 1995, Mr. Tanzi was director of sales,
Eastern
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Region at Asante Technologies Inc. Mr. Tanzi was employed in various capacities
from November 1979 through October 1993 at Digital Equipment Corporation.
SILVIA KESSEL has served as a Director of our company since July 1997 and as
Executive Vice President since October 1997. Ms. Kessel has served as chief
financial officer and treasurer of Metromedia International Group, Inc. since
1995 and executive vice president of Metromedia International Group, Inc. since
1996. In addition, Ms. Kessel served as executive vice president of Orion
Pictures Corporation, a motion picture production and distribution company, from
January 1993 through July 1997, senior vice president of Metromedia Company
since 1994 and president of Kluge & Company since January 1994. Prior to that
time, Ms. Kessel served as senior vice president and a director of Orion
Pictures Corporation from June 1991 to November 1992 and managing director of
Kluge & Company from April 1990 to January 1994. Ms. Kessel is executive vice
president and a member of the Board of Directors of Big City Radio, Inc. and of
Metromedia International Group, Inc. In addition, Ms. Kessel is a director of
Liquid Audio, Inc.
JOHN W. KLUGE has been a Director of our company since July 1997. Mr. Kluge
has been the president and chairman of Metromedia Company and its
predecessor-in-interest, Metromedia, Inc., for over five years. Mr. Kluge has
been the chairman of the Board of Metromedia International Group, Inc. since
1995. In addition, Mr. Kluge has been chairman of the Board of Directors and a
director of Orion Pictures Corporation from 1992 until July 1997. He also serves
as a director of Conair Corporation and Occidental Petroleum Corporation.
DAVID RAND has served as a Director of our company since September 1999. Mr.
Rand has served as AboveNet's Chief Technology Officer since March 1996,
initially as a consultant, and since May 1998 as an employee. Mr. Rand has
served as a member of the Internet Engineering Task Force for the past seven
years. Mr. Rand authored rfc 1962 and rfc 1663, developed the EtherValve
technology, ASAP and APS, as well as co-developed MRTG. From September 1995 to
May 1998, Mr. Rand was an engineer at Cisco Systems, Inc., a router
manufacturer. From February 1994 to August 1995, Mr. Rand was an engineer at
Innovative Systems and Technologies, a video compression company. From
October 1993 to February 1994, Mr. Rand was a software engineer at
Novell, Inc., a network server company.
DAVID ROCKEFELLER has served as a Director of our company since
October 1997. Mr. Rockefeller currently serves as chairman of The Chase
Manhattan Bank's International Advisory Committee, as chairman of Rockefeller
Center Properties, Inc. (since 1995) and as a director of Rockefeller & Co.,
Inc. (since 1994), a privately owned investment management firm and its parent
corporation, Rockefeller Financial Services. From 1961 to 1981, Mr. Rockefeller
served as chairman of The Chase Manhattan Corporation and The Chase Manhattan
Bank, N.A. From 1981 to 1995, he served as chairman of Rockefeller Group, Inc.
STUART SUBOTNICK has served as a Director of our Company since July 1997.
Mr. Subotnick has been the vice chairman of the Board of Directors of Metromedia
International Group, Inc. since 1995 and president and chief executive officer
of Metromedia International Group, Inc. since December 1996. In addition,
Mr. Subotnick served as vice chairman of the Board of Directors of Orion
Pictures Corporation from 1992 until July 1997. Mr. Subotnick has served as
executive vice president of Metromedia Company and its predecessor-in-interest,
Metromedia, Inc., for over five years. Mr. Subotnick has served as vice chairman
of Metromedia International Group, Inc. since November 1995 and president and
chief executive officer of Metromedia International Group, Inc. since November
1996. Mr. Subotnick is also a director of Carnival Cruise Lines, Inc. and
chairman of the Board of Directors of Big City Radio, Inc.
SHERMAN TUAN, the founder of AboveNet, has served as a Director of our
company since September 1999. Mr. Tuan has served as Chief Executive Officer and
a Director of AboveNet since 1996, and President until January 1998. Mr. Tuan
served as chairman of the board of AboveNet from
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August 1998 to September 1999. Mr. Tuan was president of InterNex Information
Services, Inc., an Internet infrastructure provider, from November 1994 to
October 1995 and from February 1994 to November 1995, was president of Tiara
Computer, Inc., a network equipment manufacturer, which merged with InterNex
Information Services, Inc. in November 1994. From January 1992 to June 1993,
Mr. Tuan was vice president of worldwide sales and marketing of Primus
Technologies, Inc., a provider of problem resolution and knowledge management
software, and president of Celerite Graphics, Inc., a manufacturer of video
chips. Mr. Tuan received an electrical engineering degree from Feng-Chia
University in Taiwan.
ARNOLD L. WADLER has served as our Executive Vice President, General Counsel
and Secretary since October 1997 and has served as a Director of our company
since July 1997. Mr. Wadler has served as executive vice president, general
counsel and secretary of Metromedia International Group, Inc. since August 29,
1996 and, from November 1, 1995 until that date, as senior vice president,
general counsel and secretary of Metromedia International Group, Inc. and as the
executive vice president, general counsel, secretary and director of Big City
Radio, Inc. since December 1997. In addition, Mr. Wadler serves as a director of
Metromedia International Group, Inc. and has served as a director of Orion
Pictures Corporation from 1991 until July 1997 and as senior vice president,
secretary and general counsel of Metromedia Company, and its
predecessor-in-interest, Metromedia, Inc., for over five years.
LEONARD WHITE has served as a Director of our company since October 1997.
Mr. White has served as president and chief executive officer of Rigel
Enterprises since July 1997. Mr. White served as president and chief executive
officer of Orion Pictures Corporation from 1992 until 1997 and as president and
chief executive officer of Orion Home Entertainment Corporation from 1987 to
1992. Mr. White also serves as a director of Metromedia International Group,
Inc., Big City Radio, Inc. and American Film Technologies, Inc.
BOARD OF DIRECTORS
There are presently eleven members on the Board of Directors of our company.
Holders of the class B common stock are entitled to elect 75% of the Board of
Directors and holders of the class A common stock are entitled to vote as a
separate class to elect the remaining directors. Currently, eight of the eleven
directors are nominees of the holders of class B common stock and as a result
holders of the class A common stock are entitled to fill three vacancies on the
Board of Directors. Members of each class of directors will hold office until
their successors are elected and qualified. The directors are elected by a
plurality vote of all votes cast at each annual meeting of the stockholders
entitled to vote for such directors and hold office for a one-year term.
COMPENSATION OF DIRECTORS
During 1999, each director of our company who was not an officer, employee
or affiliate of our company (the "Non-Employee Directors") will be entitled to
receive a $20,000 annual retainer plus a separate attendance fee of $1,200 for
each meeting of the Board of Directors attended by a Non-Employee Director in
person or $500 for each meeting of the Board of Directors in which a Non-
Employee Director participated by conference telephone call. Members of
committees of the Board of Directors are paid $500 for each meeting attended. In
addition, our 1998 Incentive Stock Plan entitles any Non-Employee Director who
meets the criteria for "outside director" under Section 162(m) of the Internal
Revenue Code and who first serves on the Board of Directors subsequent to the
adoption of the 1998 Incentive Stock Plan to receive awards under such plan of
40,000 shares of class A common stock, each having an exercise price equal to
the fair market value of a share of class A common stock on the date of grant.
Awards to Non-Employee Directors under the 1998 Incentive Stock Plan will be
aggregated with awards under the 1997 Incentive Stock Plan so that total awards
under each plan will not exceed 40,000 shares of class A common stock.
Non-Employee Directors are entitled to receive options to purchase 40,000
shares of our class A common stock under our 1997 Incentive Stock Plan. Options
to purchase 40,000 shares of class A
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common stock will be granted annually on the day of each annual stockholder
meeting. Each outside director is eligible to receive options to purchase a
maximum of 100,000 shares of class A common stock under the plan. Under the 1997
Incentive Stock Plan, each Non-Employee Director who was a director of our
company on October 28, 1997 was granted an option to purchase 40,000 shares of
our common stock at an exercise price of $2.00, the price of the class A common
stock on the date of the Initial Public Offering.
In addition, on August 20, 1997, we granted to each of Mr. Kluge and
Mr. Subotnick options to purchase 2,028,000 shares of class A common stock at an
exercise price of $.245 per share, and to each of Mr. Wadler and Ms. Kessel
options to purchase 405,600 shares of class A common stock at an exercise price
of $.245 per share, in each case.
EXECUTIVE COMPENSATION
The following table provides you with information on the compensation
awarded to, earned by or paid to the Chief Executive Officer and the four other
most highly compensated executive officers of our company whose individual
compensation exceeded $100,000 during the fiscal years ended December 31, 1998,
1997 and 1996 for services rendered in all capacities to us and our
subsidiaries. The persons listed in the table below are referred to as the
"Named Executive Officers."
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
------------------------------------ ---------------------------
OTHER NUMBER OF ALL
ANNUAL SECURITIES OTHER
COMPENSATION UNDERLYING STOCK COMPENS.
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS ($) ($)(1) OPTIONS (2) ($)
- --------------------------- -------- --------- --------- ------------ ---------------- --------
<S> <C> <C> <C> <C> <C> <C>
Stephen A. Garofalo.................. 1998 328,385 100,000 23,301 -- -- -- --
Chairman and Chief Executive 1997 295,000 50,000 14,157 3,042,000(3)
Officer 1996 225,960 -- --
Howard M. Finkelstein................ 1998 321,462 100,000 24,074 -- -- -- --
President and Chief Operating 1997 196,756 50,000 11,769 12,168,000(5)
Officer(4) 1996 -- -- --
Vincent A. Galluccio................. 1998 183,400 15,000 1,673 300,000(6) -- --
Senior Vice President 1997 181,522 -- -- 2,481,840(7) --
1996 127,087 -- --
Gerard Benedetto..................... 1998 181,423 -- 3,355 1,100,000(9) -- -- --
Senior Vice President--Chief 1997 -- -- -- --
Financial Officer(8) 1996 -- -- --
Nicholas M. Tanzi.................... 1998 158,000 65,000 2,819 300,000(6) -- --
Senior Vice President--Sales and 1997 -- -- -- 721,680(11)
Marketing(10) 1996 -- -- -- --
</TABLE>
- ------------------------
(1) Includes amounts paid as automobile allowance, insurance premiums and 401(k)
matching funds.
(2) This information gives effect to our stock splits.
(3) Includes presently exercisable options to purchase 3,043,000 shares of
class A common stock at an exercise price of $.245 per share.
(4) Since Mr. Finkelstein was hired by us during 1997, the preceding year's
compensation is not applicable.
(5) Includes presently exercisable options to purchase 12,168,000 shares of
class A common stock at an exercise price of $.245 per share.
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(6) Includes options to purchase 300,000 shares of class A common stock at an
exercise price of $5.25 per share that will become exercisable ratably over
a four year period commencing August 31, 1999.
(7) Includes presently exercisable options to purchase 1,281,840 shares of
class A common stock at an exercise price of $.245 per share, and options to
purchase 300,000 shares of class A common stock, which Mr. Galluccio
exercised during 1998. Also includes options to purchase 600,000 shares of
class A common stock at an exercise price of $2.00 per share that will
become exercisable ratably over a four year period commencing October 28,
1998.
(8) Since Mr. Benedetto was hired by us during 1998, the preceding year's
compensation is not applicable.
(9) Includes options to purchase 800,000 and 300,000 shares of class A common
stock at an exercise price of $1.94 and $5.25 per share that will become
exercisable ratably over a four year period commencing January 6, 1999 and
August 31, 1999, respectively.
(10) Since Mr. Tanzi was hired by Metromedia Fiber Network during 1997, the
preceding year's compensation is not applicable. Compensation information
for 1997 is omitted because aggregate compensation during such fiscal year
was less than $100,000.
(11) Includes presently exercisable options to purchase 121,680 shares of
class A common stock at an exercise price of $.96 per share and options to
purchase 600,000 shares of class A common stock at an exercise price of
$2.00 per share that will become exercisable ratably over a four year
period commencing October 28, 1998.
During 1998 and 1997, Mr. Wadler and Ms. Kessel, each of whom serves as an
executive officer of our company, were employed and paid by Metromedia Company,
pursuant to a management agreement with Metromedia Company, dated as of
January 2, 1998, as amended (the "Management Agreement"). Please refer to the
section in this prospectus supplement entitled "Certain Relationships and
Related Transactions--Recent Transactions--Management Agreement." We did not pay
any other amounts to the Named Executive Officers during 1997 or 1998.
During 1999, certain of our executive officers were granted stock options to
purchase 150,000 shares of class A common stock at an exercise price of $26.375
per share.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of our Named Executive
Officers.
GAROFALO EMPLOYMENT AGREEMENT. Mr. Garofalo's employment agreement, dated
as of February 26, 1997, has a five year term. It provides Mr. Garofalo a base
salary of $295,000 for the first year, $335,000 for the second year, $375,000
for the third year, $415,000 for the fourth year and $455,000 for the fifth
year. Mr. Garofalo is also entitled to receive an annual incentive bonus to be
determined by the Compensation Committee of the Board of Directors. The
incentive bonus will not be less than $100,000 per year. Mr. Garofalo's
employment agreement also provides for other employee benefits such as a car
allowance, life insurance, health care and certain disability and death
benefits. In addition, Mr. Garofalo was granted options to purchase 3,042,000
shares of class A common stock at an exercise price of $.245 per share after
giving effect to the recent stock splits. These options are immediately
exercisable and expire 10 years from their grant. We registered the shares of
class A common stock underlying the options under the Securities Act upon the
consummation of the initial public offering.
Except in the case of disability, we may terminate Mr. Garofalo's employment
only for cause, upon which termination Mr. Garofalo will have no right to
receive any compensation or benefit from us. If the agreement is terminated
without cause, or if Mr. Garofalo terminates employment for good reason,
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we will be obligated to pay Mr. Garofalo an amount equal to the greater of
(i) his monthly base salary as then in effect multiplied by the number of months
remaining in term of his employment as of such termination date and (ii)
$1,000,000. "Good reason" includes:
- a reduction in the nature or scope of Mr. Garofalo's titles, authorities,
powers, duties or responsibilities;
- a change in the method or formula for determining the bonus, which results
in a decrease in the amount of bonus payable to Mr. Garofalo;
- the removal of Mr. Garofalo as a member of the Board of Directors, unless
such removal occurs after termination of Mr. Garofalo's employment for
cause;
- a sale of all or substantially all of the ownership interests or assets of
our company, or a merger or consolidation of our company with any other
corporation or entity;
- a change in control of our company, defined as any person or entity, other
than Mr. Garafalo, becoming a beneficial owner, as defined in Rule 13d-3
of the Securities Exchange Act of 1934, directly or indirectly, of
securities of our company representing 50% or more of the combined voting
power of our then outstanding securities; or
- a material breach by our company of our affirmative or negative covenants
or undertakings in the employment agreement, and a failure to remedy such
breach within 15 days.
Pursuant to the agreement, Mr. Garofalo has agreed not to compete with us
for a period of one year following termination of the agreement. During such
non-compete period, Mr. Garofalo will be entitled to receive an amount equal to
his base salary as in effect on the date of termination, so long as the
agreement was not terminated prior to the expiration of the term by either
party.
FINKELSTEIN EMPLOYMENT AGREEMENT. Mr. Finkelstein's employment agreement,
dated as of April 30, 1997, has a three year term. It provides Mr. Finkelstein
with a base salary of $295,000 for the first year, $335,000 for the second year
and $375,000 for the third year. Mr. Finkelstein is also entitled to receive an
annual incentive bonus to be determined by the Compensation Committee of the
Board of Directors. The incentive bonus will not be less than $100,000 for each
year. Mr. Finkelstein's employment agreement also provides for other employee
benefits such as a car allowance, life insurance, health care, and certain
disability and death benefits. In addition, Mr. Finkelstein was granted options
to purchase 12,168,000 shares of class A common stock at an exercise price of
$.245 per share after giving effect to the recent stock splits, which options
are immediately exercisable and expire 10 years from their grant. We registered
these shares of class A common stock under the Securities Act upon the
consummation of our initial public offering.
Except in the case of disability, we may terminate Mr. Finkelstein's
employment only for cause, upon which termination Mr. Finkelstein will have no
right to receive any compensation or benefit from us. If the agreement is
terminated without cause, or if Mr. Finkelstein terminates employment for good
reason, we will be obligated to pay to Mr. Finkelstein his base salary, bonus
and benefits that are accrued and unpaid as of the date of termination, as well
as an amount equal to one and a half time his base salary as then in effect.
"Good reason" includes
- a reduction in the nature or scope of Mr. Finkelstein's titles,
authorities, powers, duties or responsibilities;
- a change in the method or formula for determining the bonus, which results
in a decrease in the amount of bonus payable to Mr. Finkelstein;
- the removal of Mr. Finkelstein as a member of the Board of Directors,
unless such removal occurs after termination of Mr. Finkelstein's
employment for cause;
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- a sale of all or substantially all of the ownership interests or assets of
our company, or a merger or consolidation of our company with any other
corporation or entity;
- a change in control of our company, defined as any person or entity, other
than Mr. Garofalo, becoming a beneficial owner, as defined in Rule 13d-3
of the Securities Exchange Act of 1934, directly or indirectly, of
securities of our company representing 50% or more of the combined voting
power of our then outstanding securities; or
- a material breach by us of our affirmative or negative covenants or
undertakings in the employment agreement, and a failure to remedy such
breach within 15 days.
Pursuant to the agreement, Mr. Finkelstein has agreed not to compete with us
for a period of one year following termination of the agreement. During such
non-compete period, Mr. Finkelstein will be entitled to receive an amount equal
to his base salary as in effect on the date of termination, so long as the
agreement was not terminated prior to the expiration of the term by either
party.
GALLUCCIO EMPLOYMENT AGREEMENT. Mr. Galluccio's employment agreement, dated
as of August 31, 1998, has a one year term and contains a one-year renewal
option which was exercised by the Company. It provides Mr. Galluccio with an
annual base salary of $225,000 for the current year. Mr. Galluccio is also
entitled to receive an annual incentive bonus, which is dependent upon our
performance, to be determined by the Compensation Committee of the Board of
Directors. If approved by the Compensation Committee, the incentive bonus has an
initial target of 20% of Mr. Galluccio's base salary. Mr. Galluccio's employment
agreement also provides for other employee benefits such as the right to
participate in all group health and insurance programs. In addition,
Mr. Galluccio was granted options to purchase 300,000 shares of class A common
stock at an exercise price of $5.25 per share. These shares have been registered
under the Securities Act on Form S-8.
Except in the case of disability or a change of control, we may terminate
Mr. Galluccio's employment only for cause, upon which termination Mr. Galluccio
will have no right to receive any compensation or benefit from us. If
Mr. Galluccio's employment is terminated for any reason other than for cause, or
in the event that there is a change of control of our company and Mr. Galluccio
is requested, in connection with such change of control, to perform his duties
under this agreement on a regular, full-time basis at a location further than 75
miles from Mr. Galluccio's current principal office location, Mr. Galluccio, in
his sole and absolute discretion, may deem this agreement to be terminated by us
without cause. Upon such termination, Mr. Galluccio will be entitled to receive
his base salary for the remaining term of his employment agreement, all
previously earned and accrued entitlements and benefits from us and our employee
benefit plans, and an amount equal to 25% of Mr. Galluccio's base salary.
Mr. Galluccio has agreed not to compete with us or any affiliated company
for a period of two years following the termination of his employment agreement.
BENEDETTO EMPLOYMENT AGREEMENT. Mr. Benedetto's employment agreement, dated
as of August 31, 1998, has a three and one-half year term. It provides
Mr. Benedetto with an annual base salary of $225,000 for the current year.
Mr. Benedetto is also entitled to receive an annual incentive bonus, which is
dependent upon our performance, to be determined by the Compensation Committee
of the Board of Directors. If approved by the Compensation Committee, the
incentive bonus has an initial target of 20% of Mr. Benedetto's base salary.
Mr. Benedetto's employment agreement also provides for other employee benefits
such as the right to participate in all group health and insurance programs. In
addition, Mr. Benedetto was granted options to purchase 300,000 shares of
class A common stock at an exercise price of $5.25 per share. These shares have
been registered under the Securities Act on Form S-8.
Except in the case of disability or a change of control, we may terminate
Mr. Benedetto's employment only for cause, upon which termination Mr. Benedetto
will have no right to receive any
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compensation or benefit from us. If Mr. Benedetto's employment is terminated for
any reason other than for cause, or in the event that there is a change of
control of our company and Mr. Benedetto is requested, in connection with such
change of control, to perform his duties under this agreement on a regular,
full-time basis at a location further than 75 miles from Mr. Benedetto's current
principal office location, Mr. Benedetto, in his sole and absolute discretion,
may deem this agreement to be terminated by us without cause. Upon such
termination, Mr. Benedetto will be entitled to receive his base salary for the
remaining term of his employment agreement, all previously earned and accrued
entitlements and benefits from us and our employee benefit plans, and an amount
equal to 25% of Mr. Benedetto's base salary.
Mr. Benedetto has agreed not to compete with us or any affiliated company
for a period of two years following termination of his employment agreement.
TANZI EMPLOYMENT AGREEMENT. Mr. Tanzi's employment agreement, dated as of
August 31, 1998, has a two year term. It provides Mr. Tanzi with an annual base
salary of $225,000 for the current year. Mr. Tanzi is also entitled to receive
an annual incentive bonus, which is dependent upon our performance, to be
determined by the Compensation Committee of the Board of Directors. If approved
by the Compensation Committee, the incentive bonus has an initial target of 40%
of Mr. Tanzi's base salary. Mr. Tanzi's employment agreement also provides for
other employee benefits such as the right to participate in all group health and
insurance programs. In addition, Mr. Tanzi was granted options to purchase
300,000 shares of class A common stock at an exercise price of $5.25 per share.
These shares have been registered under the Securities Act on Form S-8.
Except in the case of disability or change of control, we may terminate
Mr. Tanzi's employment only for cause, upon which termination Mr. Tanzi will
have no right to receive any compensation or benefit from us. If Mr. Tanzi's
employment is terminated for any reason other than for cause, or in the event
that there is a change of control of our company and Mr. Tanzi is requested, in
connection with such change of control, to perform his duties under this
agreement on a regular, full-time basis at a location further than 75 miles from
Mr. Tanzi's current principal office location, Mr. Tanzi, in his sole and
absolute discretion, may deem this agreement to be terminated by us without
cause. Upon such termination, Mr. Tanzi will be entitled to receive his base
salary for the remaining term of his employment agreement, all previously earned
and accrued entitlements and benefits from us and our employee benefit plans,
and an amount equal to 25% of Mr. Tanzi's base salary.
Mr. Tanzi has agreed not to compete with us or any affiliated company for a
period of two years following termination of his employment agreement.
1997 AND 1998 INCENTIVE STOCK PLANS
We have adopted the 1997 Incentive Stock Plan and the 1998 Incentive Stock
Plan pursuant to which key employees, officers and directors (including
independent directors and members of the Compensation Committee) of our company
and its subsidiaries who have substantial responsibility in the direction of our
company and its subsidiaries, and others whom the option committee determines
provide substantial and important services to our company, may be granted
(i) incentive stock options ("ISOs") and/or (ii) non-qualified stock options
("NQSOs" and, together with ISOs, "Stock Options"). The aggregate number of
shares of the class A common stock that may be the subject of Stock Options
under the Incentive Stock Plans is 28,000,000 (8,000,000 under the 1997
Incentive Stock Plan and 20,000,000 under the 1998 Incentive Stock Plan), and
the maximum number of shares of class A common stock available with respect to
Stock Options granted to any one grantee is 2,000,000 (800,000 under the 1997
Incentive Stock Plan and 1,200,000 under the 1998 Incentive Stock Plan) shares.
The exercise price of all ISOs is the fair market value of the class A
common stock on the date of grant (or 110% of such fair market value with
respect to ISOs granted to persons who own stock possessing more than 10% of the
voting rights of our company's capital stock), and the exercise price
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of all NQSOs is determined by the Compensation Committee, although the initial
awards will be made at fair market value of the class A common stock on the date
of grant. Stock Options vest and become exercisable over a period of years, as
determined by the Compensation Committee, and have a term not to exceed ten
years.
If a grantee's employment with us is terminated because of the grantee's
death, or the grantee's retirement on or after attaining the age which the
company may from time to time establish as the retirement age for any class of
its employees, or the age specified in the employment agreement with such
grantee, prior to the date when the Stock Option is by its terms exercisable,
the Stock Option will be immediately exercisable as of the date of the
termination of the grantee's employment, subject to the other terms of the
Incentive Stock Plans. Upon a "change in control" of our company (as defined in
the Incentive Stock Plans), each holder of a Stock Option will have the right to
exercise the Stock Option in full without regard to any waiting period,
installment period or other limitation or restriction thereon, and the right,
exercisable by written notice within 60 days after the change in control, to
receive in exchange for the surrender of an option an amount of cash equal to
the difference between the fair market value of the class A common stock on the
date of exercise and the exercise price of the Stock Option. For options granted
under the 1998 Incentive Stock Plan on or after November 13, 1998, in the event
of a change in control, the Board of Directors may in its sole discretion
determine (i) that each holder of such a Stock Option will have the right to
exercise the Stock Option in full without regard to any waiting period,
installment period or other limitation or restriction thereon, and/or (ii) each
holder of such a Stock Option will have the right, exercisable by written notice
within 60 days after the change of control, to receive, in exchange for the
surrender of a Stock Option, an amount of cash equal to the difference between
the fair market value of the class A common stock on the date of exercise and
the exercise price of the Stock Option. Alternatively, the board of directors
may in its sole discretion determine to take neither action. Upon a grantee's
termination of employment from our company or a subsidiary on account of
disability, the grantee or the legal representative of the grantee will have the
right, for a period of one year following the date of such termination, to
exercise a Stock Option, to the extent such award is exercisable and to the
extent such Stock Option has not yet expired. In the event the grantee's
employment with us is terminated for any reason other than disability, death or
retirement, the grantee may exercise a Stock Option within three months after
his or her termination of employment.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with certain officers and
directors. The indemnification agreements provide for indemnification of such
directors and officers to the fullest extent authorized or permitted by law. The
indemnification agreements also provide that:
- we will advance all expenses incurred by the director or officer in
defending certain litigation,
- we will appoint in certain circumstances an independent legal counsel to
determine whether the director or officer is entitled to indemnification,
and
- we will continue to maintain a directors' and officers' liability
insurance (which currently consists of $25.0 million of primary coverage).
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee consists of Messrs. Rockefeller and White.
Neither member of the Compensation Committee served as an officer or employee of
our company or any of its subsidiaries during fiscal 1998. There were no
material transactions between us and any of the members of the Compensation
Committee during fiscal 1998.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRADEMARK LICENSE AGREEMENT. We are a party to a ten year royalty free
license agreement with Metromedia Company, pursuant to which Metromedia Company
has granted us a nonexclusive, nontransferable and nonassignable right and
license, without the right to grant sublicenses and to use the trade name,
trademark and corporate name Metromedia in the United States and worldwide. The
license agreement with Metromedia Company can be terminated by Metromedia
Company upon one month's prior written notice in the event that:
- Metromedia Company or its affiliates own less than 20% of the common
stock;
- a change in control of our company occurs; or
- any of the stock or all or substantially all of the assets of any of our
subsidiaries are sold or transferred, in which case, the license agreement
with Metromedia Company will terminate with respect to such subsidiary.
A change in control of our company for purpose of the trademark license
agreement is defined as:
- a transaction in which a person or group, within the meaning of
Section 13(d)(3) of the Securities Exchange Act of 1934, not in existence
at the time of the execution of the Metromedia license agreement becomes
the beneficial owner of stock entitling such person or group to exercise
50% or more of the combined voting power of all classes of our stock;
- a change in the composition of our Board of Directors whereby a majority
of the members are not directors serving on the Board of Directors at the
time of the license agreement with Metromedia Company, or any person
succeeding such director who was recommended or elected by such directors;
- a reorganization, merger or consolidation where following consummation
thereof, Metromedia Company would hold less than 20% of the combined
voting power of all classes of our stock;
- a sale or other disposition of all or substantially all of our assets; or
- any transaction the result of which would be that the common stock would
not be required to be registered under the Securities Exchange Act of
1934, and the holders of common stock would not receive common stock of
the survivor to the transaction which is required to be registered under
the Securities Exchange Act of 1934.
In addition, Metromedia Company has reserved the right to terminate this
trademark license agreement in its entirety immediately upon written notice to
us if, in Metromedia Company's sole judgment, our continued use of Metromedia as
a trade name would jeopardize or be detrimental to the good will and reputation
of Metromedia Company.
We have agreed to indemnify Metromedia Company and hold it harmless against
any and all losses, claims, suits, actions, proceedings, investigations,
judgments, deficiencies, damages, settlements, liabilities and reasonable legal
expenses, and other related expenses, arising in connection with the license
agreement with Metromedia Company.
MANAGEMENT AGREEMENT. We are a party to the management agreement under
which Metromedia Company provides us with consultation and advisory services
relating to legal matters, insurance, personnel and other corporate policies,
cash management, internal audit and finance, taxes, benefit plans and other
services as we may reasonably request. The management agreement terminates on
December 31 of each year, and is automatically renewed for successive one year
terms unless either party terminates upon 60 days prior written notice. We are
also obligated to reimburse Metromedia Company all its out-of-pocket costs and
expenses incurred and advances paid by Metromedia Company in connection with the
management agreement. In this agreement, we have agreed to indemnify
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Metromedia Company and hold it harmless from and against any and all damages,
liabilities, losses, claims, actions, suits, proceedings, fees, costs or
expenses, including reasonable attorneys' fees and other costs and expenses
incident to any suit, proceeding or investigation of any kind imposed on,
incurred by or asserted against Metromedia Company in connection with the
management agreement. In 1997, Metromedia Company received no money for its
out-of-pocket costs and expenses or for interest on advances extended by it to
us under the management agreement. For the year ended December 31, 1998, we
incurred $500,000 to Metromedia Company under this agreement. The management fee
for 1999 under the agreement is $1,000,000, payable quarterly at a rate of
$250,000.
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PROPOSED TRANSACTIONS
OFFERING OF OUR SENIOR NOTES DUE 2009
GENERAL. Concurrently with the offering described in this prospectus
supplement, we intend to issue $ million of % Senior Notes due 2009 and
[EURO] million of % Senior Notes due 2009, under an indenture between us
and The Bank of New York, as trustee.
PRINCIPAL, MATURITY AND INTEREST. These notes will mature on December 15,
2009. Interest on the Dollar notes will accrue at % per annum and interest on
the Euro notes will accrue at % per annum. In each case, interest will be
payable semiannually in arrears on June 15 and December 15 of each year.
RANKING. These notes will be general obligations, will rank equal in right
of payment with all of our existing and future senior unsecured indebtedness and
will be effectively subordinated to all our existing and future secured
indebtedness to the extent of the assets that secure such indebtedness and to
all of our subsidiaries' existing or future indebtedness, whether or not
secured.
REDEMPTION. These notes will be redeemable on or after December 15, 2004,
at our option, in whole or in part, at the following redemption prices
(expressed as percentages of principal amount) described below plus accrued
interest, if redeemed during the twelve-month period beginning on December 15 of
the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---- ----------
<S> <C>
2004........................................................ %
2005........................................................ %
2006........................................................ %
2007 and thereafter......................................... %
</TABLE>
In addition, at any time prior to December 15, 2002, we will be permitted to
redeem up to 35% of the original aggregate principal amount of each of the
Dollar notes and the Euro notes, determined separately, with the net proceeds of
a sale of common equity at a redemption price equal to % of the principal
amount, in the case of the Dollar notes redeemed, and % of the principal
amount, in the case of the Euro notes redeemed, in each case, plus accrued
interest, provided that at least 65% of the original aggregate principal amount
of each of the Dollar notes and the Euro notes, determined separately, remains
outstanding after the redemption and we use the net cash proceeds of any public
equity offerings resulting in gross proceeds of at least $100 million. Except in
connection with a change of control or an asset sale (as those terms are defined
in the indentures relating to these notes) of our company, we will not be
required to make mandatory redemption or sinking fund payments with respect to
these notes.
COVENANTS. The indenture relating to these notes will restrict, among other
things, our ability to incur additional indebtedness, pay dividends or make
certain other restricted payments, incur certain liens, sell, assign, transfer,
lease, convey or otherwise dispose of substantially all of our assets or enter
into certain transactions with affiliates. The indenture relating to these notes
will permit, under certain circumstances, our subsidiaries to be deemed
unrestricted subsidiaries and thus not subject to the restrictions of the
indenture.
EVENTS OF DEFAULT. The indenture relating to these notes will contain
standard events of default, including:
- defaults in the payment of principal, premium or interest;
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- defaults in the compliance with covenants contained in the indenture;
- cross defaults on more than $15 million of other indebtedness;
- failure to pay more than $15 million of judgments; and
- certain events of our subsidiaries
OFFERING OF DECS SECURITIES
Concurrently with the offering described in this prospectus supplement, some
of the selling stockholders intend to enter into prepaid forward contracts with
DECS Trust VI, a Delaware business trust, under which DECS Trust VI will agree
to purchase on , 2002 from those selling stockholders an aggregate of
up to 10,000,000 shares of class A common stock (excluding the over-allotment
option) beneficially owned by those selling stockholders subject to the terms
and conditions set forth in those contracts. The trust will terminate on or
shortly after , 2002, which is referred to in this summary as the "exchange
date" because that is when the shares of class A common stock or their value in
cash are expected to be delivered under all of the prepaid forward contracts the
trust has with the sellers. In some limited circumstances, the class A common
stock or its value in cash may be delivered and the trust terminated sooner than
that date. In other limited circumstances, one or more sellers who elect to
deliver cash may extend the exchange date, for purposes of their respective
contracts only, to , 2003, and may subsequently accelerate the extended
exchange date if they wish. If the exchange date under any of the sellers'
contracts is extended in this way, the trust will terminate on or shortly after
the date all of the class A common stock or cash has been delivered under all of
the prepaid forward contracts. Prior to the exchange date, each selling
stockholder will continue to beneficially own and vote the shares of our common
stock pledged to the DECS Trust VI.
We understand that DECS Trust VI will concurrently sell an aggregate of
10,000,000 DECS Securities (excluding the over-allotment option). The DECS are
securities that represent all of the beneficial interest in the trust.
Neither of the transactions described above nor the offering described in
this prospectus supplement is conditioned upon any of the other transactions.
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SELLING STOCKHOLDERS
The following table shows the selling stockholders' beneficial ownership of
our common stock as of the date of this prospectus supplement, the number of
shares the selling stockholders are offering hereunder, and the selling
stockholders' beneficial ownership of our common stock after the offering,
assuming that each of them sells all of the shares being offered and that each
of them does not acquire any additional shares of common stock before the
completion of this offering. Except as indicated in the footnotes to the table,
the persons named in the table have sole voting and investment power with
respect to shares of common stock shown as beneficially owned by them. The
address of the selling stockholders is One North Lexington Avenue, White Plains,
New York 10601, unless otherwise indicated.
<TABLE>
<CAPTION>
CLASS A COMMON STOCK CLASS B COMMON STOCK(1)
---------------------------------------------------------------------- ------------------------
NUMBER TO BE OWNED
OWNED BEFORE OF SHARES AFTER THE OWNED BEFORE
THE OFFERING BEING OFFERED OFFERING THE OFFERING
--------------------------- ------------- ------------------------ ------------------------
SELLING STOCKHOLDERS NUMBER % NUMBER NUMBER % NUMBER %
- -------------------- ------------- -------- ------------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Stephen A.
Garofalo........... 45,495,512(2) 22.5 1,156,000 44,339,512(3) 21.9 -- --
Howard M.
Finkelstein........ 12,218,000(4) 5.8 2,400,000 9,818,000 4.7 -- --
Gerard Benedetto..... 475,000(5) * 235,000 240,000 * -- --
Silvia Kessel........ 510,472(6) * 77,000 433,472 * -- --
John W. Kluge........ 2,028,000(7) 1 143,000 1,885,000 * 31,462,048(8) 93.2
David Rockefeller.... 2,829,104(10) 1.4 170,000 2,659,104 1.3 -- --
Stuart Subotnick..... 2,028,000(7) 1 375,000 1,653,000 * 33,769,272(8) 100.0
Arnold L. Wadler..... 615,344(6) * 115,000 500,344 * -- --
<CAPTION>
CLASS B COMMON STOCK(1)
----------------------------------------
NUMBER TO BE OWNED
OF SHARES AFTER THE
BEING OFFERED OFFERING
------------- ------------------------
SELLING STOCKHOLDERS NUMBER NUMBER %
- -------------------- ------------- ---------- --------
<S> <C> <C> <C>
Stephen A.
Garofalo........... -- -- --
Howard M.
Finkelstein........ -- -- --
Gerard Benedetto..... -- -- --
Silvia Kessel........ -- -- --
John W. Kluge........ -- 31,462,048(9) 93.2
David Rockefeller.... -- -- --
Stuart Subotnick..... -- 33,769,272(9) 100.0
Arnold L. Wadler..... -- -- --
</TABLE>
- ------------------------------
* less than 1%
(1) The shares of class B common stock are convertible into shares of class A
common stock at the rate of one share of class A common stock for each share
of class B common stock and the holders of shares of class B common stock
are entitled to 10 votes per share.
(2) Includes presently exercisable options to purchase 3,042,000 shares of
class A common stock at an exercise price of $.245 per share of which
options to purchase 2,882,000 shares are held by the Stephen A. Garofalo
1999 Annuity Trust No. 1 and 160,000 are held by the Stephen A. Garofalo
1999 Annuity Trust No. 2. Mr. Garofalo is the trustee of both trusts.
(3) Concurrently with the offering, Stephen A. Garofalo intends to enter into a
prepaid forward contract, under which Mr. Garofalo may deliver up to
4,844,000 shares of class A common stock to DECS Trust VI on , 2002 (or
, 2003 if the contract is extended). See "Proposed
Transactions--Offering of DECS Securities."
(4) Includes presently exercisable options to purchase 12,168,000 shares of
class A common stock at an exercise price of $.245 per share and 50,000
shares of class A common stock owned by members of Mr. Finkelstein's family.
(5) Includes presently exercisable options to purchase 350,000 and 75,000 shares
of class A common stock at an exercise price of $1.9375 and $5.25 per share,
respectively.
(6) Includes 405,600 presently exercisable options to acquire shares of class A
common stock at an exercise price of $.245 per share held by each of
Ms. Kessel and Mr. Wadler. Does not include shares owned by Metromedia
Company. Ms. Kessel and Mr. Wadler are employed by Metromedia Company and
disclaim beneficial ownership of the shares owned by Metromedia Company.
Mr. Wadler's address is One Meadowlands Plaza, East Rutherford, NJ 07073 and
Ms. Kessel's address is 215 East 67th Street, New York, NY 10021.
(7) Consists of 2,028,000 presently exercisable options to acquire shares of
class A common stock at an exercise price of $.245 per share held by each of
Mr. Kluge and Mr. Subotnick. Mr. Kluge's address is 215 East 67th Street,
New York, NY 10021 and Mr. Subotnick's address is 215 East 67th Street, New
York, NY 10021.
(8) Includes 31,462,048 shares owned by Metromedia Company. Messrs. Kluge and
Subotnick, directors of our company, are general partners of Metromedia
Company.
(9) Concurrently with the offering, Metromedia Company and Stuart Subotnick
intend to enter into prepaid forward contracts, under which Metromedia
Company and Mr. Subotnick may convert up to 4,880,000 shares and 5,156,000
shares, respectively, of class B common stock into an equal number of shares
of class A common stock for delivery to DECS Trust VI on , 2002 (or
, 2003 if the contract is extended). See "Proposed
Transactions--Offering of DECS Securities."
(10) Represents 2,789,104 shares owned by DR & Descendants Partnership, of which
Mr. Rockefeller is a partner and for which he exercises voting and
investment power and presently exercisable options to purchase 40,000 shares
of class A common stock at an exercise price of $2.00 per share.
Mr. Rockefeller disclaims actual beneficial ownership of shares owned by DR
& Descendants Partnership except as to shares attributable to his
proportionate interest in the partnership. Mr. Rockefeller's address is 30
Rockefeller Plaza, New York, NY 10112.
Each of the selling stockholders is a director and/or executive officer of
our company. See "Management."
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DESCRIPTION OF THE NEW CREDIT FACILITY
The description provided below does not purport to be complete and is
qualified in its entirety by reference to certain agreements setting forth the
principal terms and conditions of the new credit facility.
We have entered into a commitment letter with an affiliate of one of the
underwriters that provides us with a senior secured reducing revolving credit
facility of up to $150.0 million from the lender. We do not intend to consummate
the new credit facility simultaneously with consummation of the offering
described in this prospectus supplement. Depending upon market conditions, we
may incur certain additional indebtedness in place of the new credit facility.
We can use the new credit facility to help finance the cost of building out
networks and for other general corporate purposes.
The new credit facility will mature on the fifth anniversary of the closing
of the new credit facility. Amounts outstanding under the new credit facility
will bear interest at an applicable margin plus, at our option, the lender's
base rate (in which case the applicable margin will initially be 2.25%, subject
to reductions upon obtaining performance criteria based on our leverage ratio)
or LIBOR (in which case the applicable margin will initially be 3.25%, subject
to reductions upon obtaining performance criteria based on our leverage ratio).
Our obligations under the new credit facility will be unconditionally and
irrevocably guaranteed by each of our subsidiaries (other than certain foreign
subsidiaries or ION) and secured by a pledge of substantially all of our assets
and our restricted subsidiaries' assets. We will pay an annual commitment fee of
1.25% when less than 33 1/3% of the new credit facility has been utilized, 1.00%
when at least 33 1/3%, but not less than 66 2/3%, of the new credit facility has
been utilized and 0.75% thereafter. We will also pay certain upfront commitment
and other fees to the lender and their affiliate.
The new credit facility will contain certain financial and operational
covenants and ratios and other restrictions with which we must comply,
including, among others:
- limitations on the incurrence of additional indebtedness,
- limitations on paying dividends and other payments,
- restrictions on mergers, consolidations and dispositions of assets,
- restrictions on sale-leaseback transactions and lease payments,
- restrictions on transactions with affiliates,
- restrictions on capital expenditures, investments, acquisitions, joint
ventures and partnerships,
- restrictions on liens,
- maximum net total debt to net property, plant and equipment,
- minimum annualized revenue, number of fiber miles, interest coverage ratio
and fixed charge coverage, and
- maximum leverage ratios and (total debt to annualized EBITDA).
The new credit facility will contain the following customary events of
default:
- material misrepresentations,
- payment defaults,
- breach of performance of covenants,
- bankruptcy default,
- failure to make payments to the FCC,
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- default under material contracts,
- judgment and cross defaults, and
- change in control.
Commitments and amounts outstanding under the new credit facility will
automatically reduce in equal quarterly amounts, commencing on the first quarter
following the third anniversary of the closing date under the new credit
facility, pursuant to a schedule to be agreed. Commitments under the new credit
facility will be permanently reduced (and loans under the facility prepaid to
the extent the loans exceed the amount of the commitments under the facility as
so reduced) from (i) 100% of the net proceeds from all non-ordinary course asset
dispositions, subject to customary reinvestment provisions, and (ii) 100% of the
net proceeds from insurance recovery and condemnation event, in each case with
customary baskets and exceptions. We may make voluntary prepayments and
commitment reductions at any time without premium or penalty.
The lender may syndicate the amounts to be provided to us under the new
credit facility. Our commitment letter with the lender allows the lender to
change most of the terms (including the interest rate and other fees payable to
the lender) of their commitment letter with us (other than the amount of the
proposed loan), if the lender believes that these changes are needed to
syndicate successfully the new credit facility. In addition, the lender's
obligation to enter into a definitive agreement and lend us monies under the new
credit facility remains subject to a number of significant conditions and we
therefore can not assure you that we will be able to enter into binding
agreements and borrow money from the lender. These conditions include:
- we must negotiate and enter into definitive documents and provide the
lender with a number of certificates and legal opinions,
- there not occurring certain material changes in the loan syndication,
financial or capital markets or any material adverse change in our
business and operations,
- satisfaction by the lender with certain due diligence matters and
financial statements relating to us, and
- other customary conditions.
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CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-UNITED STATES HOLDERS OF CLASS A COMMON STOCK
GENERAL
The following general discussion summarizes certain of the material U.S.
federal income and estate tax consequences of the ownership and disposition of
our class A common stock applicable to a non-U.S. holder (as described below).
This discussion is based on provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), existing, temporary and proposed regulations promulgated
under the Code and administrative and judicial interpretations of the Code, all
as in effect or proposed on the date of this prospectus supplement and all of
which are subject to change, possibly with retroactive effect, or different
interpretations. This discussion assumes that our class A common stock is held
as a capital asset within the meaning of section 1221 of the Code. This
discussion does not address all aspects of U.S. federal income and estate
taxation and does not address any foreign, state or local tax consequences.
Furthermore, this discussion does not consider any specific facts or
circumstances that may apply to a particular non-U.S. holder and does not
address all aspects of U.S. federal income tax law that may be relevant to
non-U.S. holders that may be subject to special treatment under that tax law,
such as insurance companies, tax-exempt organizations, financial institutions,
broker-dealers or certain U.S. expatriates.
For purposes of this discussion, the term "U.S. holder" means a holder that
is:
- a citizen or resident of the United States;
- a corporation or other entity taxable as a corporation created or
organized in or under the laws of the United States or any of its
political subdivisions;
- an estate the income of which is subject to U.S. federal income taxation
regardless of its source;
- a trust if a U.S. court is able to exercise primary supervision over
administration of the trust and one or more U.S. persons have authority to
control all substantial decisions of the trust; or
- otherwise subject to United States federal income tax on a net income
basis in respect of our class A common stock.
In the case of a partnership that is a holder of class A common stock, any
partner described in any of the points above is also a U.S. holder. A "non-U.S.
holder" is a holder, including any partner in a partnership, that holds our
class A common stock and that is not a U.S. holder.
DIVIDENDS
In general, the gross amount of dividends paid to a non-U.S. holder that are
not effectively connected with a U.S. trade or business of the non-U.S. holder
will be subject to U.S. federal withholding tax at a 30% rate, or some lower
rate as may be specified by an applicable tax treaty. To receive a reduced
treaty rate, the non-U.S. holder must furnish the Company or its paying agent a
duly completed Internal Revenue Service ("IRS") Form 1001 or IRS Form W-8BEN (or
substitute form) certifying to its qualification for that rate.
Dividends that are effectively connected with the conduct of a trade or
business within the United States or, if a tax treaty applies, are attributable
to a U.S. permanent establishment of the non-U.S. holder, are exempt from U.S.
federal withholding tax, provided that the non-U.S. holder furnishes us or our
paying agent a duly completed IRS Form 4224 or IRS Form W-8ECI (or substitute
form) certifying to that fact. Effectively connected dividends are subject to
U.S. federal income tax on a net income basis at the same graduated rates
applicable to U.S. persons. In the case of a non-U.S. holder that is a
corporation, effectively connected income may, in certain circumstances, be
subject to an additional "branch profits tax" at a 30% rate or a lower rate as
may be specified by an applicable income tax treaty.
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A non-U.S. holder that is eligible for a reduced rate of withholding tax
pursuant to a tax treaty may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund with the IRS.
DISPOSITION OF CLASS A COMMON STOCK
Generally, subject to the special rules applicable to U.S. real property
holding companies discussed below, a non-U.S. holder will not be subject to U.S.
federal income tax on any gain recognized on the disposition of our class A
common stock unless:
- the gain is effectively connected with a trade or business carried on by
the non-U.S. holder within the United States, or, alternatively, if a tax
treaty applies, the gain is attributable to a U.S. permanent establishment
maintained by that non-U.S. holder, in which case that gain will be
subject to tax at the rates and in the manner applicable to U.S. persons,
and, if the holder is a corporation, the branch profits tax may also
apply; or
- the class A common stock is disposed of by an individual non-U.S. holder
who holds the class A common stock as a capital asset and is present in
the United States for 183 or more days in the taxable year of the
disposition and certain other conditions are met, in which case that gain
will be subject to a flat 30% tax, which may be offset by United States
source capital losses even though the individual is not considered a
resident of the United States.
Non-U.S. holders should consult applicable tax treaties, which may exempt
from U.S. taxation gains realized upon the disposition of common stock in
certain cases.
Notwithstanding the above, because of our present ownership and anticipated
acquisition of substantial interests in real property assets in the United
States, it is possible that we may presently be, or may become, a U.S. real
property holding company. If we were to be treated as a U.S. real property
holding company, a non-U.S. holder who owns more than 5% of our class A common
stock may be subject to U.S. federal income taxation on any gain realized from
the sale or exchange of that stock, unless an exemption is provided under an
applicable tax treaty.
FEDERAL ESTATE TAX
Class A common stock held by an individual non-U.S. holder at the time of
death will be included in the holder's gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING
Under U.S. Treasury regulations, we must report annually to the IRS and to
each non-U.S. holder the amount of dividends paid to and the tax withheld from,
that holder, regardless of whether any tax was actually withheld or whether
withholding was required. This information may also be made available to the tax
authorities in the non-U.S. holder's country of residence.
Backup withholding, which generally is a withholding tax imposed at a rate
of 31% on certain payments to persons that fail to furnish the information
required under the U.S. information reporting and backup withholding rules,
generally will not apply to:
- dividends paid to non-U.S. holders that are subject to the U.S.
withholding tax, whether at 30% or a reduced treaty rate; or
- dividends paid to non-U.S. holders at an address outside the United States
on or prior to December 31, 2000 unless the payor has actual knowledge
that the payee is a U.S. person.
In the case of a non-U.S. holder that sells class A common stock to or
through a U.S. office of a broker, the broker must backup withhold at a rate of
31% and report the sale to the IRS, unless the holder certifies its non-U.S.
status under penalties of perjury or otherwise establishes an exemption. In the
case of a non-U.S. holder that sells class A common stock to or through the
foreign office of a U.S. broker, or a foreign broker with certain types of
relationships to the United States, the broker must
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report the sale to the IRS (but not backup withhold) unless the broker has
documentary evidence in its files that the seller is a non-U.S. holder or
certain other conditions are met, or the holder otherwise establishes an
exemption. A non-U.S. holder will generally not be subject to information
reporting or backup withholding if that non-U.S. holder sells the Class A common
stock to or through a foreign office of a non-U.S. broker.
Backup withholding is not an additional tax. Any amount withheld under the
backup withholding rules from a payment to a holder is allowable as a credit
against the holder's U.S. federal income tax liability, provided the required
information or appropriate claim for refund is filed with the IRS.
Recently promulgated U.S. Treasury regulations effective for payments made
after December 31, 2000 eliminate the general, current legal presumption that
dividends paid to an address in a foreign country are paid to a resident of that
country. In addition, these regulations impose certain certification and
documentation requirements on non-U.S. holders claiming the benefit, under a tax
treaty, of a reduced withholding rate on dividends.
THE FOREGOING DISCUSSION IS A SUMMARY OF CERTAIN U.S. FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION OF THE
CLASS A COMMON STOCK BY NON-U.S. HOLDERS. ACCORDINGLY, HOLDERS ARE URGED TO
CONSULT WITH THEIR TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL INCOME AND
ESTATE TAX CONSEQUENCES OF THE OWNERSHIP AND DISPOSITION OF CLASS A COMMON STOCK
INCLUDING THE APPLICATION AND EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR
OTHER TAXING JURISDICTION.
S-84
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated November , 1999, each underwriter named below has severally agreed to
purchase, and the selling stockholders have agreed to sell to such underwriter,
the number of shares of class A common stock set forth opposite the name of such
underwriter below.
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERWRITER OF CLASS A COMMON STOCK
- ----------- -----------------------
<S> <C>
Salomon Smith Barney Inc....................................
Credit Suisse First Boston Corporation......................
Deutsche Bank Securities Inc................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Goldman, Sachs & Co.........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.....................................
---------
Total............................................... 4,671,000
=========
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares of class A common stock included in this
offering are subject to approval of legal matters by counsel and to other
conditions. The underwriters are obligated to purchase all of the shares of
class A common stock offered hereby (other than those shares covered by the
over-allotment option described below) if any are purchased.
The underwriters propose to offer some of the shares directly to the public
at the public offering price set forth on the cover page of this prospectus
supplement and some of the shares to certain dealers at the public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share on sales to certain other dealers. If all of the shares are not sold at
the initial offering price, the underwriters may change the public offering
price and the other selling terms.
The selling stockholders have granted to the underwriters an option,
exercisable for 30 days from the date of this prospectus supplement, to purchase
up to 700,650 additional shares of class A common stock at the offering price
less underwriting discounts. The underwriters may exercise such option solely
for the purpose of covering over-allotments, if any, in connection with the
offering. To the extent that the underwriters exercise such option, each
underwriter will be obligated, subject to certain conditions, to purchase a
number of additional shares approximately proportionate to such underwriter's
initial purchase commitment.
We, the selling stockholders and certain of our other stockholders have
agreed that, for a period of 90 days from the date of this prospectus, they will
not, without the prior written consent of Salomon Smith Barney Inc., dispose of
or hedge any shares of our common stock or any securities convertible into or
exchangeable for our common stock, except for (1) Bell Atlantic's purchase of
shares of class A common stock and a convertible subordianted note and (2) the
entering into of forward prepaid contracts with DECS Trust VI. Salomon Smith
Barney Inc. in its sole discretion may release any of the securities subject to
these lock-up agreements at any time without notice.
The class A common stock is quoted on The Nasdaq Stock Market's National
Market under the symbol "MFNX."
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<PAGE>
The following table shows the underwriting discounts and commissions to be
paid to the underwriters in connection with this offering. These amounts are
shown assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of the class A common stock.
<TABLE>
<CAPTION>
PAID BY SELLING STOCKHOLDERS
---------------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share........................................ $ $
Total............................................ $ $
</TABLE>
In connection with the offering, Salomon Smith Barney Inc., on behalf of the
underwriters, may purchase and sell shares of the class A common stock in the
open market. These transactions may include over-allotment, syndicate covering
transactions and stabilizing transactions. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in the offering, which creates a syndicate short position.
Syndicate covering transactions involve purchases of the class A common stock in
the open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of certain bids or
purchases of the class A common stock made for the purpose of preventing or
retarding a decline in the market price of the class A common stock while the
offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities may cause the price of the class A common stock to
be higher than the price that otherwise would exist in the open market in the
absence of such transactions. These transactions may be effected on The Nasdaq
Stock Market or in the over-the-counter market, or otherwise and, if commenced,
may be discontinued at any time.
In addition, in connection with this offering, certain of the underwriters
(and selling group members) may engage in passive market making transactions in
the class A common stock on The Nasdaq Stock Market, prior to the pricing and
completion of the offering. Passive market making consists of displaying bids on
The Nasdaq Stock Market no higher than the bid prices of independent market
makers and making purchases at prices no higher than those independent bids and
effected in response to order flow. Net purchases by a passive market maker on
each day are limited to a specified percentage of the passive market maker's
average daily trading volume in the class A common stock during a specified
period and must be discontinued when such limit is reached. Passive market
making may cause the price of the class A common stock to be higher than the
price that otherwise would exist in the open market in the absence of such
transactions. If passive market making is commenced, it may be discontinued at
any time.
The selling stockholders estimate that the total expenses of this offering
will be $ .
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act of
1933, or to contribute to payments the underwriters may be required to make in
respect of any of these liabilities.
Each underwriter has represented and agreed in the underwriting agreement
that:
- it has not offered or sold and will not offer or sell, any shares of
class A common stock to persons in the United Kingdom, except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purposes of their
businesses or otherwise in circumstances which shall not result in an
offer to the public in the United Kingdom within the meaning of the Public
Offers of Securities Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 (the "FSA") with respect to anything done by
it in relation to the shares of class A common stock in, from or otherwise
involving the United Kingdom; and
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<PAGE>
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the issue or
sale of the shares of class A common stock to a person who is of a kind
described in Article 11(3) of the FSA 1986 (Investment
Advertisements)(Exemptions) Order 1996, as amended, or is a person to whom
the document may otherwise lawfully be issued or passed on.
Certain of the underwriters, their affiliates or predecessors are providing,
have provided and may in the future provide investment banking or other
financial services to us and our affiliates in the ordinary course of business
and will receive customary compensation in connection therewith. Certain of the
underwriters in this offering are acting as underwriters in the sale of our
% Senior Notes due 2009, which is expected to be completed concurrently with
the offering of the shares of class A common stock and in an offering for DECS
Trust IV, none of which are conditional on the offer. See "Proposed
Transactions." An affiliate of one of the underwriters has entered into a
commitment letter with us for the provision of a new credit facility.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial amount of class A common stock in the public market,
or the perception that sales may occur, could adversely affect the market price
of the class A common stock prevailing from time to time in the public market
and could impair our ability to raise additional capital through the sale of our
equity securities in the future.
In general, under Rule 144 as currently in effect, if one year has elapsed
since the later of the date of acquisition of restricted securities from us or
any of our "affiliates", as that term is defined under the Securities Act, the
holder is entitled to sell within any three-month period a number of shares of
class A common stock that does not exceed the greater of 1% of the
then-outstanding shares of the class A common stock or the average weekly
trading volume of shares of class A common stock on all exchanges and reported
through the automated quotation system of a registered security association
during the four calendar weeks preceding the date on which notice of the sale is
filed with the Securities and Exchange Commission. Sales under Rule 144 are also
subject to certain restrictions on the manner of sales, notices, requirements
and the availability of current public information about the company. If two
years have elapsed since the date of acquisition of restricted shares from us or
from any "affiliate" of the company, and the holder thereof is deemed not to
have been an affiliate of the company at any time during the 90 days preceding a
sale, such person would be entitled to sell such class A common stock in the
public market under Rule 144(k) without regard to the volume limitations, manner
of sale provisions, public information requirements or notice requirements.
Upon completion of this offering, we will have approximately 202,152,336
shares of class A common stock outstanding (or 202,852,986 if the underwriters'
over-allotment option is exercised in full, assuming exercise of options). Upon
completion of the offering, we will have 33,769,272 shares of class B common
stock outstanding, which shares are convertible into shares of class A common
stock on a one-for-one basis. All of the shares of class B common stock are
currently owned by persons who are affiliates of the company.
The shares of class A common stock offered in this offering will be freely
tradeable without restriction or further registration under the Securities Act
by persons other than our "affiliates" within the meaning of Rule 144. The
holders of restricted shares generally will be entitled to sell these shares in
the public securities market without registration under the Securities Act to
the extent permitted by Rule 144 or any exemption under the Securities Act.
We have filed with the Securities and Exchange Commission a Registration
Statement on Form S-8, covering the shares of class A common stock issuable upon
exercise of certain officer's options and the shares of class A common stock
underlying options granted under the 1997 Incentive Stock Plan and the 1998
Incentive Stock Plan and the 1998 Incentive Stock Plan. The shares of class A
common stock so registered and acquired under the 1997 Incentive Stock Plan and
the 1998 Incentive Stock
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<PAGE>
Plan will be available for sale by non-affiliates in the public securities
market without limitation and by affiliates, subject to the volume limitations
of Rule 144.
Certain persons have registration rights agreements with us and/or warrant
agreements with us to purchase shares of class A common stock. As a result, the
number of shares eligible for future sale and the availability of those shares
in the public securities market may be affected by the exercise of these
registration rights and warrants and by additional shares of class A common
stock that are entitled to "piggyback" registration rights and may be included
in any such registration. See "Risk Factors--Shares Eligible for Future Sale May
Have a Potential Adverse Effect on Our Stock Price."
NOTICE TO CANADIAN RESIDENTS
THE OFFERING
The distribution of class A common stock in Canada is being made on a
private placement basis solely in the Provinces of Quebec, Ontario, Manitoba,
Saskatchewan, Alberta and British Columbia.
RESALE RESTRICTIONS
Any resale of the class A common stock must be made in accordance with an
exemption from the registration and prospectus requirements of applicable
securities laws, which vary depending on the province. Purchasers of class A
common stock are advised to seek legal advice prior to any resale of the class A
common stock.
REPRESENTATION BY PURCHASERS
Confirmations of the acceptance of offers to purchase the class A common
stock will be sent to purchasers in Canada who have not withdrawn their offers
to purchase prior to the issuance of such confirmations. Each purchaser who
receives a purchase confirmation will, by the purchaser's receipt thereof, be
deemed to represent to the selling stockholders and the dealer from whom such
purchase confirmation is received that such purchaser is entitled under
applicable provincial securities laws to purchase the class A common stock
without the benefit of a prospectus qualified under such securities laws.
ENFORCEMENT OF LEGAL RIGHTS
ONTARIO
The class A common stock being offered is that of a foreign issuer and
Ontario purchasers will not receive the contractual right of action prescribed
by section 32 of the regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
All of our directors and officers, the selling stockholders and the experts
named herein may be located outside Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada upon
us or such persons. All or a substantial portion of our assets and the assets of
such persons may be located outside of Canada and, as a result, it may not be
possible to satisfy a judgment against us or such persons in Canada or to
enforce a judgment obtained in Canadian courts against us or such persons
outside of Canada.
SASKATCHEWAN
THE SECURITIES ACT, 1988 (Saskatchewan) provides purchasers with certain
statutory rights of action, including: (a) if the prospectus supplement or any
amendment thereto contains a misrepresentation, which was a misrepresentation at
the time of purchase (i) a right of action for damages or rescission against the
selling stockholders, (ii) a right of action for damages against every promoter
of ours who was a promoter at the time the prospectus supplement or any
amendment thereto was sent or delivered, and (iii) a right of action for damages
against the dealer from whom the shares were
S-88
<PAGE>
purchased; (b) a right of action for damages against any individual who makes a
verbal misrepresentation to such Saskatchewan purchaser prior to or
contemporaneously with the purchase of the shares; (c) a right to void the
agreement to purchase the shares and recover the purchase price if the shares
are sold in contravention of the Act, the regulations under the Act or a
decision of the Saskatchewan Securities Commission; and (d) a right of action
for damages or rescission if a copy of this notice, the attached prospectus
supplement or any amendment thereto was not delivered to such purchaser before
the shares were subscribed for.
An action for damages must be started by the earlier of (a) one year after
the investor first had knowledge of the facts giving rise to the action or
(b) six years after the date of the transaction that gave rise to the action. An
action for rescission must be commenced by 180 days after the date of the
transaction that gave rise to the action.
The rights available to Saskatchewan purchasers are in addition to and
without derogation from any other right or remedy which such purchasers may have
at law, are intended to correspond to the provisions of the Act and are subject
to the defenses contained therein.
ALBERTA
Securities legislation in Alberta provides that every purchaser of
securities pursuant to this offering memorandum shall have, in addition to any
other rights they may have at law, a right of action for damages or rescission,
or both, against the selling security holder on whose behalf the distribution is
made if the offering memorandum or any amendment thereto contains a
misrepresentation. However such rights must be exercised within prescribed time
limits. Purchasers should refer to the applicable provisions of the Alberta
securities legislation for particulars of these rights or consult with a lawyer.
THE SECURITIES ACT (Alberta) provides that no action may be commenced to
enforce such right of action unless the right is exercised: (a) in the case of
an action for rescission, 180 days from the day of the transaction that gave
rise to the cause of action; or (b) in the case of any action, other than an
action for rescission, the earlier of: (i) 180 days from the day that the
purchaser first had knowledge of the facts giving rise to the cause of action;
or (ii) one year from the day of the transaction that gave rise to the cause of
action.
VALIDITY OF THE SECURITIES
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, will pass upon
certain legal matters for us in connection with the offering of the shares.
Skadden, Arps, Slate, Meagher & Flom LLP, Los Angeles, California, will pass
upon certain legal matters for the underwriters in connection with the offering
of the shares. Skadden, Arps, Slate, Meagher & Flom LLP has represented us on
other unrelated matters.
S-89
<PAGE>
EXPERTS
The consolidated financial statements of Metromedia Fiber Network, Inc. at
December 31, 1997 and 1998 and for each of the years in the three-year period
ended December 31, 1998, appearing in this prospectus supplement, have been
audited by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere in this prospectus supplement and are included in
reliance upon such report given on the authority of such firm as experts in
accounting and auditing.
AboveNet's financial statements as of June 30, 1998 and 1999 and for each of
the three years in the period ended June 30, 1999 included and incorporated by
reference in this prospectus supplement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report, which is included and
incorporated by reference herein, and have been so included and incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The Combined Statement of Assets to be Acquired and Liabilities to be
Assumed of Palo Alto Internet Exchange as of December 26, 1998 and December 27,
1997 and the related Combined Statement of Revenues and Direct Expenses for the
period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 12, 1998 and the fiscal years ended December 27, 1997 and
December 29, 1996 included, in this prospectus supplement, have been so included
in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We are currently subject to the periodic reporting and other informational
requirements of the Exchange Act. The reports and other information that we
filed with the Securities and Exchange Commission can be inspected and copied at
prescribed rates at the public reference facilities maintained by the Securities
and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and will also be available for inspection and copying at
the regional offices of the Securities and Exchange Commission located at 7
World Trade Center, Suite 1300, New York, New York 10048 and the Citicorp Center
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may
obtain information on the operation of the public reference facilities by
calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities
and Exchange Commission also maintains an Internet Web Site at
http://www.sec.gov that contains reports, proxy and information statements and
other information. You can also obtain copies of such materials from us upon
request.
S-90
<PAGE>
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The following documents and other materials, which have been filed by us
with the Securities and Exchange Commission, are incorporated herein and
specifically made a part of this prospectus supplement by this reference:
- our Annual Report on Form 10-K for the fiscal year ended December 31,
1998;
- our Quarterly Report on Form 10-Q for the three months ended March 31,
1999;
- our Quarterly Report on Form 10-Q for the six months ended June 30, 1999;
- our Current Report on Form 8-K dated June 30, 1999;
- our Current Report on Form 8-K dated September 10, 1999, as amended by our
Current Report on Form 8-K/A dated October 14, 1999 as further amended by
our Current Report on Form 8-K/A dated October 26, 1999;
- the "Risk Factors--Risk Factors Applicable to AboveNet" and "Business of
AboveNet" sections contained in our Registration Statement on Form S-4
dated August 5, 1999 (File No. 333-84541); and
- our Current Report on Form 8-K filed on October 18, 1999.
In addition, all documents filed with the Securities and Exchange Commission
pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities Exchange Act
of 1934 by us subsequent to the date of this prospectus supplement shall be
deemed to be incorporated by reference into this prospectus supplement and to be
a part hereof from the date of filing of such documents with the Securities and
Exchange Commission. Any statement contained in this prospectus supplement or in
a document incorporated or deemed to be incorporated by reference in this
prospectus supplement shall be deemed to be modified or superseded for purposes
of this prospectus supplement to the extent that a statement contained in this
prospectus supplement or in any other subsequently filed document which also is
or is deemed to be incorporated by reference herein modifies or supersedes such
statement. Any such statement so modified or superseded shall not be deemed,
except as so modified or superseded, to constitute a part of this prospectus
supplement.
Statements contained in this prospectus supplement or in any document
incorporated by reference in this prospectus supplement as to the contents of
any contract or other document referred to herein or therein are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the documents incorporated by
reference, each such statement being qualified in all respects by such
reference.
This prospectus supplement incorporates documents by reference that are not
presented herein or delivered herewith. Copies of such documents, other than
exhibits to such documents that are not specifically incorporated by reference
herein, are available without charge to any person to whom this prospectus
supplement is delivered, upon written or oral request to: Metromedia Fiber
Network, Inc., c/o Metromedia Company, One Meadowlands Plaza, East Rutherford,
NJ 07073; Attention: General Counsel; tel: (201) 531-8000.
S-91
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
METROMEDIA FIBER NETWORK, INC. AND SUBSIDIARIES:
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1998 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1998, 1997 and 1996............................ F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996............................ F-5
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) for the years ended December 31, 1998, 1997 and
1996........................................................ F-6
Notes to Consolidated Financial Statements.................. F-7
Consolidated Statements of Operations for the six months
ended
June 30, 1998 and 1999 (unaudited).......................... F-24
Consolidated Balance Sheet as of June 30, 1999
(unaudited)............................................... F-25
Consolidated Statements of Cash Flows for the six months
ended
June 30, 1998 and 1999 (unaudited).......................... F-26
Notes to Consolidated Financial Statements.................. F-27
ABOVENET COMMUNICATIONS INC.:
Independent Auditors' Report................................ F-36
Consolidated Balance Sheets as of June 30, 1998 and 1999.... F-37
Consolidated Statements of Operations for the Years Ended
June 30, 1997, 1998 and 1999.............................. F-38
Consolidated Statements of Stockholders' Equity for the
Years Ended
June 30, 1997, 1998 and 1999.............................. F-39
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1998 and 1999.............................. F-40
Notes to Consolidated Financial Statements.................. F-41
PALO ALTO INTERNET EXCHANGE:
Independent Accountants' Reports............................ F-57
Combined Statements of Assets to be Acquired and Liabilities
to be Assumed as of March 27, 1999 (unaudited), December
26, 1998 and December 27, 1997............................ F-59
Combined Statement of Revenues and Direct Expenses for the
Quarters Ended March 27, 1999 and March 26, 1998
(unaudited), period from June 12, 1998 through December
26, 1998, period from December 28, 1997 through June 11,
1998 and the Fiscal Years Ended December 27, 1997 and
December 29, 1996......................................... F-60
Notes to Combined Statements of Assets to be Acquired and
Liabilities to be Assumed and Combined Statements of
Revenues and Direct Expenses.............................. F-61
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Metromedia Fiber Network, Inc.
We have audited the accompanying consolidated balance sheets of Metromedia
Fiber Network, Inc. and Subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended December
31, 1998. Our audits also included the financial statement schedule listed in
the index at Item 14(a). These consolidated financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and schedule based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Metromedia Fiber Network, Inc. and Subsidiaries as of December 31, 1998 and
1997, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
<TABLE>
<S> <C> <C>
/s/ ERNST & YOUNG LLP
</TABLE>
New York, New York
March 4, 1999, except for paragraph 16 of note 2,
as to which the date is May 19, 1999
F-2
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $569,319 $138,846
Pledged securities, current portion....................... 61,384 --
Accounts receivable....................................... 30,910 837
Prepaid expenses and other current assets................... 4,210 874
-------- --------
Total current assets.................................. 665,823 140,557
Fiber optic transmission network and related equipment,
net....................................................... 244,276 24,934
Property and equipment, net................................. 2,716 759
Pledged securities.......................................... 30,512 --
Investment in/advance to joint venture...................... 4,156 56
Other assets................................................ 26,934 1,072
-------- --------
Total assets.......................................... $974,417 $167,378
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,106 $ 3,072
Accrued liabilities....................................... 96,512 3,271
Deferred revenue, current portion......................... 8,100 1,184
Capital lease obligations, current portion................ 55 --
-------- --------
Total current liabilities............................. 110,773 7,527
Senior notes payable........................................ 650,000 --
Capital lease obligations................................... 22,675 --
Deferred revenue............................................ 33,455 10,311
Commitments and contingencies (see notes)
Stockholders' equity:
Class A common stock, $.01 par value; 360,000,000 shares
authorized; 155,210,220 and 149,793,136 shares issued
and outstanding, respectively........................... 1,552 1,498
Class B common stock, $.01 par value; 40,000,000 shares
authorized; 33,769,272 shares issued and outstanding.... 338 338
Additional paid-in capital................................ 197,861 190,927
Accumulated deficit....................................... (42,237) (43,223)
-------- --------
Total stockholders' equity............................ 157,514 149,540
-------- --------
Total liabilities and stockholders' equity............ $974,417 $167,378
======== ========
</TABLE>
See accompanying notes
F-3
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Revenue..................................................... $36,436 $ 2,524 $ 236
Expenses:
Cost of sales............................................. 13,937 3,572 699
Selling, general and administrative....................... 14,712 6,303 2,070
Consulting and employment incentives...................... 248 19,218 3,652
Settlement agreement...................................... 3,400 -- --
Depreciation and amortization............................. 1,532 757 613
------- -------- --------
Income (loss) from operations............................... 2,607 (27,326) (6,798)
Interest income........................................... 8,788 1,808 --
Interest expense (including financing costs).............. (6,861) (741) (3,561)
Loss from joint venture................................... (146) -- --
------- -------- --------
Income (loss) before income taxes........................... 4,388 (26,259) (10,359)
Income taxes.............................................. 3,402 -- --
------- -------- --------
Net income (loss)........................................... $ 986 $(26,259) $(10,359)
======= ======== ========
Net income (loss) per share, basic.......................... $ 0.01 $ (0.28) $ (0.14)
======= ======== ========
Net income per share, diluted............................... $ 0.01 N/A N/A
======= ======== ========
Weighted average number of shares outstanding, basic........ 186,990 94,894 71,716
======= ======== ========
Weighted average number of shares outstanding, diluted...... 219,524 N/A N/A
======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ 986 $(26,259) $(10,359)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 1,532 757 613
Stock options and warrants issued for services.......... 248 19,439 5,395
Warrants issued for settlement agreement................ 3,000 -- --
Deferred taxes.......................................... 2,707
Reserve for note receivable............................. -- 338 --
Loss from joint venture................................. 146 -- --
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable..................................... (30,073) (656) 2
Accounts payable and accrued expenses................... 13,449 (12) 758
Deferred revenue........................................ 30,060 10,387 833
Other................................................... (4,070) (1,806) 12
-------- -------- --------
Net cash provided by (used in) operating activities......... 17,985 2,188 (2,746)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures on fiber optic transmission network and
related equipment......................................... (114,849) (19,206) (974)
Deposit payments............................................ (4,675) (87) --
Investment in / advance to joint venture.................... (4,246) (56) --
Purchase of pledged securities.............................. (91,896) -- --
Capital expenditures on property and equipment.............. (2,305) (318) (95)
-------- -------- --------
Net cash used in investing activities..................... (217,971) (19,667) (1,069)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 1,038 133,975 123
Proceeds from issuance of preferred stock and warrants...... -- 32,500 2,025
Dividends paid on preferred stock........................... -- (77) --
Repayments of notes payable- private placement.............. -- (1,408) 25
Repayments of notes payable................................. -- (5,950) (3,350)
Proceeds from notes payables, net........................... 630,000 -- 5,450
Payments of capital lease obligations....................... (579) -- --
Purchase of common stock.................................... -- (1,140) --
Purchase of preferred stock................................. -- (2,039) --
-------- -------- --------
Net cash provided by financing activities................. 630,459 155,861 4,273
-------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 430,473 138,382 458
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD............... 138,846 464 6
CASH AND CASH EQUIVALENTS-END OF PERIOD..................... $569,319 $138,846 $ 464
Supplemental information:
Interest paid........................................... $ 219 $ 1,145 $ 996
======== ======== ========
Income taxes paid....................................... $ 3,760 $ -- $ --
======== ======== ========
Supplemental disclosure of significant non-cash investing
activities:
Capital lease obligations............................... $ 23,309 $ -- $ --
======== ======== ========
Accrued capital expenditures............................ $ 82,916 $ -- $ --
======== ======== ========
</TABLE>
See accompanying notes
F-5
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
COMMON STOCK COMMON STOCK
SERIES A & B ------------------- -------------------
PREFERRED STOCK COMMON STOCK CLASS CLASS
------------------- ------------------- A B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995....... -- -- 49,920 $ 499 -- $ -- -- $ --
Issuance of common stock and
warrants for services rendered... -- -- 21,305 213 -- -- -- --
Issuance of common stock and
warrants related to debt
financing activities............. -- -- 6,870 69 -- -- -- --
Issuance of common stock in
connection with the exercise of
warrants......................... -- -- 1,525 15 -- -- -- --
Sale of common stock and
warrants......................... -- -- 392 4 -- -- -- --
Sale of preferred stock with
warrants......................... 300 30 -- -- -- -- -- --
Net loss for the year.............. -- -- -- -- -- -- -- --
---- --- ------- ----- ------- ------ ------ ----
Balance at December 31, 1996....... 300 30 80,012 800 -- -- -- --
Issuance of common stock in
connection with the exercise of
warrants......................... -- -- 1,216 12 -- -- -- --
Issuance of options to employees... -- -- -- -- -- -- -- --
Issuance of warrants in connection
with debt extension.............. -- -- -- -- -- -- -- --
Dividends on preferred stock....... -- -- -- -- -- -- -- --
Repurchase and retirement of Series
A preferred stock and warrants... (300) (30) -- -- -- -- -- --
Repurchase and retirement of common
stock and warrants............... -- -- (4,707) (47) -- -- -- --
Sale of Series B preferred stock... 16 -- -- -- -- -- -- --
Net proceeds from initial Public
Offering......................... -- -- -- -- 72,863 729 -- --
Conversion of Common Stock to
Series A Common Stock............ -- -- (76,521) (765) 76,520 765 -- --
Conversion of Series B Preferred
Stock to Series A & B Common
Stock............................ (16) -- -- -- 314 3 33,769 338
Sale of Series A Common Stock for
warrant.......................... -- -- -- -- 96 1 -- --
Net loss for the year.............. -- -- -- -- -- -- -- --
---- --- ------- ----- ------- ------ ------ ----
Balance at December 31, 1997....... -- -- -- -- 149,793 1,498 33,769 338
Issuance of options to employees... -- -- -- -- -- -- -- --
Issuance of warrants in connection
with settlement agreement........ -- -- -- -- -- -- -- --
Issuance of common stock in
connection with the exercise of
warrants......................... -- -- -- -- 4,317 43 -- --
Issuance of common stock in
connection with the exercise of
stock options.................... -- -- -- -- 1,100 11 -- --
Net income for the year............ -- -- -- -- -- -- -- --
Income tax benefit from exercises
of employee stock options........ -- -- -- -- -- -- -- --
---- --- ------- ----- ------- ------ ------ ----
Balance at December 31, 1998....... -- -- -- $ -- 155,210 $1,552 33,769 $338
==== === ======= ===== ======= ====== ====== ====
<CAPTION>
ADDITIONAL
PAID-IN ACCUMULATED
CAPITAL DEFICIT TOTAL
---------- ------------ --------
<S> <C> <C> <C>
Balance at December 31, 1995....... $ (454) $ (5,381) (5,336)
Issuance of common stock and
warrants for services rendered... 4,702 -- 4,915
Issuance of common stock and
warrants related to debt
financing activities............. 1,703 -- 1,772
Issuance of common stock in
connection with the exercise of
warrants......................... (15) -- --
Sale of common stock and
warrants......................... 120 -- 124
Sale of preferred stock with
warrants......................... 1,995 -- 2,025
Net loss for the year.............. -- (10,359) (10,359)
-------- -------- --------
Balance at December 31, 1996....... 8,051 (15,740) (6,859)
Issuance of common stock in
connection with the exercise of
warrants......................... (2) -- 10
Issuance of options to employees... 19,218 -- 19,218
Issuance of warrants in connection
with debt extension.............. 220 -- 220
Dividends on preferred stock....... -- (77) (77)
Repurchase and retirement of Series
A preferred stock and warrants... (1,996) (13) (2,039)
Repurchase and retirement of common
stock and warrants............... 42 (1,134) (1,139)
Sale of Series B preferred stock... 32,500 -- 32,500
Net proceeds from initial Public
Offering......................... 133,150 -- 133,879
Conversion of Common Stock to
Series A Common Stock............ -- -- --
Conversion of Series B Preferred
Stock to Series A & B Common
Stock............................ (341) -- --
Sale of Series A Common Stock for
warrant.......................... 85 -- 86
Net loss for the year.............. -- (26,259) (26,259)
-------- -------- --------
Balance at December 31, 1997....... 190,927 (43,223) 149,540
Issuance of options to employees... 248 -- 248
Issuance of warrants in connection
with settlement agreement........ 3,000 -- 3,000
Issuance of common stock in
connection with the exercise of
warrants......................... 118 -- 161
Issuance of common stock in
connection with the exercise of
stock options.................... 861 -- 872
Net income for the year............ -- 986 986
Income tax benefit from exercises
of employee stock options........ 2,707 -- 2,707
-------- -------- --------
Balance at December 31, 1998....... $197,861 $(42,237) $157,514
======== ======== ========
</TABLE>
F-6
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BUSINESS OPERATIONS AND LINE OF BUSINESS
The Company is a facilities-based provider of a technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate/government customers in the United States. The Company
focuses its operations on domestic intracity fiber optic networks in clusters of
the 15 largest cities, based on population, throughout the United States.
The Company operates high-bandwidth fiber optic communications networks in
New York and Philadelphia. The Company also is engineering and constructing
networks in Washington, D.C., Chicago, San Francisco and Boston. The Company is
designing networks in Atlanta, Dallas, Houston, Seattle and Los Angeles.
The Company has also built or obtained intercity fiber optic capacity that
links certain of its intracity networks. The Company has under construction a
250-route mile network from New York to Washington, D.C. The Company has also
obtained rights for fiber optic capacity with other facilities-providers and
obtained fiber optic capacity linking certain of the metropolitan areas (New
York-Chicago, New York-Boston, Chicago-Seattle-Portland) in which it plans to
construct intracity networks, except in Portland.
In addition, the Company has entered into a joint venture with a United
Kingdom telecommunications company to connect its New York network to London.
The Company has formed a joint venture to construct a high-bandwidth fiber optic
network connecting 13 major cities in Germany and obtain certain additional
fiber optic capacity in Western Europe.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant inter-company balances and transactions
have been eliminated in consolidation. The investment in a 50% owned joint
venture with a United Kingdom telecommunications company is accounted for by the
equity method. Certain balances in the consolidated financial statements have
been restated to conform to the current period presentation.
MANAGEMENT ESTIMATES
The preparation of financial statements, in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results may differ from those estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts for cash, accounts receivable, accounts payable and
accrued liabilities approximate their fair value. The fair value of long-term
debt is determined based on quoted market rates or the cash flows from such
financial instruments discounted at the Company's estimated current interest
rate to enter similar financial instruments. At December 31, 1998, the fair
value of the Company's fixed rate long-term debt for the 10% Senior Notes due in
2008, was $650 million. The recorded amounts for all other long-term debt of the
Company approximates fair values.
F-7
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CASH AND CASH EQUIVALENTS
For purposes of the consolidated financial statements, the Company considers
all highly liquid investments with an original maturity of three months or less
when purchased to be cash equivalents.
PLEDGED SECURITIES
In connection with the sale of 10% Senior Notes (see Note 9), a portion of
the net proceeds was utilized to purchase a portfolio consisting of U.S.
government securities, which mature at dates sufficient to provide for payment
in full of interest on the 10% Senior Notes through May 15, 2000. The pledged
securities are stated at cost, adjusted for premium amortization and accrued
interest. The fair value of the pledged securities approximates the carrying
value.
ACCOUNTS RECEIVABLE
Accounts receivable includes trade receivables and costs and estimated
earnings in excess of billings for those contracts where the Company utilizes
the percentage of completion method for recognizing revenue.
FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
The fiber optic transmission network and related equipment are stated at
cost. Costs in connection with the installation and expansion of the network are
capitalized. Depreciation is computed using the straight-line method through the
life of either the franchise agreement or right of way for the related network.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
OTHER ASSETS
Other assets include debt issuance costs, franchise agreements and deposits.
Those costs, which are amortizable, are amortized on a straight-line basis over
a period ranging from ten to fifteen years.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The Company has
identified no such impairment indicators.
INCOME TAXES
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
109, "Accounting for Income Taxes," the Company recognizes deferred income taxes
for the tax consequences in future years of differences between the tax bases of
assets and liabilities and their financial reporting amounts at each year end,
based on enacted tax laws and statutory tax rates applicable to the periods in
which the differences are expected to affect taxable income. Valuation
allowances are established when
F-8
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
necessary to reduce deferred tax assets to the amount that is "more likely than
not" to be realized. The provision for income taxes is the tax payable for the
period and the change, during the period, in deferred tax assets and
liabilities.
RECAPITALIZATIONS
In April 1997, the Company increased its authorized common stock of $.01 par
value to 60,000,000 shares; in addition, authorized preferred stock with a par
value of $.01 was increased to 2,000,000 shares. On April 29, 1997, the Company
effected a 3-for-one stock split of its outstanding shares of common stock.
In September 1997, the Company effected a .507-for-one reverse stock split
of its common stock.
On October 28, 1997, the total authorized number of shares of common stock
of the Company was increased to 200 million shares, par value $0.01 per share,
of which 180 million shares were designated Class A common stock and 20 million
shares were designated Class B common stock.
On August 28, 1998, the Company completed a two-for-one stock split of the
Company's Class A and Class B Common Stock in the form of a 100 percent stock
dividend to all shareholders of record as of the close of business on August 7,
1998. In addition, on December 22, 1998, the Company completed another
two-for-one stock split of the Company's Class A and Class B Common Stock in the
form of a 100 percent stock dividend to all shareholders of record as of the
close of business on December 8, 1998.
On May 19, 1999, the Company completed a two-for-one stock split of the
Company's Class A Common Stock and Class B Common Stock in the form of a 100
percent stock dividend.
The accompanying financial statements give retroactive effect to the above
recapitalizations.
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.
F-9
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
STOCK OPTIONS
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock options.
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 24,762,600 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 at
the date of grant.
EARNINGS PER SHARE
In accordance with the Financial Accounting Standards Board's ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share," basic earnings per share is computed based upon the weighted average
number of common shares outstanding during the periods. Diluted earnings per
share is computed based upon the weighted average number of common shares
outstanding plus the assumed issuance of common stock equivalents computed in
accordance with the treasury stock method.
DEFERRED REVENUE
Deferred revenue represents prepayments received from customers for future
use of the Company's fiber optic network as well as prepayment for installation
services, which have not yet been provided. Lease payments are structured as
either prepayments or monthly recurring charges. Prepayments are accounted for
as deferred revenues and recognized over the term of the respective customer
lease agreement. At December 31, 1998, the Company had received prepaid lease
payments in excess of revenue recognized totaling $41.6 million.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB released SFAS No. 130 "Reporting Comprehensive
Income," governing the reporting and display of comprehensive income and its
components. This statement is effective for financial statements issued for
periods beginning after December 15, 1997. The Company adopted this standard as
required in fiscal 1998 in its Statement of Changes in Stockholders' Equity
(Deficiency).
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of
an Enterprise and Related Information." SFAS No. 131 redefines how operating
segments are determined and requires disclosure of certain financial and
descriptive information about a company's operating segments. In 1998 the
Company adopted SFAS No. 131. The Company currently operates in one business
segment.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments and hedging activities. This standard is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The
F-10
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Company does not expect the adoption of SFAS No. 133 to have an impact on its
results of operations, financial position or cash flows.
NOTE 3: ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Trade accounts receivable................................... $ 560 $837
Costs and earnings in excess of billings.................... 30,134 --
Other....................................................... 216 --
------- ----
$30,910 $837
======= ====
</TABLE>
At December 31, 1998, three customers accounted for 43%, 40% and 14%,
respectively, of the Company's combined accounts receivable.
NOTE 4: FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
Fiber optic transmission network and related equipment consists of the
following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Material-fiber optic cable............................... $ 23,436 $ 1,133
Engineering and layout costs............................. 7,101 3,322
Fiber optic cable installation costs..................... 16,639 1,869
Other.................................................... 4,242 2,019
Construction in progress................................. 195,256 17,835
-------- -------
246,674 26,178
Less: accumulated depreciation........................... (2,398) (1,244)
-------- -------
$244,276 $24,934
======== =======
</TABLE>
Construction in progress includes amounts incurred in the Company's
expansion of its network. These amounts include fiber optic cable and other
materials, engineering and other layout costs, fiber optic cable installation
costs and other network assets held under capital leases. Construction in
progress also includes payments for rights of way for the underlying sections of
the network build.
F-11
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------
1998 1997 USEFUL LIFE
-------- -------- -----------
<S> <C> <C> <C>
Leasehold improvements........................... $ 614 $538 174 months
Furniture, equipment and software................ 2,581 352 5 years
------ ----
3,195 890
Less: accumulated depreciation and
amortization................................... (479) (131)
------ ----
$2,716 $759
====== ====
</TABLE>
NOTE 6: INVESTMENT IN/ADVANCES TO JOINT VENTURE
The Company has a joint venture agreement with Racal Telecommunications,
Inc. ("Racal"), that provides broad-based transatlantic communication services
between New York and London. As of December 31, 1997, neither party had made a
capital contribution. The balance of the investment at December 31, 1997
represents advances made to the joint venture by the Company. During 1998, each
party made capital contributions of $4.3 million. The Company and Racal may each
be required to contribute additional capital as needed for their respective 50%
interests. The Company accounts for its investment using the equity method. For
1998, the Company recorded a $146,000 loss from the joint venture based on its
50% interest in the joint venture. Included within the Company's accounts
receivable is $70,000 for administrative services provided to the joint venture
which were not reimbursed as of December 31, 1998.
NOTE 7: GERMAN NETWORK BUILD
In February, 1999, the Company entered into a joint venture with Viatel,
Inc. and Carrier 1 Holdings, Ltd. to jointly build a national fiber optic
telecommunications network in Germany. Upon completion of construction, the
joint venture will be dissolved and the Company will own its own separate German
broadband network. In connection with the terms of this agreement, the Company
made a deposit payment of $4.7 million, during the third quarter of 1998. Upon
signing a definitive agreement, the Company provided an irrevocable standby
letter of credit in the amount of $64 million as security for the construction
costs of the network, which, in addition to the deposit payment made, covers the
Company's portion of the estimated construction costs.
NOTE 8: RELATED PARTY TRANSACTIONS
The Company is a party to a management agreement under which the Company's
controlling shareholder, Metromedia Company, provides consultation and advisory
services relating to legal matters, insurance, personnel and other corporate
policies, cash management, internal audit and finance, taxes, benefit plans and
other services as are reasonably requested. The management agreement terminates
on December 31, of each year, and is automatically renewed for successive one-
year terms unless either party terminates upon 60 days prior written notice. The
1998 management fee under the agreement was $500,000 per year, payable quarterly
at a rate of $125,000. The Company is also obligated to reimburse Metromedia
Company for all its out-of-pocket costs and expenses incurred and advances paid
by Metromedia Company in connection with the management agreement. In 1997,
F-12
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 8: RELATED PARTY TRANSACTIONS (CONTINUED)
Metromedia Company received no money for its out-of-pocket costs and expenses or
for interest on advances extended by it to the Company under the management
agreement.
In March and June 1997, the Company entered into two one-year leases for
office space with an affiliate. Subsequent to June 1997, the affiliate sold this
property. For the year ended December 31, 1997, office rent expenses for these
leases amounted to approximately $110,000.
NOTE 9: SETTLEMENT AGREEMENTS
In February 1996, the Company entered into a settlement agreement with a
former officer regarding the termination of his employment. This agreement
provided for the Company to make payments to the officer totaling $1,003,000,
including interest. The former officer's services effectively terminated prior
to December 31, 1995. Accordingly, as of December 31, 1995, the Company recorded
$876,146 as a liability in accordance with the terms of the settlement
agreement. The settlement agreement also reaffirmed an option previously issued
to this former officer on May 1, 1995, which entitles the holder to purchase
415,766 shares of the Company's common stock at $0.003 per share through
February 1, 1999. In 1997 the Company repurchased and retired the warrants held
by this former officer. On November 14, 1996, the Company amended the above
referenced settlement agreement with the former officer, whereby a consultant to
the Company agreed to purchase common stock of the company from the former
officer and certain of his affiliates in exchange for $640,000 and the complete
satisfaction of the aforementioned liability.
On February 11, 1997, the Company entered into an agreement with a
consultant/director. Pursuant to the agreement the Company agreed to pay the
consultant/director a fee of $250,000 in full and complete payment for all
services provided to the Company by the consultant/director and for any fees or
compensation due to the consultant/director resulting from any prior agreements
with the Company, and the consultant/director agreed to release the Company from
any claims against the Company.
In March 1998, the Company entered into a settlement agreement with Howard
Katz, Realprop Capital Corporation and Evelyn Katz, among others, which settled
and resulted in the dismissal of litigation for which the Company was a
defendant in KATZ, ET AL. V. NATIONAL FIBER NETWORK, INC., ET AL., No. 97 Civ.
2764 (JGK) (the "Katz Litigation").
NOTE 10: NOTES PAYABLE
On November 25, 1998, the Company issued and sold $650.0 million of 10%
Senior Notes due November 15, 2008. The net proceeds of the 10% Senior Notes
were approximately $630.0 million, after deducting offering costs, which are
included in other long-term assets. Interest on the 10% Senior Notes is payable
semi-annually in arrears on May 15 and November 15 of each year, commencing May
15, 1999. Approximately $91.5 million of the net proceeds was utilized to
purchase certain pledged securities, the proceeds of which, together with
interest earned on such securities, will be used to satisfy the Company's
semi-annual interest obligations through May 15, 2000. The 10% Senior Notes are
subject to redemption at the option of the Company, in whole or in part, at any
time on or after November 15, 2003, at specified redemption prices. In addition,
prior to November 15, 2001, the Company may use the net cash proceeds from
certain specified equity transactions to redeem up to 35% of the 10% Senior
Notes at specified redemption prices.
F-13
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 10: NOTES PAYABLE (CONTINUED)
The indentures pursuant to which the 10% Senior Notes are issued contain
certain covenants that, among other matters, limit the ability of the Company
and its subsidiaries to incur additional indebtedness, issue stock in
subsidiaries, pay dividends or make other distributions, repurchase equity
interests or subordinated indebtedness, engage in sale and leaseback
transactions, create certain liens, enter into certain transactions with
affiliates, sell assets, and enter into certain mergers and consolidations.
In the event of a change in control of the Company as defined in the
indentures, holders of the 10% Senior Notes will have the right to require the
Company to purchase their Notes, in whole or in part, at a price equal to 101%
of the stated principal amount thereof, plus accrued and unpaid interest, if
any, thereon to the date of purchase. The 10% Senior Notes are senior unsecured
obligations of the Company, and are subordinated to all current and future
indebtedness of the Company's subsidiaries, including trade payables.
NOTE 11: EQUITY TRANSACTIONS
COMMON STOCK
On November 3, 1997, the Company completed the initial public offering (the
"IPO") of 72,864,000 shares of its Class A common stock, at an offering price of
$2 per share. The net proceeds to the Company from the IPO, after deducting
expenses of the IPO, were approximately $133.9 million.
In addition, on October 28, 1997, a total of 76,519,520 shares of the common
stock of the Company owned by stockholders prior to the IPO were exchanged for
an equal number of shares of Class A common stock. The Company also reserved for
issuance 34,083,888 shares of Class A common stock for conversion of the
Class B common stock.
On October 28, 1996, a shareholder granted to the Company's Chairman of the
Board an option to purchase 3,199,112 shares of common stock of the company for
an aggregate exercise price of $500,000. By letter dated December 3, 1996, the
option was amended to reduce the number of option shares to 2,590,712 shares.
The Chairman thereafter assigned the option to the Company. On February 11,
1997, the Company exercised the option by payment of $500,000.
On April 15, 1996, the Company entered into a stock purchase agreement with
Vento & Company of New York, LLC ("VCNY"). Pursuant to this agreement, the
Company issued 12,168,000 shares of common stock to VCNY as consideration for
services provided by VCNY. The Company estimated the value of the stock issued
approximated $2,760,000.
Concurrent with the execution of the aforementioned stock purchase
agreement, the parties entered into a consulting agreement. The term of the
agreement was from April 15, 1996 to April 15, 2001. Under the terms of the
agreement, VCNY was to provide guidance and advice with respect to the
management of the day-to-day operations of the Company's fiber optic
transmission network. In consideration for such services, the Company reimbursed
VCNY for all reasonable personnel and travel costs incurred by VCNY with respect
to the performance of these services. On October 9, 1996, the Company entered
into a settlement agreement with the Company's former chief executive officer
and VCNY regarding the termination of such officer's employment and services
provided by VCNY. The agreement provided for VCNY to deliver a total of
12,168,000 shares of common stock in exchange for
F-14
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
payments made by the Company. The payments were not made and the sale of the
shares and the Company's obligation to buy the shares was deemed null and void.
In September 1996, the Company sold 87,472 shares of common stock to three
individuals for total proceeds of $23,500.
In August 1996, the Company issued 1,460,160 shares of common stock for
consulting services. The Company recorded a non-cash charge of $334,800 for such
issuance.
In July 1996, the Company issued 97,344 shares of common stock as
consideration for consulting services. The Company recorded a non-cash charge of
$21,200 for such issuance. In addition, the Company issued 1,204,632 shares to
three employees for services rendered. The transaction was later rescinded and
the shares were returned to the Company.
In June 1996, the Company sold a total of 304,200 shares of common stock to
two individuals for total proceeds of $100,000. Concurrent with the issuance of
these shares, the Company issued warrants to these shareholders entitling the
holders to purchase a total of 304,200 shares at $0.33 per share for a
three-year period.
On January 12, 1996, the Company entered into an agreement with its legal
counsel to issue common stock as additional consideration for legal services
provided. Pursuant to this agreement, as amended, the Company issued a total of
3,928,840 shares of its common stock. Management has estimated the value of the
3,928,840 shares issued to be $907,301 and has recorded a non-cash charge in
connection with such issuance.
PREFERRED STOCK
On April 30, 1997, the Company sold an aggregate of 67,226,600 shares of
Series B convertible preferred stock, par value $0.01 per share (the "Series B
preferred stock"), to Metromedia Company and affiliates ("Metromedia") for an
aggregate purchase price of $32.5 million (the "Metromedia Investment"). Each
share of the Series B preferred stock was convertible into 507 shares of the
Company's common stock. On October 28, 1997, the Series B convertible preferred
shares were converted into 34,083,888 shares of Class B common stock. Further,
on October 28,1997, a total of 314,616 shares of Class B common stock
outstanding were converted into an equivalent number of shares of Class A common
stock.
A portion of the proceeds from the Metromedia Investment was used to repay
the Metromedia Loan, discussed below, and accrued interest thereon ($4,058,127),
repay other short-term indebtedness ($3,485,000), and redeem (for $2,115,000)
all of the outstanding shares of the Company's preferred stock (the "Series A
preferred stock") and related warrants.
Through April 30, 1997, Metromedia loaned the Company an aggregate of
$4,000,000 (the "Metromedia Loan"). A portion of the proceeds from the
Metromedia Loan was used to purchase 4,707,760 shares of the Company's common
stock and warrants to purchase 1,663,064 shares of its common stock.
No shares of the Company's Series A preferred stock or Series B preferred
stock remained outstanding at December 31, 1997. Both the Series A and Series B
preferred stock of the Company have been eliminated pursuant to actions by the
Board of Directors.
F-15
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
STOCK WARRANTS
A. In 1996, the Company entered into an agreement with a Customer for
exclusive usage rights for fibers on portions of its network. In connection with
this agreement, the Company borrowed $4.9 million from the customer. On
April 30, 1997, the Company amended this agreement to satisfy the obligations of
the above-referenced note by providing (i) additional leased fiber miles,
(ii) a cash payment of $1,370,000 and (iii) a warrant to purchase common stock
of the Company. In July 1998, the agreement was amended to include additional
fiber miles on the Company's network and for cancellation of the warrants.
B. From October 1995 through February 1996, the Company issued and sold a
private offering of $858,000 of convertible subordinated notes. Concurrent with
the issuance of these notes, warrants were issued by the Company to the
noteholders to purchase 1,044,016 shares of common stock at $1.00 per share
through November 2000. In 1996 and 1997, in exchange for the extension of the
due dates of the notes, the Company issued warrants to purchase 1,318,084 shares
of its common stock at $1.00 per share and recorded a charge of $111,306 and
$220,036 in 1996 an 1997, respectively. In 1997, the Company repaid the
outstanding balance of these notes plus all accrued interest. As of
December 31, 1998, 1,564,032 of such warrants have been exercised.
C. In September 1996, the Company entered into a loan agreement with a
finance company for $550,000. The loan bore interest at 10% per annum and was
repaid in 1997. As an incentive for the loan, the Company issued to the finance
company warrants to purchase 754,416 shares of common stock at an exercise price
of $0.74. The warrants are exercisable through September 1999. In 1996, the
Company recorded a non-cash charge of $13,640 in connection with the issuance of
the warrants. All of the warrants have been exercised.
D. In August 1995, the Company initiated a $600,000 private offering of
subordinated notes which bore interest at an annual rate of 15% and were repaid
in 1997. With the issuance of the notes, warrants were issued to the
noteholders. In April 1996, the Company issued a total of 474,872 shares of the
Company's common stock in exchange for the surrender and cancellation of the
warrants and a three-month extension of the maturity date of the notes. In 1996,
the Company recorded a non-cash charge of $107,322 in connection with such
issuance.
E. In April 1995, the Company entered into a loan agreement with a customer
for $500,000 bearing interest at 11% per annum. In July 1997, the note was
repaid in full. In connection with this loan, the Company issued the customer a
warrant entitling the holder to purchase a total of 5,353,336 shares of the
Company's common stock. In February 1997, this warrant was exchanged for a new
warrant to purchase 3,650,400 shares of the Company's common stock at $0.61 per
share. The new warrant expires on February 13, 2000. As of December 31, 1998,
none of the warrants have been exercised.
F. On December 13, 1996, the Company issued and sold to a private investor,
for an aggregate cash consideration of $2,025,000, (i) 1,200,000 shares of 10%
cumulative convertible preferred stock (the "Series A preferred stock") bearing
dividends at a rate of $.17 per share per annum, (ii) warrants to purchase
912,600 shares of Class A common stock at an exercise price of $0.62 per share
and (iii) a contingent stock subscription warrant to purchase a number of shares
of Class A common stock (such number to be determined based on certain future
events) at an exercise price of $0.005 per share. In
F-16
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
connection with the Metromedia Investment, the private investor allowed the
Series A preferred stock and the contingent warrants to be redeemed at an
aggregate redemption price of $2,115,000 (which includes accrued but unpaid
dividends on the Series A preferred stock) and the number of shares underlying
the private investor's warrants to be increased from 912,600 to 1,825,200. In
January 1998, the private investor made a cashless exercise of all its warrants
and the number of its shares issuable upon exercise was reduced by the number of
shares at the closing on the day of exercise having a value equal to the
aggregate exercise price. Accordingly, the Company issued the private investor
1,382,120 common shares for all its warrants.
G. In June 1996, the Company granted 1,216,800 common stock purchase
warrants to the Company's legal counsel exercisable at $.01 per share for a
period of four years as additional consideration for legal services provided.
The Company recorded a non-cash charge of $200,000 for such issuance. As of
December 31, 1998, all of the warrants have been exercised.
As of December 31, 1998, in the aggregate, the Company had reserved
approximately 4,456,100 shares of its Class A common stock for exercise of
outstanding warrants.
STOCK OPTIONS
In 1997, the Company granted to certain officers, employees and directors
options to purchase up to 24,761,888 shares of its Class A common stock. The
options have exercise prices between $0.25 and $0.96 per share and expire in
2007. The Company recorded a non-cash charge of $19,218,591 for such issuance.
On October 28, 1997, the Stockholders of the Company approved the Metromedia
Fiber Network, Inc. 1997 Incentive Stock Plan ("1997 Option Plan"). The 1997
Option Plan authorized the award of up to 8,000,000 options to acquire Class A
common stock of the Company to directors, officers and employees of the Company
and others who are deemed to provide substantial and important services to the
Company. In 1997, options to purchase 4,900,000 shares of the Company's Class A
common stock were granted at an exercise price of $2.00 per share, the market
price at the date of grant. In 1998, options to purchase 3,400,000 shares of the
Company's Class A common stock were granted at exercise prices ranging from
$1.94 to $4.30 per share, the market price at the date of grant. Of these
grants, 1,115,000 were canceled and 235,000 were exercised as of December 31,
1998.
On May 18, 1998, the Stockholders of the Company approved the Metromedia
Fiber Network, Inc. 1998 Incentive Stock Plan ("1998 Option Plan"). The 1998
Option Plan authorized the award of up to 20,000,000 options to acquire Class A
common stock of the Company to directors, officers and employees of the Company
and others who are deemed to provide substantial and important services to the
Company. Options to purchase 6,918,000 shares of the Company's Class A common
stock were granted at exercise prices ranging from $3.64 to $13.25 per share,
the market prices at the dates of grant.
The compensation committee of the Company's Board of Directors is
responsible for determining the type of award, when and to whom awards are
granted, the number of shares and terms of the awards and the exercise price.
The options are exercisable for a period not to exceed ten years from the date
of the grant. Vesting periods range from immediate vesting to four years.
F-17
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
The following table summarizes the stock option transactions for the two
years ended December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS EXERCISE PPRICES
-------------- ----------------
<S> <C> <C>
Granted prior to December 31, 1997.......................... 29,661,888 $0.25 to $ 2.00
----------
Balance outstanding at December 31, 1997.................... 29,661,888 0.25 to 2.00
----------
Granted..................................................... 10,318,000 1.94 to 13.25
Excercised.................................................. 1,100,048 0.25 to 3.74
Cancelled................................................... 1,135,000 0.25 to 4.30
----------
Balance outstanding at December 31, 1998.................... 37,744,840 0.25 to 13.25
==========
Exercisable at:
December 31, 1997........................................... 24,482,344 0.25 to 0.96
==========
December 31, 1998........................................... 24,881,840 0.25 to 2.00
==========
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS GRANTED OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED WEIGHTED
RANGES OF NUMBER AVERAGE AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
YEAR OF GRANT PRICES AT 12/31/98 LIFE (YEARS) PRICE AT 12/31/98 PRICE
- ------------- --------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
1997.................. $0.25 to $ 2.00 27,596,840 8.40 $0.49 24,881,840 $0.33
1998.................. 1.94 to 13.25 10,148,000 9.42 4.88 -- --
---------- ---- ----- ---------- -----
37,744,840 8.67 $1.67 24,881,840 $0.33
========== ==== ===== ========== =====
</TABLE>
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Standards No. 123, "Accounting for
Stock-Based Compensation", and has been determined as if the Company had
accounted for its employees' stock options under the fair value method provided
by that Statement. The fair value of the options was estimated at the date of
grant using the Black-Scholes option pricing model with the following
assumptions for vested and non-vested options:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------
1998 1997
---------------- ----------------
<S> <C> <C>
Risk-free interest yield............................ 5.53-6.56% 5.73-6.56%
Volatility factor................................... .499 .369
Dividend yield...................................... -- --
Average life........................................ 5 years 5 years
</TABLE>
The Black-Scholes options valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option
F-18
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 11: EQUITY TRANSACTIONS (CONTINUED)
valuation models require the input of highly subjective assumptions including
the expected stock price volatility.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of the options. The
Company's pro forma information is as follows (000's):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1998 1997
-------- --------
<S> <C> <C>
Pro forma net loss applicable to common stock............. $ (864) $(28,043)
Pro forma net loss per share applicable to common stock,
basic................................................... $(0.01) $ (0.30)
</TABLE>
NOTE 12: SIGNIFICANT CUSTOMERS
During the years ended December 31, 1998 and 1997 one customer accounted for
40% and 21%, respectively of the Company's total revenue. During the years ended
December 31, 1998 and 1997 another customer accounted for 35% and 15%,
respectively of the Company's total revenue. During the years ended
December 31, 1998 a third customer accounted for 12% of the Company's total
revenue.
NOTE 13: INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1998, 1997 and
1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
CURRENT
Federal.............................................. $4,513 $ -- $ --
State and local...................................... 2,720 -- --
------ ---- ----
7,233 -- --
------ ---- ----
DEFERRED
Federal.............................................. (2,375) -- --
State and local...................................... (1,456) -- --
------ ---- ----
(3,831) -- --
------ ---- ----
$3,402 $ -- $ --
====== ==== ====
</TABLE>
F-19
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 13: INCOME TAXES (CONTINUED)
Total income tax expense (benefit) differed from the amounts computed by
applying the federal statutory income tax rate (35%) to earnings (loss) before
income tax expense (benefit) as a result of the following items for the years
ended December 31, 1998, 1997 and 1996 (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
U.S. statutory rate applied to pre-tax income (loss)... $1,492 $ -- $ --
State and local taxes, net of federal tax benefit...... 834 -- --
Non deductible expenses................................ 1,118 -- --
Valuation allowance.................................... -- -- --
Others, net............................................ (42) -- --
------ ---- ----
$3,402 $ -- $ --
====== ==== ====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Deferred revenue.............................. $ 19,923 $ 5,173 $ 499
Employee benefits............................. 9,893 10,074 1,425
Cost of sales of IRU's and sales type
leases...................................... 5,599 573 --
Net operating losses.......................... -- 1,125 3,668
Others........................................ 2,522 1,465 1,047
-------- -------- -------
$ 37,937 $ 18,410 $ 6,639
-------- -------- -------
Valuation allowance........................... (18,309) (18,309) (6,579)
-------- -------- -------
19,628 101 60
DEFERRED TAX (LIABILITIES)
Capitalized leases............................ (14,782) -- --
Depreciation and amortization................. (1,003) (89) (48)
Other......................................... (12) (12) (12)
-------- -------- -------
(15,797) (101) (60)
-------- -------- -------
Net deferred asset............................ $ 3,831 $ -- $ --
======== ======== =======
</TABLE>
A portion of the deferred tax asset has been reserved since it is not
certain that future taxable income will be realized in the carryforward period
or in year of asset turnaround.
There was no provision for federal or state income taxes for the years ended
December 31, 1997 and 1996. At December 31, 1998, the Company expects to have
fully utilized its net operating losses
NOTE 14: 401(K) PLAN
In 1998, the Company implemented a 401(k) Plan (the "Plan") which permits
employees to make contributions to the Plan on a pre-tax salary reduction basis
in accordance with the Internal Revenue Code. All full-time employees are
eligible to participate at the beginning of the quarter following three
F-20
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 14: 401(K) PLAN (CONTINUED)
months of service. Eligible employees may contribute up to 15% of their annual
compensation. The Company matches 50% of the employees first 6% of
contributions. The Company contributed $78,000 for 1998 as these matching
contributions. The company bore the nominal administrative cost of the plan
during 1998.
NOTE 15: RECONCILIATION OF EARNINGS PER SHARE (IN THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Net income (loss)............................. $ 986 $(26,259) $(10,359)
Deduct dividend on preferred shares........... -- 77 --
-------- -------- --------
Net loss applicable to common stock........... 986 (26,336) (10,359)
======== ======== ========
Shares
Weighted average number of common shares
outstanding--basic.......................... 186,990 94,894 71,716
Net income (loss) per common share--basic..... $ 0.01 $ (0.28) $ (0.14)
======== ======== ========
Weighted average number of common shares
outstanding--basic.......................... 186,990 94,894 71,716
Assuming conversion of warrants and options
outstanding................................. 32,534 -- --
-------- -------- --------
Weighted average number of common shares
outstanding--diluted........................ 219,524 94,894 71,716
======== ======== ========
Net income (loss) per common share--diluted... $ 0.01 N/A N/A
======== ======== ========
</TABLE>
NOTE 16: COMMITMENTS AND CONTINGENCIES
NETWORK CONSTRUCTION PROJECTS
In 1998, the Company commenced construction of various networks outside of
the New York Metropolitan area. The Company's commitment to purchase materials
and contracts for the construction of fiber optic network systems was
approximately $70 million as of December 31, 1998.
FRANCHISE, LICENSE, RIGHT-OF WAY AGREEMENTS AND OPERATING AND CAPITAL LEASES
The Company has entered into various franchise and license agreements with
municipalities and utility-related companies to, in most instances, install,
operate, repair, maintain and replace cable, wire, fiber or other transmission
media and the related equipment and facilities. The terms for these agreements
vary in length, with various renewal and termination provisions. The Company
charges the portions of these agreements incurred to construction-in-progress
until the related portion of the network is completed. The fees charged to
operations in connection with these agreements were approximately $1,673,000,
$607,000 and $459,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
F-21
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: COMMITMENTS AND CONTINGENCIES (CONTINUED)
In addition, the company leases office and operation facilities and various
equipment, which expire at various times through March 31, 2010. Rent expense
charged to operations was approximately $958,000, $268,000 and $158,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
The Company has entered into capital lease agreements for certain network
assets and for certain rights-of-ways. Total assets acquired under capital
leases were approximately $27,876,000 at December 31, 1998. The capital leases
are held as construction-in-progress until the related portion of the network is
completed.
Approximate minimum payments under the aforementioned agreements are (in
thousands):
<TABLE>
<CAPTION>
FRANCHISE,
LICENSE AND
RIGHT-OF-WAY CAPITAL OPERATING
AGREEMENTS LEASES LEASES
------------ -------- ---------
<S> <C> <C> <C>
For the year ended December 31,
1999.......................................... $ 1,018 $ 1,551 $ 1,994
2000.......................................... 1,121 1,797 2,032
2001.......................................... 1,121 1,859 2,054
2002.......................................... 971 1,923 2,050
2003.......................................... 661 1,991 1,532
Thereafter.................................... 7,922 42,972 7,339
------- ------- -------
Total minimum lease payments.................. $12,814 52,093 $17,001
======= =======
Less amounts representing interest............ 29,363
-------
Present value of future minimum lease
payments.................................... 22,730
Less amounts due in one year.................. 55
-------
$22,675
=======
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has executed employment contracts for future services, for up to
five years, with certain senior executives for whom the Company has a minimum
commitment aggregating approximately $3.4 million at December 31, 1998. This
amount is not included in the consolidated financial statements at December 31,
1998.
LITIGATION
On or about October 20, 1997, Vento & Company of New York, LLC commenced an
action against Metromedia Fiber Network, 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). On or about May 29, 1998, Vento
& Company filed an amended complaint. In its complaint, as amended, Vento &
Company alleges four causes of action in connection with its sale of
F-22
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 16: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 four
causes of action include: (i) violation of Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 promulgated under such Act; (ii) fraud and
fraudulent concealment; (iii) breach of fiduciary duty; and (iv) negligent
misrepresentation and omission. On the first and second causes of action, Vento
& Company is seeking, among other things, rescission of the Vento & Company
sale, or alternatively, damages in an amount which we cannot currently ascertain
but believe to be in excess of $36 million, together with interest. On the third
and fourth causes of action, Vento & Company is seeking damages in an amount
which we cannot currently ascertain but believe to be in excess of $36 million,
together with interest. Vento & Company is also seeking punitive damages in the
amount of $50 million, reasonable legal fees and the cost of this action. All
the defendants, including Metromedia Fiber Network and Stephen A. Garofalo, have
moved to dismiss Vento and Company's amended complaint.
On or about June 12, 1998, Claudio E. Contardi commenced an action against
Peter Sahagen, Sahagen Consulting Group of Florida and Metromedia Fiber Network
in the United States District Court for the Southern District of New York (No.
98 CIV 4140). Mr. Contardi alleges a cause of action for, among other things,
breach of a finder's fee agreement entered into between Mr. Sahagen and
Mr. Contardi 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.
Mr. Contardi is seeking, among other things, a number of shares of Metromedia
Fiber Network which we cannot currently ascertain but believe to be
approximately 225,000 shares (calculated as of the date on which the complaint
was filed and not adjusted for subsequent stock splits) or damages in an amount
which we cannot currently ascertain but believe to be approximately $4.9 million
(calculated as of the date on which the complaint was filed) and all costs and
expenses incurred by him in this action. We have filed an answer to the
complaint and has raised affirmative defenses.
We intend to vigorously defend both these actions because we believe that we
acted appropriately in connection with the matters at issue in these two cases.
However, we cannot assure you that we will not determine that the advantages of
entering into a settlement outweigh the risk and expense of protracted
litigation or that ultimately we will be successful in defending against these
allegations. If we are unsuccessful in defending against these allegations, an
award of the magnitude being sought in the Vento & Company litigation would have
a material adverse effect on our financial condition or results of operations.
In addition, we are subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, we
believe that none of such current claims, or proceedings, individually, or in
the aggregate, including the Vento & Company litigation and the Contardi
litigation, will have a material adverse effect on our financial condition or
results of operations, although we can make no assurances in this regard.
F-23
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue..................................................... $ 38,673 $ 9,133
Expenses:
Cost of sales............................................. 14,819 4,553
Selling, general and administrative....................... 13,786 5,914
Consulting and employment incentives...................... -- 195
Settlement agreement...................................... -- 3,400
Depreciation and amortization............................. 5,058 440
-------- --------
Income (loss) from operations............................... 5,010 (5,369)
Other income (expenses):
Interest income........................................... 13,512 3,576
Interest expense.......................................... (30,407) (12)
Loss from joint venture................................... (393) (251)
-------- --------
Net income (loss)........................................... $(12,278) $ (2,056)
======== ========
Net income (loss) per share, basic.......................... $ (0.06) $ (0.01)
======== ========
Net income (loss) per share, diluted........................ N/A N/A
======== ========
Weighted average number of shares outstanding, basic........ 189,098 185,616
======== ========
Weighted average number of shares outstanding, diluted...... N/A N/A
======== ========
</TABLE>
SEE ACCOMPANYING NOTES
F-24
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
JUNE 30,
1999
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 341,897
Marketable securities..................................... 19,716
Pledged securities, current portion....................... 63,142
Accounts receivable....................................... 86,258
Prepaid expenses and other current assets................. 2,761
----------
Total current assets.................................. 513,774
Fiber optic transmission network and related equipment,
net....................................................... 417,803
Property and equipment, net................................. 3,909
Pledged securities.......................................... --
Restricted cash............................................. 51,920
Investment in/advances to joint venture..................... 6,763
Other assets................................................ 40,525
----------
Total assets.......................................... $1,034,694
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,276
Accrued liabilities....................................... 134,736
Deferred revenue, current portion......................... 8,106
Capital lease obligations, current portion................ 55
----------
Total current liabilities............................. 150,173
Senior notes payable........................................ 650,000
Capital lease obligations................................... 23,202
Deferred revenue............................................ 68,530
Commitments and contingencies (see notes) Stockholders'
equity:
Preferred stock, $.01 par value; 20,000,000 shares
authorized; none issued and outstanding................. --
Class A common stock, $.01 par value; 2,404,031,240 shares
authorized; 156,293,412 shares issued and outstanding... 1,563
Class B common stock, $.01 par value; 522,254,782 shares
authorized; 33,769,272 shares issued and outstanding.... 338
Additional paid-in capital................................ 200,370
Accumulated deficit....................................... (54,515)
Cumulative comprehensive loss............................. (4,967)
----------
Total stockholders' equity............................ 142,789
----------
Total liabilities and stockholders' equity............ $1,034,694
==========
</TABLE>
See accompanying notes
F-25
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
1999 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(12,278) $ (2,056)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization............................. 5,057 440
Amortization of deferred financing costs.................. 1,000 --
Options issued for settlement agreement................... -- 3,000
Stocks, options and warrants issued for services.......... 395 195
Loss from joint venture................................... 393 251
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable....................................... (48,985) (6,676)
Accounts payable and accrued liabilities.................. 37,990 1,532
Deferred revenue.......................................... 35,081 16,802
Other..................................................... 2,391 (149)
-------- --------
Net cash provided by operating activities................. 21,044 13,339
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities........................... (19,716) --
Capital expenditures on fiber optic transmission network and
related equipment......................................... (122,823) (28,779)
Restricted cash secured by letter of credit................. (63,313) --
Investment in / advances to joint venture................... (3,000) (2,745)
Capital expenditures on property and equiptment............. (1,676) (770)
Business acquisition (net of cash acquired)................. (24,966) --
-------- --------
Net cash used in investing activities....................... (235,494) (32,294)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 2,056 754
Payments of business acquisition's pre-acquisition's debt... (15,028) --
-------- --------
Net cash used in financing activities..................... (12,972) 754
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........ (227,422) (18,201)
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD............... 569,319 138,846
-------- --------
CASH AND CASH EQUIVALENTS-END OF PERIOD..................... $341,897 $120,645
======== ========
Supplemental information:
Interest paid............................................. $ 31,152 $ 12
======== ========
Income taxes paid......................................... $ 2,736 $ 473
======== ========
Interest capitalized...................................... $ 3,072 $ --
======== ========
Supplemental disclosure of significant non-cash investing
activites: Capital lease obligations...................... $ 527 $ 19,401
======== ========
Accrued capital expenditures.............................. $ 30,092 $ 20,543
======== ========
</TABLE>
See accompanying notes
F-26
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS AND LINE OF BUSINESS
Metromedia Fiber Network, Inc. and its subsidiaries (collectively, the
"Company") is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate and government customers in the United States and Europe.
The Company focuses its operations on domestic, intra-city fiber optic networks
in clusters of the 15 largest cities throughout the United States based on
population. The Company leases or otherwise makes available for use its
broadband communications infrastructure to two main customer groups:
communications carriers and corporate/government customers located in selected
top 15 cities in the United States based on population. The Company currently
operates high-bandwidth fiber optic communications networks in the New York
metropolitan area, the greater Philadelphia area and parts of the Dallas
Metroplex, Washington D.C. and Chicago areas. The Company has also begun
engineering and constructing networks in Boston, Los Angeles, Seattle, Houston
and Atlanta. The Company expects that its domestic intra-city networks will
ultimately encompass approximately 810,000 fiber miles, covering approximately
1,896 route miles. Fiber miles means the number of strands of fiber contained in
a length of fiber optic cable multiplied by the length of cable in miles. Route
miles means the number of miles spanned by fiber optic cable calculated without
including physically overlapping segments of cable.
The Company has also built or obtained inter-city fiber optic capacity that
links certain of its intra-city networks. The Company built a 250 route-mile
network from New York to Washington D.C., which was put into operation at the
end of the first quarter of 1999. When complete, as currently planned, this
network will cover approximately 180,000 net fiber miles. The Company has also
obtained rights for fiber optic capacity with other facilities-providers,
obtained fiber optic capacity linking New York to Chicago, New York to Boston,
Chicago to Seattle and Seattle to Portland and plans to construct intra-city
networks in all of these metropolitan areas except Portland.
In addition, the Company has entered into a joint venture with a U.K.
telecommunications company to connect its New York network to London. The
Company has also formed a joint venture to construct a high-bandwidth fiber
optic network connecting 13 cities in Germany and obtained certain additional
fiber optic capacity in Western Europe. In addition, the Company plans to
engineer and construct networks in the European cities of London, Amsterdam,
Frankfurt, Stuttgart, and Cologne.
The Company has entered into letters of intent with a Canadian
telecommunications company, providing the Company with access to intra-city
fiber optic network facilities in Toronto, Canada.
The Company expects that the entire network when completed, as currently
planned, will ultimately consist of approximately 1.2 million fiber miles
covering approximately 9,250 route miles.
On June 22, 1999, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with AboveNet Communications, Inc. Pursuant to the Merger
Agreement, each share of AboveNet common stock will convert into the right to
receive 1.175 shares of the Company's class A common stock. Following
consummation of the merger, AboveNet will become a wholly-owned subsidiary of
the Company. AboveNet is a leading provider of facilities-based, managed
services for customer-owned Web servers and related equipment, known as
co-location, and high performance Internet connectivity solutions for electronic
commerce and other business critical Internet operations.
F-27
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
BASIS OF PRESENTATION
The interim unaudited consolidated financial statements in this Report have
been prepared in accordance with the United States Securities and Exchange
Commission's Regulation S-X and consequently do not include all disclosures
required under generally accepted accounting principles. The interim unaudited
consolidated financial statements should be read in conjunction with the audited
Consolidated Financial Statements of the Company and accompanying Notes for the
year ended December 31, 1998, contained in the Company's Annual Report on Form
10-K. 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 report have been made. Certain balances have been
reclassified to conform to the current period presentation.
STOCK SPLITS
On August 28, 1998, December 22, 1998 and May 19, 1999, the Company
completed two-for-one stock splits of the Company's class A and class B common
stock in the form of 100 percent stock dividends to all stockholders of record
as of certain specified dates.
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. In addition,
the Company occasionally enters into sales of portions of its network. For those
sales occurring prior to completion of the portion of the network, the Company
recognizes revenue 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. The Company also provides installation services
for its customers, and as these services typically are completed within a short
time period, the Company records the revenues and related costs for these
services under the completed contract method.
FOREIGN CURRENCY TRANSLATION
For translation of the financial statements of its newly formed German
operations, the Company has determined that the local currency is the functional
currency. Assets and liabilities of foreign operations are translated at the
period-end exchange rates and income statement items are translated at average
exchange rates for the period. The resulting adjustments are made directly to
the Cumulative Translation Adjustment component of Stockholders' Equity. Foreign
currency transactions are recorded at the exchange rate prevailing on the
transaction date.
F-28
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
For purposes of the consolidated financial statements, the Company considers
all highly liquid investments with a maturity of greater than three months from
the financial statement date to be marketable securities.
COMPREHENSIVE INCOME (LOSS)
In 1998, the Company adopted Statement of Financial Accounting Standards No.
130, ("SFAS 130") Reporting Comprehensive Income (Loss). This statement
establishes rules for the reporting of comprehensive income and its components.
Comprehensive income (loss) consists of net income (loss) and foreign currency
translation adjustments. The comprehensive loss for the three and six months
ended June 30, 1999 was $8.5 million and $17.2 million, respectively, compared
with comprehensive income of $2.2 million and comprehensive loss of $2.1
million, respectively, for the comparable periods in 1998.
2. FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
Fiber optic transmission network and related equipment consist of the
following (in 000's):
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
<S> <C> <C>
Material-fiber optic cable.................................. $76,273 $23,436
Engineering and layout costs................................ 7,515 7,101
Fiber optic cable installation costs........................ 101,714 16,639
Other....................................................... 34,525 4,242
Construction in progress.................................... 204,563 195,256
------- -------
424,590 246,674
Less: accumulated depreciation.............................. (6,787) (2,398)
------- -------
417,803 244,276
======= =======
</TABLE>
Construction in progress includes amounts incurred in the Company's
expansion of its network. These amounts include fiber optic cable and other
materials, engineering and other layout costs, fiber optic cable installation
costs and other network assets held under capital leases. Construction in
progress also includes payments for rights of way for the underlying sections of
the network build.
3. INVESTMENT IN/ADVANCES TO JOINT VENTURE
The Company has a joint venture agreement with Racal Telecommunications,
Inc. ("Racal") that provides broad-based transatlantic communication services
between New York and London. During 1998, each party made capital contributions
of $4.3 million. The Company and Racal may each be required to contribute
additional capital as needed for their respective 50% interests. The Company
accounts for its investment using the equity method. For the three and six
months ended June 30, 1999, the Company recorded losses of $193,000 and
$393,000, respectively, from the joint venture based on
F-29
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. INVESTMENT IN/ADVANCES TO JOINT VENTURE (CONTINUED)
its 50% interest in the joint venture compared with $0 and $251,000,
respectively, for the comparable periods in 1998.
4. ACQUISITION OF COMMUNICATION SYSTEMS DEVELOPMENT, INC.
On March 11, 1999, the Company acquired all the outstanding common stock of
Communication Systems Development, Inc. ("CSD") for $25 million in cash. CSD has
its primary operations in Dallas, Texas and is engaged in the engineering and
construction of fiber optic networks. The acquisition has been accounted for by
the purchase method and, accordingly, the results of operations of CSD have been
included in the Company's consolidated financial statements from March 11, 1999.
The purchase price has been preliminarily allocated based on estimated fair
values as of the date of acquisition pending final determination of certain
tangible and intangible assets.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and CSD as if the acquisition had
occurred as of the beginning of 1999 and 1998, after giving effect to certain
adjustments, including amortization of goodwill, additional depreciation expense
and related income tax effects. The pro forma financial information does not
necessarily reflect the results of operations that would have occurred had the
Company and CSD constituted a single entity during such periods. The amounts are
presented in thousands, except per share amounts.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30,
---------------------------
1999 1998
-------- --------
<S> <C> <C>
Revenue............................................. $ 41,940 $ 9,985
======== =======
Net Loss............................................ $(12,263) $(1,779)
======== =======
Loss per share, basic............................... $ (0.06) $ (0.01)
======== =======
</TABLE>
5. GERMAN NETWORK BUILD
In February 1999, the Company entered into a joint venture with Viatel, Inc.
and Carrier 1 Holdings, Ltd. to jointly build a national fiber optic
telecommunications network in Germany. Upon completion of construction, the
joint venture will be dissolved and the Company will own its own separate German
broadband network. In connection with the terms of this agreement, the Company
made a deposit payment of $4.7 million during the third quarter of 1998. Upon
signing a definitive agreement, the Company provided irrevocable standby letters
of credit in the amount of approximately DM110 million (approximately $63
million) as security for the construction costs of the network, which, in
addition to the deposit payment made, covers the Company's portion of the
estimated construction costs of the network. As of June 30, 1999, the Company
had restricted cash of approximately $52 million to secure the remaining value
of the irrevocable standby letters of credit.
F-30
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
6. ACQUISITION OF ABOVENET COMMUNICATIONS, INC.
On June 22, 1999, the Company entered into an Agreement and Plan of Merger
("Merger Agreement") with AboveNet Communications, Inc. ("AboveNet"). Pursuant
to the Merger Agreement, each share of AboveNet common stock was converted into
the right to receive 1.175 shares of the Company's class A common stock.
Following consummation of the merger, AboveNet became a wholly-owned subsidiary
of the Company. In connection with the execution of the Merger Agreement, the
Company and AboveNet entered into an Option Agreement pursuant to which the
Company was granted an option to acquire up to 19.9% of AboveNet's common stock
at a price of $49.9375 per share. The transaction closed on September 8, 1999.
7. RELATED PARTY TRANSACTIONS
The Company is party to a management agreement under which the Company's
controlling shareholder, Metromedia Company, provides consultation and advisory
services relating to legal matters, insurance, personnel and other corporate
policies, cash management, internal audit and finance, taxes, benefit plans and
other services as are reasonably requested. The management agreement terminates
on December 31 of each year, and is automatically renewed for successive one-
year terms unless either party terminates upon 60 days prior written notice. The
1998 management fee under the agreement was $500,000 per year, payable quarterly
at a rate of $125,000. The 1999 management fee under the agreement is $1,000,000
per year, payable quarterly at a rate of $250,000. The Company is also obligated
to reimburse Metromedia Company for all its out-of-pocket costs, expenses
incurred and advances paid by Metromedia Company in connection with the
management agreement.
8. SETTLEMENT AGREEMENT
In March 1998, the Company entered into a settlement agreement with Howard
Katz, Realprop Capital Corporation and Evelyn Katz, among others, which settled
and resulted in the dismissal of litigation for which the Company was a
defendant in KATZ, ET AL. V. NATIONAL FIBER NETWORK, INC., ET AL., No. 97 Civ.
2764 (JGK).
9. NOTES PAYABLE
On November 25, 1998, the Company issued and sold $650.0 million of 10%
Senior Notes due November 15, 2008. The net proceeds of the 10% Senior Notes
were approximately $630.0 million, after deducting offering costs, which are
included in other long-term assets. Interest on the 10% Senior Notes is payable
semi-annually in arrears on May 15 and November 15 of each year, commencing May
15, 1999. Approximately $91.5 million of the net proceeds was utilized to
purchase certain pledged securities the proceeds of which, together with
interest earned on such securities, will be used to satisfy the Company's
semi-annual interest obligations through May 15, 2000. The 10% Senior Notes are
subject to redemption at the option of the Company, in whole or in part, at any
time on or after November 15, 2003, at specified redemption prices. In addition,
prior to November 15, 2001, the Company may use the net cash proceeds from
certain specified equity transactions to redeem up to 35% of the 10% Senior
Notes at specified redemption prices.
The indenture pursuant to which the 10% Senior Notes are issued contains
certain covenants that, among other matters, limit the ability of the Company
and its subsidiaries to incur additional
F-31
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
9. NOTES PAYABLE (CONTINUED)
indebtedness, issue stock in subsidiaries, pay dividends or make other
distributions, repurchase equity interests or subordinated indebtedness, engage
in sale and leaseback transactions, create liens, enter into transactions with
affiliates, sell assets, and enter into mergers and consolidations.
In the event of a change in control of the Company as defined in the
indentures, holders of the 10% Senior Notes will have the right to require the
Company to purchase their Notes, in whole or in part, at a price equal to 101%
of the stated principal amount thereof, plus accrued and unpaid interest, if
any, thereon to the date of purchase. The 10% Senior Notes are senior unsecured
obligations of the Company, and are subordinated to all current and future
indebtedness of the Company's subsidiaries, including trade payables.
The Company made an interest payment on May 15, 1999. As a result, the value
of pledged securities to satisfy the Company's semi-annual interest obligation
through May 15, 1999 was reduced to approximately $63 million.
10. EQUITY TRANSACTIONS
AUTHORIZED CAPITAL
On May 18, 1999, the stockholders of the Company approved an amendment to
its Certificate of Incorporation to increase the authorized number of shares of
its capital stock to 2,946,286,022 shares consisting of (a) 2,404,031,240 shares
of class A common stock, (b) 522,254,782 shares of class B common stock, and (c)
20,000,000 shares of preferred stock.
STOCK SPLITS
As discussed in Note 1, on August 28, 1998, December 22, 1998 and May 19,
1999 the Company completed two-for-one stock splits of the Company's class A and
class B common stock in the form of 100 percent stock dividends to all
stockholders of record as of certain specified dates. The accompanying financial
statements give retroactive effect to the stock dividends.
As of June 30, 1999, adjusted for the effect of the stock dividends, the
Company had 156,293,412 class A common shares outstanding and 33,769,272 class B
common shares outstanding.
STOCK WARRANTS
(a) On December 13, 1996, the Company issued and sold to a private investor,
for an aggregate cash consideration of $2,025,000, (i) 1,200,000 shares of 10%
cumulative convertible preferred stock (the "Series A preferred stock") bearing
dividends at a rate of $.17 per share per annum, (ii) warrants to purchase
912,600 shares of class A common stock at an exercise price of $.62 per share
and (iii) a contingent stock subscription warrant to purchase a number of shares
of class A common stock (such number to be determined based on certain future
events) at an exercise price of $0.01 per share. In connection with the
investment in the Company by Metromedia Company, the private investor allowed
the Series A preferred stock and the contingent warrants to be redeemed at an
aggregate redemption price of $2,115,000 (which includes accrued but unpaid
dividends on the Series A preferred stock) and the number of shares underlying
the private investor's warrants to be increased from 912,600 to 1,825,200. In
January 1998, the private investor made a cashless exercise of all its warrants
and the
F-32
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. EQUITY TRANSACTIONS (CONTINUED)
number of its shares issuable upon exercise was reduced by the number of shares
at the closing on the day of exercise having a value equal to the aggregate
exercise price. Accordingly, the Company issued the private investor 1,382,120
shares of class A common stock for all its warrants.
(b) In April 1995, the Company entered into a loan agreement with a
customer for $500,000 bearing interest at 11% per annum. In July 1997, the
note was repaid in full. In connection with this loan, the Company issued
the customer a warrant entitling the holder to purchase a total of 5,353,336
shares of the Company's common stock. In February 1997, this warrant was
exchanged for a new warrant to purchase 3,650,400 shares of the Company's
common stock at $.60 per share. In February 1999, in accordance with an
anti-dilution provision in the warrant, the Company increased the warrant to
include the right to purchase an additional 331,882 shares of the Company's
class A common stock at $.56 per share and repriced the existing warrant to
the same $.56 per share. As of March 31, 1999, none of the warrants have
been exercised. The warrant expires on February 13, 2000.
11. CONTINGENCIES
(a) On or about October 20, 1997, Vento & Company of New York, LLC 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, Robert Kramer, Birdie Capital Corp., Lawrence
Black, Sterling Capital LLC, Penrush Limited, Needham Capital Group, Arthur
Asch, Michael Asch and Ronald Kuzon in the United States District Court for the
Southern District of New York, No. 97 CIV 7751(JGK). On or about May 29, 1998,
Vento & Company filed an amended complaint. In its complaint, as amended, Vento
& Company alleges four causes of action in connection with its sale of 900,000
shares, not adjusted for subsequent stock splits, of the Company's class A
common stock to Mr. Sahagen and some of the defendants on January 13, 1997. The
four causes of action include:
(i) violation of Section 10(b) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated under such Act;
(ii) fraud and fraudulent concealment;
(iii) breach of fiduciary duty; and
(iv) negligent misrepresentation and omission.
On the first and second causes of action, Vento & Company is seeking,
among other things, rescission of the Vento & Company sale, or
alternatively, damages in an amount which the Company cannot currently
ascertain but believe to be in excess of $36 million, together with
interest. On the third and fourth causes of action, Vento & Company is
seeking damages in an amount, which the Company cannot currently ascertain
but believe to be in excess of $36 million, together with interest. Vento &
Company is also seeking punitive damages in the amount of $50 million,
reasonable legal fees and the cost of this action. All the defendants,
including Metromedia Fiber Network and Stephen A. Garofalo, have moved to
dismiss Vento & Company's amended complaint. On or about March 17, 1999 the
defendant's motions to dismiss were denied in part
F-33
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. CONTINGENCIES (CONTINUED)
and granted in part. The Company filed an answer to the amended complaint
and raised affirmative defenses.
On or about July 1, 1999, Vento & Company filed a second amended
complaint. In its complaint, as amended, Vento & Company alleges seven
causes of action in connection with its sale of 900,000 shares, not adjusted
for subsequent stock splits, of the Company's class A common stock to
Mr. Sahagen and some of the defendants on January 13, 1997, including
(i) violation of Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated under such Act; (ii) fraud and fraudulent
concealment; (iii) breach of fiduciary duty (but not against the Company);
(iv) negligent misrepresentation and omission; and (v) breach of contract.
Vento & Company is seeking, among other things, recission of the Vento &
Company sale, or alternatively, damages in an amount not currently
ascertainable but believed to be in excess of $460 million, together with
interest thereon. Vento & Company is also seeking punitive damages in an
amount not yet determined, reasonable legal fees and the costs of this
action.
The Company has filed an answer to the second amended complaint and has
raised affirmative defenses. All the defendants, including the Company and
its Chairman, served motions for summary judgment to dismiss the action.
(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(JGK). Mr. Contardi alleges a cause of action for, among
other things, breach of a finder's fee agreement entered into between
Mr. Sahagen and Mr. Contardi 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. Mr. Contardi is seeking, among other things, a number of our
shares of class A common stock which we cannot currently ascertain but
believe to be approximately 112,500 shares (calculated as of the date on
which the complaint was filed without taking into account subsequent stock
splits) or damages in an amount which we cannot currently ascertain but
believe to be approximately $4.9 million (calculated as of the date on which
the complaint was filed) and all costs and expenses incurred by him in this
action. The Company has filed an answer to the complaint and has raised
affirmative defenses.
The Company intends to vigorously defend both these actions because the
Company believes that it acted appropriately in connection with the matters
at issue in these two cases. However, the Company cannot assure you that it
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 defending against these allegations. If
the Company is unsuccessful in defending against these allegations, an award
of the magnitude being sought in the Vento & Company litigation would have a
material adverse effect on our financial condition and results of
operations.
(c) On June 29, 1999, an alleged stockholder of AboveNet filed a
lawsuit, captioned KAUFMAN V. TUAN, et al, Del. Ch. C.A. No. 17259NC, in the
Court of Chancery of the State of Delaware in and for the New Castle County.
The plaintiff, who purports to represent a class of all AboveNet
stockholders, challenges the terms of the proposed merger between the
Company and AboveNet. The complaint names, as defendants, AboveNet, the
directors of AboveNet, and the
F-34
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
11. CONTINGENCIES (CONTINUED)
Company (as an aider and abettor). The complaint alleges generally that
AboveNet's directors breached their fiduciary duty to stockholders of
AboveNet, and seeks an injunction against the merger, or, in the
alternative, rescission and the recovery of unspecified damages, fees and
expenses. AboveNet, the Company and the individual defendants believe the
lawsuit is without merit and intend to defend themselves vigorously.
AboveNet and the individual director defendants' responses were filed on
July 22, 1999. In connection with these responses, a motion to dismiss the
complaint in its entirety and a motion to stay discovery pending the outcome
of the motion to dismiss were filed by the AboveNet and the individual
directors of AboveNet on July 22, 1999. Similar motions to dismiss the
complaint and stay discovery were filed by the Company on July 26, 1999.
Four other complaints, which are virtually identical to the complaint in
KAUFMAN V. TUAN, have also been filed in the Delaware Court of the Chancery.
None of these four complaints have been served. The four actions are
captioned BROSIOUS V. TUAN, et al, Del. Ch. C.A. No. 17271NC, CHONG V. TUAN,
et al, Del. Ch. C.A. No. 17281NC, EHLERT V. TUAN, et al, Del. Ch. C.A. No.
17284NC, HORN V. TUAN, et al, Del. Ch. C.A. No. 17300NC.
In addition, the Company is subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, the
Company believes that none of such current claims, or proceedings, individually,
or in the aggregate, including the Vento & Company litigation and the Contardi
litigation, will have a material adverse effect on our financial condition or
results of operations, although the Company can make no assurances in this
regard.
F-35
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AboveNet Communications Inc.:
We have audited the accompanying consolidated balance sheets of AboveNet
Communications Inc. as of June 30, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AboveNet Communications Inc. as of
June 30, 1998 and 1999 and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1999 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
July 28, 1999
(September 8, 1999 as to Note 17)
F-36
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 8,141,200 $209,126,300
Short-term investments.................................... -- 11,744,200
Accounts receivable, net of reserve for doubtful accounts
of $60,000 and $388,300, respectively................... 357,000 3,355,000
Prepaid expenses and other current assets................. 269,600 3,850,400
----------- ------------
Total current assets.................................. 8,767,800 228,075,900
Property and equipment, net................................. 4,436,100 46,590,900
Rights to use fiber optic capacity.......................... -- 12,904,500
Intangible assets........................................... -- 69,474,100
Restricted cash............................................. 300,000 21,475,900
Deposits and other assets................................... 189,400 5,377,400
----------- ------------
Total assets................................................ $13,693,300 $383,898,700
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,301,300 $ 13,593,300
Remaining obligation for rights to use fiber optic
capacity................................................ -- 800,000
Accrued liabilities....................................... 619,900 1,322,600
Unearned revenue.......................................... 309,400 2,510,700
Current portion of long-term obligations.................. 476,000 5,984,800
----------- ------------
Total current liabilities............................. 3,706,600 24,211,400
Convertible notes payable and advances...................... 8,000,000 --
Unearned revenue............................................ -- 4,375,000
Other long-term obligations................................. 1,325,300 21,588,600
Commitments and contingencies (Notes 4, 5 and 12)
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized;
shares issued and outstanding--none..................... -- --
Convertible preferred stock, $0.001 par value:
Series A; shares issued and outstanding: 2,050,000 and
none, respectively.................................... 410,000 --
Series B; shares issued and outstanding: 3,263,792 and
none, respectively.................................... 2,323,100 --
Series C; shares issued and outstanding: 4,006,000 and
none, respectively.................................... 3,873,400 --
Series D; no shares issued and outstanding.............. -- --
Series E; no shares issued and outstanding.............. -- --
Common stock, $0.001 par value, 60,000,000 shares
authorized; shares issued and outstanding: 728,696 and
34,548,308, respectively................................ 38,900 363,218,000
Common stock options...................................... 1,861,500 4,413,800
Deferred stock compensation............................... (540,100) (47,800)
Accumulated deficit....................................... (7,305,400) (33,860,300)
----------- ------------
Total stockholders' equity............................ 661,400 333,723,700
----------- ------------
Total liabilities and stockholders' equity.................. $13,693,300 $383,898,700
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-37
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenues.............................................. $ 551,600 $ 3,436,400 $ 13,967,800
----------- ----------- ------------
Costs and expenses:
Data communications and telecommunications.......... 558,600 2,199,800 12,649,700
Network operations.................................. 416,700 1,571,800 6,084,300
Sales and marketing................................. 382,600 1,618,700 11,251,300
General and administrative.......................... 433,700 1,621,500 6,610,900
Depreciation and amortization....................... 132,700 475,500 3,412,600
Stock-based compensation expense.................... -- 1,276,400 1,688,700
Joint venture termination fee....................... 431,100 -- --
----------- ----------- ------------
Total costs and expenses.......................... 2,355,400 8,763,700 41,697,500
Loss from operations.................................. (1,803,800) (5,327,300) (27,729,700)
Interest expense...................................... (7,400) (160,800) (1,573,100)
Interest and other income............................. 8,400 63,100 2,947,900
----------- ----------- ------------
Loss before equity interest in affiliates............. (1,802,800) (5,425,000) (26,354,900)
Equity interest in losses of affiliates............... -- -- (200,000)
----------- ----------- ------------
Net loss.............................................. $(1,802,800) $(5,425,000) $(26,554,900)
=========== =========== ============
Basic and diluted loss per share...................... $ (4.58) $ (10.34) $ (1.60)
=========== =========== ============
Shares used in basic and diluted loss per share....... 393,236 524,608 16,643,027
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-38
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK COMMON DEFERRED
-------------------------- ------------------------- STOCK STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT OPTIONS COMPENSATION DEFICIT
----------- ------------ ---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, July 1, 1996.......... -- $ -- 250,000 $ 5,000 $ -- $ -- $ (77,600)
Issuance of common stock........ 125,000 2,500
Issuance of Series A convertible
preferred stock............... 2,050,000 410,000
Exercise of common stock
options....................... 31,250 600
Issuance of Series B convertible
preferred stock............... 1,000,000 600,000
Issuance of Series B convertible
preferred stock in conjunction
with acquisition of DSK, Inc.
(Note 11)..................... 1,000,000 600,000
Net loss........................ (1,802,800)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1997......... 4,050,000 1,610,000 406,250 8,100 -- -- (1,880,400)
Exercise of common stock
options....................... 322,446 30,800
Issuance of warrants in
connection with issuance of
debt.......................... 112,000 45,000
Issuance of Series B convertible
preferred stock............... 1,263,792 1,011,100
Issuance of Series C convertible
preferred stock............... 4,006,000 3,873,400
Compensatory stock
arrangements.................. 1,816,500 (1,816,500)
Amortization of deferred stock
compensation.................. 1,276,400
Net loss........................ (5,425,000)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1998......... 9,319,792 6,606,500 728,696 38,900 1,861,500 (540,100) (7,305,400)
Issuance of Series D convertible
preferred stock............... 4,230,756 10,771,000
Issuance of Series E convertible
preferred stock............... 817,550 3,846,400
Exercise of Series B warrants... 209,400 --
Conversion of convertible
preferred stock to common
stock......................... (14,577,498) (21,223,900) 14,577,498 21,223,900
Issuance of common stock upon
initial public offering....... 11,500,000 67,822,000
Issuance of common stock upon
public offering............... 6,850,356 273,421,500
Exercise of common stock options
and warrants.................. 842,440 439,200
Issuance of common stock under
employee stock purchase
plan.......................... 49,318 272,500
Issuance of warrants in
connection with issuance of
debt and leases............... 1,355,900
Compensatory stock
arrangements.................. 1,196,400 (1,196,400)
Amortization of deferred stock
compensation.................. 1,688,700
Net loss........................ (26,554,900)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1999......... -- $ -- 34,548,308 $363,218,000 $4,413,800 $ (47,800) $(33,860,300)
=========== ============ ========== ============ ========== =========== ============
<CAPTION>
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
BALANCES, July 1, 1996.......... $ (72,600)
Issuance of common stock........ 2,500
Issuance of Series A convertible
preferred stock............... 410,000
Exercise of common stock
options....................... 600
Issuance of Series B convertible
preferred stock............... 600,000
Issuance of Series B convertible
preferred stock in conjunction
with acquisition of DSK, Inc.
(Note 11)..................... 600,000
Net loss........................ (1,802,800)
------------
BALANCES, June 30, 1997......... (262,300)
Exercise of common stock
options....................... 30,800
Issuance of warrants in
connection with issuance of
debt.......................... 157,000
Issuance of Series B convertible
preferred stock............... 1,011,100
Issuance of Series C convertible
preferred stock............... 3,873,400
Compensatory stock
arrangements.................. --
Amortization of deferred stock
compensation.................. 1,276,400
Net loss........................ (5,425,000)
------------
BALANCES, June 30, 1998......... 661,400
Issuance of Series D convertible
preferred stock............... 10,771,000
Issuance of Series E convertible
preferred stock............... 3,846,400
Exercise of Series B warrants... --
Conversion of convertible
preferred stock to common
stock......................... --
Issuance of common stock upon
initial public offering....... 67,822,000
Issuance of common stock upon
public offering............... 273,421,500
Exercise of common stock options
and warrants.................. 439,200
Issuance of common stock under
employee stock purchase
plan.......................... 272,500
Issuance of warrants in
connection with issuance of
debt and leases............... 1,355,900
Compensatory stock
arrangements.................. --
Amortization of deferred stock
compensation.................. 1,688,700
Net loss........................ (26,554,900)
------------
BALANCES, June 30, 1999......... $333,723,700
============
</TABLE>
See notes to consolidated financial statements.
F-39
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,802,800) $(5,425,000) $(26,554,900)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity interest in losses of affiliates................. -- -- 200,000
Depreciation and amortization........................... 132,700 475,500 3,412,600
Stock-based compensation expense........................ -- 1,276,400 1,688,700
Noncash interest expense................................ -- 133,200 117,000
Joint venture termination fee........................... 431,100 -- --
Changes in assets and liabilities:
Accounts receivable................................... (29,100) (315,900) (2,728,000)
Prepaid expenses and other current assets............. -- (269,600) (3,577,800)
Restricted cash....................................... -- (300,000) (21,175,900)
Accounts payable...................................... 298,900 1,989,300 11,292,000
Accrued liabilities................................... 109,700 510,200 702,700
Unearned revenue...................................... 85,000 224,400 1,313,300
Deferred rent......................................... 30,400 18,200 156,100
----------- ----------- ------------
Net cash used in operating activities............... (744,100) (1,683,300) (35,154,200)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of short-term investments........................ -- -- (11,744,200)
Cash paid for rights to use fiber optic capacity.......... -- -- (7,480,000)
Purchase of property and equipment........................ (474,500) (3,666,000) (37,426,300)
Increase in deposits and other assets..................... (32,700) (111,700) (1,519,000)
Investments in affiliates................................. -- -- (2,630,100)
Cash paid for acquisition................................. -- -- (71,420,200)
----------- ----------- ------------
Net cash used in investing activities............... (507,200) (3,777,700) (132,219,800)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from notes payable and advances.................. 739,900 13,395,000 23,722,300
Debt repayments........................................... -- (70,000) (3,297,100)
Capital lease repayments.................................. (49,600) (84,700) (638,700)
Proceeds from issuance of common stock.................... 3,100 30,800 341,955,200
Proceeds from issuance of convertible preferred stock..... 800,000 -- 6,617,400
----------- ----------- ------------
Net cash provided by financing activities........... 1,493,400 13,271,100 368,359,100
----------- ----------- ------------
Net increase in cash and equivalents........................ 242,100 7,810,100 200,985,100
Cash and equivalents, beginning of period................... 89,000 331,100 8,141,200
----------- ----------- ------------
Cash and equivalents, end of period......................... $ 331,100 $ 8,141,200 $209,126,300
=========== =========== ============
Supplemental cash flow information--cash paid for
interest.................................................. $ 7,400 $ 27,600 $ 1,456,100
=========== =========== ============
Noncash investing and financing activities:
Remaining obligation for rights to use fiber optic
capacity................................................ $ -- $ -- $ 800,000
=========== =========== ============
Acquisition of equipment under capital lease.............. $ 206,200 $ 479,200 $ 5,829,500
=========== =========== ============
Acquisition of leasehold improvements in conjunction with
DSK, Inc. acquisition................................... $ 168,900 $ -- $ --
=========== =========== ============
Exchange of notes, advances, accrued interest and warrants
for convertible preferred stock......................... $ 210,000 $ 4,884,500 $ 8,000,000
=========== =========== ============
Conversion of preferred stock into common stock........... $ -- $ -- $ 21,223,900
=========== =========== ============
Issuance of warrants in connection with issuance of debt
and leases.............................................. $ -- $ 45,000 $ 1,355,900
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-40
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--AboveNet Communications Inc. (the "Company"), was formed on
March 8, 1996 (inception). The Company provides facilities-based, managed
services for customer-owned Web servers and related equipment, known as
co-location, and high performance Internet connectivity solutions for electronic
commerce and other business critical Internet operations.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the Company and its subsidiaries. All significant intercompany transactions and
amounts are eliminated in consolidation. Minority investments in joint ventures
are accounted for under the equity method of accounting, under which the Company
records in income its proportionate share of the earnings or losses of the joint
ventures.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to concentration of credit risk consist of trade receivables.
However, the Company's credit risk is mitigated by its credit evaluation process
and the reasonably short collection terms. The Company does not require
collateral or other security to support accounts receivable and maintains
reserves for potential credit losses.
CASH AND EQUIVALENTS--The Company considers all highly liquid investments
with maturities of ninety days or less when purchased by the Company to be cash
equivalents.
SHORT-TERM INVESTMENTS--Short term investments consist of treasury bills
with a maturity greater than 90 days but less than twelve months. The Company's
short-term investments are classified as available-for-sale. The investments are
carried at cost, which approximated fair value at June 30, 1999. Material
unrealized gains or losses would be reported as a separate component of
stockholders' equity. No investments were sold in the periods presented.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements and assets acquired
under capital lease are amortized over the shorter of the lease term or the
useful lives of the improvement.
RIGHTS TO USE FIBER OPTIC CAPACITY--Indefeasible rights to use (IRU)
capacity on fiber optic cable systems are stated at cost. Amortization will be
recognized over the shorter of the term of the IRU or its useful life beginning
when such capacity becomes available to the Company.
INTANGIBLE ASSETS--Goodwill is amortized on a straight-line basis over its
estimated life of ten years.
RESTRICTED CASH--Restricted cash consists of certificates of deposit which
are restricted from use pursuant to certain lease agreements.
REVENUE RECOGNITION--Revenue consists primarily of service revenue which is
recognized in the period in which the services are provided. The services
primarily include bandwidth and space requirement charges which are recognized
monthly as well as installation fees which are recognized as
F-41
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
revenue in the period of installation. Unearned revenue consists of customer
advances and the value assigned to certain ongoing services to be rendered to
Compaq Computer Corporation in connection with the acquisition of the Palo Alto
Internet Exchange ("PAIX") (see Note 2). Unearned revenue is recognized in the
period in which the services are rendered.
INCOME TAXES--Deferred tax liabilities are recognized for future taxable
amounts, and deferred tax assets are recognized for future deductions, net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF--The
Company evaluates its long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
NET INCOME (LOSS) PER SHARE--Basic income (loss) per share excludes dilution
and is computed by dividing net income (loss) by the weighted-average number of
common shares outstanding, less shares subject to repurchase by the Company, for
the period. Diluted income (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Common share equivalents are excluded
from the computation in loss periods as their effect would be antidilutive.
RECLASSIFICATIONS--Certain prior period amounts have been reclassified to
conform to the current period presentation. Such reclassifications had no effect
on stockholders' equity (deficiency) or net loss.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, REPORTING COMPREHENSIVE INCOME, which requires an enterprise to report,
by major components and as a single total, the change in the Company's net
assets during the period from nonowner sources. The Company adopted SFAS
No. 130 in fiscal 1999. For all periods presented, comprehensive loss was equal
to the Company's net loss.
Additionally, in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes annual and
interim reporting standards for an enterprise's business segments and related
disclosures about the enterprise's products, services, geographic areas and
major customers. The Company adopted this statement in fiscal 1999. The Company
has determined that it operates in one reporting segment.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1
provides guidance for an enterprise on accounting for the costs of computer
software developed or obtained for internal use. SOP 98-1 is effective for the
Company in
F-42
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
fiscal 2000. The Company anticipates that accounting for transactions under SOP
98-1 will not have a material impact on its financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for the Company in fiscal
2001. Although the Company has not fully assessed the implications of SFAS
No. 133, the Company does not believe adoption of this statement will have a
material impact on its financial position or results of operations.
2. ACQUISITION OF PALO ALTO INTERNET EXCHANGE
On June 21, 1999, the Company consummated the acquisition of certain assets
and the assumption of certain liabilities of the Palo Alto Internet Exchange
("PAIX"), a business within the Technology and Corporate Development and
Operations Management Services business units of Compaq Computer Corporation
("Compaq"). The total purchase price of $76.4 million consisted of
$70.0 million in cash, certain future ongoing services to be provided by the
Company to Compaq, with a value currently estimated to be $5.0 million, and
acquisition-related costs of $1.4 million. PAIX is a high-level switching and
peering point for global and regional Internet service providers and content
providers.
The acquisition has been recorded using the purchase method of accounting.
The excess of the aggregate purchase price over the fair market value of net
assets acquired of $69.7 million was recognized as goodwill and is being
amortized over 10 years. Amortization of goodwill for fiscal 1999 was $190,000.
At June 30, 1999, the Company made a preliminary allocation of the purchase
price. The Company will record adjustments to the purchase price allocation as
deemed necessary.
The operating results of PAIX have been included in the Company's
consolidated financial statements since the date of acquisition. Had the
acquisition of PAIX occurred on July 1, 1997 the unaudited proforma revenue, net
loss applicable to common stockholders and related basic and diluted loss per
share for the years ended June 30, 1998 and 1999 would have been: $6.6 million
and $19.7 million; $23.8 million and $44.4 million, and $45.45 per share and
$2.66 per share, respectively. These results, which are based on various
assumptions, are not necessarily indicative of what would have occurred had the
acquisition been consummated on July 1, 1997.
A reconciliation of the cash and noncash aspects of the above transaction is
as follows:
<TABLE>
<S> <C>
Tangible and intangible assets acquired..................... $76,683,200
Liabilities assumed......................................... (263,000)
Liabilities incurred in connection with purchase............ (5,000,000)
-----------
Net cash paid for acquisition............................... $71,420,200
===========
</TABLE>
F-43
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
3. PROPERTY AND EQUIPMENT, NET
Property and equipment at June 30 are comprised of the following:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Property and equipment at cost:
Telecommunication equipment....................... $2,295,300 $10,255,500
Leasehold improvements (primarily
co-location facilities)......................... 224,700 20,385,900
Office equipment.................................. 186,500 1,262,000
Construction in progress.......................... 2,389,400 18,224,900
---------- -----------
Total............................................... 5,095,900 50,128,300
Less accumulated depreciation and amortization...... (659,800) (3,537,400)
---------- -----------
Property and equipment, net......................... $4,436,100 $46,590,900
========== ===========
</TABLE>
Construction in progress primarily relates to costs incurred during the
expansion of the Company's facilities.
4. INDEFEASIBLE RIGHTS TO USE FIBER OPTIC CAPACITY
During fiscal 1999, the Company entered into a series of agreements
providing for the acquisition of an indefeasible right to use capacity on a
fiber optic cable system between the U.S. and the United Kingdom for
$8.3 million, $7.5 million of which has been paid as of June 30, 1999. The terms
of these agreements are 25 years.
In fiscal 1999, the Company entered into a series of agreements to lease
fiber optic cable systems between Washington D.C. and New York City. These
leases were initiated in the fourth quarter of fiscal 1999 and require annual
payments of $630,000 for 20 years. The leases are accounted for as capital
leases and had a net book value of $4.6 million at June 30, 1999.
5. JOINT VENTURES
In March 1999, as part of its international expansion strategy, the Company
entered into agreements to form joint ventures in Austria, Germany ("AboveNet
GmbH"), and the United Kingdom to provide managed co-location and Internet
connectivity solutions for mission critical Internet operations. The Company
invested a total of $2.4 million in fiscal 1999, which is included in deposits
and other assets at June 30, 1999. In addition, the Company has agreed to
provide up to $2 million of additional financing to certain of these joint
ventures, if required, and to arrange or provide for an additional $4.5 million
contingent upon the joint ventures raising an equivalent amount from third
parties. These joint ventures are accounted for under the equity method of
accounting.
In July 1999, the Company agreed to enter into two additional joint ventures
in Germany. The first joint venture will own real property in Frankfurt,
Germany. For an equity contribution of approximately $2 million, the Company
will own 45% and AboveNet GmbH will own 5% of this joint venture. The second
joint venture will lease the real property from the aforementioned joint
venture. It will complete improvements to the property and will manage the
property. This entity will lease managed co-location space to AboveNet GmbH and
provide leased space to other third parties. The Company will own 87.42% of this
second joint venture in exchange for equity contributions which will total
F-44
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
approximately $23 million, of which approximately $8 million will be paid as an
initial equity contribution, with the remainder to be contributed over the
following 18 to 24 months.
6. CONVERTIBLE NOTES PAYABLE AND ADVANCES
In June 1997, the Company received $739,900 in cash advances from certain
individuals, including stockholders and employees. In July and August 1997, the
Company received an additional $250,000 in cash advances. In August 1997, the
advances were converted into notes payable of $989,900 and warrants to acquire
989,906 shares of Series B convertible preferred stock at $1.00 per share. The
notes generally bore an annual interest rate of 10%. The related warrants were
valued at $112,000, or $0.12 per share, and were recorded as noncash interest
expense in fiscal 1998.
On December 31, 1997, the Company entered into exchange agreements with the
note holders. Pursuant to the exchange agreements, the above notes, accrued
interest of $21,200 and the related warrants were exchanged for (i) 1,263,792
shares of Series B convertible preferred stock and (ii) warrants to acquire
247,472 shares of Series B convertible preferred stock at $1.00 per share.
During fiscal 1998, the Company received $3,873,400 of cash advances from
certain potential investors. In May 1998, these advances were converted into
4,006,000 shares of Series C convertible preferred stock.
On June 30, 1998, in anticipation of the Company's pending sale of preferred
stock, the Company received $8 million in cash, of which $1 million represented
a noninterest-bearing cash advance and $7 million represented convertible notes
payable. The notes bore interest at 6%, were due on July 15, 1998 and were
convertible into Series D convertible preferred stock at $2.60 per share. On
July 15, 1998, the convertible notes and advance were converted into Series D
convertible preferred stock (see Note 9).
F-45
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
7. OTHER LONG-TERM OBLIGATIONS
Long-term obligations at June 30 consist of:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Credit facility..................................... $1,201,600 $21,626,800
Capital lease facility.............................. 551,100 5,741,900
Deferred rent....................................... 48,600 204,700
---------- -----------
Total obligations................................... 1,801,300 27,573,400
Less current portion of long-term obligations....... (476,000) (5,984,800)
---------- -----------
Long-term obligations............................... $1,325,300 $21,588,600
========== ===========
</TABLE>
CREDIT FACILITY
At June 30, 1999, the Company had $21.6 million outstanding under its credit
facility (the "Credit Facility"), with no additional borrowings available as of
June 30, 1999. Borrowings outstanding under the Credit Facility are payable in
42 monthly installments, bear interest at rates ranging from 13.3% to 15.1% and
are collateralized by the equipment and leasehold improvements purchased with
the proceeds of the borrowing. At June 30, 1999, the outstanding borrowings on
the Credit Facility are due as follows: fiscal 2000, $5,480,000; fiscal 2001,
$6,286,600; fiscal 2002, $6,874,200; and fiscal 2003, $2,986,000.
CAPITAL LEASE FACILITY
At June 30, 1999, the Company had $820,000 available on a $2.5 million
facility under which the Company leases certain equipment under capital leases.
Leases outstanding at June 30, 1999 expire on various dates through fiscal 2019
(see Note 12).
8. INCOME TAXES
The Company's deferred income tax assets at June 30 are comprised of the
following:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards................ $ 1,871,700 $ 10,755,900
Stock compensation expense on nonqualified stock
options....................................... 485,300 1,067,000
Accruals deductible in different periods........ 114,700 935,200
Depreciation and amortization................... (65,200) (231,600)
----------- ------------
2,406,500 12,526,500
Valuation allowance............................... (2,406,500) (12,526,500)
----------- ------------
Total............................................. $ -- $ --
=========== ============
</TABLE>
F-46
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
The Company's effective rate differs from the federal statutory tax rate for
the years ended June 30, 1997, 1998 and 1999 as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal statutory tax rate.............................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit..................... 3.0 3.0 2.9
Joint venture termination fee........................... (9.1) -- --
Other................................................... (0.1) (0.3) (0.4)
Valuation allowance..................................... (28.8) (37.7) (37.5)
----- ----- -----
Effective tax rate...................................... --% --% --%
===== ===== =====
</TABLE>
The Company has no income tax provision due to its history of operating
losses. Due to the uncertainty surrounding the realization of the benefits of
its favorable tax attributes in future tax returns, the Company has fully
reserved its net deferred tax assets as of June 30, 1997,1998 and 1999.
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $28.4 million for federal and $14.2 million for state income tax
purposes. These carryforwards begin to expire in 2003 for state and 2010 for
federal purposes. Additionally, Section 382 of the Internal Revenue Code and the
applicable California law impose annual limitations on the use of net operating
loss carryforwards if there is a change in ownership, as defined, within any
three-year period. The utilization of certain net operating loss carryforwards
may be limited due to the Company's capital stock transactions.
9. STOCKHOLDERS' EQUITY
STOCK SPLITS
During November 1998, the Company reincorporated in the State of Delaware
and effected a stock exchange of one share of common stock and preferred stock
for every two and one-half shares of common stock and preferred stock,
respectively, of its California predecessor entity. The Company also effected
another reverse stock split during November 1998 whereby one share of common and
preferred stock was issued for every 1.6 shares of common stock and preferred
stock. All share and per share amounts in these financial statements have been
adjusted to give effect to these reverse stock splits.
On May 7, 1999, the Company distributed a two-for-one stock split effected
as a stock dividend. All share or per share amounts in the consolidated
financial statements have been adjusted to give effect to this stock split.
INITIAL PUBLIC OFFERING
On December 10, 1998, the Company sold 10,000,000 shares of common stock in
an underwritten public offering and on December 30, 1998 sold an additional
1,500,000 shares through the exercise of the underwriters' over-allotment option
for net proceeds of approximately $67,822,000.
STOCK OFFERING
On April 30, 1999, the Company sold 5,650,356 shares of its common stock in
an underwritten public offering at a price of $42.50 per share and on May 5,
1999 sold an additional 1,200,000 shares
F-47
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
through the exercise of the underwriters' overallotment option for net proceeds
to the Company of approximately $273,421,500.
CONVERTIBLE PREFERRED STOCK AND WARRANTS
In fiscal 1997, the Company issued 2,050,000 shares of Series A convertible
preferred stock for cash of $200,000 and the conversion of advances of $210,000.
Also in fiscal 1997, the Company issued 1,000,000 shares of Series B convertible
preferred stock in connection with the acquisition of DSK, Inc. (see Note 11)
and issued 1,000,000 shares of Series B convertible preferred stock for cash of
$600,000. In fiscal 1998, the Company issued 1,263,792 shares of Series B
convertible preferred stock and 4,006,000 shares of Series C convertible
preferred stock upon conversions of notes, advances, and accrued interest of
$1,011,100 and $3,873,400, respectively (see Note 6). In fiscal 1999, the
Company issued 4,230,756 shares of Series D convertible preferred stock for cash
of $2,771,000 (net of costs of $229,000) and the conversion of notes and
advances of $8,000,000. During the same period, the Company issued 817,550
shares of Series E convertible preferred stock for cash of $3,846,400 (net of
costs of $223,600).
As discussed in Note 6, pursuant to certain exchange agreements entered into
on December 31, 1997, the Company issued warrants to acquire 247,472 shares of
Series B convertible preferred stock at $1.00 per share. Also, during fiscal
1998, the Company issued a warrant to purchase 2,500 shares of Series D
convertible preferred stock at an exercise price of $2.00 per share in
connection with a revolving line of credit from a bank that expired in
May 1999.
Simultaneously with the closing of the initial public offering, all
14,368,098 shares of the Company's preferred stock were converted into common
stock on a share for share basis. Additionally, all of the holders of warrants
to purchase 247,472 shares of Series B convertible preferred stock exercised
such warrants through a net issuance provision and were issued 209,400 shares of
common stock. Also in connection with the initial public offering, the warrant
to acquire 2,500 shares of Series D convertible preferred stock was converted
into a warrant to purchase an equivalent number of common shares at an exercise
price of $2.00 per share.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At June 30, 1999, the Company has reserved the following shares of common
stock for issuance in connection with:
<TABLE>
<S> <C>
Warrants issued and outstanding............................. 350,036
Options issued and outstanding.............................. 5,057,606
Options available under stock option plans.................. 1,108,547
Shares available under 1998 Purchase Plan................... 263,182
---------
Total....................................................... 6,779,371
=========
</TABLE>
COMMON STOCK SUBJECT TO REPURCHASE
Upon the exercise of certain unvested employee stock options, the Company
issued to the employees common stock which is subject to repurchase by the
Company at the original exercise price of the stock option. This right lapses
over the original vesting period. At June 30, 1999, 66,661 shares were subject
to repurchase.
F-48
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
STOCK OPTION PLANS
Under the Company's stock option plans (collectively, the "Plans") a total
of 5,656,712 nonstatutory and incentive common stock options are authorized for
issuance. Nonstatutory stock options may be granted to employees, outside
directors and consultants, and incentive stock options may only be granted to
employees. The Plans provide for the granting of incentive stock options at not
less than 100% of the fair market value of the underlying stock at the grant
date. Nonstatutory stock options may be granted at not less than 85% of the fair
market value of the underlying stock at the date of grant. Options granted to
employees generally vest over four years and expire ten years from the date of
the grant. In addition, upon change in control, all options granted under
certain plans shall immediately vest.
The plans provide that each nonemployee director who is elected to the
Company's board of directors will automatically be granted a nonstatutory stock
option to purchase 18,750 shares of common stock at an exercise price equal to
the fair value of the common stock on the grant date. These grants vest ratably
over three years. An additional option to purchase 6,250 shares of common stock
will be granted to the nonemployee director each year thereafter with an
exercise price equal to the fair market value of the common stock on that date.
These grants vest after one year of service.
EMPLOYEE STOCK PURCHASE PLAN
On December 10, 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (the "1998 Purchase Plan"). Under the 1998 Purchase Plan, eligible
employees are allowed to have salary withholdings of up to 15% of their base
compensation to purchase shares of common stock at a price equal to 85% of the
lower of the market value of the stock at the beginning or end of defined
purchase periods. The initial purchase period commenced on December 10, 1998.
The Company has reserved 312,500 shares of common stock for issuance under this
plan. As of June 30, 1999, 49,318 shares have been issued under the 1998
Purchase Plan.
NONPLAN OPTION GRANT
In connection with its hiring of the Company's President and Chief Operating
Officer in November 1997, the Company granted to this officer options to
purchase 350,000 shares of common stock with an exercise price of $0.20 per
share. The option was immediately exercisable with respect to 20% of the option
shares with the balance exercisable in equal monthly installments over the next
36 months of employment with the Company. However, vesting accelerated upon the
closing of the Company's underwritten public offering. In addition, the option
grant contained an antidilution clause which guaranteed that, prior to any
underwritten initial public offering of the Company's common stock, the number
of shares under the option grant would always be equal to 5% of its outstanding
common stock on a fully diluted basis less 36,666 shares. As a result of various
sales of equity securities and option grants since the initial grant in
November 1997, the officer was issued options to purchase an additional 638,850
shares of common stock at an exercise price of $0.20 per share during fiscal
1999. In connection with this award, the Company recognized $362,100 and
$1,087,200 in stock-based compensation expense during fiscal 1998 and 1999,
respectively.
OPTIONS AND WARRANTS GRANTED TO NONEMPLOYEES
The Company has granted options and warrants to nonemployees for services
performed and to be performed after the date of grant. In connection with these
awards, the Company recognized $310,100
F-49
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
and $601,500 in stock-based compensation expense during fiscal 1998 and 1999,
respectively. At June 30, 1999, options to purchase 85,000 shares of common
stock at an exercise price of $42.53 were unearned by certain nonemployees.
These options vest over three years and have a term of three years. At June 30,
1999, all services relating to all other nonemployee awards have been rendered
and the related options and warrants were fully exercisable.
In connection with the Company's formation of its European joint ventures in
March 1999, the Company agreed that it will grant options to purchase up to
600,000 shares of common stock to employees of the joint ventures upon the joint
ventures meeting certain performance criteria of over the next four years. The
exercise price for these options would be based on the fair market value of the
Company's common stock at the date of grant.
In connection with the Credit Facility (see Note 7), in fiscal 1998, the
Company issued warrants to purchase 45,000 shares of common stock at a
weighted-average exercise price of $2.31 per share. The fair value of these
warrants is being recognized as interest expense through June 30, 1999. During
fiscal 1999, in connection with an amendment to the Credit Facility, the Company
issued warrants to purchase 67,032 shares of common stock which have a
weighted-average exercise price of $18.72 per share and a term of five years.
The estimated fair value of these warrants of $787,600 is included in deposits
and other assets at June 30, 1999 and is being amortized to interest expense
over the repayment period.
In connection with the signing of a new facility lease (See Note 12) in
fiscal 1999, the Company issued the lessor a warrant to purchase 200,000 shares
of its common stock at $5.00 per share. The estimated fair value of this warrant
of $609,100 is included in deposits and other assets at June 30, 1999 and will
be amortized to expense over the lease period.
At June 30, 1998, warrants to purchase 64,686 shares of common stock at a
weighted-average exercise price of $2.10 per share were outstanding; such
warrants expire in 2003. All of these warrants were issued during the year ended
June 30, 1998 and had an estimated weighted-average fair value of $1.23 per
share at the date of grant. During fiscal 1999, warrants to purchase 302,662
shares of common stock at a weighted-average exercise price of $7.99 were issued
and had an estimated weighted-average fair value of $4.72 per share at date of
grant. At June 30, 1999, warrants to purchase 350,036 shares of common stock at
a weighted-average exercise price of $7.17 per share were outstanding.
OPTION REPRICING
On December 1, 1998, the Company repriced 928,850 options previously granted
at $6.00 to $8.00 per share to fair value at that date of $5.00 per share.
F-50
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- --------
<S> <C> <C>
Balance, July 1, 1996 (137,500 shares vested at a
weighted average exercise price of $0.02 per share)... 1,140,000 $ 0.02
Granted................................................. 450,000 0.07
Exercised............................................... (31,250) 0.02
Canceled................................................ (388,750) 0.02
----------
Balance, June 30, 1997 (219,374 shares vested at a
weighted average exercise price of $0.02 per share)... 1,170,000 0.03
Granted................................................. 1,142,612 0.59
Exercised............................................... (322,446) 0.10
Canceled................................................ (32,334) 0.31
----------
Balance, June 30, 1998 (734,270 shares vested at a
weighted average exercise price of $0.19 per share)... 1,957,832 0.34
Granted................................................. 5,058,100 15.61
Exercised............................................... (822,908) 0.50
Canceled................................................ (1,135,418) 6.35
----------
Balance, June 30, 1999.................................. 5,057,606 $14.24
==========
</TABLE>
The following table summarizes information as of June 30, 1999 concerning
currently outstanding and vested options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE OF SHARES PRICE
- ----------------------- ----------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.02 - $ 0.60 1,621,374 8.3 $ 0.17 1,185,423 $ 0.19
2.00 - 2.60 276,628 8.5 2.29 45,397 2.12
4.00 - 6.50 1,337,654 9.2 5.17 337,103 5.36
12.25 - 41.06 1,595,550 9.7 33.34 690,668 36.47
42.53 - $75.13 226,400 9.5 48.55 7,500 46.63
--------- --- -------- --------- --------
5,057,606 9.1 $ 14.24 2,266,091 $ 12.21
========= === ======== ========= ========
</TABLE>
At June 30, 1999, 1,108,547 shares remained available for future grant.
F-51
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related
interpretations.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net income (loss) and net income (loss) per share had
the Company adopted the fair value method since the Company's inception. Under
SFAS No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values.
The Company's calculations for employee grants were made using the minimum
value method for grants prior to September 8, 1998 and the fair value method for
grants after that date with the following weighted average assumptions: expected
life, one year following vesting; risk free interest rate of 6%; and no
dividends during the expected term. In addition, volatility of 70% was used for
grants valued under the fair value method. The Company's calculations are based
on a multiple award valuation approach and forfeitures are recognized as they
occur. If the computed values of the Company's stock-based awards to employees
had been amortized to expense over the vesting period of the awards as specified
under SFAS No. 123, net loss would have been $1,803,800 ($4.59 per basic and
diluted share), $5,111,000 ($9.75 per basic and diluted share) and $37,202,000
($2.24 per basic and diluted share) for the years ended June 30, 1997, 1998 and
1999, respectively.
The number and estimated weighted-average grant date value per option for
employee and nonemployee awards during the year are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Employee options:
Number of shares......................... -- 1,003,250 4,957,600
Estimated weighted average value......... $ -- $ 0.10 $ 5.98
Nonemployee options:
Number of shares......................... 450,000 139,362 100,500
Estimated weighted average value......... $ 0.02 $ 0.08 $ 20.43
</TABLE>
F-52
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
10. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share at June 30:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss (numerator), basic and
diluted............................. $(1,802,800) $(5,425,000) $(26,554,900)
=========== =========== ============
Shares (denominator):
Weighted average common shares
Outstanding....................... 393,236 530,224 16,675,822
Weighted average common shares
Outstanding subject to
repurchase........................ -- (5,616) (32,795)
----------- ----------- ------------
Shares used in computation, basic and
diluted............................. 393,236 524,608 16,643,027
=========== =========== ============
Net loss per share, basic and
diluted............................. $ (4.58) $ (10.34) $ (1.60)
=========== =========== ============
</TABLE>
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic net income per share in the future, but
were excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. At June 30, 1999,
outstanding potentially dilutive securities consist of 66,661 outstanding shares
of common stock subject to repurchase, and options and warrants to purchase
5,407,642 shares of common stock.
11. JOINT VENTURE TERMINATION FEE
In fiscal 1996, the Company entered into a joint venture agreement (the
"Agreement") with DSK, Inc. ("DSK") to cooperatively market and develop the
Company's services. The Company paid $33,700 to DSK during the year ended
June 30, 1997 related to the Agreement.
In April 1997, the Company terminated the Agreement and hired the majority
stockholders of DSK as either employees or consultants by issuing 1,000,000
fully vested shares of the Series B preferred stock with a fair value of $0.60
per share, or $600,000, for the outstanding shares of common stock of DSK. The
Company recorded the transaction by allocating the value of the shares issued to
property and equipment (at DSK's net book value of $168,900, which approximated
fair value), with the balance of $431,100 reflected as a joint venture
termination fee.
Additionally, in April 1997, the Company granted to certain of the former
owners of DSK options to purchase a total of 250,000 shares of its common stock
at $0.06 per share for real estate consulting services to be performed. In
June 1998, the Company accelerated the vesting of all the DSK options awarded.
In conjunction with this award, the Company recognized $604,200 of stock-based
compensation expense during fiscal 1998.
F-53
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities under noncancelable operating leases.
These leases expire on various dates through fiscal 2002. Minimum future lease
payments under noncancelable operating and capital leases as of June 30, 1999
are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
JUNE 30, LEASES LEASES
- ------------ ----------- -----------
<S> <C> <C>
2000...................................................... $ 1,320,600 $ 3,903,200
2001...................................................... 1,282,100 4,108,000
2002...................................................... 921,500 4,215,100
2003...................................................... 630,000 4,305,600
2004...................................................... 630,000 4,341,700
Thereafter.................................................. 9,060,000 47,604,800
----------- -----------
Total minimum lease payments................................ $13,844,200 $68,478,400
=========== ===========
Less amount representing interest at rates ranging from
13.253% to 14.68%......................................... (8,102,300)
-----------
Present value of minimum lease payments..................... 5,741,900
Less current portion........................................ (569,200)
-----------
Long-term portion........................................... $ 5,172,700
===========
</TABLE>
Rent expense under operating leases for the years ended June 30, 1997, 1998
and 1999 was $444,900, $917,000 and $1.3 million, respectively.
Effective in fiscal 2000, the Company has committed to lease additional
facilities. The lease is for a minimum term of 20 years with annual rental
payments increasing from approximately $3 million to $4 million over the lease
term.
On June 29, 1999, the Company entered into an agreement to purchase
approximately nine acres of land in Fairfax County, Virginia, for $7,750,000
which is expected to close in fiscal 2000. The Company intends to open a
facility on the site in fiscal 2001.
See Note 4 regarding the Company's agreements to lease fiber optic cable
systems.
PURCHASE COMMITMENTS
The Company has entered into noncancelable commitments to purchase property
and equipment related to the expansion of its operations facilities. As of
June 30, 1999, approximately $48 million was committed for purchases under these
agreements through fiscal 2000.
TELECOMMUNICATIONS AND PEERING ARRANGEMENTS
The Company has guaranteed to pay certain monthly usage levels or fees with
various communications or interconnect providers. Minimum payments under these
agreements at June 30, 1999 are approximately $24.8 million in fiscal 2000;
$24.7 million in fiscal 2001; $23.1 million in fiscal 2002; $14.4 million in
fiscal 2003; $13.7 million in fiscal 2004; and $8.6 million in fiscal 2005.
F-54
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
The Company is a party to numerous peering agreements with other internet
providers to allow for the exchange of internet traffic. These agreements do not
have fee commitments and generally have a one year term with automatic renewals.
The Company does not record any revenue or expense associated with these
non-cash transactions as such transactions do not represent the culmination of
the earnings process and the fair value of such transactions are not reasonably
determinable.
LEGAL MATTERS
On June 29, 1999, an alleged stockholder of AboveNet filed a lawsuit in the
Court of Chancery of the State of Delaware. The plaintiff, who purports to
represent a class of all AboveNet stockholders, challenges the terms of the
merger between AboveNet and Metromedia Fiber Network, Inc. ("Metromedia") (see
Note 17). Four other vitually identical complaints have also been filed in the
Delaware Court of Chancery. None of these four complaints has been served.
AboveNet believes these lawsuits are without merit and intends to defend itself
vigorously, and accordingly, management does not expect that the outcome of
these cases will have a material effect on the Company's financial position or
results of operations.
13. RELATED PARTY TRANSACTIONS
A member of the Board of Directors is the president of an entity which is
the co-manager of the Company's primary facilities. Rent expense in fiscal 1997,
1998 and 1999 for these facilities was $16,400, $265,200 and $1,073,200,
respectively. The Company believes that its lease arrangements were on an arm's
length basis.
During fiscal 1999, the same entity was granted a warrant to purchase
200,000 shares of common stock in connection with the signing of a new facility
lease (see Note 9). The estimated fair value of the warrant when granted was
$609,100.
14. MAJOR CUSTOMERS
For the year ended June 30, 1999, no one customer accounted for more than
10% of revenues. One customer accounted for 14% and 12% of revenues in fiscal
1998 and 1997, respectively.
At June 30, 1999, one customer accounted for approximately 10% of trade
receivables. At June 30, 1998, two customers accounted for approximately 22% and
13% of trade receivables.
15. GEOGRAPHIC DATA
During the year ended June 30, 1999, the Company generated approximately 14%
of its revenues from customers domiciled in countries other than the United
States, primarily in Asia. For the years ended June 30, 1998 and 1997,
substantially all of the Company's revenues were derived from domestic
customers.
16. 401(K) PLAN
In May 1998, the Company began a 401(k) plan (the Plan) that covers all
employees who meet the Plan's eligibility requirements. Eligible employees can
contribute up to 15% of their salary, subject to certain IRS limitations. The
Company's contributions related to fiscal 1998 and 1999 were zero and $168,100,
respectively.
F-55
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
17. SUBSEQUENT EVENTS
In August 1999, the Company entered into an additional agreement for the
acquisition of an indefeasible right to use additional capacity on a fiber optic
cable system between the U.S. and the United Kingdom for a 25-year period. The
agreement commits the Company to pay approximately $15.8 million in a series of
installments through October 1999.
On September 8, 1999, the Company completed a merger with Metromedia Fiber
Network, Inc. ("MFN"). Under the terms of the agreement, AboveNet stockholders
received 1.175 shares of MFN Class A common stock for each AboveNet share owned.
Additionally, upon completion of the merger, all outstanding stock options
granted prior to June 18, 1999 became immediately vested.
F-56
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Compaq Computer Corporation
We have audited the accompanying Combined Statement of Assets to be Acquired
and Liabilities to be Assumed of Palo Alto Internet Exchange (the "Business") as
of December 26, 1998 and the related Combined Statement of Revenues and Direct
Expenses for the period June 12, 1998 through December 26, 1998. These
statements are the responsibility of the Business' and Compaq Computer
Corporation's management. Our responsibility is to express an opinion on these
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in the Current Report on Form 8-K of AboveNet Communications Inc.) as
described in Note 2 and are not intended to be a complete presentation of the
Business' financial position or results of operations.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets to be acquired and liabilities to be assumed as of
December 26, 1998 and the revenues and direct expenses described in Note 2 of
the Business for the period June 12, 1998 through December 26, 1998, in
conformity with generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 15, 1999
F-57
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Compaq Computer Corporation
We have audited the accompanying Combined Statement of Assets to be Acquired
and Liabilities to be Assumed of Palo Alto Internet Exchange (the "Business") as
of December 27, 1997 and the related Combined Statement of Revenues and Direct
Expenses for the period December 28, 1997 through June 11, 1998 and the fiscal
years ended December 27, 1997 and December 29, 1996. These statements are the
responsibility of the Business' and Compaq Computer Corporation's management.
Our responsibility is to express an opinion on these statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in the Current Report on Form 8-K of AboveNet Communications Inc.) as
described in Note 2 and are not intended to be a complete presentation of the
Business' financial position or results of operations.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets to be acquired and liabilities to be assumed as of
December 27, 1997 and the revenues and direct expenses described in Note 2 of
the Business for the period December 28, 1997 through June 11, 1998 and the
fiscal years ended December 27, 1997 and December 29, 1996, in conformity with
generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 15, 1999
F-58
<PAGE>
PALO ALTO INTERNET EXCHANGE
COMBINED STATEMENT OF ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 27,
1999 DECEMBER 26, DECEMBER 27,
(UNAUDITED) 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
ASSETS TO BE ACQUIRED:
Unbilled accounts receivable........... $ 102 $ 18 $ 14
Prepaid expenses....................... 29 2 1
Property and equipment, net............ 3,405 3,088 2,750
Intangible assets, net................. 32,863 33,756 --
------- ------- ------
Total assets to be acquired........ $36,399 $36,864 $2,765
======= ======= ======
LIABILITIES TO BE ASSUMED:
Unearned service revenue............... 166 200 106
------- ------- ------
Total liabilities to be assumed.... 166 200 106
------- ------- ------
Net assets to be acquired........ $36,233 $36,664 $2,659
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
PALO ALTO INTERNET EXCHANGE
COMBINED STATEMENT OF REVENUES AND DIRECT EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
QUARTER QUARTER JUNE 12, 1998 PERIOD FROM FISCAL FISCAL
ENDED ENDED THROUGH DECEMBER 28, YEAR ENDED YEAR ENDED
MARCH 27, MARCH 26, DECEMBER 26, 1997 THROUGH DECEMBER 27, DECEMBER 29,
1999 1998 1998 JUNE 11, 1998 1997 1996
--------- --------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Service revenues....................... $1,534 $ 892 $ 2,630 $1,732 $ 1,895 $ 155
------ ----- ------- ------ ------- -------
Direct expenses:
Cost of revenues..................... 616 817 1,548 1,440 2,579 537
Research and development............. -- 4 9 8 54 599
Selling, general and administrative
expenses........................... 131 83 191 242 700 121
Amortization of intangible assets.... 893 -- 1,944 -- -- --
------ ----- ------- ------ ------- -------
Total direct expenses............ 1,640 904 3,692 1,690 3,333 1,257
------ ----- ------- ------ ------- -------
Excess (shortfall) of revenues
over direct expenses......... $ (106) $ (12) $(1,062) $ 42 $(1,438) $(1,102)
====== ===== ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES
(AMOUNTS IN THOUSANDS)
1. DESCRIPTION OF BUSINESS:
The Palo Alto Internet Exchange ("PAIX" or the "Business") is a business
within the Technology & Corporate Development and Operations Management Services
business units of Compaq Computer Corporation ("Compaq," formerly Digital
Equipment Corporation, "Digital," collectively the "Company"). The Business is a
high-level switching and peering point for global and regional Internet Service
Providers ("ISP") and content providers. The Business features a data center to
provide global services to PAIX customers for transmission of data in
high-volume over the worldwide Internet network. The Business utilizes a highly
redundant fiber-based infrastructure owned by multiple data carriers, including
the 30-mile fiber ring owned by the City of Palo Alto. The Business was started
in 1993 as a research project within the Company and commenced meaningful
operations during fiscal year 1996. The business is engaged primarily in
providing Internet interconnectivity solutions and related services in support
of mission critical Internet operations of its customers.
2. BASIS OF PRESENTATION:
The accompanying Combined Statement of Assets to be Acquired and Liabilities
to be Assumed and Combined Statement of Revenues and Direct Expenses ("the
financial statements") have been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Current Report on Form 8-K of AboveNet Communications, Inc. ("AboveNet").
The Combined Statement of Assets to be Acquired and Liabilities to be Assumed
includes the Business' assets to be sold to and liabilities to be assumed by
AboveNet, in accordance with the Asset Purchase Agreement dated May 21, 1999
(the "Agreement"). Compaq and AboveNet also entered into certain service
contracts and other arrangements that are described in the Agreement. These
arrangements include, but are not limited to, access to the Internet, favorable
pricing terms on such future services, and non-relocation and non-compete
arrangements. The terms of such contracts and other arrangements range from one
to 20 years. The assets to be acquired and liabilities to be assumed include
unbilled accounts receivable, prepaid expenses, property and equipment,
intangibles and unearned service revenue. The Combined Statement of Revenues and
Direct Expenses includes only those revenues and expenses directly related to
the Business to be sold. The financial statements exclude any other activity and
related expense that are not directly attributable to the Business, such as
corporate general and administrative costs, income taxes and interest expense.
The financial statements of the Business are derived from the historic books
and records of Digital through June 11, 1998. As a result of the acquisition of
Digital by Compaq on June 11, 1998, the financial statements of the Business
after the acquisition date are derived from the historic books and records of
Compaq.
As mentioned above, indirect costs allocated to the Business from the
Company, such as certain corporate general and administrative costs, have been
excluded from the financial statements on the basis that such costs are not
direct costs of the Business. However, in determining the Business' direct
expenses, certain allocations were made for expenses incurred by the Company, as
appropriate, that are directly attributed to the services provided to the
Business. These allocations relate primarily to engineering support in
connection with the delivery of services, facility and other occupancy costs,
and other general and administrative functions performed directly on behalf and
for the benefit of the
F-61
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
2. BASIS OF PRESENTATION: (CONTINUED)
Business. Costs for such services have been reflected in the financial
statements on the basis of activity or utilization, estimated support provided
to the Business, or other methods management believe to be reasonable.
Cost of revenues primarily consists of costs relating to facility rent, data
communications and telecommunication expenses, service delivery and engineering
support personnel and depreciation expense.
The financial statements have been prepared in accordance with the Company's
accounting policies and generally accepted accounting principles. However, these
statements do not purport to represent the costs and expenses which may be
incurred by an unaffiliated company to achieve similar results. In addition, the
financial statements do not purport to represent the financial position of the
Business.
FISCAL YEAR
For purposes of these financial statements the fiscal year of PAIX is a
fifty-two week period ending the Saturday nearest the last day of December.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
direct expenses, and related disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Building improvements, computer, telecommunications, and office equipment
and construction-in-progress are stated at cost less depreciation, which is
computed using the straight-line method. Expenditures for improvements which
substantially extend the useful life or increase the capacity of an asset are
capitalized. Ordinary repairs and maintenance are expensed as incurred.
Estimated useful lives for purposes of computing depreciation expense range from
two to 10 years.
INTANGIBLE ASSETS
Intangible assets, which consist of goodwill and customer lists related to
the acquisition of Digital by Compaq, are amortized on a straight-line basis
over 10 years.
REVENUE
Service revenue relating to Internet and colocation service contracts are
recognized over the contract period the services are provided. The Business
recognizes installation and certain other service fees as revenue on a per event
basis. Unearned service revenue represents the unearned portion of prepaid
service from Internet and colocation service contracts with customers. Such
amounts are amortized to revenue over the contract period, which ranges from one
year to three years. The
F-62
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
2. BASIS OF PRESENTATION: (CONTINUED)
Business provides for estimated future losses on Internet and colocation service
contracts, to the extent such losses are probable and estimable.
RESEARCH AND DEVELOPMENT
Research and development costs of the Business are charged to expense in the
period incurred.
LONG-LIVED ASSETS
The Business reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Business sells to customers primarily in the Internet and
Telecommunications industries and customers are primarily located in the United
States. The Company performs ongoing credit evaluations of its customers'
financial condition and maintains adequate provisions for uncollectible amounts
when necessary.
For the periods in the fiscal year ended December 26, 1998, and for the
years ended December 27, 1997 and December 29, 1996, PAIX generated more than
10% of its total revenue from the following customers:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
UUNet...................................................... 12% 19% 35%
BBN\GTE Internetworking.................................... -- -- 14%
Epoch...................................................... -- -- 31%
Genuity.................................................... -- -- 11%
</TABLE>
As of December 26, 1998 and December 27, 1997, customers which comprised 10%
or more of accounts receivable were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
UUNet....................................................... 23% 25%
Epoch....................................................... -- 20%
</TABLE>
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information for the quarters ended March 27, 1999 and
March 26, 1998 is unaudited and has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Results for the
F-63
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
2. BASIS OF PRESENTATION: (CONTINUED)
three months ended March 27, 1999 are not necessarily indicative of results to
be expected for the year ending December 31, 1999.
3. PROPERTY AND EQUIPMENT:
Major classifications of property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 26, DECEMBER 27,
USEFUL LIVES 1998 1997
--------------- ------------ ------------
<S> <C> <C> <C>
Building improvements............... 10 years $2,479 $2,450
Computer equipment.................. 2-3 years 52 87
Office equipment.................... 10 years 6 --
Electrical and telecommunications
equipment......................... 3 years 251 388
Construction in progress............ -- 521 112
------ ------
Less: accumulated depreciation...... (221) (287)
------ ------
$3,088 $2,750
====== ======
</TABLE>
Depreciation expense was approximately $221, $184, $286 and $1 for the
period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 11, 1998, and the fiscal years ended December 27, 1997 and
December 29, 1996, respectively.
4. INTANGIBLE ASSETS:
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 11,
1998 1998
------------ --------
<S> <C> <C>
Goodwill............................................... $27,400 $27,400
Customer lists......................................... 8,300 8,300
Less: accumulated amortization......................... (1,944) --
------- -------
$33,756 $35,700
======= =======
</TABLE>
On June 11, 1998, Compaq consummated its acquisition of Digital and
allocated its purchase price to the assets acquired and liabilities assumed
based on Compaq's estimates of fair value. The fair value assigned to intangible
assets acquired was based on a valuation prepared by an independent third-party
appraisal company and included goodwill and customer lists related to the
Business.
5. COMMITMENTS AND CONTINGENCIES:
The Company, on behalf of the Business, has entered into service contracts
with customers and telecommunications vendors to provide services.
F-64
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES (CONTINUED)
(AMOUNTS IN THOUSANDS)
5. COMMITMENTS AND CONTINGENCIES: (CONTINUED)
In some instances, the Company provides limited warranties to customers in
connection with Internet and colocation service contracts. To date, costs
incurred in connection with such warranties have been immaterial.
6. LEGAL MATTERS:
The Company is involved in lawsuits, claims, investigations, and proceedings
which are being handled and defended in the ordinary course of business. There
are no such matters pending that the Company and its General Counsel expect to
be material in relation to the Business and no amounts have been accrued in the
financial statements for such matters.
7. RELATED PARTY TRANSACTIONS:
As described in Note 2, the Company incurred expenses for services performed
directly on behalf and for the benefit of the Business. Costs for such services
have been reflected in the accompanying Statement of Revenues and Direct
Expenses on the basis of activity or utilization, estimated support provided to
the Business, or other methods management believe to be reasonable. The cost of
such services is presented as cost of revenue, research and development and
general and administrative.
The Business has no external borrowings and there has been no allocation of
the Company's consolidated borrowings and related interest expense in the
financial statements.
The Business recognized revenue from AboveNet of $66, $36, $22 and $0 for
the period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 11, 1998, and the fiscal years ended December 27, 1997 and
December 29, 1996, respectively. Accounts receivable from AboveNet are $11 and
$4 at December 26, 1998 and December 27, 1997, respectively.
F-65
<PAGE>
- ------------------------------------
- ------------------------------------
4,671,000 SHARES
METROMEDIA FIBER NETWORK, INC.
CLASS A COMMON STOCK
[LOGO]
---------
P R O S P E C T U S S U P P L E M E N T
, 1999
---------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEXu BROWN
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
- ------------------------------------
- ------------------------------------
<PAGE>
- ------------------------------------
- ------------------------------------
4,671,000 SHARES
METROMEDIA FIBER NETWORK, INC.
CLASS A COMMON STOCK
[LOGO]
---------
P R O S P E C T U S S U P P L E M E N T
, 1999
---------
SALOMON SMITH BARNEY
CREDIT SUISSE FIRST BOSTON
DEUTSCHE BANC ALEXu BROWN
DONALDSON, LUFKIN & JENRETTE
GOLDMAN, SACHS & CO.
MERRILL LYNCH & CO.
- ------------------------------------
- ------------------------------------
<PAGE>
SUBJECT TO COMPLETION DATED OCTOBER 27, 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
P R O S P E C T U S
[LOGO]
--------------
From time to time, we may sell any of the following securities:
- Debt Securities
- Preferred Stock
- Class A Common Stock
- Warrants
We will provide the specific terms of these securities in one or more
supplements to this prospectus. You should read this prospectus and any
prospectus supplement carefully before you invest.
Our class A common stock is traded over-the-counter on The Nasdaq Stock
Market's National Market under the trading symbol "MFNX." The applicable
prospectus supplement will contain information, where applicable, as to any
other listing on The Nasdaq Stock Market's National Market or any securities
exchange of the securities covered by the prospectus supplement.
In addition, up to 21,505,376 shares of class A common stock being
registered may be offered by certain selling stockholders. For additional
information on the methods of sale, you should refer to the section entitled
"Plan of Distribution."
The securities may be sold directly by us or, in case of class A common
stock, may be sold by selling stockholders, to investors, through agents
designated from time to time or to or through underwriters or dealers. See "Plan
of Distribution." If any underwriters are involved in the sale of any securities
in respect of which this prospectus is being delivered, the names of such
underwriters and any applicable commissions or discounts will be set forth in a
prospectus supplement. The net proceeds we expect to receive from such sale also
will be set forth in a prospectus supplement. We would not receive any of the
proceeds from the sale of class A common stock by selling stockholders.
This prospectus may not be used to offer or sell any securities unless
accompanied by a prospectus supplement. We urge you to read carefully this
prospectus and the accompanying prospectus supplement, which will describe the
specific terms of the securities being offered to you, before you make your
investment decision.
INVESTING IN THE SECURITIES INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 3.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THE SECURITIES TO BE ISSUED UNDER THIS
PROSPECTUS OR DETERMINED IF THIS PROSPECTUS IS ACCURATE OR ADEQUATE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus is , 1999.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
RISK FACTORS............................................................................................... 3
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS.......................................................... 10
ABOUT THIS PROSPECTUS...................................................................................... 11
BUSINESS................................................................................................... 11
RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS........................................... 12
USE OF PROCEEDS............................................................................................ 12
DESCRIPTION OF DEBT SECURITIES............................................................................. 13
DESCRIPTION OF CAPITAL STOCK............................................................................... 22
DESCRIPTION OF WARRANTS.................................................................................... 28
SELLING STOCKHOLDERS....................................................................................... 29
PLAN OF DISTRIBUTION....................................................................................... 29
VALIDITY OF SECURITIES..................................................................................... 30
EXPERTS.................................................................................................... 30
WHERE YOU CAN FIND MORE INFORMATION........................................................................ 31
INCORPORATION OF INFORMATION WE FILE WITH THE SEC.......................................................... 31
</TABLE>
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RISK FACTORS
WE HAVE A LIMITED HISTORY OF OPERATIONS
You will have limited historical financial information upon which to base
your evaluation of our performance. We were formed in April 1993 and have a
limited operating history. We currently have a limited number of customers and
are still in the process of building many of our networks. Accordingly, you must
consider our prospects in light of the risks, expenses and difficulties
frequently encountered by companies in their early stage of development.
WE EXPECT TO CONTINUE TO INCUR NET LOSSES
We cannot assure you that we will succeed in establishing an adequate
revenue base or that our services will generate profitability. In connection
with the construction of our networks, we have incurred substantial losses. We
expect to continue incurring losses while we concentrate on the development and
construction of our networks and until our networks have established a
sufficient revenue-generating customer base. We also expect to incur losses
during the initial startup phases of any services that we may provide. We expect
to continue experiencing net operating losses for the foreseeable future.
Continued losses may prevent us from pursuing our strategies for growth and
could cause us to be unable to meet our debt service obligations, capital
expenditure requirements or working capital needs.
WE HAVE SUBSTANTIAL DEBT WHICH MAY LIMIT OUR ABILITY TO BORROW, RESTRICT THE USE
OF OUR CASH FLOWS AND CONSTRAIN OUR BUSINESS STRATEGY, AND WE MAY NOT BE ABLE
TO MEET OUR DEBT OBLIGATIONS
We have substantial debt and debt service requirements. Our substantial debt
has important consequences, including:
- our ability to borrow additional amounts for working capital, capital
expenditures or other purposes is limited,
- a substantial portion of our cash flow from operations is required to make
debt service payments, and
- our leverage could limit our ability to capitalize on significant business
opportunities and our flexibility to react to changes in general economic
conditions, competitive pressures and adverse changes in government
regulation.
We cannot assure you that our cash flow and capital resources will be
sufficient to repay our existing indebtedness and any indebtedness we may incur
in the future, or that we will be successful in obtaining alternative financing.
In the event that we are unable to repay our debts, we may be forced to reduce
or delay the completion or expansion of our networks, sell some of our assets,
obtain additional equity capital or refinance or restructure our debt.
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY BECAUSE WE
DEPEND ON FACTORS BEYOND OUR CONTROL, WHICH COULD ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS
Our future largely depends on our ability to implement our business strategy
and proposed expansion in order to create the new business and revenue
opportunities. Our results of operations will be adversely affected if we cannot
fully implement our business strategy. Successful implementation depends on
numerous factors beyond our control, including economic, competitive and other
conditions and uncertainties, the ability to obtain licenses, permits,
franchises and rights-of-way on reasonable terms and conditions and the ability
to hire and retain qualified management personnel.
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WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY COMPLETE THE CONSTRUCTION OF OUR
NETWORKS
The construction of future networks and the addition of Internet service
exchange facilities entail significant risks, including management's ability to
effectively control and manage these projects, shortages of materials or skilled
labor, unforeseen engineering, environmental or geological problems, work
stoppages, weather interference, floods and unanticipated cost increases. The
failure to obtain necessary licenses, permits and authorizations could prevent
or delay the completion of construction of all or part of our networks or
increase completion costs. In addition, our AboveNet Communications Inc.
subsidiary's establishment and maintenance of interconnections with other
network providers at various public and private points (often referred to as
"peering arrangements") is necessary for AboveNet to provide cost efficient
services. We cannot assure you that the budgeted costs of our current and future
projects will not be exceeded or that these projects will commence operations
within the contemplated schedules, if at all.
WE CANNOT ASSURE YOU THAT A MARKET FOR OUR CURRENT OR FUTURE SERVICES WILL
DEVELOP
The practice of leasing dark fiber, which is fiber optic cable without any
of the electronic or optronic equipment necessary to use the fiber for
transmission, is not widespread and we cannot assure you that the market will
develop or that we will be able to enter into contracts, comply with the terms
of these contracts or maintain relationships with communications carriers and
corporate and government customers. We also cannot assure you that these
contracts or relationships will be on economically favorable terms or that
communications carriers and corporate and government customers will not choose
to compete against, rather than cooperate with us. If we are unable to enter
into contracts, comply with the terms of the contracts or maintain relationships
with these constituencies, our operations would be materially and adversely
affected. We cannot predict whether providing services to governments will
evolve into a significant market because governments usually already control
existing rights-of-way and often build their own communications infrastructure.
We will need to strengthen our marketing efforts and increase our staff to
handle future marketing and sales requirements. If we fail to obtain
significant, widespread commercial and public acceptance of our networks and
access to sufficient buildings our visibility in the telecommunications market
could be jeopardized. We cannot assure you that we will be able to secure
customers for the commercial use of our proposed networks or access to such
buildings in each market. In addition, the market for co-location and Internet
services, which are offered by AboveNet, is new and evolving. We cannot assure
you that AboveNet's services will achieve widespread acceptance in this new
market. Further, AboveNet's success depends in large part on growth in the use
of the Internet. The growth of the Internet is highly uncertain and depends on a
variety of factors.
We may expand the range of services that we offer. These services may
include assisting customers with the integration of their leased dark fiber with
appropriate electronic and optronic equipment by facilitating the involvement of
third party suppliers, vendors and contractors. We cannot assure you that a
market will develop for our new services, that implementing these services will
be technically or economically feasible, that we can successfully develop or
market them or that we can operate and maintain our new services profitably.
SEVERAL OF OUR CUSTOMERS MAY TERMINATE THEIR AGREEMENTS WITH US IF WE DO NOT
PERFORM BY SPECIFIED TIMES
We currently have some contracts to supply leased fiber capacity which allow
the lessee to terminate the contracts and/or provide for liquidated damages if
we do not supply the stated fiber capacity by a specified time. Terminating any
of these contracts could adversely affect our operating results.
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WE MAY BE UNABLE TO RAISE THE ADDITIONAL FINANCING NECESSARY TO COMPLETE THE
CONSTRUCTION OF OUR NETWORKS, WHICH WOULD ADVERSELY AFFECT OUR LONG-TERM
BUSINESS STRATEGY
We may need significant amounts of additional capital to complete the
build-out of our planned fiber optic communications networks, to expand
AboveNet's network infrastructure and to meet our long-term business strategies,
including expanding our networks to additional cities and constructing our
networks in Europe. If we need additional funds, our inability to raise them
will have an adverse effect on our operations. If we decide to raise additional
funds by incurring debt, we may become more leveraged and subject to additional
or more restrictive financial covenants and ratios. In addition, if we issue
equity securities or securities convertible or exchangeable into our equity
securities, current stockholders may face dilution.
COMPETITORS OFFER SERVICES SIMILAR TO OURS IN OUR CURRENT OR PLANNED MARKETS
WHICH WOULD AFFECT OUR RESULTS OF OPERATIONS
The telecommunications industry and AboveNet's business are extremely
competitive, particularly with respect to price and service, which may adversely
affect our results of operations. A significant increase in industry capacity or
reduction in overall demand would adversely affect our ability to maintain or
increase prices. In the telecommunications industry, we compete against
incumbent local exchange carriers, which have historically provided local
telephone services and currently dominate their local telecommunications
markets, and competing carriers in the local services market. In addition to
these carriers, several other potential competitors, such as facilities-based
communications service providers, cable television companies, electric
utilities, microwave carriers, satellite carriers, wireless telephone system
operators and large end-users with private networks, are capable of offering,
and in some cases offer, services similar to those offered by us. Furthermore,
several of these service providers, such as wireless service providers, could
build wireless networks more rapidly and at lower cost than fiber optic
networks. Additionally, the business in which AboveNet competes is highly
competitive due to a lack of barriers to entry and high price sensitivity. Many
of our competitors have greater financial, research and development and other
resources than we do.
Some of our principal competitors already own fiber optic cables as part of
their telecommunications networks. Accordingly, any of these carriers, some of
which already have franchise and other agreements with local and state
governments and substantially greater resources and more experience than us,
could directly compete with us in the market for leasing fiber capacity, if they
are willing to offer this capacity to their customers. In addition, some
communications carriers and local cable companies have extensive networks in
place that could be upgraded to fiber optic cable, as well as numerous personnel
and substantial resources to begin construction to equip their networks. If
communications carriers and local cable companies decide to equip their networks
with fiber optic cable, they could become significant competitors. Our franchise
and other agreements with the city of New York and other local and state
governments are not exclusive. Potential competitors with greater resources and
more experience than us could enter into franchise and other agreements with
local and state governments and compete directly with us. Other companies may
choose to compete with us in our current or planned markets, including Europe,
by leasing fiber capacity, including dark fiber, to our targeted customers. This
additional competition could materially and adversely affect our operations.
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS AND ARE MORE VULNERABLE TO CHANGING
ECONOMIC CONDITIONS AND CONSUMER PREFERENCES
We are particularly dependent on a limited number of customers. In addition,
AboveNet has a long sales cycle. We are, therefore, more susceptible to the
impact of poor economic conditions than our competitors with a more balanced mix
of business.
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REGULATION OF THE TELECOMMUNICATIONS INDUSTRY MAY LIMIT THE DEVELOPMENT OF OUR
NETWORKS AND AFFECT OUR COMPETITIVE POSITION
Existing and future government laws and regulations may greatly influence
how we operate our business, our business strategy and ultimately, our
viability. U.S. Federal and state telecommunications laws and the laws of
foreign countries in which we operate directly shape the telecommunications
market. Consequently, regulatory requirements and/or changes could adversely
affect our operations and also influence the market for Internet, web hosting
and related services. However, we cannot predict the future regulatory framework
of our business.
U.S. LAWS MAY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS BY REGULATING
OUR OPERATIONS AND OUR CUSTOMERS' OPERATIONS
U.S. Federal telecommunications law imposes legal requirements on common
carriers who engage in interstate or foreign communication by wire or radio, and
on telecommunications carriers. Should these regulations be applied to us, they
may have a material adverse impact on our business and results of operation. If
providing dark fiber facilities or related services provided by us were deemed
to be a telecommunications service, then regulations, both Federal and state,
applicable to telecommunications carriers might apply to us. This could subject
the revenues we receive from facility leases in interstate commerce to
assessment by the Federal Communications Commission Universal Service Fund and
the offering of those facilities or services would be subject to common carrier
regulation. In addition, our customers and, in the case of Bell Atlantic, one of
our potential shareholders, are local exchange carriers or long distance
carriers, subject to regulation by the Federal Communications Commission. Our
business may be affected by regulations applicable to these telecommunications
carriers. For example, the Federal Communications Commission has recently taken
steps, and may take further steps, to reduce the access charges, the fees paid
by long distance carriers to local exchange carriers for originating and
terminating long distance calls on the local exchange carriers' local networks,
and to give the local exchange carriers greater flexibility in setting these
charges. While we cannot predict the precise effect reduction in access charge
will have on our operations, the reduction will likely make it more attractive
for long distance carriers to use local exchange carriers facilities, rather
than our fiber optic telecommunications network. A recent decision by the
Federal Communications Commission to require unbundling of incumbent local
exchange carriers' dark fiber could decrease the demand for our dark fiber by
allowing our potential customers to obtain dark fiber from incumbent local
exchange carriers at cost-based rates, and thereby have an adverse effect on the
results of our operations.
STATE LEGISLATION AFFECTS OUR PRICING POLICIES AND OUR COSTS
Our offering of transmission services, which is different from dark fiber
capacity, may be subject to regulation in each state to the extent that these
services are offered for intrastate use, and this regulation may have an adverse
effect on the results of our operations. We cannot assure you that these
regulations, if any, as well as future regulatory, judicial, or legislative
action will not have a material adverse effect on us. In particular, state
regulators have the authority to determine both the rates we will pay to
incumbent local exchange carriers for certain interconnection arrangements such
as physical collocation, and the prices that incumbent local exchange carriers
will be able to charge our potential customers for services and facilities that
compete with our services. We will also incur costs in order to comply with
regulatory requirements such as the filing of tariffs, submission of periodic
financial and operational reports to regulators, and payment of regulatory fees
and assessments including contributions to state universal service funds. In
some jurisdictions, our pricing flexibility for intrastate services may be
limited because of regulation, although our direct competitors will be subject
to similar restrictions.
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LOCAL GOVERNMENTS' CONTROL OVER RIGHTS-OF-WAY CAN LIMIT THE DEVELOPMENT OF
OUR NETWORKS
Local governments exercise legal authority that may have an adverse effect
on our business because of our need to obtain rights-of-way for our fiber
network. While local governments may not prohibit persons from providing
telecommunications services nor treat telecommunication service providers in a
discriminating manner, they can affect the timing and costs associated with our
use of public rights-of-way.
THE REGULATORY FRAMEWORK FOR OUR INTERNATIONAL OPERATIONS IS EXTENSIVE AND
CONSTANTLY CHANGING, ADDING UNCERTAINTIES TO OUR PLANNED EXPANSION INTO
FOREIGN COUNTRIES
Various regulatory requirements and limitations also will influence our
business as we attempt to enter international markets. Regulation of the
international telecommunications industry is changing rapidly. We are unable to
predict how the Federal Communications Commission and foreign regulatory bodies
will resolve the various pending international policy issues and the effect of
such resolutions on us. Our US/UK undersea cable joint venture is a U.S.
international common carrier subject to U.S. regulation under Title II of the
Communications Act of 1934. We are also licensed as a U.S. international common
carrier subject to U.S. regulation under Title II of the Communications Act of
1934. Our U.K. joint venture is, and we also are, required, under Sections 214
and 203 of the Communications Act of 1934, respectively, to obtain authorization
and file an international service tariff containing rates, terms and conditions
before initiating service. International carriers are also subject to certain
annual fees and filing requirements such as the requirement to file contracts
with other carriers, including foreign carrier agreements, and reports
describing international circuit, traffic and revenue data service. So long as
our U.K. joint venture and we operate as international common carriers, they
will also be required to comply with the rules of the Federal Communications
Commission. The international services provided by our U.K. joint venture are
and our international services are also subject to regulation in the United
Kingdom and other European jurisdictions in which we may operate. National
regulations of relevant European and other foreign countries, as well as
policies and regulations on the European Union and other foreign governmental
level, impose separate licensing, service and other conditions on our foreign
joint ventures and our international service operations, and these requirements
may have a material adverse impact on us.
OUR FRANCHISES, LICENSES OR PERMITS COULD BE CANCELED OR NOT RENEWED, WHICH
WOULD IMPAIR THE DEVELOPMENT OF MAJOR MARKETS FOR OUR SERVICES
Termination or non-renewal of our franchise with the city of New York or of
certain other rights-of-way or franchises that we use for our networks would
have a material adverse effect on our business, results of operations and
financial condition. We will also need to obtain additional franchises, licenses
and permits for our planned intracity networks, intercity networks and
international networks. We cannot assure you that we will be able to maintain on
acceptable terms our existing franchises, licenses or permits or to obtain and
maintain the other franchises, licenses or permits needed to implement our
strategy.
WE MAY NOT BE ABLE TO OBTAIN AND MAINTAIN THE RIGHTS-OF-WAY AND OTHER PERMITS
NECESSARY TO IMPLEMENT OUR BUSINESS STRATEGY
We must obtain additional rights-of-way and other permits from railroads,
utilities, state highway authorities, local governments and transit authorities
to install underground conduit for the expansion of our intracity networks,
intercity networks and international networks. We cannot assure you that we will
be successful in obtaining and maintaining these right-of-way agreements or
obtaining these agreements on acceptable terms. Some of these agreements may be
short-term or revocable at will, and we cannot assure you that we will continue
to have access to existing rights-of-way after they have expired or terminated.
If any of these agreements were terminated or could not be renewed and we were
forced to remove our fiberoptic cable from under the streets or abandon our
networks, the termination could have a material adverse effect on our
operations. In addition, landowners have asserted that railroad companies and
others
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to whom they granted easements to their properties are not entitled as a result
of these easements to grant rights of way to telecommunications providers. If
these disputes are resolved in the landowners' favor, we could be obligated to
make substantial lease payments to these landowners for the lease of these
rights of way. More specifically, our New York/New Jersey network relies upon,
and our planned expansions into Long Island and Westchester County will rely
upon, right-of-way agreements with Bell Atlantic Corporation and our subsidiary,
Empire City Subway Company (Ltd.). The current agreements may be terminated at
any time without cause with three months notice. In case of termination, we may
be required to remove our fiber optic cable from the conduits or poles of Bell
Atlantic. This termination would have a material adverse effect on our
operations.
RAPID TECHNOLOGICAL CHANGES COULD AFFECT THE CONTINUED USE OF OUR SERVICES AND
OUR RESULTS OF OPERATIONS
The telecommunications industry is subject to rapid and significant changes
in technology that could materially affect the continued use of our services,
including fiber optic cable and Internet connectivity services. We cannot
predict the effect of technological changes on our business. We also cannot
assure you that technological changes in the communications industry and
Internet related industry will not have a material adverse effect on our
operations.
WE MAY EXPERIENCE RISKS AS A RESULT OF EXPANDING OUR NETWORKS INTO EUROPEAN AND
OTHER FOREIGN COUNTRIES, WHICH MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS
Our strategy includes expanding our services to provide fiber optic cable
and developing regional Internet service exchange facilities in Europe,
particularly Austria, Germany and the United Kingdom. The following are risks we
may experience as a result of doing business in Germany, the United Kingdom and
other foreign countries in which we may expand our networks:
- difficulties in staffing and managing our operations in foreign countries;
- longer payment cycles;
- problems in collecting accounts receivable;
- fluctuations in currency exchange rates;
- delays from customs brokers or government agencies encountered as a result
of exporting fiber from the United States to Germany, the United Kingdom
or other countries in which we may operate; and
- potentially adverse consequences resulting from operating in multiple
countries, such as Germany and the United Kingdom, each with their own
laws and regulations, including tax laws and industry related regulations.
We cannot assure you that we will be successful in overcoming these risks or
any other problems arising because of expansion into Europe and other foreign
countries.
WE MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY, MANAGE AND ASSIMILATE FUTURE
ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES, WHICH WOULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS
We have in the past, and may in the future, acquire, make investments in, or
enter into strategic alliances, including joint ventures in which we hold less
than a majority interest, with, companies which have customer bases, switching
capabilities, existing networks or other assets in our current markets or in
areas into which we intend to expand our networks. Any acquisitions,
investments, strategic alliances or related efforts will be accompanied by risks
such as:
- the difficulty of identifying appropriate acquisition candidates;
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- the difficulty of assimilating the operations of the respective entities;
- the potential disruption of our ongoing business;
- the potential inability to control joint ventures in which we hold less
than a majority interest;
- the inability of management to capitalize on the opportunities presented
by acquisitions, investments, strategic alliances or related efforts;
- the failure to successfully incorporate licensed or acquired technology
and rights into our services;
- the inability to maintain uniform standards, controls, procedures and
policies; and
- the impairment of relationships with employees and customers as a result
of changes in management.
We cannot assure you that we would be successful in overcoming these risks
or any other problems encountered with such acquisitions, investments, strategic
alliances or related efforts.
IN THE TELECOMMUNICATIONS INDUSTRY, CONTINUED PRICING PRESSURES FROM OUR
COMPETITORS AND AN EXCESS OF NETWORK CAPACITY CONTINUE TO CAUSE PRICES FOR OUR
SERVICES TO DECLINE
We anticipate that prices for our services specifically, and transmission
services in general, will continue to decline over the next several years due
primarily to the following:
- price competition as various network providers continue to install
networks that might compete with our networks;
- recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber; and
- strategic alliances or similar transactions, such as long distance
capacity purchasing alliances among regional Bell operating companies,
that increase the parties' purchasing power.
WE MAY EXPERIENCE ADDITIONAL RISKS AS A RESULT OF ABOVENET'S CO-LOCATION AND
INTERNET CONNECTIVITY SERVICES
The legal landscape that governs AboveNet has yet to be interpreted or
enforced. Regulatory issues for AboveNet's industry include property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy. AboveNet's business may be adversely affected by the
adoption and interpretation of any future or currently existing laws and
regulations. AboveNet has no patented technology and relies on a combination of
copyright, trademark, service mark and trade secret laws and contractual
restrictions to establish and protect certain proprietary rights in its
technology. Despite AboveNet's design and implementation of a variety of network
security measures, unauthorized access, computer viruses, accidental or
intentional action and other disruptions could occur. In addition, we may incur
significant costs to prevent breaches in AboveNet's security or to alleviate
problems caused by those breaches. The law relating to the liability of online
services companies and Internet access providers for information carried on or
disseminated through their networks is currently unsettled. It is possible that
claims could be made against online services companies, co-location companies
and Internet access providers. We may need to implement measures to reduce our
exposure to this potential liability.
METROMEDIA COMPANY EFFECTIVELY CONTROLS OUR COMPANY AND HAS THE POWER TO CAUSE
OR PREVENT A CHANGE OF CONTROL
Metromedia Company and one of its general partners currently own 100% of our
class B common stock, which currently represents approximately 63% of our total
voting power and also is entitled to elect 75% of the members of our board of
directors. Accordingly, Metromedia Company is able to control the
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board of directors and all stockholder decisions and, in general, to determine
the outcome of any corporate transaction or other matter submitted to the
stockholders for approval, including mergers, consolidations and the sale of all
or substantially all of our assets, without the consent of other stockholders.
In addition, Metromedia Company has the power to prevent or cause a change in
control of our company.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statements in this prospectus about our expectations, belief, plans,
objectives, assumptions or future events or performance are not historical facts
and are 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. These statements are often, but not always, made
through the use of words or phrases such as "will likely result," "expect,"
"will continue," "anticipate," "estimate," "intend," "plan," "projection,"
"would" and "outlook." Accordingly, these statements involve estimates,
assumptions and uncertainties which could cause actual results to differ
materially from those expressed in them. Any forward-looking statements are
qualified in their entirety by reference to the factors discussed throughout
this document. The following cautionary statements identify important factors
that could cause our actual results to differ materially from those projected in
the forward-looking statements made in this document. Among the key factors that
have a direct bearing on our results of operation are:
- general economic and business conditions;
- the existence or absence of adverse publicity;
- changes in, or failure to comply with, government regulations;
- changes in marketing and technology;
- changes in political, social and economic conditions, especially with
respect to our foreign operations;
- competition in the telecommunications industry;
- industry capacity;
- general risks of the telecommunications industries;
- success of acquisition and operating initiatives, including our ability to
successfully integrate our acquisitions;
- changes in business strategy or development plans;
- management of growth;
- availability, terms and deployment of capital;
- construction schedules;
- costs and other effects of legal and administrative proceedings;
- dependence on senior management;
- business abilities and judgments of personnel;
- availability of qualified personnel; and
- labor and employee benefit costs.
These factors and the risk factors referred to above could cause actual
results or outcomes to differ materially from those expressed in any
forward-looking statements made by us. You should not place undue reliance on
any such forward-looking statements. Further, any forward-looking statement
speaks only as of the date on which it is made and we undertake no obligation to
update any forward-looking
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statement or statements to reflect events or circumstances after the date on
which such statement is made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time, and it is not possible for us to
predict which will arise. In addition, we cannot assess the impact of each
factor on our business or the extent to which any factor, or combination of
factors, may cause actual results to differ materially from those contained in
any forward-looking statements.
For a discussion of important risks of an investment in our securities,
including factors that could cause actual results to differ materially from
results referred to in the forward-looking statements, see "Risk Factors." You
should carefully consider the information set forth under the caption "Risk
Factors." In light of these risks, uncertanities and assumptions, the
forward-looking events discussed in or incorporated by reference in this
prospectus might not occur.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
SEC utilizing a "shelf" registration process. Under this shelf process, we may,
over the next two years, sell any combination of the securities described in
this prospectus in one or more offerings up to a total dollar amount of
$1,500,000,000. In addition, the selling stockholders may, over the next two
years, sell up to 21,505,376 shares of class A common stock.
This prospectus provides you with a general description of the securities we
or the selling stockholders may offer. Each time we or the selling stockholders
sell securities, we will provide a prospectus supplement that will contain
specific information about the terms of that offering. The prospectus supplement
may also add, update or change information contained in this prospectus. You
should read both this prospectus and any prospectus supplement together with
additional information described immediately below under the heading "Where You
Can Find More Information."
BUSINESS
We are a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to carrier and
corporate/government customers in the United States and Europe. We have
installed and intend to install local intracity networks that will consist of in
excess of 2.9 million fiber miles, which is equal to the number of strands of
fiber in a length of fiber optic cable multiplied by the length of the cable in
miles, covering approximately 6,941 route miles, which is equal to the number of
miles spanned by fiber optic cable calculated without including physically
overlapping segments of cable, in 50 metropolitan markets in the United States
and Europe.
We focus on leasing or otherwise making available for use our broadband
communications infrastructure to two main customer groups: communications
carriers and corporate/governmental customers. In addition, through our
subsidiary AboveNet Communications Inc., we are providing facilities-based,
managed services for customer-owned webservers and related equipment, known as
co-location, and high performance Internet connectivity solutions for electronic
commerce and other business critical Internet operations. AboveNet has developed
a network architecture based upon strategically located facilities. These
facilities, known as Internet service exchanges, allow Internet content
providers direct access to Internet service providers.
Our company was founded in 1993 and is a Delaware corporation and its
executive offices are located at One North Lexington Avenue, White Plains, NY
10601.
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RATIO OF EARNINGS TO FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
The following table sets forth our consolidated ratio of earnings to fixed
charges, the deficiency of our consolidated earnings to cover fixed charges, our
consolidated ratio of earnings to combined fixed charges and preferred stock
dividends and the deficiency of our consolidated earnings to cover combined
fixed charges and preferred stock dividends for the periods indicated. We have
no preferred stock outstanding as of October 14, 1999.
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED ENDED
DECEMBER 31, JUNE 30,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS OF DOLLARS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated ratio of earnings to fixed
charges................................. -- -- -- -- 1.61 -- --
Deficiency of consolidated earnings to
cover fixed charges..................... $ 874 $ 4,319 $ 10,359 $ 26,259 -- $ 2,056 $ 12,278
Consolidated ratio of earnings to combined
fixed charges and preferred stock
dividends............................... -- -- -- -- 1.61 -- --
Deficiency of consolidated earnings to
cover combined fixed charges and
preferred stock dividends............... $ 874 $ 4,319 $ 10,359 $ 26,259 -- $ 2,056 $ 12,278
</TABLE>
For purposes of computing the ratios of earnings to fixed charges and
earnings to combined fixed charges and preferred stock dividends, earnings
represent income (loss) before income taxes and fixed charges. Fixed charges
consist of interest expense, the interest component of operating leases and
amortization of deferred financing costs.
USE OF PROCEEDS
We will use the net proceeds from our sale of the securities for the
development, engineering, construction, installation, acquisition, lease,
development or improvement of our telecommunications assets and for our general
corporate purposes, which may include, repaying indebtedness, making additions
to our working capital, funding future acquisitions or for any other purpose we
describe in the applicable prospectus supplement.
We will not receive any of the proceeds from the sale of class A common
stock or other securities that may be sold by selling stockholders.
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DESCRIPTION OF DEBT SECURITIES
The following is a summary of the general terms of the debt securities. We
will file a prospectus supplement that may contain additional terms when we
issue debt securities. The terms presented here, together with the terms in a
related prospectus supplement, which could be different from the terms described
below, will be a description of the material terms of the debt securities. You
should also read the indenture. We have filed the indenture with the SEC as an
exhibit to the registration statement of which this prospectus is a part. All
capitalized terms have the meanings specified in the Indenture. The terms and
provisions of the debt securities below will most likely be modified by the
documents that set forth the specific terms of the debt securities issued.
We may issue, from time to time, debt securities, in one or more series,
that will consist of either our senior debt ("Senior Debt Securities"), our
senior subordinated debt ("Senior Subordinated Debt Securities"), our
subordinated debt ("Subordinated Debt Securities") or our junior subordinated
debt ("Junior Subordinated Debt Securities" and, together with the Senior
Subordinated Debt Securities and the Subordinated Debt Securities, the
"Subordinated Securities"). The debt securities we offer will be issued under an
indenture between us and the trustee. Debt securities, whether senior, senior
subordinated, subordinated or junior subordinated, may be issued as convertible
debt securities or exchangeable debt securities.
GENERAL TERMS OF THE INDENTURE
The indenture does not limit the amount of debt securities that we may
issue. It provides that we may issue debt securities up to the principal amount
that we may authorize and may be in any currency or currency unit that we may
designate. The terms of the indenture do not contain any covenants or other
provisions designed to give holders of any debt securities protection against
changes in our operations, financial condition or transactions involving us, but
such provisions may be included in the documents that set forth the specific
terms of the debt securities.
We may issue the debt securities issued under the indenture as "discount
securities," which means they may be sold at a discount below their stated
principal amount. These debt securities, as well as other debt securities that
are not issued at a discount, may, for United States federal income tax
purposes, be treated as if they were issued with "original issue discount"
("OID") because of interest payment and other characteristics. Special United
States federal income tax considerations applicable to debt securities issued
with original issue discount will be described in more detail in any applicable
prospectus supplement.
The applicable prospectus supplement for a series of debt securities that we
issue will describe, among other things, the following terms of the offered debt
securities:
- the title;
- any limit on the aggregate principal amount;
- whether issued in fully registered form without coupons or in a form
registered as to principal only with coupons or in bearer form with
coupons;
- whether issued in the form of one or more global securities and whether
all or a portion of the principal amount of the debt securities is
represented thereby;
- the price or prices at which the debt securities will be issued;
- the date or dates on which principal is payable;
- the place or places where and the manner in which principal, premium or
interest will be payable and the place or places where the debt
securities may be presented for transfer and, if applicable, conversion
or exchange;
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- interest rates, and the dates from which interest, if any, will accrue,
and the dates when interest is payable and the maturity;
- the right, if any, to extend the interest payment periods and the
duration of the extensions;
- our rights or obligations to redeem or purchase the debt securities;
- any sinking fund provisions;
- conversion or exchange provisions, if any, including conversion or
exchange prices or rates and adjustments thereto;
- the currency or currencies of payment of principal or interest;
- the terms applicable to any debt securities issued at a discount from
their stated principal amount;
- the terms, if any, under which any debt securities will rank junior to
any of our other debt;
- if the amount of payments of principal or interest is to be determined by
reference to an index or formula, or based on a coin or currency other
than that in which the debt securities are stated to be payable, the
manner in which these amounts are determined and the calculation agent,
if any, with respect thereto;
- if other than the entire principal amount of the debt securities when
issued, the portion of the principal amount payable upon acceleration of
maturity as a result of a default on our obligations;
- if applicable, covenants affording holders of debt protection against
changes in our operations, financial condition or transactions involving
us;
- if other than dollars, the coin, currency or currencies in which the
series of debt securities are denominated; and
- any other specific terms of any debt securities.
The applicable prospectus supplement will present United States federal
income tax considerations for holders of any debt securities and the securities
exchange or quotation system on which any debt securities are listed or quoted.
SENIOR DEBT SECURITIES
Payment of the principal of, premium, if any, and interest on Senior Debt
Securities will rank on a parity with all of our other unsecured and
unsubordinated debt.
SENIOR SUBORDINATED DEBT SECURITIES
Payment of the principal of, premium, if any, and interest on Senior
Subordinated Debt Securities will be junior in right of payment to the prior
payment in full of all of our unsubordinated debt, including Senior Debt
Securities. We will state in the applicable prospectus supplement relating to
any Senior Subordinated Debt Securities the subordination terms of the
securities as well as the aggregate amount of outstanding debt, as of the most
recent practicable date, that by its terms would be senior to the Senior
Subordinated Debt Securities. We will also state in such prospectus supplement
limitations, if any, on issuance of additional senior debt.
SUBORDINATED DEBT SECURITIES
Payment of the principal of, premium, if any, and interest on Subordinated
Debt Securities will be subordinated and junior in right of payment to the prior
payment in full of all of our senior debt, including
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our senior subordinated debt. We will state in the applicable prospectus
supplement relating to any Subordinated Debt Securities the subordination terms
of the securities as well as the aggregate amount of outstanding indebtedness,
as of the most recent practicable date, that by its terms would be senior to the
Subordinated Debt Securities. We will also state in such prospectus supplement
limitations, if any, on issuance of additional senior indebtedness.
JUNIOR SUBORDINATED DEBT SECURITIES
Payment of the principal of, premium, if any, and interest on Junior
Subordinated Debt Securities will be subordinated and junior in right of payment
to the prior payment in full of all of our senior, senior subordinated and
subordinated debt. We will state in the applicable prospectus supplement
relating to any Junior Subordinated Debt Securities the subordination terms of
the securities as well as the aggregate amount of outstanding debt, as of the
most recent practicable date, that by its terms would be senior to the Junior
Subordinated Debt Securities. We will also state in such prospectus supplement
limitations, if any, on issuance of additional senior indebtedness.
CONVERSION OR EXCHANGE RIGHTS
Debt securities may be convertible into or exchangeable for shares of our
equity securities or equity securities of our subsidiaries or affiliates. The
terms and conditions of conversion or exchange will be stated in the applicable
prospectus supplement. The terms will include, among others, the following:
- the conversion or exchange price;
- the conversion or exchange period;
- provisions regarding the convertibility or exchangeability of the debt
securities, including who may convert or exchange;
- events requiring adjustment to the conversion or exchange price;
- provisions affecting conversion or exchange in the event of our
redemption of the debt securities; and
- any anti-dilution provisions, if applicable.
EVENTS OF DEFAULT
Unless otherwise provided for in the prospectus supplement, the term "Event
of Default," when used in the indenture, unless otherwise indicated, means any
of the following:
- failure to pay interest for 30 days after the date payment is due and
payable; provided that if we extend an interest payment period in
accordance with the terms of the debt securities, the extension will not
be a failure to pay interest;
- failure to pay principal or premium, if any, on any debt security when
due, either at maturity, upon any redemption, by declaration or
otherwise;
- failure to make sinking fund payments when due;
- failure to perform other covenants for 60 days after notice that
performance was required;
- events in bankruptcy, insolvency or reorganization of our company; or
- any other Event of Default provided in the applicable resolution of our
Board or the supplemental indenture under which we issue a series of debt
securities.
An Event of Default for a particular series of debt securities does not
necessarily constitute an Event of Default for any other series of debt
securities issued under the indenture. IF AN EVENT OF DEFAULT RELATING
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TO THE PAYMENT OF INTEREST, PRINCIPAL OR ANY SINKING FUND INSTALLMENT INVOLVING
ANY SERIES OF DEBT SECURITIES HAS OCCURRED AND IS CONTINUING, THE TRUSTEE OR THE
HOLDERS OF NOT LESS THAN 25% IN AGGREGATE PRINCIPAL AMOUNT OF THE DEBT
SECURITIES OF EACH AFFECTED SERIES MAY DECLARE THE ENTIRE PRINCIPAL OF ALL THE
DEBT SECURITIES OF THAT SERIES TO BE DUE AND PAYABLE IMMEDIATELY.
If an Event of Default relating to the performance of other covenants occurs
and is continuing for a period of 60 days after notice of such, or if any other
Event of Default occurs and is continuing involving all of the series of Senior
Debt Securities, then the trustee or the holders of not less than 25% in
aggregate principal amount of all of the series of Senior Debt Securities may
declare the entire principal amount of all of the series of Senior Debt
Securities due and payable immediately.
Similarly, if an Event of Default relating to the performance of other
covenants occurs and is continuing for a period of 60 days after notice of such,
or if any other Event of Default occurs and is continuing involving all of the
series of Subordinated Securities, then the trustee or the holders of not less
than 25% in aggregate principal amount of all of the series of Subordinated
Securities may declare the entire principal amount of all of the series of
Subordinated Securities due and payable immediately.
If, however, the Event of Default relating to the performance of other
covenants or any other Event of Default that has occurred and is continuing is
for less than all of the series of Senior Debt Securities or Subordinated
Securities, as the case may be, then, the trustee or the holders of not less
than 25% in aggregate principal amount of each affected series of the Senior
Debt Securities or the Subordinated Securities, as the case may be, may declare
the entire principal amount of all debt securities of such affected series due
and payable immediately. The holders of not less than a majority, or any
applicable supermajority, in aggregate principal amount of the debt securities
of a series may, after satisfying conditions, rescind and annul any of the
above-described declarations and consequences involving the series.
If an Event of Default relating to events in bankruptcy, insolvency or
reorganization of our company occurs and is continuing, then the principal
amount of all of the debt securities outstanding, and any accrued interest, will
automatically become due and payable immediately, without any declaration or
other act by the trustee or any holder.
The indenture imposes limitations on suits brought by holders of debt
securities against us. Except for actions for payment of overdue principal or
interest, no holder of debt securities of any series may institute any action
against us under the indenture unless:
- the holder has previously given to the trustee written notice of default
and continuance of such default,
- the holders of at least 25% in principal amount of the outstanding debt
securities of the affected series have requested that the trustee
institute the action,
- the requesting holders have offered the trustee reasonable indemnity for
expenses and liabilities that may be incurred by bringing the action,
- the trustee has not instituted the action within 60 days of the request,
and
- the trustee has not received inconsistent direction by the holders of a
majority in principal amount of the outstanding debt securities of the
series.
We will be required to file annually with the trustee a certificate, signed
by an officer of our company, stating whether or not the officer knows of any
default by us in the performance, observance or fulfillment of any condition or
covenant of the indenture.
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REGISTERED GLOBAL SECURITIES
We may issue the debt securities of a series in whole or in part in the form
of one or more fully registered global securities. We will deposit any
registered global securities with a depositary or with a nominee for a
depositary identified in the applicable prospectus supplement and registered in
the name of such depositary or nominee. In such case, we will issue one or more
registered global securities denominated in an amount equal to the aggregate
principal amount of all of the debt securities of the series to be issued and
represented by such registered global security or securities.
Unless and until it is exchanged in whole or in part for debt securities in
definitive registered form, a registered global security may not be transferred
except as a whole:
- by the depositary for such registered global security to its nominee,
- by a nominee of the depositary to the depositary or another nominee of
the depositary, or
- by the depositary or its nominee to a successor of the depositary or a
nominee of the successor.
The prospectus supplement relating to a series of debt securities will
describe the specific terms of the depositary arrangement involving any portion
of the series represented by a registered global security.
We anticipate that the following provisions will apply to all depositary
arrangements for debt securities:
- ownership of beneficial interests in a registered global security will be
limited to persons that have accounts with the depositary for such
registered global security, these persons being referred to as
"participants," or persons that may hold interests through participants;
- upon the issuance of a registered global security, the depositary for the
registered global security will credit, on its book-entry registration
and transfer system, the participants' accounts with the respective
principal amounts of the debt securities represented by the registered
global security beneficially owned by the participants;
- any dealers, underwriters, or agents participating in the distribution of
the debt securities will designate the accounts to be credited; and
- ownership of beneficial interest in such registered global security will
be shown on, and the transfer of such ownership interest will be effected
only through, records maintained by the depositary for such registered
global security for interests of participants, and on the records of
participants for interests of persons holding through participants.
The laws of some states may require that specified purchasers of securities
take physical delivery of the securities in definitive form. These laws may
limit the ability of those persons to own, transfer or pledge beneficial
interests in registered global securities.
So long as the depositary for a registered global security, or its nominee,
is the registered owner of such registered global security, the depositary or
such nominee, as the case may be, will be considered the sole owner or holder of
the debt securities represented by the registered global security for all
purposes under the indenture. Except as stated below, owners of beneficial
interests in a registered global security:
- will not be entitled to have the debt securities represented by a
registered global security registered in their names,
- will not receive or be entitled to receive physical delivery of the debt
securities in the definitive form, and
- will not be considered the owners or holders of the debt securities under
the Indenture.
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Accordingly, each person owning a beneficial interest in a registered global
security must rely on the procedures of the depositary for the registered global
security and, if the person is not a participant, on the procedures of a
participant through which the person owns its interest, to exercise any rights
of a holder under the indenture.
We understand that under existing industry practices, if we request any
action of holders or if an owner of a beneficial interest in a registered global
security desires to give or take any action that a holder is entitled to give or
take under the indenture, the depositary for the registered global security
would authorize the participants holding the relevant beneficial interests to
give or take the action, and the participants would authorize beneficial owners
owning through the participants to give or take the action or would otherwise
act upon the instructions of beneficial owners holding through them.
We will make payments of principal and premium, if any, and interest, if
any, on debt securities represented by a registered global security registered
in the name of a depositary or its nominee to the depositary or its nominee, as
the case may be, as the registered owners of the registered global security.
None of our company, the trustee or any other agent of our company or the
trustee will be responsible or liable for any aspect of the records relating to,
or payments made on account of, beneficial ownership interests in the registered
global security or for maintaining, supervising or reviewing any records
relating to the beneficial ownership interests.
We expect that the depositary for any debt securities represented by a
registered global security, upon receipt of any payments of principal and
premium, if any, and interest, if any, in respect of the registered global
security, will immediately credit participants' accounts with payments in
amounts proportionate to their respective beneficial interests in the registered
global security as shown on the records of the depositary. We also expect that
standing customer instructions and customary practices will govern payments by
participants to owners of beneficial interests in the registered global security
held through the participants, as is now the case with the securities held for
the accounts of customers in bearer form or registered in "street name." We also
expect that any of these payments will be the responsibility of the
participants.
If the depositary for any debt securities represented by a registered global
security is at any time unwilling or unable to continue as depositary or stops
being a clearing agency registered under the Exchange Act, we will appoint an
eligible successor depositary. If we fail to appoint an eligible successor
depositary within 90 days, we will issue the debt securities in definitive form
in exchange for the registered global security. In addition, we may at any time
and in our sole discretion decide not to have any of the debt securities of a
series represented by one or more registered global securities. In that event,we
will issue debt securities of the series in a definitive form in exchange for
all of the registered global securities representing the debt securities. The
trustee will register any debt securities issued in definitive form in exchange
for a registered global security in the name or names as the depositary, based
upon instructions from its participants, shall instruct the trustee.
We may also issue bearer debt securities of a series in the form of one or
more global securities, referred to as "bearer global securities." We will
deposit these securities with a common depositary for Euroclear System and
CedelBank, SOCIETE ANONYME, or with a nominee for the depositary identified in
the prospectus supplement relating to the series. The prospectus supplement
relating to a series of debt securities represented by a bearer global security
will describe the applicable terms and procedures. These will include the
specific terms of the depositary arrangement and any specific procedures for the
issuance of debt securities in definitive form in exchange for a bearer global
security, in proportion to the series represented by a bearer global security.
DISCHARGE, DEFEASANCE AND COVENANT DEFEASANCE
We can discharge or defease our obligations under the indenture as stated
below or as provided in the prospectus supplement.
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Unless otherwise provided in the applicable prospectus supplement, we may
discharge obligations to holders of any series of debt securities that have not
already been delivered to the trustee for cancellation and that have either
become due and payable or are by their terms to become due and payable, or are
scheduled for redemption, within one year. We may effect a discharge by
irrevocably depositing with the trustee cash or U.S. government obligations, as
trust funds, in an amount certified to be enough to pay when due, whether at
maturity, upon redemption or otherwise, the principal of, premium, if any, and
interest on the debt securities and any mandatory sinking fund payments.
Unless otherwise provided in the applicable prospectus supplement, we may
also discharge any and all of our obligations to holders of any series of debt
securities at any time ("defeasance"). We may also be released from the
obligations imposed by any covenants of any outstanding series of debt
securities and provisions of the indenture, and we may omit to comply with those
covenants without creating an event of default under the trust declaration
("covenant defeasance"). We may effect defeasance and covenant defeasance only
if, among other things:
- we irrevocably deposit with the trustee cash or U.S. government
obligations, as trust funds, in an amount certified to be enough to pay
at maturity, or upon redemption, the principal, premium, if any, and
interest on all outstanding debt securities of the series;
- we deliver to the trustee an opinion of counsel from a nationally
recognized law firm to the effect that (i) in the case of covenant
defeasance, the holders of the series of debt securities will not
recognize income, gain or loss for U.S. federal income tax purposes as a
result of such defeasance, and will be subject to tax in the same manner
and at the same times as if no covenant defeasance had occurred and
(ii) in the case of defeasance, either we have received from, or there
has been published by, the Internal Revenue Service a ruling or there has
been a change in applicable U.S. federal income tax law, and based
thereon, the holders of the series of debt securities will not recognize
income, gain or loss for U.S. federal income tax purposes as a result of
such defeasance, and will be subject to tax in the same manner as if no
defeasance had occurred; and
- in the case of subordinated debt securities, no event or condition shall
exist that, based on the subordination provisions applicable to the
series, would prevent us from making payments of principal of, premium,
if any, and interest on any of the applicable subordinated debt
securities at the date of the irrevocable deposit referred to above or at
any time during the period ending on the 91st day after the deposit date.
Although we may discharge or decrease our obligations under the indenture as
described in the two preceding paragraphs, we may not avoid, among other things,
our duty to register the transfer or exchange of any series of debt securities,
to replace any temporary, mutilated, destroyed, lost or stolen series of debt
securities or to maintain an office or agency in respect of any series of debt
securities.
MODIFICATION OF THE INDENTURE
Except as provided in the prospectus supplement, the indenture provides that
we and the trustee may enter into supplemental indentures without the consent of
the holders of debt securities to:
- secure any debt securities,
- evidence the assumption by a successor corporation of our obligations,
- add covenants for the protection of the holders of debt securities,
- cure any ambiguity or correct any inconsistency in the Indenture,
- establish the forms or terms of debt securities of any series, and
- evidence and provide for the acceptance of appointment by a successor
trustee.
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The indenture also provides that we and the trustee may, with the consent of
the holders of not less than a majority in aggregate principal amount of debt
securities of all series of Senior Debt Securities or of Subordinated
Securities, as the case may be, then outstanding and affected, voting as one
class, add any provisions to, or change in any manner, eliminate or modify in
any way the provisions of, the indenture or modify in any manner the rights of
the holders of the debt securities. We and the trustee may not, however, without
the consent of the holder of each outstanding debt security affected thereby:
- extend the final maturity of any debt security;
- reduce the principal amount or premium, if any;
- reduce the rate or extend the time of payment of interest;
- reduce any amount payable on redemption;
- change the currency in which the principal, unless otherwise provided for
a series, premium, if any, or interest is payable;
- reduce the amount of the principal of any debt security issued with an
original issue discount that is payable upon acceleration or provable in
bankruptcy;
- impair the right to institute suit for the enforcement of any payment on
any debt security when due; or
- reduce the percentage of holders of debt securities of any series whose
consent is required for any modification of the indenture.
CONCERNING THE TRUSTEE
The indenture provides that there may be more than one trustee under the
indenture, each for one or more series of debt securities. If there are
different trustees for different series of debt securities, each trustee will be
a trustee of a Trust under the indenture separate and apart from the trust
administered by any other trustee under the indenture. Except as otherwise
indicated in this prospectus or any prospectus supplement, any action permitted
to be taken by a trustee may be taken by such trustee only on the one or more
series of debt securities for which it is the trustee under the indenture. Any
trustee under the indenture may resign or be removed from one or more series of
debt securities. All payments of principal of, premium, if any, and interest on,
and all registration, transfer, exchange, authentication and delivery of, the
debt securities of a series will be effected by the trustee for such series at
an office designated by such trustee in New York, New York.
If the trustee becomes a creditor of our company, the indenture places
limitations on the right of the trustee to obtain payment of claims or to
realize on property received in respect of any such claim as security or
otherwise. The trustee may engage in other transactions. If it acquires any
conflicting interest relating to any duties concerning the debt securities,
however, it must eliminate the conflict or resign as trustee.
The holders of a majority in aggregate principal amount of any series of
debt securities then outstanding will have the right to direct the time, method
and place of conducting any proceeding for exercising any remedy available to
the trustee concerning the applicable series of debt securities, provided that
the direction:
- would not conflict with any rule of law or with the indenture,
- would not be unduly prejudicial to the rights of another holder of the
debt securities, and
- would not involve any trustee in personal liability.
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The indenture provides that in case an Event of Default shall occur, not be
cured and be known to any trustee, the trustee must use the same degree of care
as a prudent person would use in the conduct of his or her own affairs in the
exercise of the Trust's power. The trustee will be under no obligation to
exercise any of its rights or powers under the indenture at the request of any
of the holders of the debt securities, unless they shall have offered to the
trustee security and indemnity satisfactory to the trustee.
NO INDIVIDUAL LIABILITY OF INCORPORATORS, SHAREHOLDERS, OFFICERS OR DIRECTORS
The indenture provides that no incorporator and no past, present or future
shareholder, officer or director of our company or any successor corporation in
their capacity as such shall have any individual liability for any of our
obligations, covenants or agreements under the debt securities or the indenture.
GOVERNING LAW
The indenture and the debt securities will be governed by, and construed in
accordance with, the laws of the State of New York.
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DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 2,404,031,240 shares of class A
common stock, par value $.01 per share, 522,254,782 shares of class B common
stock, par value $.01 per share, and 20,000,000 shares of preferred stock, par
value $.01 per share. As of October 4, 1999 there were 198,835,335 shares of
class A common stock outstanding, 33,769,272 shares of class B common stock
outstanding and no shares of preferred stock outstanding.
COMMON STOCK
The shares of class A common stock and class B common stock are identical in
all respects, except for different voting rights described below and conversion
rights and restrictions on transfer applicable only to the class B common stock
that we also describe below.
VOTING RIGHTS. The holders of class A common stock are entitled to one vote
per share. Holders of class B common stock are entitled to ten votes per share.
Holders of all classes of common stock are entitled to vote together as a single
class on all matters presented to our stockholders for their vote or approval
except for the election and the removal of directors and as otherwise required
by applicable law. With respect to the election of directors, our amended and
restated certificate of incorporation provides that holders of class B common
stock vote as a separate class to elect at least 75% of the members of our
board.
Directors may be removed, with or without cause, only by the holders of the
class of common stock or series of preferred stock that, as of the date such
removal is effected, would be entitled to elect such director at the next annual
meeting of stockholders. Vacancies in a directorship may be filled only by
- the remaining directors elected by holders of each class of common stock
or series of preferred stock that elected such director and as of the date
such vacancy is filled, would be entitled to elect such director at the
next annual meeting of the stockholders; or
- if there are no such remaining directors, then by the vote of the holders
of the class or classes of common stock or series of preferred stock,
that, as of the date such vacancy is filled, would be entitled to elect
such director at the next annual meeting of stockholders, voting as a
separate class at a meeting, special or otherwise, of the holders of
common stock of such class or series of preferred stock.
DIVIDENDS. Holders of class A common stock and the class B common stock are
entitled to receive dividends at the same rate if, as and when such dividends
are declared by our board out of assets legally available therefor after payment
of dividends required to be paid on shares of outstanding preferred stock. We
may not make any dividend or distribution to any holder of any class of common
stock unless simultaneously with such dividend or distribution we make the same
dividend or distribution with respect to each outstanding share of common stock
regardless of class. In the case of a dividend or other distribution payable in
shares of class of common stock, including distributions pursuant to stock
splits or divisions of common stock, only shares of class A common stock may be
distributed with respect to class A common stock and only shares of class B
common stock may be distributed with respect to class B common stock. Whenever a
dividend or distribution, including distributions pursuant to stock splits or
divisions of the common stock, is payable in shares of a class of common stock,
the number of shares of each class of common stock payable per share of such
class of common stock will be equal in number. In the case of dividends or other
distributions consisting of our other voting securities or of voting securities
of any corporation which is our wholly-owned subsidiary, we will declare and pay
such dividends in two separate classes of such voting securities, identical in
all respects except that:
- the voting rights of each security issued to the holders of class A common
stock will be one-tenth of the voting rights of each security issued to
holders of class B common stock;
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- such security issued to holders of class B common stock will convert into
the security issued to the holders of class A common stock into class A
common stock and will have the same restrictions on transfer and ownership
applicable to the transfer and ownership of the class B common stock; and
- with respect only to dividends or other distributions of voting securities
of any corporation which is our wholly owned subsidiary, the respective
voting rights of each such security issued to holders of the class A
common stock and class B common stock with respect to election of
directors shall otherwise be as comparable as is practicable to those of
the class A common stock and class B common stock.
In the case of dividends or other distributions consisting of securities
convertible into, or exchangeable for, our voting securities or of voting
securities of any corporation which is our wholly owned subsidiary, we will
provide that such convertible or exchangeable securities and the underlying
securities be identical in all respects (including, without limitation, the
conversion or exchange rate) except that the underlying securities may have the
same difference as they would have if we issued voting securities of our wholly
owned subsidiary rather than issuing securities convertible into or exchangeable
for, such securities. We do not anticipate paying cash dividends in the
foreseeable future.
RESTRICTIONS ON ADDITIONAL ISSUANCES AND TRANSFER. We may not issue or sell
any shares of class B common stock or any securities (including, without
limitation, any rights, options, warrants or other securities) convertible into,
or exchangeable or exercisable for, shares of class B common stock to any person
or entity other than to Metromedia Company, John W. Kluge and Stuart Subotnick,
their affiliates, relatives and other permitted holders that are controlled by
these persons. Additionally, shares of class B common stock may not be
transferred, whether by sale, assignment, gift, bequest, appointment or
otherwise, to a person other than to a permitted holder. Notwithstanding the
foregoing:
- any permitted holder may pledge his, her or its shares of class B common
stock to a financial institution pursuant to a bona fide pledge of such
shares as collateral security for indebtedness due to the pledgee as long
as such shares remain subject to the transfer restrictions and that, in
the event of foreclosure or other similar action by the pledgee, such
pledged shares of class B common stock may only be transferred to a
permitted holder or converted into shares of class A common stock, as the
pledgee may elect; and
- the foregoing transfer restrictions do not apply in the case of a merger,
consolidation or business combination of us with or into another
corporation in which all of the outstanding shares of common stock and
preferred stock regardless of class are purchased by the acquiror.
CONVERSION. Class A common stock has no conversion rights. Shares of
class B common stock are convertible into class A common stock, in whole or in
part, at any time and from time to time at the option of the holders, on the
basis of one share of class A common stock for each share of class B common
stock converted. Additionally, at such time as a person ceased to be a permitted
holder, any share of class B common stock held by such person at such time shall
convert into a share of class A common stock. We agree that:
- we will at all times reserve and keep available out of our authorized but
unissued shares of class A common stock, such number of shares of class A
common stock issuable upon the conversion of all outstanding shares of
class B common stock;
- we will cause any shares of class A common stock issuable upon conversion
of a share of class B common stock that require registration with or
approval of any governmental authority under federal or state law before
such shares may be issued upon conversion to be so registered or approved;
and
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- we will use our best efforts to list the shares of class A common stock
required to be delivered upon conversion prior to such delivery upon such
national securities exchange upon which the outstanding class A common
stock is listed at the time of such delivery.
RECLASSIFICATION AND MERGER. In the event of a reclassification or other
similar transaction as a result of which the shares of class A common stock are
converted into another security, then a holder of class B common stock will be
entitled to receive upon conversion the amount of such other securities that the
holder would have received if the conversion occurred immediately prior to the
record date of such reclassification or other similar transaction. No
adjustments in respect of dividends will be made upon the conversion of any
share of class B common stock. If a share is converted subsequent to the record
date for the payment of a dividend or other distribution on shares of class B
common stock but prior to such payment, then the registered holder of such share
at the close of business on such record date will be entitled to receive the
dividend or other distribution payable on such date regardless of the conversion
thereof or our default in payment of the dividend due on such date.
In the event we enter into any consolidation, merger, combination or other
transaction in which shares of common stock are exchanged for or changed into
other stock or securities, cash and/or any other property, then, and in such
event, the shares of each class of common stock will be exchanged for or changed
into either:
- the same amount of stock, securities, cash and/or any other property, as
the case may be, into which or for which each share of any other class of
common stock is exchanged for or changed into shares of capital stock,
such shares so exchanged for or changed into may differ only to the extent
that the class A common stock and the class B common stock differ as
provided in our amended and restated certificate of incorporation; or
- if holders of each class of common stock are to receive different
distributions of stock, securities, cash and/or any other property, an
amount of stock, securities, cash and/or property per share having a value
as determined by an independent investment banking firm of national
reputation selected by the board of directors, equal to the value per
share into which or for which each share of any other class of common
stock is exchanged or changed.
LIQUIDATION. In the event of our liquidation, after payment of our debts
and other liabilities and after making provision for the holders of preferred
stock, if any, our remaining assets will be distributable ratably among the
holders of the class A common stock and class B common stock treated as a single
class.
OTHER PROVISIONS. Except as described below, the holders of the class A
common stock and class B common stock are not entitled to preemptive rights.
None of the class A common stock or class B common stock may be subdivided or
combined in any manner unless the other classes are subdivided or combined in
the same proportion. We may not make any offering of options, rights or warrants
to subscribe for shares of class B common stock. If we make an offering of
options, rights or warrants to subscribe for shares of any other class or
classes of capital stock (other than class B common stock) to all holders of a
class of common stock, then we are required to simultaneously make an identical
offering to all holders of the other classes of common stock other than to any
class the holders of which, voting as a separate class, agrees that such
offerings need not be made to such class. All such options, rights or warrants
offerings will offer the respective holders of class A common stock and class B
common stock the right to subscribe at the same rate per share. All outstanding
shares of common stock are, and all shares of common stock offered hereby when
issued will be upon payment therefor, validly issued, fully paid and
nonassessable.
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PREFERRED STOCK
The board has the authority, without any further action by our stockholders
to issue from time to time shares of preferred stock in one or more series and
to fix the designations, preferences, rights, qualifications, limitations and
restrictions thereof, including voting rights, dividend rights, dividend rates,
conversion rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series. The issuance of
preferred stock with voting rights could have an adverse effect on the voting
power of holders of common stock by increasing the number of outstanding shares
having voting rights. In addition, if the board authorizes preferred stock with
conversion rights, the number of shares of common stock outstanding could
potentially be increased up to the authorized amount. The issuance of preferred
stock could decrease the amount of earnings and assets available for
distribution to holders of common stock. Any such issuance could also have the
effect of delaying, deterring or preventing a change in control of the company
and may adversely affect the rights of holders of common stock.
CERTIFICATE OF INCORPORATION AND BY-LAWS
Stockholders' rights and related matters are governed by the Delaware
General Corporation Law, and our certificate of incorporation and the by-laws.
Certain provisions of our certificate of incorporation and by-laws, which are
summarized below, may have the effect, either alone or in combination with each
other, of discouraging or making more difficult a tender offer or takeover
attempt that is opposed by our board of directors but that a stockholder might
consider to be in its best interest. Such provisions may also adversely affect
prevailing market prices for the common stock. We believe that such provisions
are necessary to enable us to develop our business in a manner that will foster
our long-term growth without disruption caused by the threat of a takeover not
deemed by our board of directors to be in our best interests and those of our
stockholders.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Our by-laws establish advance notice procedures for stockholder proposals
and the nomination, other than by or at the direction of the board of directors,
of candidates for election as directors. These procedures provide that the
notice of stockholder proposals and stockholder nominations for the election of
directors at an annual meeting must be in writing and received by our secretary
at least 60 days but not more than 90 days prior to the scheduled date of the
annual meeting. However, if public disclosure of our annual meeting date is made
less than 70 days before the annual meeting, notice by a stockholder will be
considered timely if it is delivered not later than the 10th day following the
earlier of (i) the day on which public disclosure of the date of the annual
meeting was made or (ii) the day on which such notice of the date of the meeting
was mailed. The notice of nominations for the election of directors must set
forth certain information concerning the stockholder giving the notice and each
nominee.
By requiring advance notice of nominations by stockholders, these procedures
will afford our board of directors an opportunity to consider the qualifications
of the proposed nominees and, to the extent deemed necessary or desirable by the
board of directors, to inform stockholders about these qualifications. By
requiring advance notice of other proposed business, these procedures will
provide our board of directors with an opportunity to inform stockholders of any
business proposed to be conducted at a meeting, together with any
recommendations as to the board of directors' position on action to be taken on
such business. This should allow stockholders to better decide whether to attend
a meeting or to grant a proxy for the disposition of any such business.
DILUTION
Our certificate of incorporation provides that our board of directors is
authorized to create and issue, whether or not in connection with the issuance
and sale of any of its stock or other securities or property, rights entitling
the holders to purchase from us shares of stock or other securities of us or of
any other
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corporation. Our board of directors is authorized to issue these rights even
though the creation and issuance of these rights could have the effect of
discouraging third parties from seeking, or impairing their right to seek, to:
(1) acquire a significant portion of our outstanding securities;
(2) engage in any transaction which might result in a change of control of
the corporation; or
(3) enter into any agreement, arrangement or understanding with another
party to accomplish these transactions or for the purpose of acquiring,
holding, voting or disposing of any of our securities.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law prohibits certain
transactions between a Delaware corporation and an "interested stockholder",
which is defined as a person who, together with any affiliates and/or associates
of such person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting shares of a Delaware corporation. This provision prohibits
certain business combinations between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder acquired its stock, unless:
- the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder acquired shares;
- the interested stockholder acquired at least 85% of the voting stock of
the corporation in the transaction in which it became an interested
stockholder; or
- the business combination is approved by a majority of the board of
directors and by the affirmative vote of two-thirds of the outstanding
voting stock owned by disinterested stockholders at an annual or special
meeting.
A business combination is defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate value
of 10% or more of the consolidated assets of the corporation, and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation. A Delaware corporation, under a provision in
its certificate of incorporation or by-laws, may elect not to be governed by
Section 203 of the Delaware General Corporation Law. We are subject to the
restrictions imposed by Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who could be an "interested stockholder" to effect various business
combinations with a corporation for a three-year period, although the
stockholders may elect to exclude a corporation from the restrictions imposed
thereunder. Our certificate of incorporation does not exclude us from the
restrictions imposed under Section 203 of the Delaware General Corporation Law.
It is anticipated that the provisions of Section 203 of the Delaware General
Corporation Law may encourage companies interested in acquiring us to negotiate
in advance with the board of directors, since the stockholder approval
requirement would be avoided if a majority of the directors then in office
approves, prior to the date on which a stockholder becomes an interested
stockholder, either the business combination or the transaction which results in
the stockholder becoming an interested stockholder. Mr. Stephen Garafalo and
Metromedia Company are interested stockholders under the Delaware General
Corporation Law. However since their acquisition of our securities was approved
in advance by our board, they would not be prohibited from engaging in a
business transaction with us.
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LIMITATIONS OF DIRECTORS' LIABILITY
Our certificate of incorporation provides that none of our directors will be
personally liable to us or our stockholders for monetary damages for breach of
fiduciary duty as a director except for liability:
- for any breach of the director's duty of loyalty to us or our
stockholders,
- for acts of omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
- under Section 174 of the Delaware General Corporation Law, or
- for any transaction from which the director derived an improper personal
benefit.
The effect of these provisions will be to eliminate our rights and our
stockholders (through stockholders' derivatives suits on behalf of us) to
recover monetary damages against a director for breach of fiduciary duty as a
director (including breaches resulting from grossly negligent behavior), except
in the situations described above. These provisions will not limit the liability
of directors under federal securities laws and will not affect the availability
of equitable remedies such as an injunction or rescission based upon a
director's breach of his duty of care.
TRANSFER AGENT
The Transfer Agent and Registrar for our class A common stock is ChaseMellon
Shareholder Services, L.L.C.
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DESCRIPTION OF WARRANTS
We may issue warrants for the purchase of debt securities, preferred stock
or common stock. Warrants may be issued independently or together with debt
securities, preferred stock or common stock offered by any prospectus supplement
and may be attached to or separate from any such offered securities. Each series
of warrants will be issued under a separate warrant agreement to be entered into
between us and a bank or trust company, as warrant agent. The warrant agent will
act solely as our agent in connection with the warrants and will not assume any
obligation or relationship of agency or trust for or with any holders or
beneficial owners of warrants. The following summary of certain provisions of
the warrants does not purport to be complete and is subject to, and qualified in
its entirety by reference to, the provisions of the warrant agreement that will
be filed with the SEC in connection with the offering of such warrants.
DEBT WARRANTS
The prospectus supplement relating to a particular issue of debt warrants
will describe the terms of the debt warrants, including the following: (a) the
title of the debt warrants; (b) the offering price for the debt warrants, if
any; (c) the aggregate number of the debt warrants; (d) the designation and
terms of the debt securities purchasable upon exercise of the debt warrants;
(e) if applicable, the designation and terms of the debt securities with which
the debt warrants are issued and the number of such debt warrants issued with
each debt security; (f) if applicable, the date from and after which the debt
warrants and any debt securities issued therewith will be separately
transferable; (g) the principal amount of debt securities purchasable upon
exercise of a debt warrant and the price at which the principal amount of debt
securities may be purchased upon exercise (which price may be payable in cash,
securities, or other property); (h) the date on which the right to exercise the
debt warrants shall commence and the date on which the right shall expire;
(i) if applicable, the minimum or maximum amount of the debt warrants that may
be exercised at any one time; (j) whether the debt warrants represented by the
debt warrant certificates or debt securities that may be issued upon exercise of
the debt warrants will be issued in registered or bearer form; (k) information
with respect to book-entry procedures, if any; (1) the currency or currency
units in which the offering price, if any, and the exercise price are payable;
(m) if applicable, a discussion of material United States federal income tax
considerations; (n) the antidilution provisions of the debt warrants, if any;
(o) the redemption or call provisions, if any, applicable to such debt warrants;
and (p) any additional terms of the debt warrants, including terms, procedures,
and limitations relating to the exchange and exercise of the debt warrants.
STOCK WARRANTS
The prospectus supplement relating to any particular issue of preferred
stock warrants or common stock warrants will describe the terms of the warrants,
including the following: (a) the title of the warrants; (b) the offering price
for the warrants, if any; (c) the aggregate number of the warrants; (d) the
designation and terms of the common stock or preferred stock purchasable upon
exercise of the warrants; (e) if applicable, the designation and terms of the
offered securities with which the warrants are issued and the number of the
warrants issued with each such offered security; (f) if applicable, the date
from and after which the warrants and any offered securities issued therewith
will be separately transferable; (g) the number of shares of common stock or
preferred stock purchasable upon exercise of a warrant and the price at which
the shares may be purchased upon exercise; (h) the date on which the right to
exercise the warrants shall commence and the date on which the right shall
expire; (i) if applicable, the minimum or maximum amount of the warrants that
may be exercised at any one time; (j) the currency or currency units in which
the offering price, if any, and the exercise price are payable, (k) if
applicable, a discussion of material United States federal income tax
considerations; (l) the antidilution provisions of the warrants, if any;
(m) the redemption or call provisions, if any, applicable to such warrants; and
(n) any additional terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the warrants.
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SELLING STOCKHOLDERS
The selling stockholders may be our directors, executive officers, former
directors, employees or certain holders of our common stock, including
Metromedia Company and its general partners. The prospectus supplement for any
offering of the common stock by selling stockholders will include the following
information:
- the names of the selling stockholders;
- the nature of any position, office, or other material relationship which
the selling stockholder has had within the last three years with us or any
of our predecessors or affiliates;
- the number of shares held by each of the selling stockholders before the
offering;
- the percentage of the common stock held by each of the selling
stockholders after the offering; and
- the number of shares of the common stock offered by each of the selling
stockholders.
PLAN OF DISTRIBUTION
The distribution of the securities may be effected from time to time in one
or more transactions at a fixed price or prices (which may be changed from time
to time), at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. Each prospectus
supplement will describe the method of distribution of the securities offered
therein.
We are also registering shares of our class A common stock on behalf of the
selling stockholders. We and any selling stockholders may sell securities
directly, through agents designated from time to time, through underwriting
syndicates led by one or more managing underwriters or through one or more
underwriters acting alone. The selling stockholders may also distribute
securities through one or more special purpose entities, which may enter into
forward purchase arrangements with selling stockholders and distribute their own
securities. In connection with an offering of securities of such a special
purpose entity, the selling stockholders may also enter into securities loan
agreements with the underwriters of the entity's securities in order to
facilitate such underwriters' market-making activities in the entity's
securities. Each prospectus supplement will describe the terms of the securities
to which the prospectus supplement relates, the names of the selling
stockholders and the number of shares of class A common stock to be sold by
each, the name or names of any underwriters or agents with whom we or the
selling stockholders, or both, have entered into arrangements with respect to
the sale of the securities, the public offering or purchase price of the
securities and the net proceeds we or the selling stockholders will receive from
the sale. In addition, each prospectus supplement will describe any underwriting
discounts and other items constituting underwriters' compensation, any discounts
and commissions allowed or paid to dealers, if any, any commissions allowed or
paid to agents, and the securities exchange or exchanges, if any, on which the
securities will be listed. Dealer trading may take place in certain of the
securities, including securities not listed on any securities exchange.
If so indicated in the applicable prospectus supplement, we or the selling
stockholders, or both, will authorize underwriters or agents to solicit offers
by certain institutions to purchase securities from us or the selling
stockholders, or both, pursuant to delayed delivery contracts providing for
payment and delivery at a future date. Institutions with which the contracts may
be made include, among others:
- commercial and savings banks;
- insurance companies;
- pension funds;
- investment companies; and
- educational and charitable institutions.
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In all cases, the institutions must be approved by us or the selling
stockholders, or both. Unless otherwise set forth in the applicable prospectus
supplement, the obligations of any purchaser under any contract will not be
subject to any conditions except that (i) the purchase of the securities will
not at the time of delivery be prohibited under the laws of the jurisdiction to
which the purchaser is subject and (ii) if the securities are also being sold to
underwriters acting as principals for their own account, the underwriters will
have purchased the securities not sold for delayed delivery. The underwriters
and such other persons will not have any responsibility in respect of the
validity or performance of such contracts.
Any selling stockholder, underwriter or agent participating in the
distribution of the securities may be deemed to be an underwriter, as that term
is defined in the Securities Act, of the securities so offered and sold and any
discounts or commissions received by them, and any profit realized by them on
the same or resale of the securities may be deemed to be underwriting discounts
and commissions under the Securities Act.
Certain of any such underwriters and agents including their associates, may
be customers of, engage in transactions with and perform services for us and our
subsidiaries in the ordinary course of business. One or more of our affiliates
may from time to time act as an agent or underwriter in connection with the sale
of the securities to the extent permitted by applicable law. The participation
of any such affiliate in the offer and sale of the securities will comply with
Rule 2720 of the Conduct Rules of the National Association of Securities
Dealers, Inc. regarding the offer and sale of securities of an affiliate.
Under agreements which may be entered into by us, the underwriters, dealers
and agents who participate in the distribution of securities may be entitled to
indemnification by us against or contribution toward some liabilities, including
liabilities under the Securities Act.
Except as indicated in the applicable prospectus supplement, the securities
are not expected to be listed on a securities exchange, except for the class A
common stock, which is listed on The Nasdaq Stock Market's National Market, and
any underwriters or dealers will not be obligated to make a market in
securities. We cannot predict the activity or liquidity of any trading in the
securities.
We will not receive any proceeds from the sale of shares of class A common
stock or any other securities by the selling stockholders. We will, however,
bear certain expenses in connection with the registration of the securities
being offered under this prospectus by the selling stockholders, including all
costs incident to the offering and sale of the securities to the public other
than any commissions and discounts of underwriters, dealers or agents and any
transfer taxes.
VALIDITY OF SECURITIES
The validity of the securities offered hereby will be passed upon for us by
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, and certain
matters may be passed upon for the underwriters or agents, if any, by Skadden,
Arps, Slate, Meagher & Flom LLP, Los Angeles, California. Skadden, Arps, Slate,
Meagher & Flom LLP has represented us on other unrelated matters.
EXPERTS
The consolidated financial statements of Metromedia Fiber Network, Inc.
appearing in Metromedia Fiber Network, Inc.'s Annual Report on Form 10-K for the
year ended December 31, 1998, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon included therein and
incorporated herein by reference. Such consolidated financial statements are
incorporated herein by reference in reliance upon such report given on the
authority of such firm as experts in accounting and auditing.
AboveNet's financial statements as of June 30, 1998 and 1999 and for each of
the three years in the period ended June 30, 1999 included and incorporated by
reference in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report, which is included and
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incorporated by reference herein, and have been so included and incorporated in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The Combined Statement of Assets to be Acquired and Liabilities to be
Assumed of Palo Alto Internet Exchange as of December 26, 1998 and December 27,
1997 and the related Combined Statement of Revenues and Direct Expenses for the
period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 12, 1998 and the fiscal years ended December 27, 1997 and
December 29, 1996, that are incorporated by reference in this prospectus by
reference to the Registration Statement on Form S-4 (Registration
No. 333-84541) of Metromedia Fiber Network, Inc. filed with the Securities and
Exchange Commission on August 4, 1999, have been so incorporated in reliance on
the reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. Our SEC filings are available to the public over the
Internet at the SEC's web site at http://www.sec.gov. You may also read and copy
any document we file with the SEC at the SEC's following public reference
facilities:
<TABLE>
<S> <C> <C>
Public Reference Room New York Regional Office Chicago Regional Office
450 Fifth Street, N.W. 7 World Trade Center Citicorp Center
Room 1024 Suite 1300 500 West Madison Street
Washington, D.C. 20549 New York, New York 10048 Suite 1400
Chicago, Illinois 60661-2511
</TABLE>
You may also obtain copies of the documents at prescribed rates by writing
to the Public Reference Section of the SEC at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549. Please call 1-800-SEC-0330 for further information on
the operations of the public reference facilities. Our SEC filings are also
available at the offices of The Nasdaq Stock Market at 1735 K Street, N.W.,
Washington, D.C. 20006.
INCORPORATION OF INFORMATION WE FILE WITH THE SEC
The SEC allows us to "incorporate by reference" the information we file with
them, which means: incorporated documents are considered part of this
prospectus; we can disclose important information to you by referring you to
those documents; and information that we file with the SEC will automatically
update and supersede this incorporated information.
We incorporate by reference the documents listed below which were filed with
the SEC under the Securities Exchange Act of 1934:
- Our Annual Report on Form 10-K for the year ended on December 31, 1998;
- Our Quarterly Report on Form 10-Q for the three months ended March 31,
1999;
- Our Quarterly Report on Form 10-Q for the six months ended June 30, 1999;
- Our Current Report on Form 8-K dated June 30, 1999;
- Our Current Report on Form 8-K dated September 10, 1999, as amended by our
Current Report on Form 8-K/A dated October 14, 1999 and as further amended
by our Current Report on Form 8-K/A dated October 26, 1999;
- Our Current Report on Form 8-K dated October 18, 1999;
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- The "Risk Factors--Risk Factors Applicable to AboveNet" and "Business of
AboveNet" sections and the financial statements of Palo Alto Internet
Exchange contained in our Registration Statement on Form S-4 dated
August 5, 1999 (File No. 333-84541); and
- The description of our class A common stock contained in our Registration
Statement on Form 8-A, filed on October 17, 1997.
We also incorporate by reference each of the following documents that we
will file with the SEC after the date of the initial filing of the registration
statement and prior to the time we sell all of the securities offered by this
prospectus:
- Reports filed under Section 13(a) and (c) of the Exchange Act;
- Definitive proxy or information statements filed under Section 14 of the
Exchange Act in connection with any subsequent shareholders meeting; and
- Any reports filed under Section 15(d) of the Exchange Act.
You can obtain any of the filings incorporated by reference in this document
through us, or from the SEC through the SEC's web site or at the addresses
listed above. Documents incorporated by reference are available from us without
charge, excluding any exhibits to those documents unless the exhibit is
specifically incorporated by reference as an exhibit in this prospectus. You can
obtain documents incorporated by reference in this prospectus by requesting them
in writing or by telephone from us at the following address:
Metromedia Fiber Network, Inc.
One North Lexington Avenue
White Plains, New York 10601
Attention: Investor Relations
Telephone: (914) 421-6700
If you request any incorporated documents from us, we will mail them to you
by first class mail, or another equally prompt means, within one business day
after we receive your request.
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PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
<TABLE>
<S> <C>
Registration fee to the Securities and Exchange Commission...................... $ 625,500
NASD filing fee................................................................. $ 30,500
Accounting fees and expenses.................................................... $ 200,000
Legal fees and expenses......................................................... $ 500,000
Printing and engraving expenses................................................. $ 500,000
Miscellaneous expenses.......................................................... $ 144,000
---------
Total..................................................................... $2,000,000
</TABLE>
The foregoing items, except for the registration fee to the Securities and
Exchange Commission, are estimated. All expenses of the offering, other than
selling discounts, commissions and legal fees and expenses incurred separately
by the selling stockholders, will be paid by the Registrant.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a Delaware
corporation may indemnify any person who was or is a party or is threatened to
be made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding") (other than an action by or in the right of the corporation) by
reason of the fact that this person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by this person in connection with such action, suit or proceeding if
this person acted in good faith and in a manner this person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. A Delaware corporation may indemnify any person
under such section in connection with a proceeding by or in the right of the
corporation to procure judgment in its favor, as provided in the preceding
sentence, against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection with the defense or settlement of such
action, except that no indemnification shall be made in respect thereof unless,
and then only to the extent that, a court of competent jurisdiction shall
determine upon application that this person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper. A Delaware
corporation must indemnify any person who was successful on the merits or
otherwise in defense of any action, suit or proceeding or in defense of any
claim, issue or matter in any proceeding, by reason of the fact that this person
is or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by this person in connection therewith. A Delaware corporation may pay
for the expenses (including attorneys' fees) incurred by an officer or director
in defending a proceeding in advance of the final disposition upon receipt of an
undertaking by or on behalf of this director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the corporation.
The Registrant's Amended and Restated Certificate of Incorporation provides
that the Registrant will indemnify any person, including persons who are not
directors or officers of the Registrant, to the extent permitted by Section 145
of the Delaware General Corporation Law.
II-1
<PAGE>
Section 102(b) (7) of the Delaware General Corporation Law provides that a
Delaware corporation may in its articles of incorporation eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director except for
liability: for any breach of the director's duty of loyalty to the corporation
or its stockholder; for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; under Section 174
(pertaining to certain prohibited acts including unlawful payment of dividends
or unlawful purchase or redemption of the corporation's capital stock); or for
any transaction from which the director derived an improper personal benefit.
The Registrant's Amended and Restated Certificate of Incorporation eliminates
the liability of directors for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to the Registrant or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or
(iv) for any transaction from which the director derived an improper personal
benefit, and provides that if the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the Registrant shall
be eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended.
The Delaware General Corporation Law permits the purchase of insurance on
behalf of directors and officers against any liability asserted against
directors and officers and incurred by such persons in their capacity, or
arising out of their status as such, whether or not the corporation would have
the power to indemnify officers and directors against this liability. The
Registrant's Amended and Restated Certificate of Incorporation allows the
Registrant to maintain insurance, at its expense, to protect itself and any
director, officer, employee or agent of the Registrant or another corporation,
partnership, joint venture, trust or other enterprise against any expense,
liability or loss, whether or not the Registrant would have the power to
indemnify this person against this expense, liability or loss under the Delaware
General Corporation Law. The Registrant has obtained liability coverage, which
includes coverage to reimburse the Registrant for amounts required or permitted
by law to be paid to indemnify directors and officers.
The Registrant's Amended and Restated Certificate of Incorporation limits
the liability of directors thereof to the extent permitted by Section 102(b)(7)
of the Delaware General Corporation Law.
The Registrant's Directors' and Officers' liability insurance policy is
designed to reimburse the Registrant for payments made by it pursuant to the
foregoing indemnification. This policy has aggregate coverage of $25 million.
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus, and, if given or
made, this information or representations must not be relied upon as having been
authorized. This prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Registrant since the date hereof or that the information
contained herein is correct as of any time subsequent to its date.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement (Debt)
1.2* Form of Underwriting Agreement (Equity)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------- --------------------------------------------------------------------------------------------------------
<S> <C>
1.3 Form of 1999 Underwriting Agreement (Debt)
1.4 Form of 1999 Underwriting Agreement (Equity)
2.1 Agreement and Plan of Merger among AboveNet Communications Inc., Metromedia Fiber Network, Inc. and
Magellan Acquisition, Inc., dated June 22, 1999 (incorporated by reference to the Company's Current
Report on Form 8-K filed as of June 30, 1999).
3.1 Form of Amended and Restated Certificate of Incorporation of Metromedia Fiber Network, Inc.
(incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No.
333-33653)).
3.2 Form of Amended and Restated Bylaws of Metromedia Fiber Network, Inc. (incorporated by reference to the
Company's Registration Statement on Form S-1 (Registration No. 333-33653)).
4.1 Specimen Class A Common Stock Certificate of Metromedia Fiber Network, Inc. (incorporated by reference
to the Company's Registration Statement on Form S-1 (Registration No. 333-33653)).
4.2+ Form of Indenture between Metromedia Fiber Network, Inc. and The Bank of New York.
4.3 Form of Indenture between Metromedia Fiber Network, Inc. and The Bank of New York, as trustee, relating
to the Senior Dollar Notes due 2009 and the Senior Euro Notes due 2009.
5.1+ Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding the legality of the securities.
5.2 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding the legality of the notes issued under the
indenture filed as Exhibit 4.3.
12.1 Statement re Computation of Ratios
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in the opinion filed as Exhibits 5.1 and
5.2 to this Registration Statement).
24.1+ Power of Attorney from officers and directors (included in the signature pages hereto).
25.1+ Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of The Bank of New
York, as trustee under the Indenture.
</TABLE>
- ------------------------
* To be filed by a post-effective amendment to the Registration Statement or
incorporated by reference from documents filed with the SEC under the
Securities Exchange Act of 1934.
+ Previously filed.
(B) FINANCIAL DATA SCHEDULES.
None.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item
II-3
<PAGE>
15, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission this indemnification is against public policy
as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against these liabilities (other than the
payment by the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by this director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
this indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of this issue.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Securities and Exchange Commission pursuant to Rule 424(b)
under the Securities Act of 1933 if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or
any material change to such information in this Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Registrant pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that
are incorporated by reference in the Registration Statement.
(2) That, for the purpose of determining any liability under the Securities Act
of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of
the offering.
The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to supplement the prospectus,
after the expiration of the subscription period, to set forth the results of the
subscription offer, the transactions by the underwriters during the subscription
period, the amount of unsubscribed securities to be purchased by the
II-4
<PAGE>
underwriters, and the terms of any subsequent reoffering thereof. If any public
offering by the underwriters is to be made on terms differing from those set
forth on the cover page of the prospectus, a post-effective amendment will be
filed to set forth the terms of such offering.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to file an application for the
purpose of determining the eligibility of the trustee to act under subsection
(a) of Section 310 of the Trust Indenture Act (the "Act") in accordance with the
rules and regulations prescribed by the Commission under Section 305(b)(2) of
the Act.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Metromedia Fiber Network, Inc. certifies that it has reasonable grounds to
believe that it meets all of the requirements for filing on Form S-3 and has
duly caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on October 27, 1999.
METROMEDIA FIBER NETWORK, INC.
By: /s/ SILVIA KESSEL
-----------------------------------------
Name: Silvia Kessel
Title: EXECUTIVE VICE PRESIDENT
Pursuant to the requirements of the Securities Act, this Registration
Statement and the foregoing Power-of-Attorney have been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
* Chief Executive Officer and
- ------------------------------ Chairman of the Board of October 27, 1999
Stephen A. Garofalo Directors
* Vice President--Chief
- ------------------------------ Financial Officer October 27, 1999
Gerard Benedetto
* President, Chief Operating
- ------------------------------ Officer and Director October 27, 1999
Howard M. Finkelstein
* Senior Vice President and
- ------------------------------ Director October 27, 1999
Vincent A. Galluccio
/s/ SILVIA KESSEL Executive Vice President
- ------------------------------ and Director October 27, 1999
Silvia Kessel
Director
- ------------------------------ , 1999
John W. Kluge
Director
- ------------------------------ , 1999
David Rand
* Director
- ------------------------------ October 27, 1999
David Rockefeller
* Director
- ------------------------------ October 27, 1999
Stuart Subotnick
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
Director
- ------------------------------ , 1999
Sherman Tuan
* Executive Vice President,
- ------------------------------ General Counsel, October 27, 1999
Arnold L. Wadler Secretary and Director
Director
- ------------------------------ , 1999
Leonard White
</TABLE>
<TABLE>
<S> <C> <C> <C>
By: /s/ SILVIA KESSEL
-------------------------
Silvia Kessel
Attorney-in-fact
</TABLE>
II-7
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ----------- ---------------------------------------------------------------------------------------------------------
<S> <C>
1.1* Form of Underwriting Agreement (Debt)
1.2* Form of Underwriting Agreement (Equity)
1.3 Form of 1999 Underwriting Agreement (Debt)
1.4 Form of 1999 Underwriting Agreement (Equity)
2.1 Agreement and Plan of Merger among AboveNet Communications Inc., Metromedia Fiber Network, Inc. and
Magellan Acquisition, Inc., dated June 22, 1999 (incorporated by reference to the Company's Current
Report on Form 8-K filed as of June 30, 1999).
3.1 Form of Amended and Restated Certificate of Incorporation of Metromedia Fiber Network, Inc. (incorporated
by reference to the Company's Registration Statement on Form S-1 (Registration No. 333-33653)).
3.2 Form of Amended and Restated Bylaws of Metromedia Fiber Network, Inc. (incorporated by reference to the
Company's Registration Statement on Form S-1 (Registration No. 333-33653)).
4.1 Specimen Class A Common Stock Certificate of Metromedia Fiber Network, Inc. (incorporated by reference to
the Company's Registration Statement on Form S-1 (Registration No. 333-33653)).
4.2+ Form of Indenture between Metromedia Fiber Network, Inc. and The Bank of New York.
4.3 Form of Indenture between Metromedia Fiber Network, Inc. and the Bank of New York, as trustee, relating
to the Senior Dollar Notes due 2009 and the Senior Euro Notes due 2009.
5.1+ Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding the legality of the securities.
5.2 Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding the legality of the notes issued under the
indenture filed as Exhibit 4.3.
12.1 Statement re Computation of Ratios.
23.1 Consent of Ernst & Young LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of PricewaterhouseCoopers LLP
23.4 Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in the opinion filed as Exhibits 5.1 and
5.2 to this Registration Statement).
24.1+ Power of Attorney from officers and directors (included in the signature pages hereto).
25.1+ Form T-1 Statement of Eligibility under the Trust Indenture Act of 1939, as amended, of The Bank of New
York, as trustee under the Indenture.
</TABLE>
- ------------------------
* To be filed by a post-effective amendment to the Registration Statement or
incorporated by reference from documents filed with the SEC under the
Securities Exchange Act of 1934.
+ Previously filed.
<PAGE>
Exhibit 1.3
[Form of Debt Underwriting Agreement]
Metromedia Fiber Network, Inc.
$___________________ _____% Senior Dollar Notes Due 2009
*_________ __% Senior Euro Notes Due 2009
Underwriting Agreement
New York, New York
____________, 1999
SALOMON SMITH BARNEY INC.
CHASE SECURITIES INC.
DEUTSCHE BANK SECURITIES INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MORGAN STANLEY DEAN WITTER
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
Metromedia Fiber Network, Inc., a Delaware corporation (the
"Company"), proposes to sell to the underwriters named in Schedule II hereto
(the "Underwriters"), for whom Salomon Smith Barney Inc., Chase Securities Inc.,
Deutsche Bank Securities Inc., Donaldson, Lufkin & Jenrette Securities
Corporation, Goldman, Sachs & Co. and Morgan Stanley Dean Witter (the
"Representatives") are acting as representatives, an aggregate of $[ ] principal
amount of its [ ]% Senior Dollar Notes due 2009 (the "U.S. Securities") and an
aggregate of [*_______] principal amount of its [__]% Senior Euro Notes due 2009
(the "International Securities" and together with the U.S. Securities, the
"Securities"). The Securities are to be issued under an indenture (the
"Indenture") to be entered into between the Company and The Bank of New York, as
trustee (the "Trustee"). To the extent there are no additional Underwriters
listed on Schedule II other than you, the term Representatives as used herein
shall mean you, as
<PAGE>
Underwriters, and the terms Representatives and Underwriters shall mean either
the singular or plural as the context requires. Any reference herein to the
Registration Statement, the Basic Prospectus, any Preliminary Final Prospectus
or the Final Prospectus shall be deemed to refer to and include the documents
incorporated or deemed to be incorporated by reference therein pursuant to Item
12 of Form S-3 which were filed under the Exchange Act on or before the
Effective Date of the Registration Statement or the issue date of the Basic
Prospectus, any Preliminary Final Prospectus or the Final Prospectus, as the
case may be (the "Incorporated Documents"); and any reference herein to the
terms "amend", "amendment" or "supplement" with respect to the Registration
Statement, the Basic Prospectus, any Preliminary Final Prospectus or the Final
Prospectus shall be deemed to refer to and include the filing of any document
under the Exchange Act after the Effective Date of the Registration Statement or
the issue date of the Basic Prospectus, any Preliminary Final Prospectus or the
Final Prospectus, as the case may be, deemed to be incorporated therein by
reference. Certain terms used herein are defined in Section 17 hereof.
1. Representations and Warranties. The Company represents and warrants to,
and agrees with, each Underwriter as set forth below in this Section 1.
(a) The Company meets the requirements for use of Form S-3 under the
Act and has prepared and filed with the Commission a Registration
Statement (the file number of which is set forth in Schedule I hereto) on
Form S-3, including a Basic Prospectus, for registration under the Act of
the offering and sale of the Securities. The Company may have filed one or
more amendments thereto, including a Preliminary Final Prospectus, each of
which has previously been furnished to you. The Company will next file
with the Commission one of the following: (1) after the Effective Date of
such Registration Statement, a final prospectus supplement relating to the
Securities in accordance with Rules 430A and 424(b), (2) prior to the
Effective Date of such Registration Statement, an amendment to such
Registration Statement (including the form of final prospectus supplement)
or (3) a final prospectus in accordance with Rules 415 and 424(b). In the
case of clause (1), the Company has included in such Registration
Statement, as amended at the Effective Date, all information (other than
Rule 430A Information) required by the Act and the rules thereunder to be
included in such Registration Statement and the Final Prospectus. As
filed, such final prospectus supplement or such amendment and form of
final prospectus supplement shall contain all Rule 430A Information,
together with all other such required information, and, except to the
extent the Representatives shall agree in writing to a modification, shall
be in all substantive respects in the form furnished to you prior to the
Execution Time or, to the extent not completed at the Execution Time,
shall contain only such specific additional information and other changes
(beyond that contained in the Basic Prospectus and any Preliminary Final
Prospectus) as the Company has advised you, prior to the Execution Time,
will be included or made therein. The Registration Statement, at the
Execution Time, meets the
<PAGE>
requirements set forth in Rule 415(a)(1)(x).
(b) On the Effective Date, the Registration Statement did or will,
and when the Final Prospectus is first filed (if required) in accordance
with Rule 424(b) and on the Closing Date (as defined herein), the Final
Prospectus (and any supplement thereto) will, comply in all material
respects with the applicable requirements of the Act, the Exchange Act and
the Trust Indenture Act and the respective rules thereunder; on the
Execution Time, the Registration Statement, as supplemented by any
prospectus supplement filed pursuant to Rule 424(b), did not or will not
contain any untrue statement of a material fact or omit to state any
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; on the Effective
Date and on the Closing Date the Indenture did or will comply in all
material respects with the applicable requirements of the Trust Indenture
Act and the rules thereunder; and, on the Effective Date, the Final
Prospectus, if not filed pursuant to Rule 424(b), will not, and on the
date of any filing pursuant to Rule 424(b) and on the Closing Date, the
Final Prospectus (together with any supplement thereto) will not, include
any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to (i)
that part of the Registration Statement which shall constitute the
Statement of Eligibility and Qualification (Form T-1) under the Trust
Indenture Act of the Trustee or (ii) the information contained in or
omitted from the Registration Statement or the Final Prospectus (or any
amendment or supplement thereto) in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through the Representatives specifically for inclusion
therein, it being understood and agreed that the only such information is
that described as such in Section 8(b) of this Agreement.
(c) The Incorporated Documents heretofore filed, when they were
filed (or, if any amendment with respect to any such document was filed,
when such amendment was filed), conformed in all material respects with
the requirements of the Exchange Act and the rules and regulations
thereunder, any further Incorporated Documents so filed will, when they
are filed, conform in all material respects with the requirements of the
Exchange Act and the rules and regulations thereunder; no such document
when it was filed (or, if an amendment with respect to any such document
was filed, when such amendment was filed), contained an untrue statement
of a material fact or omitted to state a material fact necessary to make
the statements therein, in light of the circumstances under which they
were made, not misleading; and no such further document, when it is filed,
will contain an untrue statement of a material fact or will omit to state
a material fact required to be stated therein or necessary in order to
make the statements therein not
<PAGE>
misleading.
(d) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation or limited liability
company in good standing under the laws of the jurisdiction in which it is
chartered or organized with full corporate power and authority to own or
lease, as the case may be, and to operate its properties and conduct its
business as described in the Final Prospectus (as then amended or
supplemented), and is duly qualified to do business as a foreign
corporation or limited liability company and is in good standing under the
laws of each jurisdiction which requires such qualification, except where
the failure to be so qualified would not have, singly or in the aggregate,
a material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions
in the ordinary course of business.
(e) All the outstanding shares of capital stock of each subsidiary
that is a corporation have been duly and validly authorized and issued and
are fully paid and nonassessable, and, except as otherwise set forth in
the Final Prospectus, all outstanding shares of capital stock of the
subsidiaries are owned by the Company either directly or through wholly
owned subsidiaries free and clear of any perfected security interest and,
to the knowledge of the Company, any other security interests, claims,
liens or encumbrances.
(f) The Company's authorized capitalization is as set forth in the
Final Prospectus under the heading "Capitalization".
(g) The statements in the Final Prospectus under the headings
"Certain United States Federal Income Tax Considerations",
"Business--Regulation," "Business-Franchise, License and Related
Agreements," "Business-Regulation of International Operations,"
"Description of the Notes" and "Business--Legal Proceedings" fairly
summarize the matters therein described in all material respects.
(h) This Agreement has been duly authorized, executed and delivered
by the Company; the Indenture has been duly authorized by the Company and,
assuming due authorization, execution and delivery thereof by the Trustee,
when executed and delivered by the Company, will constitute a legal,
valid, binding instrument enforceable against the Company in accordance
with its terms (subject to applicable bankruptcy, reorganization,
insolvency, moratorium, fraudulent conveyance or other laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity); the Securities have been duly and validly
authorized by the Company, and, when executed, issued and authenticated in
accordance with the provisions of the Indenture and delivered to and paid
for in
<PAGE>
full by the Underwriters, will have been duly executed and delivered by
the Company and will constitute the legal, valid and binding obligations
of the Company entitled to the benefits of the Indenture (subject to
applicable bankruptcy, insolvency, moratorium, fraudulent conveyance or
other laws affecting creditors' rights generally from time to time in
effect and to general principles of equity).
(i) The Company is not, and after giving effect to the offering and
sale of the Securities and the application of the proceeds thereof as
described in the Final Prospectus, will not be, an "investment company"
required to be registered under the Investment Company Act of 1940, as
amended, without taking account of any exemption arising out of the number
of holders of the Company's securities.
(j) No consent, approval, authorization, filing with or order of any
court or governmental agency or body is required in connection with the
transactions contemplated herein or in the Indenture, except such as will
be obtained under the Act and the Trust Indenture Act in connection with
the registration of the Securities, and such as may be required under the
blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters in the manner
contemplated herein or in the Final Prospectus.
(k) None of the execution and delivery of the Indenture, this
Agreement, the issue and sale of the Securities, the consummation of any
of the transactions contemplated herein or therein or the fulfillment of
the terms hereof or thereof, will conflict with, result in a breach or
violation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries, pursuant to
(i) the charter or by-laws of the Company or any of its subsidiaries; (ii)
the terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which the Company or any of its subsidiaries is
a party or bound or to which its or their property is subject; or (iii)
any statute, law, rule, regulation, judgment, order or decree applicable
to the Company or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company or any of its subsidiaries or any of
its or their properties, except in the case of clauses (ii) and (iii), as
could not be reasonably expected to have, singly or in the aggregate, a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions
in the ordinary course of business.
(l) The Securities conform as to legal matters to the description
thereof contained in the Final Prospectus.
<PAGE>
(m) The consolidated historical financial statements of the Company
and its consolidated subsidiaries included in the Final Prospectus present
fairly in all material respects the financial condition, results of
operations and cash flows of the Company as of the dates and for the
periods indicated and have been prepared in conformity with generally
accepted accounting principles applied on a consistent basis throughout
the periods involved (except as otherwise noted therein). The selected
financial data set forth under the caption "Selected Consolidated
Financial Data" in the Final Prospectus fairly present, on the basis
stated in the Final Prospectus, the information included therein.
(n) The pro forma financial statements included in the Final
Prospectus include assumptions that provide a reasonable basis for
presenting the significant effects directly attributable to the
transactions and events described therein, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro
forma adjustments reflect the proper application of those adjustments to
the historical financial statement amounts in the pro forma financial
statements included in the Final Prospectus. The pro forma financial
statements included in the Final Prospectus comply as to form in all
material respects with the applicable accounting requirements of
Regulation S-X under the Act and the pro forma adjustments have been
properly applied to the historical amounts in the compilation of those
statements.
(o) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any of its subsidiaries or its or their property is pending or,
to the best knowledge of the Company, threatened that (i) could reasonably
be expected to have a material adverse effect on the performance of this
Agreement, the Indenture, or the consummation of any of the transactions
contemplated hereby or thereby; or (ii) could reasonably be expected to
have a material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions
in the ordinary course of business, except as set forth in or contemplated
in the Final Prospectus (exclusive of any amendment or supplement
thereto).
(p) Except as described in the Final Prospectus, each of the Company
and each of its subsidiaries owns, licenses, leases or has obtained
rights-of-way for all such properties as are necessary to the conduct of
its operations as presently conducted. The Company and each of its
subsidiaries has good and marketable title, free and clear of all liens or
encumbrances, to all property and assets described in the Final Prospectus
as being owned by it on the date hereof and such properties and assets are
in good repair and suitable for use as so described except as set forth in
the Final Prospectus. All leases to which the Company or its
<PAGE>
subsidiaries are a party are valid and binding (subject to applicable
bankruptcy, reorganization, insolvency, moratorium, fraudulent conveyance
or other laws affecting creditors' rights generally from time to time in
effect and to general principles of equity) and no default has occurred or
is continuing thereunder which could have, singly or in the aggregate, a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions
in the ordinary course of business, and the Company and each subsidiary
enjoy peaceful and undisturbed possession under all such leases to which
any of them is a party as lessee with such exceptions as do not interfere
materially with the use made by the Company or such subsidiary.
(q) Neither the Company nor any subsidiary is in violation or
default of (i) any provision of its charter or bylaws; (ii) the terms of
any indenture, contract, lease, mortgage, deed of trust, note agreement,
loan agreement or other agreement, obligation, condition, covenant or
instrument to which it is a party or bound or to which its property is
subject; or (iii) any statute, law, rule, regulation, judgment, order or
decree applicable to the Company or any of its subsidiaries of any court,
regulatory body, administrative agency, governmental body, arbitrator or
other authority having jurisdiction over the Company or such subsidiary or
any of its properties, as applicable, except in the case of clauses (ii)
and (iii) as could not be reasonably expected to have, singly or in the
aggregate, a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company and
its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business.
(r) Each of (i) Deloitte & Touche LLP, (ii) Ernst & Young LLP, and
(iii) PriceWaterhouseCoopers LLP, each of whom have audited certain
financial statements of the Company and its consolidated subsidiaries and
delivered their report with respect to the audited consolidated financial
statements included in the Final Prospectus are independent public
accountants with respect to the Company within the meaning of the Act and
the applicable published rules and regulations thereunder.
(s) The Company and each subsidiary has filed all foreign, federal,
state and local tax returns that are required to be filed or has requested
extensions thereof except in any case in which the failure so to file
would not have, singly or in the aggregate, a material adverse effect on
the condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole, whether
or not arising from transactions in the ordinary course of business, and
has paid all taxes required to be paid by it and any other assessment,
fine or penalty levied against it, to the extent that any of the foregoing
is due and payable, except for any such assessment, fine or penalty that
<PAGE>
is currently being contested in good faith or as would not have, singly or
in the aggregate, a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company and
its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business.
(t) No labor problem or dispute with the employees of the Company or
any of its subsidiaries exists or is threatened or imminent that could
have, singly or in the aggregate, a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole, whether
or not arising from transactions in the ordinary course of business.
(u) There are no transfer taxes or other similar fees or charges
under Federal law or the laws of any state, or any political subdivision
thereof, required to be paid in connection with the execution and delivery
of this Agreement or the issuance by the Company or sale by the Company of
the Securities.
(v) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and
in such amounts as are prudent and customary in the businesses in which
they are engaged; all policies of insurance and fidelity or surety bonds
insuring the Company or any of its subsidiaries or their respective
businesses, assets, employees, officers and directors are in full force
and effect; the Company and its subsidiaries are in compliance with the
terms of such policies and instruments in all material respects; and there
are no claims by the Company or any of its subsidiaries under any such
policy or instrument as to which any insurance company is denying
liability or defending under a reservation of rights clause; neither the
Company nor any such subsidiary has been refused any insurance coverage
sought or applied for; and neither the Company nor any such subsidiary has
any reason to believe that it will not be able to renew its existing
insurance coverage as and when such coverage expires or to obtain similar
coverage from similar insurers as may be necessary to continue its
business at a cost that would not have, singly or in the aggregate, a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions
in the ordinary course of business.
(w) Except as described in the Final Prospectus, no subsidiary of
the Company is currently prohibited, directly or indirectly, from paying
any dividends to the Company, from making any other distribution on such
subsidiary's capital stock, from repaying to the Company any loans or
advances to such subsidiary from the Company or from transferring any of
such subsidiary's property or assets to the Company or any other
subsidiary of the Company.
<PAGE>
(x) Except as described in the Final Prospectus, the Company and its
subsidiaries (i) possess the certificates, authorizations, approvals,
franchises, licenses, rights-of-way and permits issued by the appropriate
federal, state, local or foreign regulatory authorities necessary to
conduct their respective businesses as presently conducted, (ii) are not
in violation of any such certificates, authorizations, approvals,
franchises, licenses, rights-of-way and permits, except where such
violation would not have a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business and (iii) have not
received any notice of proceedings relating to the revocation or
modification of any such certificate, authorization, approval, franchise,
license, right-of-way or permit which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from transactions
in the ordinary course of business.
(y) The Company and its subsidiaries possess or have applied for the
patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures),
trademarks, service marks and trade names (collectively, "Intellectual
Property") presently employed by them in connection with the businesses
now operated by them, and neither the Company nor any of the Subsidiaries
has received any notice of infringement of or conflict with asserted
rights of others with respect to the foregoing except as could not have,
singly or in the aggregate, a material adverse effect on the condition
(financial or otherwise), prospects, earnings, business or properties of
the Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business. To the Company's
knowledge, the use of such Intellectual Property in connection with the
business and operations of the Company and its subsidiaries does not
infringe on the rights of any person.
(z) The Company and each of its subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's general
or specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain asset accountability; (iii)
access to assets is permitted only in accordance with management's general
or specific authorization; and (iv) the recorded accountability for assets
is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
<PAGE>
(aa) The Company and its subsidiaries are (i) in compliance with any
and all applicable foreign, federal, state and local laws and regulations
relating to the protection of human health and safety, the environment or
hazardous or toxic substances or wastes, pollutants or contaminants
("Environmental Laws"); (ii) have received and are in compliance with all
permits, licenses or other approvals required of them under applicable
Environmental Laws to conduct their respective businesses as described in
the Final Prospectus; and (iii) have not received notice of any actual or
potential liability for the investigation or remediation of any disposal
or release of hazardous or toxic substances or wastes, pollutants or
contaminants, except where such non-compliance with Environmental Laws,
failure to receive required permits, licenses or other approvals, or
liability would not, individually or in the aggregate, have a material
adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its subsidiaries,
taken as a whole, whether or not arising from transactions in the ordinary
course of business; neither the Company nor any of the subsidiaries has
been notified that it has been named as a "potentially responsible party"
under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended.
(bb) Except as described in the Final Prospectus, the Company and
its subsidiaries are implementing a comprehensive, detailed program to
analyze and address the risk that the computer hardware and software used
by them may be unable to recognize and properly execute date-sensitive
functions involving certain dates prior to and any dates after December
31, 1999 (the "Year 2000 Problem"), and reasonably believe that such risk
will be remedied on a timely basis without material expense and will not
have a material adverse effect upon the financial condition and results of
operations of the Company and its subsidiaries, taken as a whole.
(cc) Each of the Company and its subsidiaries has fulfilled its
obligations, if any, under the minimum funding standards of Section 302 of
the United States Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), and the regulations and published interpretations
thereunder with respect to each "plan" (as defined in Section 3(3) of
ERISA and such regulations and published interpretations) in which
employees of the Company and its subsidiaries are eligible to participate
and each such plan is in compliance in all material respects with the
presently applicable provisions of ERISA and such regulations and
published interpretations; the Company and its subsidiaries have not
incurred any unpaid liability to the Pension Benefit Guaranty Corporation
(other than for the payment of premiums in the ordinary course) or to any
such plan under Title IV of ERISA.
(dd) The subsidiaries listed on Schedule III attached hereto are the
only
<PAGE>
significant subsidiaries of the Company as defined in Rule 1-02 of
Regulation S-X (individually, a "Subsidiary" and collectively, the
"Subsidiaries").
(ee) None of the transactions contemplated by this Agreement
(including, without limitation, the use of the proceeds from the sale of
the Securities) will violate or result in a violation of Section 7 of the
Exchange Act, or any regulation promulgated thereunder, including, without
limitation, Regulations T, U and X of the Board of Governors of the
Federal Reserve System.
(ff) Neither the Company nor any of the subsidiaries is a "holding
company" or a "subsidiary company" of a holding company, or an "affiliate"
thereof required to be registered under the Public Utility Holding Company
Act of 1935, as amended.
(gg) Neither the Company nor any of its subsidiaries nor, to the
Company's knowledge, any employee or agent of the Company or any
subsidiary has made any payment of funds of the Company or any subsidiary
or received or retained any funds in violation of any provision of the
Foreign Corrupt Practices Act of 1977, as amended.
(hh) No "nationally recognized statistical rating organization" as
such term is defined for purposes of Rule 436(g)(2) under the Act has
indicated to the Company that it is considering (i) the downgrading,
suspension or withdrawal of, or any review for a possible change that does
not indicate the direction of the possible change in, any rating assigned
to the Company or any securities of the Company or (ii) any change in the
outlook for any rating of the Company or any securities of the Company.
(ii) No relationship, direct or indirect, exists between or among
the Company or any of its subsidiaries on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company or any of
its subsidiaries on the other hand, which is required by the Act to be
described in the Final Prospectus which is not so described.
(jj) The Company has not taken, directly or indirectly, any action
designed to cause or which has constituted or which might reasonably be
expected to cause or result, under the Exchange Act or otherwise, in the
stabilization or manipulation of the price of any security of the Company
to facilitate the sale or resale of the Securities.
Any certificate signed by any officer of the Company and delivered to the
Representatives or counsel for the Underwriters in connection with the offering
of the Securities shall be deemed a representation and warranty by the Company,
as to matters covered thereby, to each Underwriter.
<PAGE>
2. Purchase and Sale. Subject to the terms and conditions and in reliance
upon the representations and warranties herein set forth, the Company agrees to
sell to each Underwriter, and each Underwriter agrees, severally and not
jointly, to purchase from the Company, at the purchase price set forth in
Schedule I hereto the principal amount of the Securities set forth opposite such
Underwriter's name in Schedule II hereto.
3. Delivery and Payment. Delivery of and payment for the Securities shall
be made on the date and at the time specified in Schedule I hereto or at such
time on such later date not more than three Business Days after the foregoing
date as the Representatives shall designate, which date and time may be
postponed by agreement between the Representatives and the Company or as
provided in Section 9 hereof (such date and time of delivery and payment for the
Securities being herein called the "Closing Date"). Delivery of the Securities
shall be made to the Representatives for the respective accounts of the several
Underwriters against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Company by wire transfer payable in same-day funds to the account specified by
the Company. The Company shall not be obligated to deliver any of the
Securities, except upon payment for all of the Securities to be purchased as
provided herein. [Delivery of the Securities shall be made through the
facilities of The Depository Trust Company unless the Representatives shall
otherwise instruct.]
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Final Prospectus.
5. Agreements. The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the Registration
Statement, if not effective at the Execution Time, and any amendment
thereof, to become effective. Prior to the termination of the offering of
the Securities, the Company will not file any amendment of the
Registration Statement or supplement (including the Final Prospectus or
any Preliminary Final Prospectus) to the Basic Prospectus or any Rule
462(b) Registration Statement unless the Company has furnished you a copy
for your review prior to filing and will not file any such proposed
amendment or supplement without the prior written consent of the
Representatives, which consent shall not be unreasonably withheld,
conditioned or delayed. Subject to the foregoing sentence, if the
Registration Statement has become or becomes effective pursuant to Rule
430A, or filing of the Final Prospectus is otherwise required under Rule
424(b), the Company will cause the Final Prospectus, properly completed,
and any supplement thereto to be filed with the Commission pursuant to the
applicable paragraph of Rule 424(b) within the time period prescribed and
will provide evidence satisfactory to the Representatives of such timely
filing. Upon your request, the Company will cause the Rule 462(b)
Registration Statement, completed in compliance with the Act and the
applicable rules and regulations thereunder, to be filed with the
<PAGE>
Commission pursuant to Rule 462(b) and will provide evidence satisfactory
to the Representatives of such filing. The Company will promptly advise
the Representatives (1) when the Registration Statement, if not effective
at the Execution Time, shall have become effective, (2) when the Final
Prospectus, and any supplement thereto, shall have been filed (if
required) with the Commission pursuant to Rule 424(b) or when any Rule
462(b) Registration Statement shall have been filed with the Commission,
(3) when, prior to termination of the offering of the Securities, any
amendment to the Registration Statement shall have been filed or become
effective, (4) of any request by the Commission or its staff for any
amendment of the Registration Statement, or any Rule 462(b) Registration
Statement, or for any supplement to the Final Prospectus or for any
additional information, (5) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (6) of
the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the institution or threatening of any proceeding for such
purpose. The Company will use its best efforts to prevent the issuance of
any such stop order or the suspension of any such qualification and, if
issued, to obtain as soon as possible the withdrawal thereof. Prior to the
completion of the sale of the Securities by the Underwriters, the Company
will not file any document under the Exchange Act that is incorporated by
reference in the Registration Statement unless, prior to such proposed
filing, the Company has furnished the Representatives with a copy of such
document for their review and the Representatives have not reasonably
objected to the filing of such document within a reasonable period of
time. The Company will promptly advise the Representatives when any
document filed under the Exchange Act that is incorporated by reference in
the Registration Statement shall have been filed with the Commission.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of
which the Final Prospectus as then amended or supplemented would include
any untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it should
be necessary to amend the Registration Statement or supplement the Final
Prospectus to comply with the Act or the Exchange Act or the respective
rules thereunder, the Company promptly will (1) notify the Representatives
of such event, (2) prepare and file with the Commission, subject to the
second sentence of paragraph (a) of this Section 5, an amendment or
supplement which will correct such statement or omission or effect such
compliance and (3) supply any supplemented Final Prospectus to you in such
quantities as you may reasonably request.
(c) As soon as practicable, the Company will make generally
available
<PAGE>
to its security holders and to the Representatives an earnings statement
or statements of the Company and its subsidiaries which will satisfy the
provisions of Section 11(a) of the Act and Rule 158 under the Act.
(d) The Company will furnish to the Representatives and counsel for
the Underwriters, without charge, signed copies of the Registration
Statement (including exhibits thereto) and to each other Underwriter a
copy of the Registration Statement (without exhibits thereto) and, so long
as delivery of a prospectus by an Underwriter or dealer may be required by
the Act, as many copies of each Preliminary Final Prospectus and the Final
Prospectus and any supplement thereto as the Representatives may
reasonably request. The Company will pay the expenses of printing or other
production of all documents relating to the offering.
(e) The Company will arrange, if necessary, for the qualification of
the Securities for sale under the laws of such jurisdictions as the
Representatives may designate, will maintain such qualifications in effect
so long as required for the distribution of the Securities and will pay
any fee of the National Association of Securities Dealers, Inc., in
connection with its review of the offering; provided that in no event
shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action that
would subject it to service of process in suits, other than those arising
out of the offering or sale of the Securities, in any jurisdiction where
it is not now so subject. The Company will promptly advise the
Representatives of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Securities for sale
in any jurisdiction or the initiation or threatening of any proceeding for
such purpose. The Company shall use its best efforts to prevent the
issuance of any order suspending the qualification or exemption of the
Securities under any state securities or Blue Sky laws, and, if at any
time any state securities commission or any other regulatory authority
shall issue an order suspending the qualification or exemption of the
Securities under any state securities or Blue Sky laws, the Company shall
use every reasonable effort to obtain the withdrawal or lifting of such
order at the earliest possible time.
(f) The Company will not for a period of 180 days following the
Execution Time, without the prior written consent of Salomon Smith Barney
Inc., offer, sell or contract to sell, grant any other option to purchase
or otherwise dispose of (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition (whether
by actual disposition or effective economic disposition due to cash
settlement or otherwise) by the Company or any Affiliate of the Company or
any person in privity with the Company or any Affiliate of the Company),
directly or indirectly, any debt securities issued or guaranteed by the
Company (other than the Securities) except the Company may offer, sell,
contract to sell, pledge, or otherwise dispose of convertible
<PAGE>
subordinated notes to Bell Atlantic Investments, Inc. ("Bell Atlantic")
pursuant to a securities purchase agreement dated October 7, 1999 between
the Company and Bell Atlantic.
(g) The Company will cooperate with the Representatives and use its
best efforts to permit the Securities to be eligible for clearance and
settlement through The Depository Trust Company.
(h) The Company will not take, directly or indirectly, any action
designed to or which has constituted or which might reasonably be expected
to cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities.
(i) The Company will not, for so long as the Securities are
outstanding, be or become, or be or become owned by, an open-end
investment company, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act, and will not be or become, or be or become owned
by, a closed-end investment company required to be registered, but not
registered thereunder.
(j) The Company will apply the net proceeds from the sale of the
Securities as set forth in the Final Prospectus under the heading "Use of
Proceeds."
(k) The Company agrees to pay the costs and expenses relating to the
following matters: (i) the preparation of the Indenture, the issuance of
the Securities and the fees of the Trustee; (ii) the preparation, printing
or reproduction of the Registration Statement, the Preliminary Final
Prospectus and the Final Prospectus and each amendment or supplement to
any of them; (iii) the printing (or reproduction) and delivery (including
postage, air freight charges and charges for counting and packaging) of
such copies of the Registration Statement, the Preliminary Final
Prospectus and the Final Prospectus, and all amendments or supplements to
any of them, as may, in each case, be reasonably requested for use in
connection with the offering and sale of the Securities; (iv) the
preparation, printing, authentication, issuance and delivery of
certificates for the Securities, including any stamp or transfer taxes in
connection with the original issuance and sale of the Securities; (v) the
printing (or reproduction) and delivery of this Agreement, any blue sky
memorandum and all other agreements or documents printed (or reproduced)
and delivered in connection with the offering of the Securities; (vi) any
registration or qualification of the Securities for offer and sale under
the securities or blue sky laws of the several states (including filing
fees and the reasonable fees and expenses of one counsel for the
Underwriters relating to
<PAGE>
such registration and qualification); (vii) listing the International
Securities on the Luxembourg Exchange; (viii) the transportation and other
expenses incurred by or on behalf of Company representatives in connection
with presentations to prospective purchasers of the Securities; (ix) the
fees and expenses of the Company's accountants and the fees and expenses
of counsel (including local and special counsel) for the Company; and (x)
all other costs and expenses incident to the performance by the Company of
its obligations hereunder; provided, however, that, except as otherwise
provided for herein, the Underwriters shall pay their own costs and
expenses, including the fees of their counsel and any advertising expenses
connected with any offers they may make.
(l) The Company agrees to do and perform all things required to be
done and performed by it under this Agreement that are within its control
on or prior to or after the Closing Date, as applicable, and to use its
best efforts to satisfy all conditions precedent on its part to the
delivery of the Securities.
6. Conditions to the Obligations of the Underwriters. The obligations of
the Underwriters to purchase the Securities shall be subject to the accuracy of
the representations and warranties on the part of the Company contained herein
as of the Execution Time and the Closing Date, to the accuracy of the statements
of the Company made in any certificates pursuant to the provisions hereof, to
the performance by the Company of its obligations hereunder and to the following
additional conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representatives agree in writing to a later
time, the Registration Statement will become effective not later than (i)
6:00 PM New York City time, on the date of determination of the public
offering price, if such determination occurred at or prior to 3:00 PM New
York City time on such date or (ii) 9:30 AM on the Business Day following
the day on which the public offering price was determined, if such
determination occurred after 3:00 PM New York City time on such date; if
filing of the Final Prospectus, or any supplement thereto, is required
pursuant to Rule 424(b), the Final Prospectus, and any such supplement,
will be filed in the manner and within the time period required by Rule
424(b); and no stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been instituted or threatened.
(b) The Company shall have requested and caused Arnold L. Wadler,
General Counsel of the Company, to furnish to the Representatives his
opinion, dated the Closing Date and addressed to the Representatives, to
the effect that:
i. each of the Company's Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or organized,
with full corporate
<PAGE>
power and authority to own or lease, as the case may be, and to operate,
its properties and conduct its business as described in the Final
Prospectus;
ii. all the outstanding shares of capital stock of the Company
and each Subsidiary have been duly and validly authorized and issued and
are fully paid and nonassessable, and, except as otherwise set forth in
the Final Prospectus, all outstanding shares of capital stock of the
Subsidiaries are owned by the Company either directly or through wholly
owned subsidiaries free and clear of any security interest and, to the
knowledge of such counsel, after due inquiry, any other security
interests, claims, liens or encumbrances;
iii. the Company's authorized capitalization is as set forth
in the Final Prospectus under the heading "Capitalization";
iv. to the knowledge of such counsel, without conducting a
docket search, there is no pending or threatened action, suit or
proceeding by or before any court or governmental agency, authority or
body or any arbitrator involving the Company or any of its subsidiaries or
its or their property that is not adequately disclosed in the Final
Prospectus, except in each case for such proceedings that, if the subject
of an unfavorable decision, ruling or finding would not, singly or in the
aggregate, result in a material adverse change in the condition (financial
or otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries, taken as a whole; and the statements in the Final
Prospectus under the heading "Business--Legal Proceedings" fairly
summarize the matters therein described;
v. neither the execution and delivery of the Indenture, this
Agreement, the issue and sale of the Securities, nor the consummation of
any other of the transactions herein or therein contemplated, nor the
fulfillment of the terms hereof or thereof, will conflict with, result in
a breach or violation of, or imposition of any lien, charge or encumbrance
upon, any property or asset of the Company or its subsidiaries pursuant to
(i) the charter or by-laws of the Company's subsidiaries, or (ii) the
terms of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which the Company or any of its subsidiaries is
a party or bound or to which its respective property is subject which is
known to such counsel;
vi. the statements in the Final Prospectus under the captions
"Risk Factors - The Heavy Regulation of the Telecommunications Industry
May Limit the Development of Our Networks and Affect Our Competitive
Position" and "Business-Regulation" to the extent that they discuss U.S.
federal, state, and local telecommunications statutes and regulations or
legal or governmental proceedings of the FCC and state and local
governments with respect to
<PAGE>
telecommunications regulatory matters, fairly summarize the matters
referred to therein in all material respects;
vii. neither the execution and delivery of this Agreement by
the Company nor the performance by the Company of its obligations under
this Agreement will violate the Communications Act or the State
Telecommunications Laws; and
viii. to the knowledge of such counsel, (A) the Company and
its subsidiaries have in effect all the U.S. federal and state
telecommunications regulatory licenses, permits, authorizations, consents,
and approvals (hereinafter, "Licenses") required to conduct their
respective businesses as presently conducted; (B) all such Licenses have
been validly issued and are in full force and effect; (C) no determination
has been made by the FCC or any State Regulatory Agency that the Company
or any subsidiaries is in violation of any such Licenses, and no
proceeding is pending before any such agency in which any such violation
has been alleged; and (D) no proceedings by the FCC or any State
Regulatory Agency to revoke or restrict any such Licenses are pending or
threatened. "Validly issued" as used in this paragraph means that the
Licenses have been issued through the means of regular agency procedures
applied in conformity with the applicable governing statute and prior
agency practice and there is no legal basis under the applicable governing
statute to conclude that the Company or any subsidiary cannot hold one or
more of the Licenses as a matter of law. "Full force and effect" as used
in this paragraph means (i) the orders issuing the Licenses have become
effective under the applicable governing statute, (ii) the Licenses
contain no conditions that would have a material adverse effect on the
Company's or any subsidiary's operations except for such conditions
imposed generally by the agency, (iii) all conditions precedent set forth
in the Licenses have been satisfied where the failure to satisfy such
conditions would have a material adverse effect on the Company's or any
subsidiary's ability to conduct their respective businesses as they are
presently conducted, and (iv) no stay of effectiveness has been issued.
(c) The Company shall have requested and caused Paul, Weiss,
Rifkind, Wharton & Garrison, counsel for the Company, to furnish to the
Representatives its opinion, dated the Closing Date and addressed to the
Representatives, to the effect that:
i. the Company and each of the Subsidiaries incorporated (in
the case of a corporation) or organized (in the case of any other entity)
under the laws of the States of Delaware or New York has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware or New York, as applicable, with
full corporate power and authority to own or lease, as the case may be,
and to operate its properties and conduct its
<PAGE>
business as described in the Final Prospectus;
ii. the Registration Statement has become effective under the
Act; any required filing of the Basic Prospectus, any Preliminary Final
Prospectus and the Final Prospectus, and any supplements thereto, has been
made pursuant to Rule 424(b); to the knowledge of such counsel, no stop
order suspending the effectiveness of the Registration Statement has been
issued, no proceedings for that purpose have been instituted or threatened
by the Commission, and the Registration Statement and the Final Prospectus
(other than the financial statements, schedules and other financial and
statistical information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects with the
applicable requirements of the Act, the Exchange Act and the Trust
Indenture Act and the respective rules thereunder;
iii. this Agreement has been duly authorized, executed and
delivered by the Company;
iv. the Indenture has been duly authorized, executed and
delivered by the Company, and, assuming due authorization, execution and
delivery thereof by the Trustee, constitutes a legal, valid and binding
instrument enforceable against the Company in accordance with its terms
(subject to applicable bankruptcy, reorganization, insolvency, moratorium,
fraudulent conveyance or other laws affecting creditors' rights generally
from time to time in effect and to general principles of equity,
regardless of whether enforceability is considered in a proceeding in
equity or at law); the Securities have been duly and validly authorized by
the Company, and, when duly executed, issued and authenticated in
accordance with the provisions of the Indenture and delivered to and paid
for in full by the Underwriters under this Agreement, will constitute
legal, valid and binding obligations of the Company entitled to the
benefits of the Indenture (subject to applicable bankruptcy,
reorganization, insolvency, moratorium, fraudulent conveyance or other
laws affecting creditors' rights generally from time to time in effect and
to general principles of equity, regardless or whether enforceability is
considered in a proceeding in equity or at law); and the statements set
forth under the heading "Description of the Notes", insofar as such
statements purport to summarize certain provisions of the Securities and
the Indenture, provide a fair summary of such provisions;
v. To the extent that they constitute a summary of U.S.
federal law and regulations, the statements in the Final Prospectus under
the heading "Certain United States Federal Income Tax Considerations"
fairly summarize the matters therein described in all material respects;
vi. [the Company is not and, after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described
<PAGE>
in the Final Prospectus, will not be an "investment company" required to
be registered under the Investment Company Act without taking account of
any exemption arising out of the number of holders of the Company's
securities;]
vii. [except as described in the Final Prospectus, there is no
holder of any security of the Company or any other person who has the
right, contractual or otherwise, to cause the Company to sell or otherwise
issue to them, or to permit them to underwrite the sale of, the Securities
or the right to have any other securities of the Company included in the
registration statement or the right, as a result of the filing of the
registration statement, to require registration under the Act of any
securities of the Company;]
viii. no consent, approval, authorization, filing with or
order of any court or governmental agency or body under the Federal laws
of the United States or the laws of the State of New York or under the
General Corporation Law of the State of Delaware is required in connection
with the due authorization, execution and delivery of this Agreement or
the due execution, delivery or performance of the Indenture by the
Company, or for the offering, issuance, sale or delivery of the
Securities, except such as will be obtained, taken or made or such, as may
be required under the blue sky or securities laws of any state or foreign
jurisdiction or the NASD (as to which such counsel need not express any
opinion) or and such other approvals (specified in such opinion) as have
been obtained (provided that such counsel need not express any opinion
with respect to any consent, approval, authorization under the
Communications Act of 1934, as amended, or any published rules,
regulations or policies of the Federal Communications Commission (the
"FCC") thereunder);
ix. neither the execution and delivery of the Indenture, this
Agreement, the issue and sale of the Securities, nor the consummation of
any other of the transactions herein or therein contemplated, nor the
fulfillment of the terms hereof or thereof, will conflict with, result in
a breach or violation of, or imposition of any lien, charge or encumbrance
upon any property or asset of the Company or its subsidiaries pursuant to,
(i) the charter or by-laws of the Company; or (ii) any statute, law, rule
or regulation of the Federal government of the United States (excluding
the FCC) or the State of New York or under the General Corporation Law of
the State of Delaware, or to such counsel's knowledge, any judgment, order
or decree applicable to the Company or any of its subsidiaries of any
court, regulatory body, administrative agency, governmental body,
arbitrator or other authority having jurisdiction over the Company, any of
its subsidiaries or any of their respective properties which is known to
such counsel except as described in the Final Prospectus or for such
violations as could not be reasonably expected to have, singly or in the
aggregate, a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company and
its subsidiaries, taken as a whole; and
<PAGE>
In addition, such counsel shall state that it has participated in
conferences with officers and other representatives of the Company,
representatives of the independent accountants of the Company, the Underwriters
and counsel for the Underwriters at which the contents of the Registration
Statement and the Final Prospectus and related matters were discussed and,
although such counsel is not passing upon, and does not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Final Prospectus (or any
amendments or supplements thereto) and has made no independent investigation or
verification thereof, and such counsel has not participated in the preparation
of the Incorporated Documents, on the basis of the foregoing, no facts have come
to the attention of such counsel that have led such counsel to believe that at
the Execution Time and on the Closing Date the Registration Statement and the
Final Prospectus contained or contains any untrue statement of a material fact
or omitted or omits to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (in each case, other than the financial statements, schedules and
other financial and statistical information which are contained or incorporated
by reference therein or omitted thereform and the Form T-1, as to which such
counsel need express no opinion).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the State of
New York, the Federal laws of the United States or the General Corporation Law
of the State of Delaware, to the extent they deem proper and specified in such
opinion, upon the opinion of other counsel of good standing whom they believe to
be reliable and who are reasonably satisfactory to counsel for the Underwriters;
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials. References to the
Registration Statement and the Prospectus in this Section 6(c) include any
amendment or supplement thereto at the Closing Date.
(d) The Company shall have furnished to the Representatives the
opinion of Baker & McKenzie, special regulatory counsel for the Company,
dated the Closing Date, to the effect that:
i. to the extent they constitute a summary of the regulatory
matters referred to therein, the statements in the Registration Statement
and the Final Prospectus under the caption "Business--Regulation of
International Operations" fairly summarize the matters referred to
therein;
ii. no licenses under telecommunications legislation in
England and Wales including the Telecommunications Act 1984, the Wireless
Telegraphy Act 1949 or the Wireless Telegraphy Act 1998 other than the
Licenses are required by the Company, ION LLC, ION or Racal to carry on
the ION
<PAGE>
Business in the United Kingdom;
iii. no licenses under telecommunications legislation in
England and Wales including the Telecommunications Act 1984, the Wireless
Telegraphy Act 1949 or the Wireless Telegraphy Act 1998, other than the
Licenses that are currently required by the Company in relation to the
Company's telecommunications business as presently conducted in the United
Kingdom; and
iv. no German telecommunications licenses, other than the
class 3 license obtained by Metromedia Fiber Network GmbH, are currently
required by the Company in relation to the European Network, the German
Network, or the Company's telecommunications business as presently
conducted in Germany.
In rendering such opinion, such counsel may state that they express
no opinion as to the laws of any jurisdiction other than Germany or the United
Kingdom or the regulations of the European Union.
(e) The Representatives shall have received from Skadden, Arps,
Slate, Meagher & Flom LLP, counsel for the Underwriters, such opinion or
opinions, dated the Closing Date and addressed to the Representatives,
with respect to the issuance and sale of the Securities, the Indenture,
the Registration Statement, the Final Prospectus (together with any
supplement thereto) and other related matters as the Representatives may
reasonably require, and the Company shall have furnished to such counsel
such documents as they reasonably request for the purpose of enabling them
to pass upon such matters.
(f) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board of
Directors or the President and the principal financial or accounting
officer of the Company, dated the Closing Date, to the effect that the
signers of such certificate have carefully examined the Registration
Statement, the Final Prospectus, any supplements to the Final Prospectus
and this Agreement and that:
i. the representations and warranties of the Company in this
Agreement are true and correct in all material respects on and as of the
Closing Date with the same effect as if made on the Closing Date, and the
Company has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied hereunder at or prior
to the Closing Date;
ii. no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that purpose
have been instituted or, to the Company's knowledge, threatened; and
<PAGE>
iii. since the date of the most recent financial statements
included or incorporated by reference in the Final Prospectus (exclusive
of any amendment or supplement thereto), there has been no material
adverse change in the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its subsidiaries,
taken as a whole, whether or not arising from transactions in the ordinary
course of business, except as set forth in or contemplated in the Final
Prospectus (exclusive of any amendment or supplement thereto).
(g) At the Execution Time and at the Closing Date, the Company shall
have requested and caused Ernst & Young LLP to furnish to the
Representatives letters, dated respectively as of the Execution Time and
as of the Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are independent accountants within
the meaning of the Act and the Exchange Act and the applicable rules and
regulations thereunder, that they have performed a review of the unaudited
interim financial information of the Company for the [_____] month period
ended [_______], 1999 and as at [______], 1999 and stating in effect that:
i. in their opinion the audited financial statements and
financial statement schedules included or incorporated in the Registration
Statement and the Final Prospectus and reported on by them comply as to
form in all material respects with the applicable accounting requirements
of the Exchange Act and the related published rules and regulations
thereunder;
ii. on the basis of a reading of the latest unaudited
financial statements made available by the Company and its subsidiaries;
their limited review in accordance with standards established under
Statement on Auditing Standards No. 71, of the unaudited interim financial
information for the [______] month period ended [______], 1999, and as at
[_________], 1999, as indicated in their report included or incorporated
in the Registration Statement and the Final Prospectus; carrying out
certain specified procedures (but not an examination in accordance with
generally accepted auditing standards) which would not necessarily reveal
matters of significance with respect to the comments set forth in such
letter; a reading of the minutes of the meetings of the stockholders,
directors and committees of the Company and the Subsidiaries; and
inquiries of certain officials of the Company who have responsibility for
financial and accounting matters of the Company and its subsidiaries as to
transactions and events subsequent to [_________], 1998, nothing came to
their attention which caused them to believe that:
(1) any unaudited financial statements included or
incorporated in the Registration Statement and the Final Prospectus
do not comply in
<PAGE>
form in all material respects with applicable accounting
requirements and with the published rules and regulations of the
Commission with respect to financial statements included or
incorporated in quarterly reports on Form 10-Q under the Exchange
Act; or that said unaudited financial statements are not in
conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited financial
statements included or incorporated in the Registration Statement
and the Final Prospectus;
(2) with respect to the period subsequent to [______], 1999,
there were any changes, at a specified date not more than three days
prior to the date of the letter, in the capital stock, increase in
long-term debt of the Company and its subsidiaries or decreases in
net assets or stockholders' equity of the Company as compared with
the amounts shown on the [______], 1999 consolidated balance sheet
included in the Final Prospectus, or for the period from [_______],
1999 to such specified date there were any decreases, as compared
with the corresponding period in the preceding year in revenues or
in total or per share amounts of net income of the Company and its
subsidiaries, except in all instances for changes or decreases set
forth in such letter, in which case the letter shall be accompanied
by an explanation by the Company as to the significance thereof
unless said explanation is not deemed necessary by the
Representatives; or
(3) the information included under the headings "Selected
Consolidated Financial Data" and "Management-Executive Compensation"
is not in conformity with the disclosure requirements of Regulation
S-K;
iii. they have performed certain other specified procedures as
a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the general
accounting records of the Company and its subsidiaries) set forth in the
Final Prospectus, including the information set forth under the captions
"Risk Factors", "Use of Proceeds", "Capitalization", "Selected
Consolidated Financial Data", "Management's Discussion and Analysis of
Financial Condition and Results of Operations", "Business", "Management",
and "Certain Relationships and Related Transactions" in the Final
Prospectus, the information included or incorporated in Items 1, 2, 6, 7
and 11 of the Company's Annual Report on Form 10-K incorporated in the
Final Prospectus and the information included in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included or incorporated in the Company's Quarterly Reports on Form 10-Q,
incorporated in the Final Prospectus agrees with the accounting records of
the Company and its
<PAGE>
subsidiaries, excluding any questions of legal interpretation; and
iv. on the basis of a reading of the unaudited pro forma
financial statements included or incorporated by reference in the
Registration Statement and the Final Prospectus (the "pro forma financial
statements"); carrying out certain specified procedures; inquiries of
certain officials of the Company and [___________] who have responsibility
for financial and accounting matters; and proving the arithmetic accuracy
of the application of the pro forma adjustments to the historical amounts
in the pro forma financial statements, nothing came to their attention
which caused them to believe that the pro forma financial statements do
not comply as to form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or that the pro
forma adjustments have not been properly applied to the historical amounts
in the compilation of such statements.
(h) The Representatives shall have also received from Ernst & Young
LLP a letter stating that the Company's system of internal accounting
controls taken as a whole is sufficient to meet the broad objectives of
internal accounting control insofar as those objectives pertain to the
prevention or detection of errors or irregularities in amounts that would
be material in relation to the financial statements of the Company and its
subsidiaries.
(i) At the Execution Time and at the Closing Date, Deloitte & Touche
LLP shall have furnished to the Representatives letters, dated
respectively as of the Execution Time and as of the Closing Date, in form
and substance satisfactory to the Representatives, confirming that they
are independent accountants within the meaning of the Act and the
applicable rules and regulations thereunder, and stating in effect that:
i. in their opinion the audited financial statements and
financial statement schedules included in the Registration Statement and
the Final Prospectus and reported on by them comply in form in all
material respects with the applicable accounting requirements of the Act
and the related published rules and regulations; and
ii. they have performed certain other specified procedures as
a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the general
accounting records of the Company and its subsidiaries) set forth in the
Registration Statement and the Final Prospectus agrees with the accounting
records of the Company and its subsidiaries, excluding any questions of
legal interpretation.
<PAGE>
References to the Final Prospectus in this paragraph (i) include any
supplement thereto at the date of the letter.
(j) At the Execution Time and at the Closing Date,
PricewaterhouseCoopers LLP shall have furnished to the Representatives a
letter or letters, dated respectively as of the Execution Time and as of
the Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are independent accountants within
the meaning of the Act and the applicable rules and regulations
thereunder, and stating in effect that:
i. in their opinion the audited financial statements and
financial statement schedules included in the Registration Statement and
the Final Prospectus and reported on by them comply in form in all
material respects with the accounting requirements of the Act and the
related published rules and regulations; and
ii. they have performed certain other specified procedures as
a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the general
accounting records of the Company and its subsidiaries) set forth in the
Registration Statement and the Final Prospectus agrees with the accounting
records of the Company and its subsidiaries, excluding any questions of
legal interpretation.
References to the Final Prospectus in this paragraph (j) include any
supplement thereto at the date of the letter.
(k) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Final Prospectus (exclusive of any amendment or
supplement thereto), there shall not have been (i) any change or decrease
specified in the letter or letters referred to in paragraph (g) of this
Section 6 or (ii) any change, or any development involving a prospective
change, in or affecting the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its subsidiaries,
taken as a whole, whether or not arising from transactions in the ordinary
course of business, except as set forth in or contemplated in the Final
Prospectus (exclusive of any amendment or supplement thereto) the effect
of which, in any case referred to in clause (i) or (ii) above, is, in the
sole judgment of the Representatives, so material and adverse as to make
it impractical or inadvisable to market the Securities as contemplated by
the Registration Statement (exclusive of any amendment thereof) and the
Final Prospectus (exclusive of any amendment or supplement thereto).
<PAGE>
(l) Subsequent to the Execution Time, there shall not have been any
decrease in the rating of any of the Company's debt securities, including
the Securities, by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Act) or
any notice given of any intended or potential decrease in any such rating
or of a possible change in any such rating that does not indicate the
direction of the possible change.
(m) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall
have been taken or, to the knowledge of the Company, shall be contemplated
by the Commission at or prior to the Closing Date; (ii) there shall not
have been any change in the capital stock of the Company nor any material
increase in the short-term or long-term debt of the Company (other than in
the ordinary course of business) from that set forth or contemplated in
the Registration Statement or the Final Prospectus (or any amendment or
supplement thereto); (iii) there shall not have been, since the respective
dates as of which information is given in the Registration Statement and
the Final Prospectus (or any amendment or supplement thereto), except as
may otherwise be stated in the Registration Statement and Final Prospectus
(or any amendment or supplement thereto), any material adverse change in
the condition (financial or other), business, prospects, properties, net
worth or results of operations of the Company and the Subsidiaries taken
as a whole; (iv) the Company and the Subsidiaries shall not have any
liabilities or obligations, direct or contingent (whether or not in the
ordinary course of business), that are material to the Company and the
Subsidiaries, taken as a whole, other than those reflected in the
Registration Statement or the Final Prospectus (or any amendment or
supplement thereto); and (v) all the representations and warranties of the
Company contained in this Agreement shall be true and correct on and as of
the date hereof and on and as of the Closing Date as if made on and as of
the Closing Date and you shall have received a certificate, dated the
Closing Date and signed by the chief executive officer and the chief
financial officer of the Company (or such other officers as are acceptable
to you), to the effect set forth in this Section 6(f) hereof.
(n) The Company shall not have failed at or prior to the Closing
Date to have performed or complied with any of its agreements herein
contained and required to be performed or complied with by it hereunder at
or prior to the Closing Date.
(o) Prior to the Closing Date, the Company shall have furnished to
the Representatives such further information, certificates and documents
as the Representatives may reasonably request.
(p) If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or
<PAGE>
if any of the opinions and certificates mentioned above or elsewhere in
this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for
the Underwriters, this Agreement and all obligations of the Underwriters
hereunder may be cancelled at, or at any time prior to, the Closing Date
by the Representatives. Notice of such cancellation shall be given to the
Company in writing or by telephone or facsimile confirmed in writing.
(q) The documents required to be delivered by this Section 6 will be
delivered at the office of Skadden, Arps, Slate, Meagher & Flom LLP,
counsel for the Underwriters, at 919 Third Avenue, New York, New York
10022, on the Closing Date.
7. Reimbursement of Underwriters' Expenses. If the sale of the Securities
provided for herein is not consummated because any condition to the obligations
of the Underwriters set forth in Section 6 hereof is not satisfied, because of
any termination pursuant to Section 10 hereof or because of any refusal,
inability or failure on the part of the Company to perform any agreement herein
or comply with any provision hereof other than by reason of a default by any of
the Underwriters, the Company will reimburse the Underwriters severally through
Salomon Smith Barney Inc. on demand for all out-of-pocket expenses (including
reasonable fees and disbursements of one counsel) that shall have been incurred
by them in connection with the proposed purchase and sale of the Securities.
8. Indemnification and Contribution. (a) The Company agrees to indemnify
and hold harmless each Underwriter, the directors, officers, employees and
agents of each Underwriter and each person who controls any Underwriter within
the meaning of either the Act or the Exchange Act against any and all losses,
claims, damages or liabilities, joint or several, to which they or any of them
may become subject under the Act, the Exchange Act or other Federal or state
statutory law or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the registration statement for the registration of the
Securities as originally filed or in any amendment thereof, or in the Basic
Prospectus, any Preliminary Final Prospectus or the Final Prospectus, or in any
amendment thereof or supplement thereto, or arise out of or are based upon the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, and agrees to
reimburse each such indemnified party, as incurred, for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that (i) the Company will not be liable in any such case to the extent that any
such loss, claim, damage or liability arises out of or is based upon any such
untrue statement or alleged
<PAGE>
untrue statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by or on
behalf of any Underwriter through the Representatives specifically for inclusion
therein and (ii) with respect to any untrue statement or alleged untrue
statement of, or omission or alleged omission to state, a material fact made in
any Preliminary Final Prospectus, the indemnity agreement contained in this
Section 8(a) shall not inure to the benefit of any Underwriter (or any of the
directors, officers, employees and agents of such Underwriter or any controlling
person of such Underwriter) from whom the person asserting any such loss, claim,
damage or liability purchased the Securities concerned, to the extent that any
such loss, claim, damage or liability of such Underwriter occurs under the
circumstances where it shall have been determined by a court of competent
jurisdiction (or appropriate arbitral proceeding) by final and nonappealable
judgment that (w) the Company had previously furnished copies of the Final
Prospectus to the Underwriters, (x) delivery of the Final Prospectus was
required by the Act or under this Agreement to be made to such person, (y) the
untrue statement or omission of a material fact contained in the Preliminary
Final Prospectus was corrected in the Final Prospectus and (z) there was not
sent or given to such person, at or prior to the written confirmation of the
sale of such Securities to such person, a copy of the Final Prospectus. This
indemnity agreement will be in addition to any liability which the Company may
otherwise have.
(b) Each Underwriter severally and not jointly agrees to indemnify
and hold harmless the Company, each of its directors, each of its
officers, employees, agents and each person who controls the Company
within the meaning of either the Act or the Exchange Act, to the same
extent as the foregoing indemnity from the Company to each Underwriter,
but only with reference to written information relating to such
Underwriter furnished to the Company by or on behalf of such Underwriter
through the Representatives specifically for inclusion in the documents
referred to in the foregoing indemnity. This indemnity agreement will be
in addition to any liability which any Underwriter may otherwise have. The
Company acknowledges that the statements set forth [in the last paragraph
of the cover page regarding delivery of the Securities, the legend in
block capital letters on page [2] related to stabilization, syndicate
covering transactions and penalty bids and, under the heading
"Underwriting" or "Plan of Distribution", (i) the list of Underwriters and
their respective participation in the sale of the Securities, (ii) the
sentences related to concessions and reallowances and (iii) the paragraph
related to stabilization, syndicate covering transactions and penalty bids
in any Preliminary Final Prospectus and the Final Prospectus constitute
the only information furnished in writing by or on behalf of the several
Underwriters for inclusion in any Preliminary Final Prospectus or the
Final Prospectus.]
(c) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof;
<PAGE>
but the failure so to notify the indemnifying party (i) will not relieve
it from liability under paragraph (a) or (b) above unless and to the
extent it did not otherwise learn of such action and such failure results
in the forfeiture by the indemnifying party of substantial rights and
defenses as determined by a court of competent jurisdiction; and (ii) will
not, in any event, relieve the indemnifying party from any obligations to
any indemnified party other than the indemnification obligation provided
in paragraph (a) or (b) above. The indemnifying party shall be entitled to
assume the defense of such action and appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in
which case the indemnifying party shall not thereafter be responsible for
the fees and expenses of any separate counsel retained by the indemnified
party or parties except as set forth below); provided, however, that such
counsel shall be reasonably satisfactory to the indemnified party.
Notwithstanding the indemnifying party's election to assume the defense of
such action or appoint counsel to represent the indemnified party in an
action, the indemnified party shall have the right to employ separate
counsel (including local counsel), and the indemnifying party shall bear
the reasonable fees, costs and expenses of such separate counsel if (i)
the use of counsel chosen by the indemnifying party to represent the
indemnified party would present such counsel with a conflict of interest,
which has not been waived; (ii) the actual or potential defendants in, or
targets of, any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have been reasonably
advised by such counsel that there are legal defenses available to it
and/or other indemnified parties which are different from or additional to
those available to the indemnifying party; (iii) the indemnifying party
shall not have assumed the defense of the action or employed counsel
reasonably satisfactory to the indemnified party to represent the
indemnified party within a reasonable time after notice of the institution
of such action; or (iv) the indemnifying party shall authorize the
indemnified party to employ separate counsel at the expense of the
indemnifying party. In any such case, the indemnifying party shall not, in
connection with any one action or separate but substantially similar
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of more
than one separate firm of attorneys (in addition to any local counsel) for
all indemnified parties. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim or
action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability arising
out of such claim, action, suit or proceeding.
<PAGE>
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Company and the Underwriters
severally agree to contribute to the aggregate losses, claims, damages and
liabilities (including legal or other expenses reasonably incurred in
connection with investigating or defending same) (collectively "Losses")
to which the Company and one or more of the Underwriters may be subject in
such proportion as is appropriate to reflect the relative benefits
received by the Company on the one hand and by the Underwriters on the
other from the offering of the Securities; provided, however, that in no
case shall any Underwriter (except as may be provided in any agreement
among Underwriters relating to the offering of the Securities) be
responsible for any amount in excess of the underwriting discount or
commission applicable to the Securities purchased by such Underwriter
hereunder. If the allocation provided by the immediately preceding
sentence is unavailable for any reason, the Company and the Underwriters
severally shall contribute in such proportion as is appropriate to reflect
not only such relative benefits but also the relative fault of the Company
on the one hand and of the Underwriters on the other in connection with
the statements or omissions or alleged statements or omissions which
resulted in such Losses, as well as any other relevant equitable
considerations. Benefits received by the Company shall be deemed to be
equal to the total net proceeds from the offering (before deducting
expenses) received by it, and benefits received by the Underwriters shall
be deemed to be equal to the total underwriting discounts and commissions,
in each case as set forth on the cover page of the Final Prospectus.
Relative fault shall be determined by reference to, among other things,
whether any untrue or any alleged untrue statement of a material fact or
the omission or alleged omission to state a material fact relates to
information provided by the Company on the one hand or the Underwriters on
the other, the intent of the parties and their relative knowledge, access
to information and opportunity to correct or prevent such untrue statement
or omission or alleged untrue statement or omission. The Company and the
Underwriters agree that it would not be just and equitable if contribution
were determined by pro rata allocation or any other method of allocation
which does not take account of the equitable considerations referred to
above. Notwithstanding the provisions of this paragraph (d), no person
guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation. For purposes of this
Section 8, each person who controls an Underwriter within the meaning of
either the Act or the Exchange Act and each director, officer, employee
and agent of an Underwriter shall have the same rights to contribution as
such Underwriter, and each person who controls the Company within the
meaning of either the Act or the Exchange Act and each officer, director,
employee and agent of the Company shall have the same rights to
contribution as the Company, subject in each case to the applicable terms
and
<PAGE>
conditions of this paragraph (d).
9. Default by an Underwriter. If any one or more Underwriters shall fail
to purchase and pay for any of the Securities agreed to be purchased by such
Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the principal amount of
Securities set forth opposite their names in Schedule II hereto bears to the
aggregate principal amount of Securities set forth opposite the names of all the
remaining Underwriters) the Securities which the defaulting Underwriter or
Underwriters agreed but failed to purchase; provided, however, that in the event
that the aggregate principal amount of Securities which the defaulting
Underwriter or Underwriters agreed but failed to purchase shall exceed 10% of
the aggregate principal amount of Securities set forth in Schedule II hereto,
the remaining Underwriters shall have the right to (i) make arrangements for the
purchase of the Securities which such defaulting Underwriter or Underwriters
agreed but failed to purchase by other persons satisfactory to the Company and
the non-defaulting Underwriters, and/or (ii) purchase all, but shall not be
under any obligation to purchase any, of the Securities, and if such
nondefaulting Underwriters do not make such arrangements and/or purchase all the
Securities, this Agreement will terminate without liability to any nondefaulting
Underwriter or the Company. In the event of a default by any Underwriter as set
forth in this Section 9, the Closing Date shall be postponed for such period,
not exceeding five Business Days, as the Representatives shall determine in
order that the required changes in the Registration Statement and the Final
Prospectus or in any other documents or arrangements may be effected. Nothing
contained in this Agreement shall relieve any defaulting Underwriter of its
liability, if any, to the Company or any nondefaulting Underwriter for damages
occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in the
absolute discretion of the Representatives, by notice given to the Company prior
to delivery of and payment for the Securities, if at any time prior to such time
(i) trading in the Company's Common Stock shall have been suspended by the
Commission or the NASDAQ National Market or trading in securities generally on
the New York Stock Exchange or the NASDAQ National Market shall have been
suspended or limited or minimum prices shall have been established on such
Exchange or the NASDAQ National Market; (ii) a banking moratorium shall have
been declared either by Federal or New York State authorities; or (iii) there
shall have occurred any outbreak or escalation of hostilities, declaration by
the United States of a national emergency or war, or other calamity or crisis
the effect of which on financial markets is such as to make it, in the sole
judgment of the Representatives, impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Final Prospectus
(exclusive of any amendment or supplement thereto).
<PAGE>
11. Representations and Indemnities to Survive. The respective agreements,
representations, warranties, indemnities and other statements of the Company or
its officers and of the Underwriters set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of any Underwriter or the Company or any of the officers,
directors, employees, agents or controlling persons referred to in Section 8
hereof, and will survive delivery of and payment for the Securities. The
provisions of Sections 7 and 8 hereof shall survive the termination or
cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and effective
only on receipt, and, if sent to the Representatives, will be mailed, delivered
or telefaxed to Salomon Smith Barney Inc. General Counsel (fax no.: (212)
816-7912) and confirmed to the General Counsel, Salomon Smith Barney Inc., at
388 Greenwich Street, New York, New York, 10013, Attention: General Counsel; or,
if sent to the Company, will be mailed, delivered or telefaxed to Metromedia
Fiber Network Services, Inc. c/o Metromedia Fiber Network, Inc., One North
Lexington Avenue, White Plains, New York 10601, Attention: Chief Financial
Officer (fax no.: (914) 421-6777) and confirmed to it at Metromedia Company, One
Meadowlands Plaza, East Rutherford, New Jersey 07073- 2137, Attention: General
Counsel (fax no.: (201) 531-2803) and 215 East 67th Street, New York, New York
10021, Attention: Executive Vice President (fax no.: (212) 606- 4337).
13. Successors. This Agreement will inure to the benefit of and be binding
upon the parties hereto and their respective successors and the officers and
directors and controlling persons referred to in Section 8 hereof, and, except
as expressly set forth in Section 5(h) or Section 8 hereof, no other person will
have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed within the State of New York.
15. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same instrument.
16. Headings. The section headings used herein are for convenience only
and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this Agreement,
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended and the rules and
regulations of the Commission promulgated thereunder.
<PAGE>
"Basic Prospectus" shall mean the prospectus referred to in paragraph 1(a) above
contained in the Registration Statement at the Effective Date including any
Preliminary Final Prospectus.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Communications Act" shall mean the Communications Act of 1934, as amended
(including amendments made by the Telecommunications Act of 1996), 47 U.S.C.
section 151 and the rules and regulations of the FCC.
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any Rule
462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended,
and the rules and regulations of the Commission promulgated thereunder.
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
"Final Prospectus" shall mean the prospectus supplement relating to the
Securities that was first filed pursuant to Rule 424(b) after the Execution
Time, together with the Basic Prospectus.
"Preliminary Final Prospectus" shall mean any preliminary prospectus
supplement to the Basic Prospectus which describes the Securities and the
offering thereof and is used prior to filing of the Final Prospectus, together
with the Basic Prospectus.
"Registration Statement" shall mean the registration statement referred to
in paragraph 1(a) above, including exhibits and financial statements, as amended
at the Execution Time (or, if not effective at the Execution Time, in the form
in which it shall become effective) and, in the event any post-effective
amendment thereto or any Rule 462(b) Registration Statement becomes effective
prior to the Closing Date, shall also mean such registration statement as so
amended or such Rule 462(b) Registration Statement, as the case may be. Such
term shall include any Rule 430A Information deemed to be included therein at
the Effective Date as provided by Rule 430A.
"Rule 415", "Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it
<PAGE>
becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration statement
and any amendments thereto filed pursuant to Rule 462(b) relating to the
offering covered by the registration statement referred to in Section 1(a)
hereof.
"State Telecommunications Laws" shall mean the comparable state
statutes of the following states governing the regulation of telecommunication
service in [California, Connecticut, Delaware, District of Columbia, Illinois,
Maryland, Massachusetts, New Jersey, New York, Oregon, Pennsylvania, Rhode
Island, Virginia and Washington].
"Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as
amended and the rules and regulations of the Commission promulgated thereunder.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this Agreement and your acceptance shall represent a binding agreement among the
Company and the several Underwriters.
Very truly yours,
METROMEDIA FIBER NETWORK, INC.,
By: ______________________________
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date
specified in Schedule I hereto.
Salomon Smith Barney Inc.
Chase Securities Inc.
Deutsche Bank Securities Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
By: Salomon Smith Barney Inc.
By: __________________________________
Name:
Title:
For themselves and the other several Underwriters, if any, named in
Schedule II to the foregoing Agreement.
<PAGE>
SCHEDULE I
Underwriting Agreement dated
Registration Statement No.
Representative(s):
Title, Purchase Price and Description of Securities:
Title:
Principal amount:
Purchase price (include accrued interest or amortization, if any):
Sinking fund provisions:
Redemption provisions:
Other provisions:
Closing Date, Time and Location: , 19 at 10:00
a.m. at [name and address of Underwriters' counsel]
Type of Offering: Non-delayed
Date referred to in Section 5(f) after which the Company may offer or sell debt
securities issued or guaranteed by the Company without the consent of the
Representative(s):
Modification of items to be covered by the letter from [name of accountants]
delivered pursuant to Section 6(g) at the Execution Time:
<PAGE>
SCHEDULE II
Principal Amount Principal Amount
of U. S. Securities of International Securities
Underwriters to be Purchased to be Purchased
- ------------ ------------------- ---------------------------
Salomon Smith Barney Inc. $ $
Chase Securities Inc.
Deutsche Bank Securities Inc.
Donaldson, Lufkin & Jenrette
Securities Corporation
Goldman, Sachs & Co.
Morgan Stanley Dean Witter
Total ------------------- ---------------------------
$ $
================== ==========================
<PAGE>
SCHEDULE III
SUBSIDIARY
1. Metromedia Fiber Network NYC, Inc.
2. Metromedia Fiber Network of New Jersey, Inc.
3. Metromedia Fiber Network Services, Inc.
4. Metromedia Fiber Network of Illinois, Inc.
5. MFN of VA, L.L.C.
6. MFN Purchasing, Inc.
7. AboveNet Communications Inc.
<PAGE>
Exhibit 1.4
[Form of Selling Stockholder Underwriting Agreement]
Metromedia Fiber Network, Inc.
Class A Common Stock
(par value $.01 per share)
Underwriting Agreement
New York, New York
________________, 1999
SALOMON SMITH BARNEY INC.
CREDIT SUISSE FIRST BOSTON CORPORATION
DEUTSCHE BANK SECURITIES INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
GOLDMAN, SACHS & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Certain stockholders of Metromedia Fiber Network, Inc., a Delaware
corporation (the "Company"), named in Schedule I hereto (the "Selling
Stockholders") severally propose to sell to the underwriters named in Schedule
II hereto (the "Underwriters"), for whom Salomon Smith Barney Inc., _______ and
_______ (the "Representatives") are acting as representatives, [__________]
shares of Class A Common Stock, par value $.01 per share, of the Company (the
"Underwritten Securities"). The Selling Stockholders named in Schedule I hereto
also propose to grant to the Underwriters an option to purchase up to
[_________] additional shares of Common Stock to cover over-allotments (the
"Option Securities," and together with the Underwritten Securities, the
"Securities"). To the extent there are no additional Underwriters listed on
Schedule II other than you, the term Representatives as used herein shall mean
you, as Underwriters, and the terms Representatives and Underwriters shall mean
either the singular or plural as the context requires. In addition, to the
extent that there is not more than one Selling Stockholder named in Schedule I,
the term Selling Stockholder shall mean either the singular or plural. The use
of the neuter in this Agreement shall include the feminine and masculine
wherever appropriate. Any reference herein to the Registration Statement, the
Basic Prospectus, any Preliminary Final Prospectus or the Final Prospectus shall
be
<PAGE>
deemed to refer to and include the documents incorporated or deemed to be
incorporated by reference therein pursuant to Item 12 of Form S-3 which were
filed under the Exchange Act on or before the Effective Date of the Registration
Statement or the issue date of the Basic Prospectus, any Preliminary Final
Prospectus or the Final Prospectus, as the case may be (the "Incorporated
Documents"); and any reference herein to the terms "amend", "amendment" or
"supplement" with respect to the Registration Statement, the Basic Prospectus,
any Preliminary Final Prospectus or the Final Prospectus shall be deemed to
refer to and include the filing of any document under the Exchange Act after the
Effective Date of the Registration Statement or the issue date of the Basic
Prospectus, any Preliminary Final Prospectus or the Final Prospectus, as the
case may be, deemed to be incorporated therein by reference. Certain terms used
herein are defined in Section 17 hereof.
1. REPRESENTATIONS AND WARRANTIES. (i) The Company and each of the
Management Selling Stockholders jointly and severally represent and warrant to,
and agrees with, each Underwriter as set forth below in this Section 1.
(a) The Company meets the requirements for use of Form S-3
under the Act and has prepared and filed with the Commission a
Registration Statement (File No. 333-89087) on Form S-3, including a
Basic Prospectus, for registration under the Act of the offering and
sale of the Securities. The Company may have filed one or more
amendments thereto, including a Preliminary Final Prospectus, each of
which has previously been furnished to you. The Company will next file
with the Commission one of the following: (1) after the Effective Date
of such Registration Statement, a final prospectus supplement relating
to the Securities in accordance with Rules 430A and 424(b), (2) prior
to the Effective Date of such Registration Statement, an amendment to
such Registration Statement (including the form of final prospectus
supplement) or (3) a final prospectus in accordance with Rules 415 and
424(b). In the case of clause (1), the Company has included in such
Registration Statement, as amended at the Effective Date, all
information (other than Rule 430A Information) required by the Act and
the rules thereunder to be included in such Registration Statement and
the Final Prospectus. As filed, such final prospectus supplement or
such amendment and form of final prospectus supplement shall contain
all Rule 430A Information, together with all other such required
information, and, except to the extent the Representatives shall agree
in writing to a modification, shall be in all substantive respects in
the form furnished to you prior to the Execution Time or, to the extent
not completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
Basic Prospectus and any Preliminary Final Prospectus) as the Company
has advised you, prior to the Execution Time, will be included or made
therein. The Registration Statement, at the Execution Time, meets the
requirements set forth in Rule 415(a)(1)(x).
2
<PAGE>
(b) On the Effective Date, the Registration Statement did or
will, and when the Final Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date (as defined
herein), the Final Prospectus (and any supplement thereto) will, comply
in all material respects with the applicable requirements of the Act,
the Exchange Act and the respective rules thereunder; on the Execution
Time, the Registration Statement, as supplemented by any prospectus
supplement filed pursuant to Rule 424(b), did not or will not contain
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading; on the
Effective Date, the Final Prospectus, if not filed pursuant to Rule
424(b), will not, and on the date of any filing pursuant to Rule 424(b)
and on the Closing Date, the Final Prospectus (together with any
supplement thereto) will not, include any untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; PROVIDED, HOWEVER, that the
Company and the Selling Stockholders make no representations or
warranties as to the information contained in or omitted from the
Registration Statement or the Final Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with information
furnished in writing to the Company by or on behalf of any Underwriter
through the Representatives specifically for inclusion therein, it
being understood and agreed that the only such information is that
described as such in Section 8(b) of this Agreement.
(c) The Incorporated Documents heretofore filed, when they
were filed (or, if any amendment with respect to any such document was
filed, when such amendment was filed), conformed in all material
respects with the requirements of the Exchange Act and the rules and
regulations thereunder, any further Incorporated Documents so filed
will, when they are filed, conform in all material respects with the
requirements of the Exchange Act and the rules and regulations
thereunder; no such document when it was filed (or, if an amendment
with respect to any such document was filed, when such amendment was
filed), contained an untrue statement of a material fact or omitted to
state a material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
and no such further document, when it is filed, will contain an untrue
statement of a material fact or will omit to state a material fact
required to be stated therein or necessary in order to make the
statements therein not misleading.
(d) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation or limited
liability company in good standing under the laws of the jurisdiction
in which it is chartered or organized with full corporate power and
authority to own or lease, as the case may be, and to operate its
properties and conduct its business as described in the Final
3
<PAGE>
Prospectus (as then amended or supplemented), and is duly qualified to
do business as a foreign corporation or limited liability company and
is in good standing under the laws of each jurisdiction which requires
such qualification, except where the failure to be so qualified would
not have, singly or in the aggregate, a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business.
(e) All the outstanding shares of capital stock of each
subsidiary that is a corporation have been duly and validly authorized
and issued and are fully paid and nonassessable, and, except as
otherwise set forth in the Final Prospectus, all outstanding shares of
capital stock of the subsidiaries are owned by the Company either
directly or through wholly owned subsidiaries free and clear of any
perfected security interest and, to the knowledge of the Company, any
other security interests, claims, liens or encumbrances.
(f) The Company's authorized capitalization is as set forth in
the Final Prospectus under the heading "Capitalization".
(g) The statements in the Final Prospectus under the headings
"Certain United States Federal Income Tax Considerations",
"Business--Regulation," "BusinessBFranchise, License and Related
Agreements," "BusinessBRegulation of International Operations,"
"Description of the Notes" and "Business--Legal Proceedings" fairly
summarize the matters therein described in all material respects.
(h) This Agreement has been duly authorized, executed and
delivered by the Company; the Securities have been duly and validly
authorized by the Company.
(i) The Company is not, and after giving effect to the
offering and sale of the Securities and the application of the proceeds
thereof as described in the Final Prospectus, will not be, an
"investment company" required to be registered under the Investment
Company Act of 1940, as amended, without taking account of any
exemption arising out of the number of holders of the Company's
securities.
(j) No consent, approval, authorization, filing with or order
of any court or governmental agency or body is required in connection
with the transactions contemplated herein, except such as will be
obtained under the Act in connection with the registration of the
Securities, and such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and
4
<PAGE>
distribution of the Securities by the Underwriters in the manner
contemplated herein or in the Final Prospectus.
(k) Neither the execution and delivery of this Agreement nor
the consummation of any of the transactions contemplated herein or the
fulfillment of the terms hereof, will conflict with, result in a breach
or violation or imposition of any lien, charge or encumbrance upon any
property or assets of the Company or any of its subsidiaries, pursuant
to (i) the charter or by-laws of the Company or any of its
subsidiaries; (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the
Company or any of its subsidiaries is a party or bound or to which its
or their property is subject; or (iii) any statute, law, rule,
regulation, judgment, order or decree applicable to the Company or any
of its subsidiaries of any court, regulatory body, administrative
agency, governmental body, arbitrator or other authority having
jurisdiction over the Company or any of its subsidiaries or any of its
or their properties, except in the case of clauses (ii) and (iii), as
could not be reasonably expected to have, singly or in the aggregate, a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business.
(l) The Securities conform as to legal matters to the
description thereof contained in the Final Prospectus.
(m) The consolidated historical financial statements of the
Company and its consolidated subsidiaries included in the Final
Prospectus present fairly in all material respects the financial
condition, results of operations and cash flows of the Company as of
the dates and for the periods indicated and have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved (except as otherwise
noted therein). The selected financial data set forth under the caption
"Selected Consolidated Financial Data" in the Final Prospectus fairly
present, on the basis stated in the Final Prospectus, the information
included therein.
(n) The pro forma financial statements included in the Final
Prospectus include assumptions that provide a reasonable basis for
presenting the significant effects directly attributable to the
transactions and events described therein, the related pro forma
adjustments give appropriate effect to those assumptions, and the pro
forma adjustments reflect the proper application of those adjustments
to the historical financial statement amounts in the pro forma
financial statements included in the Final Prospectus. The pro forma
financial statements included in the Final Prospectus comply as to form
in all material respects with the applicable accounting requirements of
Regulation S-X under the
5
<PAGE>
Act and the pro forma adjustments have been properly applied to the
historical amounts in the compilation of those statements.
(o) No action, suit or proceeding by or before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any of its subsidiaries or its or their property is pending
or, to the best knowledge of the Company, threatened that (i) could
reasonably be expected to have a material adverse effect on the
performance of this Agreement or the consummation of any of the
transactions contemplated hereby; or (ii) could reasonably be expected
to have a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Final Prospectus (exclusive of any amendment or
supplement thereto).
(p) Except as described in the Final Prospectus, each of the
Company and each of its subsidiaries owns, licenses, leases or has
obtained rights-of-way for all such properties as are necessary to the
conduct of its operations as presently conducted. The Company and each
of its subsidiaries has good and marketable title, free and clear of
all liens or encumbrances, to all property and assets described in the
Final Prospectus as being owned by it on the date hereof and such
properties and assets are in good repair and suitable for use as so
described except as set forth in the Final Prospectus. All leases to
which the Company or its subsidiaries are a party are valid and binding
(subject to applicable bankruptcy, reorganization, insolvency,
moratorium, fraudulent conveyance or other laws affecting creditors'
rights generally from time to time in effect and to general principles
of equity) and no default has occurred or is continuing thereunder
which could have, singly or in the aggregate, a material adverse effect
on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course
of business, and the Company and each subsidiary enjoy peaceful and
undisturbed possession under all such leases to which any of them is a
party as lessee with such exceptions as do not interfere materially
with the use made by the Company or such subsidiary.
(q) Neither the Company nor any subsidiary is in violation or
default of (i) any provision of its charter or bylaws; (ii) the terms
of any indenture, contract, lease, mortgage, deed of trust, note
agreement, loan agreement or other agreement, obligation, condition,
covenant or instrument to which it is a party or bound or to which its
property is subject; or (iii) any statute, law, rule, regulation,
judgment, order or decree applicable to the Company or any of its
subsidiaries of any court, regulatory body, administrative agency,
governmental body, arbitrator or other authority having jurisdiction
over the Company or such subsidiary or any
6
<PAGE>
of its properties, as applicable, except in the case of clauses (ii)
and (iii) as could not be reasonably expected to have, singly or in the
aggregate, a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business.
(r) Each of (i) Deloitte & Touche LLP, (ii) Ernst & Young LLP,
and (iii) PriceWaterhouseCoopers LLP, each of whom have audited certain
financial statements of the Company and its consolidated subsidiaries
and delivered their report with respect to the audited consolidated
financial statements included in the Final Prospectus are independent
public accountants with respect to the Company within the meaning of
the Act and the applicable published rules and regulations thereunder.
(s) The Company and each subsidiary has filed all foreign,
federal, state and local tax returns that are required to be filed or
has requested extensions thereof except in any case in which the
failure so to file would not have, singly or in the aggregate, a
material adverse effect on the condition (financial or otherwise),
prospects, earnings, business or properties of the Company and its
subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, and has paid all taxes
required to be paid by it and any other assessment, fine or penalty
levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is
currently being contested in good faith or as would not have, singly or
in the aggregate, a material adverse effect on the condition (financial
or otherwise), prospects, earnings, business or properties of the
Company and its subsidiaries, taken as a whole, whether or not arising
from transactions in the ordinary course of business.
(t) No labor problem or dispute with the employees of the
Company or any of its subsidiaries exists or is threatened or imminent
that could have, singly or in the aggregate, a material adverse effect
on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course
of business.
(u) There are no transfer taxes or other similar fees or
charges under Federal law or the laws of any state, or any political
subdivision thereof, required to be paid in connection with the
execution and delivery of this Agreement or the issuance by the Company
or sale by the Company of the Securities.
(v) The Company and each of its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; all policies of insurance and
fidelity or surety bonds insuring the
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Company or any of its subsidiaries or their respective businesses,
assets, employees, officers and directors are in full force and effect;
the Company and its subsidiaries are in compliance with the terms of
such policies and instruments in all material respects; and there are
no claims by the Company or any of its subsidiaries under any such
policy or instrument as to which any insurance company is denying
liability or defending under a reservation of rights clause; neither
the Company nor any such subsidiary has been refused any insurance
coverage sought or applied for; and neither the Company nor any such
subsidiary has any reason to believe that it will not be able to renew
its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have, singly or in the
aggregate, a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business.
(w) Except as described in the Final Prospectus, no subsidiary
of the Company is currently prohibited, directly or indirectly, from
paying any dividends to the Company, from making any other distribution
on such subsidiary's capital stock, from repaying to the Company any
loans or advances to such subsidiary from the Company or from
transferring any of such subsidiary's property or assets to the Company
or any other subsidiary of the Company.
(x) Except as described in the Final Prospectus, the Company
and its subsidiaries (i) possess the certificates, authorizations,
approvals, franchises, licenses, rights-of-way and permits issued by
the appropriate federal, state, local or foreign regulatory authorities
necessary to conduct their respective businesses as presently
conducted, (ii) are not in violation of any such certificates,
authorizations, approvals, franchises, licenses, rights-of-way and
permits, except where such violation would not have a material adverse
effect on the condition (financial or otherwise), prospects, earnings,
business or properties of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course
of business and (iii) have not received any notice of proceedings
relating to the revocation or modification of any such certificate,
authorization, approval, franchise, license, right-of-way or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on
the condition (financial or otherwise), prospects, earnings, business
or properties of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business.
(y) The Company and its subsidiaries possess or have applied
for the patents, patent rights, licenses, inventions, copyrights,
know-how (including trade secrets and other unpatented and/or
unpatentable proprietary or confidential
8
<PAGE>
information, systems or procedures), trademarks, service marks and
trade names (collectively, "Intellectual Property") presently employed
by them in connection with the businesses now operated by them, and
neither the Company nor any of the Subsidiaries has received any notice
of infringement of or conflict with asserted rights of others with
respect to the foregoing except as could not have, singly or in the
aggregate, a material adverse effect on the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business. To the Company's
knowledge, the use of such Intellectual Property in connection with the
business and operations of the Company and its subsidiaries does not
infringe on the rights of any person.
(z) The Company and each of its subsidiaries maintain a system
of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with
management's general or specific authorizations; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(aa) The Company and its subsidiaries are (i) in compliance
with any and all applicable foreign, federal, state and local laws and
regulations relating to the protection of human health and safety, the
environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"); (ii) have received and are in
compliance with all permits, licenses or other approvals required of
them under applicable Environmental Laws to conduct their respective
businesses as described in the Final Prospectus; and (iii) have not
received notice of any actual or potential liability for the
investigation or remediation of any disposal or release of hazardous or
toxic substances or wastes, pollutants or contaminants, except where
such non-compliance with Environmental Laws, failure to receive
required permits, licenses or other approvals, or liability would not,
individually or in the aggregate, have a material adverse effect on the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business; neither the Company nor any of the subsidiaries has been
notified that it has been named as a "potentially responsible party"
under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended.
(bb) Except as described in the Final Prospectus, the Company
and its subsidiaries are implementing a comprehensive, detailed program
to analyze and
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<PAGE>
address the risk that the computer hardware and software used by them
may be unable to recognize and properly execute date-sensitive
functions involving certain dates prior to and any dates after December
31, 1999 (the "Year 2000 Problem"), and reasonably believe that such
risk will be remedied on a timely basis without material expense and
will not have a material adverse effect upon the financial condition
and results of operations of the Company and its subsidiaries, taken as
a whole.
(cc) Each of the Company and its subsidiaries has fulfilled
its obligations, if any, under the minimum funding standards of Section
302 of the United States Employee Retirement Income Security Act of
1974, as amended ("ERISA"), and the regulations and published
interpretations thereunder with respect to each "plan" (as defined in
Section 3(3) of ERISA and such regulations and published
interpretations) in which employees of the Company and its subsidiaries
are eligible to participate and each such plan is in compliance in all
material respects with the presently applicable provisions of ERISA and
such regulations and published interpretations; the Company and its
subsidiaries have not incurred any unpaid liability to the Pension
Benefit Guaranty Corporation (other than for the payment of premiums in
the ordinary course) or to any such plan under Title IV of ERISA.
(dd) The subsidiaries listed on Schedule III attached hereto
are the only significant subsidiaries of the Company as defined in Rule
1-02 of Regulation S-X (individually, a "Subsidiary" and collectively,
the "Subsidiaries").
(ee) None of the transactions contemplated by this Agreement
will violate or result in a violation of Section 7 of the Exchange Act,
or any regulation promulgated thereunder, including, without
limitation, Regulations T, U and X of the Board of Governors of the
Federal Reserve System.
(ff) Neither the Company nor any of the subsidiaries is a
"holding company" or a "subsidiary company" of a holding company, or an
"affiliate" thereof required to be registered under the Public Utility
Holding Company Act of 1935, as amended.
(gg) Neither the Company nor any of its subsidiaries nor, to
the Company's knowledge, any employee or agent of the Company or any
subsidiary has made any payment of funds of the Company or any
subsidiary or received or retained any funds in violation of any
provision of the Foreign Corrupt Practices Act of 1977, as amended.
(hh) No "nationally recognized statistical rating
organization" as such term is defined for purposes of Rule 436(g)(2)
under the Act has indicated to the Company that it is considering (i)
the downgrading, suspension or withdrawal of,
10
<PAGE>
or any review for a possible change that does not indicate the
direction of the possible change in, any rating assigned to the Company
or any securities of the Company or (ii) any change in the outlook for
any rating of the Company or any securities of the Company.
(ii) No relationship, direct or indirect, exists between or
among the Company or any of its subsidiaries on the one hand, and the
directors, officers, stockholders, customers or suppliers of the
Company or any of its subsidiaries on the other hand, which is required
by the Act to be described in the Final Prospectus which is not so
described.
(jj) The Company has not taken, directly or indirectly, any
action designed to cause or which has constituted or which might
reasonably be expected to cause or result, under the Exchange Act or
otherwise, in the stabilization or manipulation of the price of any
security of the Company to facilitate the sale or resale of the
Securities.
Any certificate signed by any officer of the Company and delivered to
the Representatives or counsel for the Underwriters in connection with the
offering of the Securities shall be deemed a representation and warranty by the
Company, as to matters covered thereby, to each Underwriter.
(ii) Each Selling Stockholder represents and warrants to, and agrees
with, each Underwriter that:
(a) Such Selling Stockholder is the record and beneficial
owner of the Securities to be sold by it hereunder free and clear of
all liens, encumbrances, equities and claims and has duly indorsed such
Securities in blank, and, assuming that each Underwriter acquires its
interest in the Securities it has purchased from such Selling
Stockholder without notice of any adverse claim (within the meaning of
Section 8-105 of the New York Uniform Commercial Code (AUCC@)), each
Underwriter that has purchased such Securities delivered on the Closing
Date to The Depository Trust Company or other securities intermediary
by making payment therefor as provided herein, and that has had such
Securities credited to the securities account or accounts of such
Underwriters maintained with The Depository Trust Company or such other
securities intermediary will have acquired a security entitlement
(within the meaning of Section 8-102(a)(17) of the UCC) to such
Securities purchased by such Underwriter, and no action based on an
adverse claim (within the meaning of Section 8-105 of the UCC) may be
asserted against such Underwriter with respect to such Securities.
(b) Such Selling Stockholder has not taken, directly or
indirectly, any action designed to or which has constituted or which
might reasonably be expected to cause or result, under the Exchange Act
or otherwise, in stabilization
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<PAGE>
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
(c) Certificates in negotiable form for such Selling
Stockholder's Securities have been placed in custody, for delivery
pursuant to the terms of this Agreement, under a Custody Agreement and
Power of Attorney duly authorized (if applicable) executed and
delivered by such Selling Stockholder, in the form heretofore furnished
to you (the "Custody Agreement") with ____________, as Custodian (the
"Custodian"); the Securities represented by the certificates so held in
custody for each Selling Stockholder are subject to the interests
hereunder of the Underwriters; the arrangements for custody and
delivery of such certificates, made by such Selling Stockholder
hereunder and under the Custody Agreement, are not subject to
termination by any acts of such Selling Stockholder, or by operation of
law, whether by the death or incapacity of such Selling Stockholder or
the occurrence of any other event; and if any such death, incapacity or
any other such event shall occur before the delivery of such Securities
hereunder, certificates for the Securities will be delivered by the
Custodian in accordance with the terms and conditions of this Agreement
and the Custody Agreement as if such death, incapacity or other event
had not occurred, regardless of whether or not the Custodian shall have
received notice of such death, incapacity or other event.
(d) No consent, approval, authorization or order of any court
or governmental agency or body is required for the consummation by such
Selling Stockholder of the transactions contemplated herein, except
such as may have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection with
the purchase and distribution of the Securities by the Underwriters and
such other approvals as have been obtained.
(e) Neither the sale of the Securities being sold by such
Selling Stockholder nor the consummation of any other of the
transactions herein contemplated by such Selling Stockholder or the
fulfillment of the terms hereof by such Selling Stockholder will
conflict with, result in a breach or violation of, or constitute a
default under any law or the charter or by-laws of such Selling
Stockholder or the terms of any indenture or other agreement or
instrument to which such Selling Stockholder or any of its subsidiaries
is a party or bound, or any judgment, order or decree applicable to
such Selling Stockholder or any of its subsidiaries of any court,
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over such Selling Stockholder or any of its
subsidiaries.
(f) Such Selling Stockholder has no reason to believe that the
representations and warranties of the Company contained in this Section
1 are not true and correct, is familiar with the Registration Statement
and has no knowledge
12
<PAGE>
of any material fact, condition or information not disclosed in the
Final Prospectus or any supplement thereto which has adversely affected
or may adversely affect the business of the Company or any of its
subsidiaries; and the sale of Securities by such Selling Stockholder
pursuant hereto is not prompted by any information concerning the
Company or any of its subsidiaries which is not set forth in the Final
Prospectus or any supplement thereto.
(g) In respect of any statements in or omissions from the
Registration Statement or the Final Prospectus or any supplements
thereto made in reliance upon and in conformity with information
furnished in writing to the Company by any Selling Stockholder
specifically for use in connection with the preparation thereof, such
Selling Stockholder hereby makes the same representations and
warranties to each Underwriter as the Company makes to such Underwriter
under paragraph (i)(b) of this Section.
Any certificate by any Selling Stockholder or any officer of any
Selling Stockholder and delivered to the Representatives or counsel for the
Underwriters in connection with the offering of the Securities shall be deemed a
representation and warranty by such Selling Stockholder, as to matters covered
thereby, to each Underwriter.
2. PURCHASE AND SALE.
(a) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Selling
Stockholders agree, severally and not jointly, to sell to each
Underwriter, and each Underwriter agrees, severally and not jointly, to
purchase from the Selling Stockholders, at a purchase price of $[____]
per share, the amount of the Underwritten Securities set forth opposite
such Underwriter's name in Schedule II hereto.
(b) Subject to the terms and conditions and in reliance upon
the representations and warranties herein set forth, the Selling
Stockholders named in Schedule I hereby grant an option to the several
Underwriters to purchase, severally and not jointly, up to [_____]
Option Securities at the same purchase price per share as the
Underwriters shall pay for the Underwritten Securities. Said option may
be exercised only to cover over-allotments in the sale of the
Underwritten Securities by the Underwriters. Said option may be
exercised in whole or in part at any time (but not more than once) on
or before the 30th day after the date of the Final Prospectus upon
written or telegraphic notice by the Representatives to the Company and
such Selling Stockholders setting forth the number of shares of the
Option Securities as to which the several Underwriters are exercising
the option and the settlement date. The maximum number of Option
Securities which each Selling Stockholder agrees to sell is set forth
in Schedule I hereto. In the event that the Underwriters exercise less
than their full over-allotment option, the number of Option Securities
to be sold by each Selling
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<PAGE>
Stockholder listed on Schedule I shall be, as nearly as practicable, in
the same proportion as the maximum number of Option Securities to be
sold by each Selling Stockholder and the number of Option Securities to
be sold. The number of Option Securities to be purchased by each
Underwriter shall be the same percentage of the total number of shares
of the Option Securities to be purchased by the several Underwriters as
such Underwriter is purchasing of the Underwritten Securities, subject
to such adjustments as you in your absolute discretion shall make to
eliminate any fractional shares.
3. DELIVERY AND PAYMENT. Delivery of and payment for the Underwritten
Securities and the Option Securities (if the option provided for in Section 2(b)
hereof shall have been exercised on or before the third Business Day prior to
the Closing Date) shall be made at 10:00 A.M., New York City time, on
[_________], 1999, or at such time on such later date not more than three
Business Days after the foregoing date as the Representatives shall designate,
which date and time may be postponed by agreement among the Representatives and
the Selling Stockholders or as provided in Section 9 hereof (such date and time
of delivery and payment for the Securities being herein called the "Closing
Date"). Delivery of the Securities shall be made to the Representatives for the
respective accounts of the several Underwriters against payment by the several
Underwriters through the Representatives of the respective aggregate purchase
prices of the Securities being sold by each of the Selling Stockholders to or
upon the order of the Selling Stockholders by wire transfer payable in same-day
funds to the account specified by the Company and the Selling Stockholders.
Delivery of the Underwritten Securities and the Option Securities shall be made
through the facilities of The Depository Trust Company unless the
Representatives shall otherwise instruct.
Each Selling Stockholder will pay all applicable state transfer taxes,
if any, involved in the transfer to the several Underwriters of the Securities
to be purchased by them from such Selling Stockholder and the respective
Underwriters will pay any additional stock transfer taxes involved in further
transfers.
If the option provided for in Section 2(b) hereof is exercised after
the third Business Day prior to the Closing Date, the Selling Stockholders named
in Schedule I hereto will deliver the Option Securities (at the expense of the
Company) to the Representatives, at 388 Greenwich Street, New York, New York, on
the date specified by the Representatives (which shall be within three Business
Days after exercise of said option) for the respective accounts of the several
Underwriters, against payment by the several Underwriters through the
Representatives of the purchase price thereof to or upon the order of the
Selling Stockholders named in Schedule I by wire transfer payable in same-day
funds to the accounts specified by the Selling Stockholders named in Schedule I
hereto. If settlement for the Option Securities occurs after the Closing Date,
such Selling Stockholders will deliver to the Representatives on the settlement
date for the Option Securities, and the obligation of the Underwriters to
purchase the Option Securities shall be conditioned upon receipt of,
supplemental opinions, certificates and letters confirming
14
<PAGE>
as of such date the opinions, certificates and letters delivered on the Closing
Date pursuant to Section 6 hereof.
4. OFFERING BY UNDERWRITERS. It is understood that the several
Underwriters propose to offer the Securities for sale to the public as set forth
in the Final Prospectus.
5. AGREEMENTS.
(i) The Company agrees with the several Underwriters that:
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment of
the Registration Statement or supplement (including the Final
Prospectus or any Preliminary Final Prospectus) to the Basic Prospectus
or any Rule 462(b) Registration Statement unless the Company has
furnished you a copy for your review prior to filing and will not file
any such proposed amendment or supplement without the prior written
consent of the Representatives, which consent shall not be unreasonably
withheld, conditioned or delayed. Subject to the foregoing sentence, if
the Registration Statement has become or becomes effective pursuant to
Rule 430A, or filing of the Final Prospectus is otherwise required
under Rule 424(b), the Company will cause the Final Prospectus,
properly completed, and any supplement thereto to be filed with the
Commission pursuant to the applicable paragraph of Rule 424(b) within
the time period prescribed and will provide evidence satisfactory to
the Representatives of such timely filing. Upon your request, the
Company will cause the Rule 462(b) Registration Statement, completed in
compliance with the Act and the applicable rules and regulations
thereunder, to be filed with the Commission pursuant to Rule 462(b) and
will provide evidence satisfactory to the Representatives of such
filing. The Company will promptly advise the Representatives (1) when
the Registration Statement, if not effective at the Execution Time,
shall have become effective, (2) when the Final Prospectus, and any
supplement thereto, shall have been filed (if required) with the
Commission pursuant to Rule 424(b) or when any Rule 462(b) Registration
Statement shall have been filed with the Commission, (3) when, prior to
termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (4)
of any request by the Commission or its staff for any amendment of the
Registration Statement, or any Rule 462(b) Registration Statement, or
for any supplement to the Final Prospectus or for any additional
information, (5) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (6)
of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the institution or threatening of any proceeding for
such
15
<PAGE>
purpose. The Company will use its best efforts to prevent the issuance
of any such stop order or the suspension of any such qualification and,
if issued, to obtain as soon as possible the withdrawal thereof. Prior
to the completion of the sale of the Securities by the Underwriters,
the Company will not file any document under the Exchange Act that is
incorporated by reference in the Registration Statement unless, prior
to such proposed filing, the Company has furnished the Representatives
with a copy of such document for their review and the Representatives
have not reasonably objected to the filing of such document within a
reasonable period of time. The Company will promptly advise the
Representatives when any document filed under the Exchange Act that is
incorporated by reference in the Registration Statement shall have been
filed with the Commission.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Final Prospectus as then amended or
supplemented would include any untrue statement of a material fact or
omit to state any material fact necessary to make the statements
therein in the light of the circumstances under which they were made
not misleading, or if it should be necessary to amend the Registration
Statement or supplement the Final Prospectus to comply with the Act or
the Exchange Act or the respective rules thereunder, the Company
promptly will (1) notify the Representatives of such event, (2) prepare
and file with the Commission, subject to the second sentence of
paragraph (a) of this Section 5, an amendment or supplement which will
correct such statement or omission or effect such compliance and (3)
supply any supplemented Final Prospectus to you in such quantities as
you may reasonably request.
(c) As soon as practicable, the Company will make generally
available to its security holders and to the Representatives an
earnings statement or statements of the Company and its subsidiaries
which will satisfy the provisions of Section 11(a) of the Act and Rule
158 under the Act.
(d) The Company will furnish to the Representatives and
counsel for the Underwriters, without charge, signed copies of the
Registration Statement (including exhibits thereto) and to each other
Underwriter a copy of the Registration Statement (without exhibits
thereto) and, so long as delivery of a prospectus by an Underwriter or
dealer may be required by the Act, as many copies of each Preliminary
Final Prospectus and the Final Prospectus and any supplement thereto as
the Representatives may reasonably request. The Company will pay the
expenses of printing or other production of all documents relating to
the offering.
(e) The Company will arrange, if necessary, for the
qualification of the Securities for sale under the laws of such
jurisdictions as the Representatives may
16
<PAGE>
designate, will maintain such qualifications in effect so long as
required for the distribution of the Securities and will pay any fee of
the National Association of Securities Dealers, Inc., in connection
with its review of the offering; provided that in no event shall the
Company be obligated to qualify to do business in any jurisdiction
where it is not now so qualified or to take any action that would
subject it to service of process in suits, other than those arising out
of the offering or sale of the Securities, in any jurisdiction where it
is not now so subject. The Company will promptly advise the
Representatives of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Securities for
sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose. The Company shall use its best efforts to
prevent the issuance of any order suspending the qualification or
exemption of the Securities under any state securities or Blue Sky
laws, and, if at any time any state securities commission or any other
regulatory authority shall issue an order suspending the qualification
or exemption of the Securities under any state securities or Blue Sky
laws, the Company shall use every reasonable effort to obtain the
withdrawal or lifting of such order at the earliest possible time.
(f) The Company will not, and the individuals listed on
Schedule IV hereto will not, without the prior written consent of
Salomon Smith Barney Inc., offer, sell, contract to sell, pledge, or
otherwise dispose of, (or enter into any transaction which is designed
to, or might reasonably be expected to, result in the disposition
(whether by actual disposition or effective economic disposition due to
cash settlement or otherwise) by the Company or any affiliate of the
Company or any person in privity with the Company or any affiliate of
the Company) directly or indirectly, including the filing (or
participation in the filing) of a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the Exchange Act, any other shares of Common
Stock or any securities convertible into, or exercisable, or
exchangeable for, shares of Common Stock; or publicly announce an
intention to effect any such transaction, for a period of [90] days
after the date of the Underwriting Agreement, provided, however, that
the Company may issue and sell Common Stock pursuant to any employee
stock option plan, stock ownership plan or dividend reinvestment plan
of the Company in effect at the Execution Time and the Company may
issue Common Stock issuable upon the conversion of securities or the
exercise of warrants outstanding at the Execution Time.
(g) The Company will not take, directly or indirectly, any
action designed to or which has constituted or which might reasonably
be expected to cause or result, under the Exchange Act or otherwise, in
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Securities.
17
<PAGE>
(h) The Company agrees to pay the costs and expenses relating
to the following matters: (i) the preparation, printing or reproduction
of the Registration Statement, the Preliminary Final Prospectus and the
Final Prospectus and each amendment or supplement to any of them; (iii)
the printing (or reproduction) and delivery (including postage, air
freight charges and charges for counting and packaging) of such copies
of the Registration Statement, the Preliminary Final Prospectus and the
Final Prospectus and all amendments or supplements to any of them, as
may, in each case, be reasonably requested for use in connection with
the offering and sale of the Securities; (iv) the preparation,
printing, authentication, issuance and delivery of certificates for the
Securities, including any stamp or transfer taxes in connection with
the Securities; (v) the printing (or reproduction) and delivery of this
Agreement, the Custody Agreement, any blue sky memorandum and all other
agreements or documents printed (or reproduced) and delivered in
connection with the offering of the Securities; (vi) any registration
or qualification of the Securities for offer and sale under the
securities or blue sky laws of the several states (including filing
fees and the reasonable fees and expenses of one counsel for the
Underwriters relating to such registration and qualification); (vii)
fees and expenses of the Custodian ; (viii) the transportation and
other expenses incurred by or on behalf of Company representatives in
connection with presentations to prospective purchasers of the
Securities; (ix) the fees and expenses of the Company's accountants and
the fees and expenses of counsel (including local and special counsel)
for the Company; and (x) all other costs and expenses incident to the
performance by the Company of its obligations hereunder; PROVIDED,
HOWEVER, that, except as otherwise provided for herein, the
Underwriters shall pay their own costs and expenses, including the fees
of their counsel, any advertising expenses connected with any offers
they may make.
(i) The Company agrees to do and perform all things required
to be done and performed by it under this Agreement that are within its
control on or prior to or after the Closing Date, as applicable, and to
use its best efforts to satisfy all conditions precedent on its part to
the delivery of the Securities.
(ii) Each Selling Stockholder agrees with the several Underwriters
that;
(a) Such Selling Stockholder will not, without the prior
written consent of Salomon Smith Barney Inc. offer, sell, contract to
sell, pledge or otherwise dispose of, (or enter into any transaction
which is designed to, or might reasonably be expected to, result in the
disposition (whether by actual disposition or effective economic
disposition due to cash settlement or otherwise) by the Company or any
affiliate of the Company or any person in privity with the Company or
any affiliate of the Company) directly or indirectly, or file (or
participate in the filing of) a registration statement with the
Commission in respect of, or establish or increase a put equivalent
position or liquidate or decrease a call equivalent position within the
meaning of Section 16 of the
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Exchange Act with respect to, any shares of capital stock of the
Company or any securities convertible into or exercisable or
exchangeable for such capital stock, or publicly announce an intention
to effect any such transaction, for a period of 90 days after the date
of this Agreement, other than shares of Common Stock disposed of as
bona fide gifts approved by Salomon Smith Barney Inc.
(b) Such Selling Stockholder will not take any action designed
to or which has constituted or which might reasonably be expected to
cause or result, under the Exchange Act or otherwise, in stabilization
or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Securities.
(c) Such Selling Stockholder will advise you promptly, and if
requested by you, will confirm such advice in writing, so long as
delivery of a prospectus relating to the Securities by an underwriter
or dealer may be required under the Act, of (i) any material change in
the Company's condition (financial or otherwise), prospects, earnings,
business or properties, (ii) any change in information in the
Registration Statement or the Final Prospectus relating to such Selling
Stockholder or (iii) any new material information relating to the
Company or relating to any matter stated in the Final Prospectus which
comes to the attention of such Selling Stockholder.
6. CONDITIONS TO THE OBLIGATIONS OF THE UNDERWRITERS. The obligations
of the Underwriters to purchase the Underwritten Securities and the Option
Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Company contained herein as of
the Execution Time, the Closing Date and any settlement date pursuant to Section
3 hereof, to the accuracy of the statements of the Company and the Selling
Stockholders made in any certificates pursuant to the provisions hereof, to the
performance by the Company and the Selling Stockholders of their respective
obligations hereunder and to the following additional conditions:
(a) If the Registration Statement has not become effective
prior to the Execution Time, unless the Representatives agree in
writing to a later time, the Registration Statement will become
effective not later than (i) 6:00 PM New York City time, on the date of
determination of the public offering price, if such determination
occurred at or prior to 3:00 PM New York City time on such date or (ii)
9:30 AM on the Business Day following the day on which the public
offering price was determined, if such determination occurred after
3:00 PM New York City time on such date; if filing of the Final
Prospectus, or any supplement thereto, is required pursuant to Rule
424(b), the Final Prospectus, and any such supplement, will be filed in
the manner and within the time period required by Rule 424(b); and no
stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have
been instituted or threatened.
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(b) The Company shall have requested and caused Arnold L.
Wadler, General Counsel of the Company, to furnish to the
Representatives his opinion, dated the Closing Date and addressed to
the Representatives, to the effect that:
i. each of the Company's Subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or
organized, with full corporate power and authority to own or lease, as
the case may be, and to operate, its properties and conduct its
business as described in the Final Prospectus;
ii. all the outstanding shares of capital stock of
the Company and each Subsidiary have been duly and validly authorized
and issued and are fully paid and nonassessable, and, except as
otherwise set forth in the Final Prospectus, all outstanding shares of
capital stock of the Subsidiaries are owned by the Company either
directly or through wholly owned subsidiaries free and clear of any
security interest and, to the knowledge of such counsel, after due
inquiry, any other security interests, claims, liens or encumbrances;
iii. the Company's authorized capitalization is as
set forth in the Final Prospectus under the heading "Capitalization";
iv. to the knowledge of such counsel, without
conducting a docket search, there is no pending or threatened action,
suit or proceeding by or before any court or governmental agency,
authority or body or any arbitrator involving the Company or any of its
subsidiaries or its or their property that is not adequately disclosed
in the Final Prospectus, except in each case for such proceedings that,
if the subject of an unfavorable decision, ruling or finding would not,
singly or in the aggregate, result in a material adverse change in the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole; and
the statements in the Final Prospectus under the heading
"BusinessCLegal Proceedings" fairly summarize the matters therein
described;
v. neither the execution and delivery of this
Agreement nor the consummation of any other of the transactions herein
contemplated, nor the fulfillment of the terms hereof, will conflict
with, result in a breach or violation of, or imposition of any lien,
charge or encumbrance upon, any property or asset of the Company or its
subsidiaries pursuant to (i) the charter or by-laws of the Company's
subsidiaries, or (ii) the terms of any indenture, contract, lease,
mortgage, deed of trust, note agreement, loan agreement or other
agreement, obligation, condition, covenant or instrument to which the
Company or any of its subsidiaries is a party or bound or to which its
respective property is subject which is known to such counsel;
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vi. the statements in the Final Prospectus under the
captions "Risk Factors B The Heavy Regulation of the Telecommunications
Industry May Limit the Development of Our Networks and Affect Our
Competitive Position" and "BusinessBRegulation" to the extent that they
discuss U.S. federal, state, and local telecommunications statutes and
regulations or legal or governmental proceedings of the FCC and state
and local governments with respect to telecommunications regulatory
matters, fairly summarize the matters referred to therein in all
material respects;
vii. neither the execution and delivery of this
Agreement by the Company nor the performance by the Company of its
obligations under this Agreement will violate the Communications Act or
the State Telecommunications Laws; and
viii. to the knowledge of such counsel, (A) the
Company and its subsidiaries have in effect all the U.S. federal and
state telecommunications regulatory licenses, permits, authorizations,
consents, and approvals (hereinafter, "Licenses") required to conduct
their respective businesses as presently conducted; (B) all such
Licenses have been validly issued and are in full force and effect; (C)
no determination has been made by the FCC or any State Regulatory
Agency that the Company or any subsidiary is in violation of any such
Licenses, and no proceeding is pending before any such agency in which
any such violation has been alleged; and (D) no proceedings by the FCC
or any State Regulatory Agency to revoke or restrict any such Licenses
are pending or threatened. "Validly issued" as used in this paragraph
means that the Licenses have been issued through the means of regular
agency procedures applied in conformity with the applicable governing
statute and prior agency practice and there is no legal basis under the
applicable governing statute to conclude that the Company or any
subsidiary cannot hold one or more of the Licenses as a matter of law.
"Full force and effect" as used in this paragraph means (i) the orders
issuing the Licenses have become effective under the applicable
governing statute, (ii) the Licenses contain no conditions that would
have a material adverse effect on the Company's or any subsidiary's
operations except for such conditions imposed generally by the agency,
(iii) all conditions precedent set forth in the Licenses have been
satisfied where the failure to satisfy such conditions would have a
material adverse effect on the Company's or any subsidiary's ability to
conduct their respective businesses as they are presently conducted,
and (iv) no stay of effectiveness has been issued.
(c) The Company shall have requested and caused Paul, Weiss,
Rifkind, Wharton & Garrison, counsel for the Company, to furnish to the
Representatives its opinion, dated the Closing Date and addressed to
the Representatives, to the effect that:
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<PAGE>
i. the Company and each of the Subsidiaries
incorporated (in the case of a corporation) or organized (in the case
of any other entity) under the laws of the States of Delaware or New
York has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware or
New York, as applicable, with full corporate power and authority to own
or lease, as the case may be, and to operate its properties and conduct
its business as described in the Final Prospectus;
ii. the Registration Statement has become effective
under the Act; any required filing of the Basic Prospectus, any
Preliminary Final Prospectus and the Final Prospectus, and any
supplements thereto, has been made pursuant to Rule 424(b); to the
knowledge of such counsel, no stop order suspending the effectiveness
of the Registration Statement has been issued, no proceedings for that
purpose have been instituted or threatened by the Commission, and the
Registration Statement and the Final Prospectus (other than the
financial statements, schedules and other financial and statistical
information contained therein, as to which such counsel need express no
opinion) comply as to form in all material respects with the applicable
requirements of the Act, the Exchange Act and the Trust Indenture Act
and the respective rules thereunder;
iii. this Agreement has been duly authorized,
executed and delivered by the Company;
iv. To the extent that they constitute a summary of
U.S. federal law and regulations, the statements in the Final
Prospectus under the heading "Certain United States Federal Income Tax
Considerations" fairly summarize the matters therein described in all
material respects;
v. [the Company is not and, after giving effect to
the offering and sale of the Securities and the application of the
proceeds thereof as described in the Final Prospectus, will not be an
"investment company" required to be registered under the Investment
Company Act without taking account of any exemption arising out of the
number of holders of the Company's securities;]
vi. [except as described in the Final Prospectus,
there is no holder of any security of the Company or any other person
who has the right, contractual or otherwise, to cause the Company to
sell or otherwise issue to them, or to permit them to underwrite the
sale of, the Securities or the right to have any other securities of
the Company included in the registration statement or the right, as a
result of the filing of the registration statement, to require
registration under the Act of any securities of the Company;]
vii. no consent, approval, authorization, filing with
or order of any court or governmental agency or body under the Federal
laws of the United
22
<PAGE>
States or the laws of the State of New York or under the General
Corporation Law of the State of Delaware is required in connection with
the due authorization, execution and delivery of this Agreement, except
such as will be obtained, taken or made or such, as may be required
under the blue sky or securities laws of any state or foreign
jurisdiction or the NASD (as to which such counsel need not express any
opinion) or and such other approvals (specified in such opinion) as
have been obtained (provided that such counsel need not express any
opinion with respect to any consent, approval, authorization under the
Communications Act of 1934, as amended, or any published rules,
regulations or policies of the Federal Communications Commission (the
"FCC") thereunder);
viii. neither the execution and delivery of this
Agreement nor the consummation of any other of the transactions herein
contemplated, nor the fulfillment of the terms hereof, will conflict
with, result in a breach or violation of, or imposition of any lien,
charge or encumbrance upon any property or asset of the Company or its
subsidiaries pursuant to, (i) the charter or by-laws of the Company; or
(ii) any statute, law, rule or regulation of the Federal government of
the United States (excluding the FCC) or the State of New York or under
the General Corporation Law of the State of Delaware, or to such
counsel's knowledge, any judgment, order or decree applicable to the
Company or any of its subsidiaries of any court, regulatory body,
administrative agency, governmental body, arbitrator or other authority
having jurisdiction over the Company, any of its subsidiaries or any of
their respective properties which is known to such counsel except as
described in the Final Prospectus or for such violations as could not
be reasonably expected to have, singly or in the aggregate, a material
adverse effect on the condition (financial or otherwise), prospects,
earnings, business or properties of the Company and its subsidiaries,
taken as a whole; and
In addition, such counsel shall state that it has participated in
conferences with officers and other representatives of the Company,
representatives of the independent accountants of the Company, the Underwriters
and counsel for the Underwriters at which the contents of the Registration
Statement and the Final Prospectus and related matters were discussed and,
although such counsel is not passing upon, and does not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Final Prospectus (or any
amendments or supplements thereto) and has made no independent investigation or
verification thereof, and such counsel has not participated in the preparation
of the Incorporated Documents, on the basis of the foregoing, no facts have come
to the attention of such counsel that have led such counsel to believe that at
the Execution Time and on the Closing Date the Registration Statement and the
Final Prospectus contained or contains any untrue statement of a material fact
or omitted or omits to state any material fact necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading (in each case, other than the financial statements, schedules and
other financial and statistical information which are contained or incorporated
by
23
<PAGE>
reference therein or omitted thereform, as to which such counsel need express no
opinion).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the State of
New York, the Federal laws of the United States or the General Corporation Law
of the State of Delaware, to the extent they deem proper and specified in such
opinion, upon the opinion of other counsel of good standing whom they believe to
be reliable and who are reasonably satisfactory to counsel for the Underwriters;
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials. References to the
Registration Statement and the Prospectus in this Section 6(c) include any
amendment or supplement thereto at the Closing Date.
(d) The Company shall have furnished to the Representatives
the opinion of Baker & McKenzie, special regulatory counsel for the
Company, dated the Closing Date, to the effect that:
i. to the extent they constitute a summary of the
regulatory matters referred to therein, the statements in the
Registration Statement and the Final Prospectus under the caption
"BusinessCRegulation of International Operations" fairly summarize the
matters referred to therein;
ii. no licenses under telecommunications legislation
in England and Wales including the Telecommunications Act 1984, the
Wireless Telegraphy Act 1949 or the Wireless Telegraphy Act 1998 other
than the Licenses are required by the Company, ION LLC, ION or Racal to
carry on the ION Business in the United Kingdom;
iii. no licenses under telecommunications legislation
in England and Wales including the Telecommunications Act 1984, the
Wireless Telegraphy Act 1949 or the Wireless Telegraphy Act 1998, other
than the Licenses that are currently required by the Company in
relation to the Company's telecommunications business as presently
conducted in the United Kingdom; and
iv. no German telecommunications licenses, other than
the class 3 license obtained by Metromedia Fiber Network GmbH, are
currently required by the Company in relation to the European Network,
the German Network, or the Company's telecommunications business as
presently conducted in Germany.
In rendering such opinion, such counsel may state that they
express no opinion as to the laws of any jurisdiction other than Germany or the
United Kingdom or the regulations of the European Union.
24
<PAGE>
(e) The Selling Stockholders shall have requested and caused
Paul, Weiss, Rifkind, Wharton & Garrison, counsel for the Selling
Stockholders, to have furnished to the Representatives their opinion
dated the Closing Date and addressed to the Representatives, to the
effect that:
i. this Agreement, the Custody Agreement and Power of
Attorney have been duly authorized, executed and delivered by the
Selling Stockholders, the Custody Agreement is valid and binding on the
Selling Stockholders and each Selling Stockholder has full legal right
and authority to sell, transfer and deliver in the manner provided in
this Agreement and the Custody Agreement the Securities being sold by
such Selling Stockholder hereunder;
ii. assuming that each Underwriter acquires its
interest in the Securities it has purchased from such Selling
Stockholder without notice of any adverse claim (within the meaning of
Section 8-105 of the UCC), each Underwriter that has purchased such
Securities delivered on the Closing Date to The Depository Trust
Company or other securities intermediary by making payment therefor as
provided herein, and that has had such Securities credited to the
securities account or accounts of such Underwriters maintained with The
Depository Trust Company or such other securities intermediary will
have acquired a security entitlement (within the meaning of Section
8-102(a)(17) of the UCC) to such Securities purchased by such
Underwriter, and no action based on an adverse claim (within the
meaning of Section 8-105 of the UCC) may be asserted against such
Underwriter with respect to such Securities;
iii. no consent, approval, authorization or order of
any court or governmental agency or body is required for the
consummation by any Selling Stockholder of the transactions
contemplated herein, except such as may have been obtained under the
Act and such as may be required under the blue sky laws of any
jurisdiction in connection with the purchase and distribution of the
Securities by the Underwriters and such other approvals (specified in
such opinion) as have been obtained; and
iv. neither the sale of the Securities being sold by
any Selling Stockholder nor the consummation of any other of the
transactions herein contemplated by any Selling Stockholder or the
fulfillment of the terms hereof by any Selling Stockholder will
conflict with, result in a breach or violation of, or constitute a
default under any law or the charter or By-laws of the Selling
Stockholder or the terms of any indenture or other agreement or
instrument known to such counsel and to which any Selling Stockholder
or any of its subsidiaries is a party or bound, or any judgment, order
or decree known to such counsel to be applicable to any Selling
Stockholder or any of its subsidiaries of any court,
25
<PAGE>
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over any Selling Stockholder or any of its
subsidiaries.
(f) The Representatives shall have received from Skadden,
Arps, Slate, Meagher & Flom LLP, counsel for the Underwriters, such
opinion or opinions, dated the Closing Date and addressed to the
Representatives, with respect to the sale of the Securities, the
Registration Statement, the Final Prospectus (together with any
supplement thereto) and other related matters as the Representatives
may reasonably require, and the Company shall have furnished to such
counsel such documents as they reasonably request for the purpose of
enabling them to pass upon such matters.
(g) The Company shall have furnished to the Representatives a
certificate of the Company, signed by the Chairman of the Board of
Directors or the President and the principal financial or accounting
officer of the Company, dated the Closing Date, to the effect that the
signers of such certificate have carefully examined the Registration
Statement, the Final Prospectus, any supplements to the Final
Prospectus and this Agreement and that:
i. the representations and warranties of the Company
in this Agreement are true and correct in all material respects on and
as of the Closing Date with the same effect as if made on the Closing
Date, and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
hereunder at or prior to the Closing Date;
ii. no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened; and
iii. since the date of the most recent financial
statements included or incorporated by reference in the Final
Prospectus (exclusive of any amendment or supplement thereto), there
has been no material adverse change in the condition (financial or
otherwise), prospects, earnings, business or properties of the Company
and its subsidiaries, taken as a whole, whether or not arising from
transactions in the ordinary course of business, except as set forth in
or contemplated in the Final Prospectus (exclusive of any amendment or
supplement thereto).
(h) Each Selling Stockholder shall have furnished to the
Representatives a certificate, signed by the Chairman of the Board or
the President and the principal financial or accounting officer of such
Selling Stockholder, dated the Closing Date, to the effect that the
signers of such certificate have carefully examined the Registration
Statement, the Final Prospectus, any supplement to the Final Prospectus
and this Agreement and that
26
<PAGE>
the representations and warranties of such Selling Stockholder in this
Agreement are true and correct in all material respects on and as of
the Closing Date to the same effect as if made on the Closing Date.
(i) At the Execution Time and at the Closing Date, the Company
shall have requested and caused Ernst & Young LLP to furnish to the
Representatives letters, dated respectively as of the Execution Time
and as of the Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are independent accountants
within the meaning of the Act and the Exchange Act and the applicable
rules and regulations thereunder, that they have performed a review of
the unaudited interim financial information of the Company for the
[_____] month period ended [_______], 1999 and as at [______], 1999 and
stating in effect that:
i. in their opinion the audited financial statements
and financial statement schedules included or incorporated in the
Registration Statement and the Final Prospectus and reported on by them
comply as to form in all material respects with the applicable
accounting requirements of the Exchange Act and the related published
rules and regulations thereunder;
ii. on the basis of a reading of the latest unaudited
financial statements made available by the Company and its
subsidiaries; their limited review in accordance with the standards
established under Statement on Auditing Standards No. 71, of the
unaudited interim financial information for the [______] month period
ended [______], 1999, and as at [_________], 1999, as indicated in
their report included or incorporated in the Registration Statement and
the Final Prospectus; carrying out certain specified procedures (but
not an examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of significance
with respect to the comments set forth in such letter; a reading of the
minutes of the meetings of the stockholders, directors and committees
of the Company and the Subsidiaries; and inquiries of certain officials
of the Company who have responsibility for financial and accounting
matters of the Company and its subsidiaries as to transactions and
events subsequent to [_________], 1998, nothing came to their attention
which caused them to believe that:
(1) any unaudited financial statements included or
incorporated in the Registration Statement and the Final
Prospectus do not comply in form in all material respects with
applicable accounting requirements and with the published
rules and regulations of the Commission with respect to
financial statements included or incorporated in quarterly
reports on Form 10-Q under the Exchange Act; or that said
unaudited financial statements are not in conformity with
generally accepted accounting principles applied on a basis
substantially consistent with that of the audited financial
27
<PAGE>
statements included or incorporated in the Registration
Statement and the Final Prospectus;
(2) with respect to the period subsequent to
[______], 1999, there were any changes, at a specified date
not more than three days prior to the date of the letter, in
the capital stock, increase in long-term debt of the Company
and its subsidiaries or decreases in net assets or
stockholders' equity of the Company as compared with the
amounts shown on the [______], 1999 consolidated balance sheet
included in the Final Prospectus, or for the period from
[_______], 1999 to such specified date there were any
decreases, as compared with the corresponding period in the
preceding year in revenues or in total or per share amounts of
net income of the Company and its subsidiaries, except in all
instances for changes or decreases set forth in such letter,
in which case the letter shall be accompanied by an
explanation by the Company as to the significance thereof
unless said explanation is not deemed necessary by the
Representatives; or
(3) the information included under the headings
"Selected Consolidated Financial Data" and
"ManagementBExecutive Compensation" is not in conformity with
the disclosure requirements of Regulation S-K;
iii. they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature (which is
limited to accounting, financial or statistical information derived
from the general accounting records of the Company and its
subsidiaries) set forth in the Final Prospectus, including the
information set forth under the captions "Risk Factors", "Use of
Proceeds", "Capitalization", "Selected Consolidated Financial Data",
"Management's Discussion and Analysis of Financial Condition and
Results of Operations", "Business", "Management", and "Certain
Relationships and Related Transactions" in the Final Prospectus, the
information included or incorporated in Items 1, 2, 6, 7 and 11 of the
Company's Annual Report on Form 10-K incorporated in the Final
Prospectus and the information included in the "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
or incorporated in the Company's Quarterly Reports on Form 10-Q,
incorporated in the Final Prospectus agrees with the accounting records
of the Company and its subsidiaries, excluding any questions of legal
interpretation; and
iv. on the basis of a reading of the unaudited pro
forma financial statements included or incorporated by reference in the
Registration Statement and the Final Prospectus (the "pro forma
financial statements"); carrying out certain specified procedures;
inquiries of certain officials of the
28
<PAGE>
Company and [___________] who have responsibility for financial and
accounting matters; and proving the arithmetic accuracy of the
application of the pro forma adjustments to the historical amounts in
the pro forma financial statements, nothing came to their attention
which caused them to believe that the pro forma financial statements do
not comply as to form in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or that the pro
forma adjustments have not been properly applied to the historical
amounts in the compilation of such statements.
(j) The Representatives shall have also received from Ernst &
Young LLP a letter stating that the Company's system of internal
accounting controls taken as a whole is sufficient to meet the broad
objectives of internal accounting control insofar as those objectives
pertain to the prevention or detection of errors or irregularities in
amounts that would be material in relation to the financial statements
of the Company and its subsidiaries.
(k) At the Execution Time and at the Closing Date, Deloitte &
Touche LLP shall have furnished to the Representatives letters, dated
respectively as of the Execution Time and as of the Closing Date, in
form and substance satisfactory to the Representatives, confirming that
they are independent accountants within the meaning of the Act and the
applicable rules and regulations thereunder, and stating in effect
that:
i. in their opinion the audited financial statements
and financial statement schedules included in the Registration
Statement and the Final Prospectus and reported on by them comply in
form in all material respects with the applicable accounting
requirements of the Act and the related published rules and
regulations; and
ii. they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature (which is
limited to accounting, financial or statistical information derived
from the general accounting records of the Company and its
subsidiaries) set forth in the Registration Statement and the Final
Prospectus agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation.
References to the Final Prospectus in this paragraph (k)
include any supplement thereto at the date of the letter.
(l) At the Execution Time and at the Closing Date,
PricewaterhouseCoopers LLP shall have furnished to the Representatives
a letter or letters, dated respectively as of the Execution Time and as
of the Closing Date, in form and substance satisfactory to the
Representatives, confirming that they are
29
<PAGE>
independent accountants within the meaning of the Act and the
applicable rules and regulations thereunder, and stating in effect
that:
i. in their opinion the audited financial statements
and financial statement schedules included in the Registration
Statement and the Final Prospectus and reported on by them comply in
form in all material respects with the accounting requirements of the
Act and the related published rules and regulations; and
ii. they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature (which is
limited to accounting, financial or statistical information derived
from the general accounting records of the Company and its
subsidiaries) set forth in the Registration Statement and the Final
Prospectus agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation.
References to the Final Prospectus in this paragraph (l)
include any supplement thereto at the date of the letter.
(m) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Final Prospectus
(exclusive of any amendment or supplement thereto), there shall not
have been (i) any change or decrease specified in the letter or letters
referred to in paragraph (g) of this Section 6 or (ii) any change, or
any development involving a prospective change, in or affecting the
condition (financial or otherwise), prospects, earnings, business or
properties of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Final
Prospectus (exclusive of any amendment or supplement thereto) the
effect of which, in any case referred to in clause (i) or (ii) above,
is, in the sole judgment of the Representatives, so material and
adverse as to make it impractical or inadvisable to market the
Securities as contemplated by the Registration Statement (exclusive of
any amendment thereof) and the Final Prospectus (exclusive of any
amendment or supplement thereto).
(n) Subsequent to the Execution Time, there shall not have
been any decrease in the rating of any of the Company's debt
securities, including the Securities, by any "nationally recognized
statistical rating organization" (as defined for purposes of Rule
436(g) under the Act) or any notice given of any intended or potential
decrease in any such rating or of a possible change in any such rating
that does not indicate the direction of the possible change.
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<PAGE>
(o) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for
that purpose shall have been taken or, to the knowledge of the Company,
shall be contemplated by the Commission at or prior to the Closing
Date; (ii) there shall not have been any change in the capital stock of
the Company nor any material increase in the short-term or long-term
debt of the Company (other than in the ordinary course of business)
from that set forth or contemplated in the Registration Statement or
the Final Prospectus (or any amendment or supplement thereto); (iii)
there shall not have been, since the respective dates as of which
information is given in the Registration Statement and the Final
Prospectus (or any amendment or supplement thereto), except as may
otherwise be stated in the Registration Statement and Final Prospectus
(or any amendment or supplement thereto), any material adverse change
in the condition (financial or other), business, prospects, properties,
net worth or results of operations of the Company and the Subsidiaries
taken as a whole; (iv) the Company and the Subsidiaries shall not have
any liabilities or obligations, direct or contingent (whether or not in
the ordinary course of business), that are material to the Company and
the Subsidiaries, taken as a whole, other than those reflected in the
Registration Statement or the Final Prospectus (or any amendment or
supplement thereto); and (v) all the representations and warranties of
the Company contained in this Agreement shall be true and correct on
and as of the date hereof and on and as of the Closing Date as if made
on and as of the Closing Date and you shall have received a
certificate, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of the Company (or such other
officers as are acceptable to you), to the effect set forth in this
Section 6(f) hereof.
(p) The Company shall not have failed at or prior to the
Closing Date to have performed or complied with any of its agreements
herein contained and required to be performed or complied with by it
hereunder at or prior to the Closing Date.
(q) At the Execution Time, the Selling Stockholders shall have
furnished to the Representatives a letter substantially in the form of
Exhibit A hereto addressed to the Representatives from each individual
listed on Schedule IV.
(r) Prior to the Closing Date, the Company and Selling
Stockholders shall have furnished to the Representatives such further
information, certificates and documents as the Representatives may
reasonably request.
(s) If any of the conditions specified in this Section 6 shall
not have been fulfilled in all material respects when and as provided
in this Agreement, or if any of the opinions and certificates mentioned
above or elsewhere in this Agreement shall not be in all material
respects reasonably satisfactory in form and
31
<PAGE>
substance to the Representatives and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be
cancelled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the
Company in writing or by telephone or facsimile confirmed in writing.
(t) The documents required to be delivered by this Section 6
will be delivered at the office of Skadden, Arps, Slate, Meagher & Flom
LLP, counsel for the Underwriters, at 919 Third Avenue, New York, New
York 10022, on the Closing Date.
7. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Underwriters set forth in Section 6 hereof is not satisfied,
because of any termination pursuant to Section 10 hereof or because of any
refusal, inability or failure on the part of the Company or any Selling
Stockholder to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally through Salomon Smith Barney Inc. on demand
for all out-of-pocket expenses (including reasonable fees and disbursements of
one counsel) that shall have been incurred by them in connection with the
proposed purchase and sale of the Securities. If the Company is required to make
any payments to the Underwriters under this Section 7 because of any Selling
Stockholder's refusal, inability or failure to satisfy any condition to the
obligations of the Underwriters set forth in Section 6, the Selling Stockholders
PRO RATA in proportion to the percentage of Securities to be sold by each shall
reimburse the Company on demand for all amounts so paid.
8. INDEMNIFICATION AND CONTRIBUTION. (a) The Company and the Management
Selling Stockholders jointly and severally agree to indemnify and hold harmless
each Underwriter, the directors, officers, employees and agents of each
Underwriter and each person who controls any Underwriter within the meaning of
either the Act or the Exchange Act against any and all losses, claims, damages
or liabilities, joint or several, to which they or any of them may become
subject under the Act, the Exchange Act or other Federal or state statutory law
or regulation, at common law or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of a material fact
contained in the registration statement for the registration of the Securities
as originally filed or in any amendment thereof, or in the Basic Prospectus, any
Preliminary Final Prospectus or the Final Prospectus, or in any amendment
thereof or supplement thereto, or arise out of or are based upon the omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, and agrees to reimburse each such
indemnified party, as incurred, for any legal or other expenses reasonably
incurred by them in connection with investigating or
32
<PAGE>
defending any such loss, claim, damage, liability or action; PROVIDED, HOWEVER,
that (i) the Company and the Management Selling Stockholders will not be liable
in any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter through the Representatives specifically for inclusion therein
and (ii) with respect to any untrue statement or alleged untrue statement of, or
omission or alleged omission to state, a material fact made in any Preliminary
Final Prospectus, the indemnity agreement contained in this Section 8(a) shall
not inure to the benefit of any Underwriter (or any of the directors, officers,
employees and agents of such Underwriter or any controlling person of such
Underwriter) from whom the person asserting any such loss, claim, damage or
liability purchased the Securities concerned, to the extent that any such loss,
claim, damage or liability of such Underwriter occurs under the circumstances
where it shall have been determined by a court of competent jurisdiction (or
appropriate arbitral proceeding) by final and nonappealable judgment that (w)
the Company had previously furnished copies of the Final Prospectus to the
Underwriters, (x) delivery of the Final Prospectus was required by the Act or
under this Agreement to be made to such person, (y) the untrue statement or
omission of a material fact contained in the Preliminary Final Prospectus was
corrected in the Final Prospectus and (z) there was not sent or given to such
person, at or prior to the written confirmation of the sale of such Securities
to such person, a copy of the Final Prospectus. This indemnity agreement will be
in addition to any liability which the Company or the Management Selling
Stockholders may otherwise have.
(b) Each Selling Stockholder severally agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers,
employees, agents and each person who controls the Company within the
meaning of either the Act or the Exchange Act, each Underwriter, the
directors, officers, employees and agents of each Underwriter and each
person who controls the Company or any Underwriter within the meaning
of either the Act or the Exchange Act and each other Selling
Stockholder, if any, to the same extent as the foregoing indemnity from
the Company and Management Selling Stockholder to each Underwriter, but
only with reference to written information furnished to the Company by
or on behalf of such Selling Stockholder specifically for inclusion in
the documents referred to in the foregoing indemnity. This indemnity
agreement will be in addition to any liability which any Selling
Stockholder may otherwise have.
(c) Each Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, each of
its officers, employees, agents and each person who controls the
Company within the meaning of either the Act or the Exchange Act and
each Selling Stockholder, to the same extent as the foregoing indemnity
to each Underwriter, but only with reference to written information
relating to such Underwriter furnished to the Company by or on behalf
of such Underwriter through the Representatives specifically for
inclusion
33
<PAGE>
in the documents referred to in the foregoing indemnity. This indemnity
agreement will be in addition to any liability which any Underwriter
may otherwise have. The Company and each Selling Stockholder
acknowledge that the statements set forth [in the last paragraph of the
cover page regarding delivery of the Securities, the legend in block
capital letters on page [2] related to stabilization, syndicate
covering transactions and penalty bids and, under the heading
"Underwriting" or "Plan of Distribution", (i) the list of Underwriters
and their respective participation in the sale of the Securities, (ii)
the sentences related to concessions and reallowances and (iii) the
paragraph related to stabilization, syndicate covering transactions and
penalty bids in any Preliminary Final Prospectus and the Final
Prospectus constitute the only information furnished in writing by or
on behalf of the several Underwriters for inclusion in any Preliminary
Final Prospectus or the Final Prospectus.]
(d) Promptly after receipt by an indemnified party under this
Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party
in writing of the commencement thereof; but the failure so to notify
the indemnifying party (i) will not relieve it from liability under
paragraph (a), (b) or (c) above unless and to the extent it did not
otherwise learn of such action and such failure results in the
forfeiture by the indemnifying party of substantial rights and defenses
as determined by a court of competent jurisdiction and (ii) will not,
in any event, relieve the indemnifying party from any obligations to
any indemnified party other than the indemnification obligation
provided in paragraph (a), (b) or (c) above. The indemnifying party
shall be entitled to assume the defense of such action and appoint
counsel of the indemnifying party's choice at the indemnifying party's
expense to represent the indemnified party in any action for which
indemnification is sought (in which case the indemnifying party shall
not thereafter be responsible for the fees and expenses of any separate
counsel retained by the indemnified party or parties except as set
forth below); PROVIDED, HOWEVER, that such counsel shall be reasonably
satisfactory to the indemnified party. Notwithstanding the indemnifying
party's election to assume the defense of such action or appoint
counsel to represent the indemnified party in an action, the
indemnified party shall have the right to employ separate counsel
(including local counsel), and the indemnifying party shall bear the
reasonable fees, costs and expenses of such separate counsel if (i) the
use of counsel chosen by the indemnifying party to represent the
indemnified party would present such counsel with a conflict of
interest, which has not been waived; (ii) the actual or potential
defendants in, or targets of, any such action include both the
indemnified party and the indemnifying party and the indemnified party
shall have been reasonably advised by such counsel that there are legal
defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying
party; (iii) the indemnifying party shall not have assumed the
34
<PAGE>
defense of the action or employed counsel reasonably satisfactory to
the indemnified party to represent the indemnified party within a
reasonable time after notice of the institution of such action; or (iv)
the indemnifying party shall authorize the indemnified party to employ
separate counsel at the expense of the indemnifying party. In any such
case, the indemnifying party shall not, in connection with any one
action or separate but substantially similar related actions in the
same jurisdiction arising out of the same general allegations or
circumstances, be liable for the fees and expenses of more than one
separate firm of attorneys (in addition to any local counsel) for all
indemnified parties. An indemnifying party will not, without the prior
written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim
or action) unless such settlement, compromise or consent includes an
unconditional release of each indemnified party from all liability
arising out of such claim, action, suit or proceeding.
(e) In the event that the indemnity provided in paragraph (a),
(b) or (c) of this Section 8 is unavailable to or insufficient to hold
harmless an indemnified party for any reason, the Company and the
Selling Stockholders, jointly and severally, and the Underwriters
severally agree to contribute to the aggregate losses, claims, damages
and liabilities (including legal or other expenses reasonably incurred
in connection with investigating or defending same) (collectively
"Losses") to which the Company, the Selling Stockholders and one or
more of the Underwriters may be subject in such proportion as is
appropriate to reflect the relative benefits received by the Company
and the Selling Stockholders on the one hand and by the Underwriters on
the other from the offering of the Securities; PROVIDED, HOWEVER, that
in no case shall any Underwriter (except as may be provided in any
agreement among Underwriters relating to the offering of the
Securities) be responsible for any amount in excess of the underwriting
discount or commission applicable to the Securities purchased by such
Underwriter hereunder. If the allocation provided by the immediately
preceding sentence is unavailable for any reason, the Company and the
Selling Stockholders, jointly and severally, and the Underwriters
severally shall contribute in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of
the Company and the Management Selling Stockholder on the one hand and
of the Underwriters on the other in connection with the statements or
omissions or alleged statements or omissions which resulted in such
Losses as well as any other relevant equitable considerations. Benefits
received by the Company and the Selling Stockholders shall be deemed to
be equal to the total net proceeds from the offering (before deducting
expenses) received by it, and benefits received by the Underwriters
shall be deemed to be equal to the total underwriting discounts and
commissions, in each case as set forth on the cover
35
<PAGE>
page of the Final Prospectus. Relative fault shall be determined by
reference to, among other things, whether any untrue or any alleged
untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information provided by the Company
and the Selling Stockholders on the one hand or the Underwriters on the
other, the intent of the parties and their relative knowledge, access
to information and opportunity to correct or prevent such untrue
statement or omission or alleged untrue statement or omission. The
Company, the Selling Stockholders and the Underwriters agree that it
would not be just and equitable if contribution were determined by pro
rata allocation or any other method of allocation which does not take
account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph (e), no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this
Section 8, each person who controls an Underwriter within the meaning
of either the Act or the Exchange Act and each director, officer,
employee and agent of an Underwriter shall have the same rights to
contribution as such Underwriter, and each person who controls the
Company within the meaning of either the Act or the Exchange Act and
each officer, director, employee and agent of the Company shall have
the same rights to contribution as the Company, subject in each case to
the applicable terms and conditions of this paragraph (e).
(f) The liability of each Selling Stockholder under such
Selling Stockholder's representations and warranties contained in
Section 1 hereof and under the indemnity and contribution agreements
contained in this Section 8 shall be limited to an amount equal to the
public offering price of the Securities sold by such Selling
Stockholder to the Underwriters. The Company and the Selling
Stockholders may agree, as among themselves and without limiting the
rights of the Underwriters under this Agreement, as to the respective
amounts of such liability for which they each shall be responsible.
9. DEFAULT BY AN UNDERWRITER. If any one or more Underwriters shall
fail to purchase and pay for any of the Securities agreed to be purchased by
such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule II hereto bears to the aggregate amount
of Securities set forth opposite the names of all the remaining Underwriters)
the Securities which the defaulting Underwriter or Underwriters agreed but
failed to purchase; PROVIDED, HOWEVER, that in the event that the aggregate
amount of Securities which the defaulting Underwriter or Underwriters agreed but
failed to purchase shall exceed 10% of the aggregate amount of Securities set
forth in Schedule II hereto, the remaining Underwriters shall have the right to
(i) make arrangements for the purchase of the Securities which such defaulting
Underwriter or Underwriters agreed but failed to
36
<PAGE>
purchase by other persons satisfactory to the Selling Stockholder and the
non-defaulting Underwriters, and/or (ii) purchase all, but shall not be under
any obligation to purchase any, of the Securities, and if such nondefaulting
Underwriters do not make such arrangements and/or purchase all the Securities,
this Agreement will terminate without liability to any nondefaulting
Underwriter, the Selling Stockholders or the Company. In the event of a default
by any Underwriter as set forth in this Section 9, the Closing Date shall be
postponed for such period, not exceeding five Business Days, as the
Representatives shall determine in order that the required changes in the
Registration Statement and the Final Prospectus or in any other documents or
arrangements may be effected. Nothing contained in this Agreement shall relieve
any defaulting Underwriter of its liability, if any, to the Company, the Selling
Stockholders or any nondefaulting Underwriter for damages occasioned by its
default hereunder.
10. TERMINATION. This Agreement shall be subject to termination in the
absolute discretion of the Representatives, by notice given to the Company prior
to delivery of and payment for the Securities, if at any time prior to such time
(i) trading in the Company's Common Stock shall have been suspended by the
Commission or the NASDAQ National Market or trading in securities generally on
the New York Stock Exchange or the NASDAQ National Market shall have been
suspended or limited or minimum prices shall have been established on such
Exchange or the NASDAQ National Market; (ii) a banking moratorium shall have
been declared either by Federal or New York State authorities; or (iii) there
shall have occurred any outbreak or escalation of hostilities, declaration by
the United States of a national emergency or war, or other calamity or crisis
the effect of which on financial markets is such as to make it, in the sole
judgment of the Representatives, impractical or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Final Prospectus
(exclusive of any amendment or supplement thereto).
11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers, of each Selling Stockholder and of the Underwriters set
forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation made by or on behalf of any Underwriter,
any Selling Stockholder or the Company or any of the officers, directors,
employees, agents or controlling persons referred to in Section 8 hereof, and
will survive delivery of and payment for the Securities. The provisions of
Sections 7 and 8 hereof shall survive the termination or cancellation of this
Agreement.
12. NOTICES. All communications hereunder will be in writing and
effective only on receipt, and, if sent to the Representatives, will be mailed,
delivered or telefaxed to Salomon Smith Barney Inc. General Counsel (fax no.:
(212) 816-7912) and confirmed to the General Counsel, Salomon Smith Barney Inc.,
at 388 Greenwich Street, New York, New York, 10013, Attention: General Counsel;
or, if sent to the Company, will be mailed, delivered or telefaxed to Metromedia
Fiber Network Services, Inc. c/o
37
<PAGE>
Metromedia Fiber Network, Inc., One North Lexington Avenue, White Plains, New
York 10601, Attention: Chief Financial Officer (fax no.: (914) 421-6777) and
confirmed to it at Metromedia Company, One Meadowlands Plaza, East Rutherford,
New Jersey 07073-2137, Attention: General Counsel (fax no.: (201) 531-2803) and
215 East 67th Street, New York, New York 10021, Attention: Executive Vice
President (fax no.: (212) 606-4337); or if sent to any Selling Stockholders,
will be mailed, delivered or telefaxed and confirmed to it at the address set
forth in Schedule I hereto.
13. SUCCESSORS. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and,
except as expressly set forth in Section 5(h) or Section 8 hereof, no other
person will have any right or obligation hereunder.
14. APPLICABLE LAW. This Agreement will be governed by and construed in
accordance with the laws of the State of New York applicable to contracts made
and to be performed within the State of New York.
15. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same instrument.
16. HEADINGS. The section headings used herein are for convenience only
and shall not affect the construction hereof.
17. DEFINITIONS. The terms which follow, when used in this Agreement,
shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended and the rules
and regulations of the Commission promulgated thereunder.
"Basic Prospectus" shall mean the prospectus referred to in paragraph
1(a) above contained in the Registration Statement at the Effective Date
including any Preliminary Final Prospectus.
"Business Day" shall mean any day other than a Saturday, a Sunday or a
legal holiday or a day on which banking institutions or trust companies are
authorized or obligated by law to close in New York City.
"Commission" shall mean the Securities and Exchange Commission.
"Communications Act" shall mean the Communications Act of 1934, as
amended (including amendments made by the Telecommunications Act of 1996), 47
U.S.C. section 151 and the rules and regulations of the FCC.
38
<PAGE>
"Effective Date" shall mean each date and time that the Registration
Statement, any post-effective amendment or amendments thereto and any Rule
462(b) Registration Statement became or become effective.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the Commission promulgated thereunder.
"Execution Time" shall mean the date and time that this Agreement is
executed and delivered by the parties hereto.
"Final Prospectus" shall mean the prospectus supplement relating to the
Securities that was first filed pursuant to Rule 424(b) after the Execution
Time, together with the Basic Prospectus.
"Management Selling Stockholders" shall mean to include Stephen A.
Garofalo, Howard M. Finkelstein, Gerard Benedetto, Silvia Kessel, and Arnold L.
Wadler.
"Preliminary Final Prospectus" shall mean any preliminary prospectus
supplement to the Basic Prospectus which describes the Securities and the
offering thereof and is used prior to filing of the Final Prospectus, together
with the Basic Prospectus.
"Registration Statement" shall mean the registration statement referred
to in paragraph 1(a) above, including exhibits and financial statements, as
amended at the Execution Time (or, if not effective at the Execution Time, in
the form in which it shall become effective) and, in the event any
post-effective amendment thereto or any Rule 462(b) Registration Statement
becomes effective prior to the Closing Date, shall also mean such registration
statement as so amended or such Rule 462(b) Registration Statement, as the case
may be. Such term shall include any Rule 430A Information deemed to be included
therein at the Effective Date as provided by Rule 430A.
"Rule 415", "Rule 424", "Rule 430A" and "Rule 462" refer to such rules
under the Act.
"Rule 430A Information" shall mean information with respect to the
Securities and the offering thereof permitted to be omitted from the
Registration Statement when it becomes effective pursuant to Rule 430A.
"Rule 462(b) Registration Statement" shall mean a registration
statement and any amendments thereto filed pursuant to Rule 462(b) relating to
the offering covered by the registration statement referred to in Section 1(a)
hereof.
"State Telecommunications Laws" shall mean the comparable state
statutes of the following states governing the regulation of telecommunication
service in [California,
39
<PAGE>
Connecticut, Delaware, District of Columbia, Illinois, Maryland, Massachusetts,
New Jersey, New York, Oregon, Pennsylvania, Rhode Island, Virginia and
Washington].
40
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this Agreement and your acceptance shall represent a binding agreement among the
Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
METROMEDIA FIBER NETWORK, INC.,
By:
--------------------------------------
Name:
Title:
[SELLING STOCKHOLDER]
By:
--------------------------------------
Name:
Title:
The foregoing Agreement is
hereby confirmed and accepted
as of the date specified in
Schedule II hereto.
Salomon Smith Barney Inc.
[NAME OF COMANAGER, IF ANY]
By: Salomon Smith Barney Inc.
By:
---------------------------------
Name:
Title:
For themselves and the other
several Underwriters, if any,
named in Schedule II to the
foregoing Agreement.
[or
41
<PAGE>
Salomon Smith Barney Inc.
By:
---------------------------------
Name:
Title:
For itself and the other
several Underwriters, if any,
named in Schedule II to the
foregoing
42
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Number of Underwritten Maximum Number of
Selling Stockholders: Securities to be Sold Option Securities to be Sold
<S> <C> <C>
Stephen A. Garofalo
[address, fax no.]
Howard M. Finkelstein
[address, fax no.]
Gerard Benedetto
[address, fax no.]
Silvia Kessel
[address, fax no.]
David Rockefeller
[address, fax no.]
Stuart Subotnick
[address, fax no.]
John Kluge
[address, fax no.]
Arnold L. Wadler
[address, fax no.]
Metromedia Company
[address, fax no.]
-------------- ---------------
Total ................
============== ===============
</TABLE>
<PAGE>
SCHEDULE II
NUMBER OF UNDERWRITTEN
UNDERWRITERS SECURITIES TO BE PURCHASED
------------ --------------------------
Salomon Smith Barney Inc.
Credit Suisse First Boston Corporation
Deutsche Bank Securities Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
Goldman, Sachs & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
-------------
Total ................
<PAGE>
SCHEDULE III
SUBSIDIARIES OF THE COMPANY
1. Metromedia Fiber Network NYC, Inc.
2. Metromedia Fiber Network of New Jersey, Inc.
3. Metromedia Fiber Network Services, Inc.
4. Metromedia Fiber Network of Illinois, Inc.
5. MFN of VA, L.L.C.
6. MFN Purchasing, Inc.
7. AboveNet Communications Inc.
<PAGE>
SCHEDULE IV
INDIVIDUALS TO PROVIDE LOCK-UP AGREEMENTS
1. Vincent A. Galluccio
2. Nicholas M. Tanzi
3. David Rand
4. Sherman Tuan
<PAGE>
Exhibit A
[Letterhead of officer, director or major stockholder of Corporation]
, 1999
Salomon Smith Barney Inc.
[NAME OF COMANAGERS, IF ANY]
As Representatives of the several Underwriters,
c/o Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the proposed
Underwriting Agreement (the "Underwriting Agreement"), between Metromedia Fiber
Network, Inc., a Delaware corporation (the "Company"), the Selling Stockholders
listed in Schedule I thereto and each of you as representatives of a group of
Underwriters named therein, relating to an underwritten public offering of
Common Stock, $.01 par value (the "Common Stock"), of the Company.
In order to induce you and the other Underwriters to enter into the
Underwriting Agreement, the undersigned will not, without the prior written
consent of Salomon Smith Barney Inc., offer, sell, contract to sell, pledge or
otherwise dispose of, (or enter into any transaction which is designed to, or
might reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or any affiliate of the Company or any person in
privity with the Company or any affiliate of the Company) directly or
indirectly, including the filing or participation in the filing of) a
registration statement with the Securities and Exchange Commission in respect
of, or establish or increase a put equivalent position or liquidate or decrease
a call equivalent position within the meaning of Section 16 of the Securities
Exchange Act of 1934, as amended, and the rules and regulations of the
Securities and Exchange Commission promulgated thereunder with respect to, any
shares of capital stock of the Company or any securities convertible into, or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, for a period of 90 days after the date
of this Agreement, other than shares of Common Stock disposed of as bona fide
gifts approved by Salomon Smith Barney Inc.
If for any reason the Underwriting Agreement shall be terminated prior
to the Closing Date (as defined in the Underwriting Agreement), the agreement
set forth above shall likewise be terminated.
Yours very truly,
By:
----------------------------------
Name:
Title:
<PAGE>
Exhibit 4.3
- -------------------------------------------------------------------------------
METROMEDIA FIBER NETWORK, INC.
$[ ] [ ]% SENIOR NOTES DUE 2009
[EURO][ ] [ ]% SENIOR NOTES DUE 2009
FORM OF INDENTURE
Dated as of November __, 1999
THE BANK OF NEW YORK
Trustee
- -------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE TABLE*
<TABLE>
<CAPTION>
TRUST INDENTURE ACT SECTION INDENTURE SECTION
<S> <C>
310(a)(1) 7.10
(a)(2) 7.10
(a)(3) N.A.
(a)(4) N.A.
(a)(5) 7.10
(b) 7.10
(c) N.A.
311(a) 7.11
(b) 7.11
(i)(c) N.A.
312(a) 2.05
(b) 12.03
(c) 12.03
313(a) 7.06
(b)(2) 7.07
(c) 7.06; 12.02
(d) 7.06
314(a) 4.03; 12.02
(c)(1) 12.04
(c)(2) 12.04
(c)(3) N.A.
(e) 12.05
(f) N.A.
315(a) 7.01
(b) 7.05; 12.02
(A)(c) 7.01
(d) 7.01
(e) 6.11
316(a)(last sentence) 2.09
(a)(1)(A) 6.05
(a)(1)(B) 6.04
(a)(2) N.A.
(b) 6.07
(c) 9.04
317(a)(1) 6.08
(a)(2) 6.09
(b) 2.04
318(a) 12.01
(b) N.A.
</TABLE>
<PAGE>
<TABLE>
<S> <C>
(c) 12.01
</TABLE>
N.A. means not applicable
*This Cross-Reference Table is not, for any purposes, part of the Indenture.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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PAGE
<S> <C>
ARTICLE 1. DEFINITIONS AND INCORPORATION BY REFERENCE 1
SECTION 1.01 DEFINITIONS 1
SECTION 1.02 OTHER DEFINITIONS 20
SECTION 1.03 TRUST INDENTURE ACT DEFINITIONS 21
SECTION 1.04 RULES OF CONSTRUCTION 21
ARTICLE 2. THE NOTES 22
SECTION 2.01 FORM AND DATING 22
SECTION 2.02 EXECUTION AND AUTHENTICATION 23
SECTION 2.03 REGISTRAR AND PAYING AGENT 24
SECTION 2.04 PAYING AGENT TO HOLD MONEY IN TRUST 24
SECTION 2.05 HOLDER LISTS 25
SECTION 2.06 BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES, CERTIFICATED NOTES 25
SECTION 2.07 TRANSFER AND EXCHANGE 26
SECTION 2.08 REPLACEMENT NOTES 32
SECTION 2.09 OUTSTANDING NOTES 33
SECTION 2.10 TREASURY NOTES 33
SECTION 2.11 TEMPORARY NOTES 33
SECTION 2.12 CANCELLATION 34
SECTION 2.13 DEFAULTED INTEREST 34
SECTION 2.14 CUSIP AND ISIN NUMBERS 34
ARTICLE 3. REDEMPTION AND PREPAYMENT 35
SECTION 3.01 NOTICES TO TRUSTEE 35
SECTION 3.02 SELECTION OF NOTES TO BE REDEEMED 35
SECTION 3.03 NOTICE OF REDEMPTION 36
SECTION 3.04 EFFECT OF NOTICE OF REDEMPTION 36
SECTION 3.05 DEPOSIT OF REDEMPTION PRICE 37
SECTION 3.06 NOTES REDEEMED IN PART 37
SECTION 3.07 OPTIONAL REDEMPTION 37
SECTION 3.08 MANDATORY REDEMPTION 38
SECTION 3.09 OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS 38
ARTICLE 4. COVENANTS 40
SECTION 4.01 PAYMENT OF NOTES 40
SECTION 4.02 MAINTENANCE OF OFFICE OR AGENCY 41
SECTION 4.03 REPORTS 42
SECTION 4.04 COMPLIANCE CERTIFICATE 42
SECTION 4.05 TAXES 43
</TABLE>
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<TABLE>
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SECTION 4.06 STAY, EXTENSION AND USURY LAWS 43
SECTION 4.07 RESTRICTED PAYMENTS 43
SECTION 4.08 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING
RESTRICTED SUBSIDIARIES 47
SECTION 4.09 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK 48
SECTION 4.10 ASSET SALES 51
SECTION 4.11 TRANSACTIONS WITH AFFILIATES 53
SECTION 4.12 LIENS 54
SECTION 4.13 CORPORATE EXISTENCE 55
SECTION 4.14 CHANGE OF CONTROL 55
SECTION 4.15 BUSINESS ACTIVITIES 56
SECTION 4.16 PAYMENTS FOR CONSENT 56
SECTION 4.17 MONEY FOR PAYMENTS TO BE HELD IN TRUST 56
ARTICLE 5. SUCCESSORS 58
SECTION 5.01 MERGER, CONSOLIDATION, OR SALE OF ASSETS 58
SECTION 5.02 SUCCESSOR CORPORATION SUBSTITUTED 59
ARTICLE 6. DEFAULTS AND REMEDIES 59
SECTION 6.01 EVENTS OF DEFAULT 59
SECTION 6.02 ACCELERATION 61
SECTION 6.03 OTHER REMEDIES 61
SECTION 6.04 WAIVER OF PAST DEFAULTS 62
SECTION 6.05 CONTROL BY MAJORITY 62
SECTION 6.06 LIMITATION ON SUITS 62
SECTION 6.07 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT 63
SECTION 6.08 COLLECTION SUIT BY TRUSTEE 63
SECTION 6.09 TRUSTEE MAY FILE PROOFS OF CLAIM 63
SECTION 6.10 PRIORITIES 64
SECTION 6.11 UNDERTAKING FOR COSTS 64
ARTICLE 7. TRUSTEE 65
SECTION 7.01 DUTIES OF TRUSTEE 65
SECTION 7.02 RIGHTS OF TRUSTEE 66
SECTION 7.03 INDIVIDUAL RIGHTS OF TRUSTEE 67
SECTION 7.04 TRUSTEE'S DISCLAIMER 67
SECTION 7.05 NOTICE OF DEFAULTS 67
SECTION 7.06 REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES 68
SECTION 7.07 COMPENSATION AND INDEMNITY 68
SECTION 7.08 REPLACEMENT OF TRUSTEE 69
SECTION 7.09 SUCCESSOR TRUSTEE BY MERGER, ETC. 70
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION 70
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY 71
</TABLE>
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<TABLE>
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SECTION 7.12 MONEY HELD IN TRUST 71
ARTICLE 8. LEGAL DEFEASANCE AND COVENANT DEFEASANCE 71
SECTION 8.01 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE 71
SECTION 8.02 LEGAL DEFEASANCE AND DISCHARGE 71
SECTION 8.03 COVENANT DEFEASANCE 72
SECTION 8.04 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE 72
SECTION 8.05 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN
TRUST; OTHER MISCELLANEOUS PROVISIONS 74
SECTION 8.06 REPAYMENT TO COMPANY 74
SECTION 8.07 REINSTATEMENT 75
SECTION 8.08 SURVIVAL 75
ARTICLE 9. AMENDMENT, SUPPLEMENT AND WAIVER 75
SECTION 9.01 WITHOUT CONSENT OF HOLDERS OF NOTES 75
SECTION 9.02 WITH CONSENT OF HOLDERS OF NOTES 76
SECTION 9.03 COMPLIANCE WITH TRUST INDENTURE ACT 78
SECTION 9.04 REVOCATION AND EFFECT OF CONSENTS 78
SECTION 9.05 NOTATION ON OR EXCHANGE OF NOTES 78
SECTION 9.06 TRUSTEE TO SIGN AMENDMENTS, ETC. 79
ARTICLE 10. SATISFACTION AND DISCHARGE 79
SECTION 10.01 SATISFACTION AND DISCHARGE OF INDENTURE 79
SECTION 10.02 APPLICATION OF TRUST MONEY 80
ARTICLE 11. [INTENTIONALLY OMITTED] 80
ARTICLE 12. MISCELLANEOUS 81
SECTION 12.01 TRUST INDENTURE ACT CONTROLS 81
SECTION 12.02 NOTICES 81
SECTION 12.03 COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS
OF NOTES 83
SECTION 12.04 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT 83
SECTION 12.05 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION 83
SECTION 12.06 RULES BY TRUSTEE AND AGENTS 84
SECTION 12.07 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES
AND SHAREHOLDERS 84
SECTION 12.08 GOVERNING LAW 84
SECTION 12.09 CONSENT TO JURISDICTION AND SERVICE 84
SECTION 12.10 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS 85
SECTION 12.11 SUCCESSORS 85
SECTION 12.12 SEVERABILITY 85
</TABLE>
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<TABLE>
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SECTION 12.13 COUNTERPART ORIGINALS 85
SECTION 12.14 TABLE OF CONTENTS, HEADINGS, ETC. 85
SECTION 12.15 JUDGMENT CURRENCY 85
</TABLE>
EXHIBIT A-1 A-1
EXHIBIT A-2 A-2
<PAGE>
FORM OF INDENTURE, dated as of November __, 1999 by and
between Metromedia Fiber Network, Inc., a Delaware corporation (the "COMPANY")
and The Bank of New York, a New York banking corporation, as trustee (the
"TRUSTEE").
The Company and the Trustee agree as follows for the benefit
of each other and for the equal and ratable benefit of the Holders of the $[ ]%
Senior Notes due 2009 denominated in U.S. Dollars (the "Dollar Notes") and the
[EURO][ ]% Senior Notes due 2009 denominated in Euros (the "Euro Notes" and,
together with the Dollar Notes, the "Notes"):
ARTICLE 1.
DEFINITIONS AND INCORPORATION BY REFERENCE
SECTION 1.01 DEFINITIONS.
"ACQUIRED DEBT" or "ACQUIRED PREFERRED STOCK" means, with
respect to any specified Person, Indebtedness or Preferred Stock of any other
Person existing at the time such other Person is merged with or into or became a
Subsidiary of such specified Person (including by Designation or Revocation),
provided such Indebtedness or Preferred Stock is not incurred in connection
with, or in contemplation of, such other Person merging with or into or becoming
a Subsidiary of such specified Person.
"AGENT MEMBER" means, with respect to any Depositary, any
member of, or participant in, such Depositary.
"AFFILIATE" of any specified Person means any other Person
directly or indirectly controlling, controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
PROVIDED that beneficial ownership of 10% or more of the Voting Stock of a
Person shall be deemed to be control.
"AGENT" means any Registrar, Paying Agent or co-registrar.
"AGENT MEMBER" means, with respect to any Depositary, any
member of, or participant in, such Depositary.
"APPLICABLE PROCEDURES" means, with respect to any transfer or
exchange of or for beneficial interests in any Global Note, the rules and
procedures of the Depositary, Euroclear or CEDEL Bank that apply to such
transfer or exchange.
<PAGE>
"ASSET SALE" means (i) the sale, lease, transfer, conveyance
or other disposition of any assets or rights (including, without limitation, by
way of a sale and leaseback) other than sales of inventory in the ordinary
course of business and other than any sale, lease, transfer, conveyance or other
disposition in the ordinary course of business of capacity on any fiber optic or
cable system owned, controlled or operated by the Company or any Restricted
Subsidiary or of telecommunications capacity, transmission rights, conduit or
rights-of-way acquired by the Company or any Restricted Subsidiary for use in a
Telecommunications Business of the Company or any Restricted Subsidiary
(PROVIDED that the sale, lease, transfer, conveyance or other disposition of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole will be governed by the provisions of Section 5.01
hereof and/or Section 4.14 and not by the provisions of Section 4.10 hereof),
and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries
of Equity Interests of any Subsidiary. Notwithstanding the foregoing, the
following items shall not be deemed to be Asset Sales: (i) a transfer of assets
by the Company to a Consolidated Subsidiary or by a Subsidiary to the Company or
to a Consolidated Subsidiary, (ii) an issuance of Equity Interests by a
Subsidiary to the Company or to a Consolidated Subsidiary, (iii) a Restricted
Payment that is permitted by Section 4.07 hereof, (iv) Permitted Investments
made in accordance with clause (a) or (d) of the definition thereof, (v) a
disposition of obsolete or worn out equipment or equipment that is no longer
useful in the conduct of a Telecommunications Business of the Company and its
Restricted Subsidiaries and that is disposed of in the ordinary course of
business, (vi) the surrender or waiver by the Company or any of its Restricted
Subsidiaries of contract rights or the settlement, release or surrender of
contract, tort or other claims of any kind by the Company or any of its
Restricted Subsidiaries or the grant by the Company or any of its Restricted
Subsidiaries of a Lien not prohibited by the Indenture, (vii) the sale of Cash
Equivalents in the ordinary course of business; and (viii) sales, transfers,
assignments and other dispositions of assets (or related assets in related
transactions) in the ordinary course of business with an aggregate fair market
value of less than $1.0 million.
"BANKRUPTCY LAW" means Title 11, U.S. Code or any similar
federal or state law for the relief of debtors.
"BOARD OF DIRECTORS" means the board of directors or other
governing body of the Company or, if the Company is owned or managed by a single
entity, the board of directors or other governing body of such entity, or, in
either case, any committee thereof duly authorized to act on behalf of such
board or governing body.
"BOARD RESOLUTION" means a duly authorized resolution of the
Board of Directors.
"BUSINESS DAY" means any day other than a Legal Holiday.
<PAGE>
"CAPITAL CONTRIBUTION" means any contribution to the equity of
the Company from a direct or indirect parent of the Company for which no
consideration other than the issuance of common stock with no redemption rights
and no special preferences, privileges or voting rights is given.
"CAPITAL LEASE OBLIGATION" means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease that would at such time be required to be capitalized on a balance
sheet in accordance with GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership or limited
liability company, partnership or membership interests (whether general or
limited) and (iv) any other interest or participation that confers on a Person
the right to receive a share of the profits and losses of, or distributions of
assets of, the issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars or Euros,
(ii) securities issued or directly and fully guaranteed or insured by (a) the
United States government or any agency or instrumentality thereof (provided that
the full faith and credit of the United States is pledged in support thereof) or
(b) any member of the European Economic Area or Switzerland or any agency or
instrumentality thereof provided that such country, agency or instrumentality
has a credit rating at least equal to that of the Unites States of America
(provided, further, that the full faith and credit of such respective nation is
pledged in support thereof), in each case having maturities of not more than six
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date of
acquisition, bankers' acceptances with maturities not exceeding six months and
overnight bank deposits, in each case with any domestic commercial bank having
capital and surplus in excess of $500 million and a Thompson Bank Watch Rating
of "B" or better, (iv) repurchase obligations with a term of not more than seven
days for underlying securities of the types described in clause (ii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having the highest rating obtainable
from Moody's Investors Service, Inc. or Standard & Poor's Ratings Services and
in each case maturing within six months after the date of acquisition and (vi)
money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i)-(v) of this definition,
PROVIDED that with respect to any Foreign Subsidiary, Cash Equivalents shall
also mean those investments that are comparable to clauses (iii) through (vi)
above in such Foreign Subsidiary 's country of organization or country where it
conducts business operations.
"CEDEL BANK" means CEDEL Bank, SA.
<PAGE>
"CHANGE OF CONTROL" means the occurrence of any of the
following: (i) any "person" or "group" (as such terms are used in Section
13(d)(3) of the Exchange Act), other than a Permitted Holder, is or becomes the
beneficial owner, directly or indirectly, of 35% or more of the Voting Stock
(measured by voting power rather than number of shares) of the Company and the
Permitted Holders own, in the aggregate, a lesser percentage of the total Voting
Stock (measured by voting power rather than by number of shares) of the Company
than such person and do not have the right or ability by voting power, contract
or otherwise to elect or designate for election a majority of the board of
directors of the Company (for the purposes of this clause, such other person
shall be deemed to "beneficially own" any Voting Stock of a specified
corporation held by a parent corporation if such other person beneficially owns,
directly or indirectly, more than 35% of the Voting Stock (measured by voting
power rather than by number of shares) of such parent corporation and the
Permitted Holders beneficially own, directly or indirectly, in the aggregate a
lesser percentage of Voting Stock (measured by voting power rather than by
number of shares) of such parent corporation and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of such parent corporation), (ii)
during any period of two consecutive years, Continuing Directors cease for any
reason to constitute a majority of the Board of Directors of the Company, (iii)
the Company consolidates or merges with or into any other Person, other than a
consolidation or merger (a) of the Company into a Wholly Owned Restricted
Subsidiary of the Company or (b) pursuant to a transaction in which the
outstanding Voting Stock of the Company is changed into or exchanged for cash,
securities or other property with the effect that the beneficial owners of the
outstanding Voting Stock of the Company immediately prior to such transaction,
beneficially own, directly or indirectly, at least a majority of the Voting
Stock (measured by voting power rather than number of shares) of the surviving
corporation immediately following such transaction or (iv) the sale, transfer,
conveyance or other disposition (other than by way of merger or consolidation),
in one or a series of related transactions, of all or substantially all of the
assets of the Company and its Restricted Subsidiaries taken as a whole to any
person other than a Wholly Owned Restricted Subsidiary of the Company or a
Permitted Holder or a person more than 50% of the Voting Stock (measured by
voting power rather than by number of shares) of which is owned, directly or
indirectly, following such transaction or transactions by the Permitted Holders;
PROVIDED, HOWEVER, that sales, transfers, conveyances or other dispositions in
the ordinary course of business of capacity on fiber optic or cable systems
owned, controlled or operated by the Company or any Restricted Subsidiary or of
telecommunications capacity or transmission rights, rights of way or conduit
acquired by the Company or any Restricted Subsidiary for use in the
Telecommunications Business of the Company or a Restricted Subsidiary,
including, without limitation, for sale, lease, transfer, conveyance or other
disposition to any customer of the Company or any Restricted Subsidiary shall
not be deemed a disposition of assets for purposes of this clause (iv).
<PAGE>
"COMMON DEPOSITARY" means a common depositary for Morgan
Guarantee Trust Company of New York, Brussels office, as operator of the
Euroclear system.
"COMPANY" means Metromedia Fiber Network, Inc., a Delaware
corporation, and any and all successors thereto.
"COMPANY ORDER" OR "COMPANY REQUEST" means a written request
or order signed in the name of the Company by a member of the Company's Board of
Directors, the Chief Executive Officer, the President or a Vice President, and
by the Chief Financial Officer, the Chief Accounting Officer, the Treasurer, an
Assistant Treasurer, the Secretary, an Assistant Secretary or other authorized
representative of the Company and delivered to the Trustee.
"CONSOLIDATED CAPITAL RATIO" means, with respect to the
Company as of any date, the ratio of (i) the aggregate consolidated amount of
Indebtedness of the Company and its Restricted Subsidiaries then outstanding to
(ii) the Consolidated Net Worth of the Company and its Consolidated Subsidiaries
as of such date.
"CONSOLIDATED CASH FLOW" means, with respect to the Company
for any period, the Consolidated Net Income of the Company and its Consolidated
Subsidiaries for such period plus (A), to the extent that any of the following
items were deducted in computing such Consolidated Net Income, but without
duplication, (i) provision for taxes based on income or profits of the Company
and its Consolidated Subsidiaries for such period, plus (ii) consolidated
interest expense of the Company and its Consolidated Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of debt issuance costs and original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), plus (iii) depreciation,
amortization (including amortization of goodwill and other intangibles and the
amount of capacity available for sale (other than for backhaul capacity) charged
to cost of sales, but excluding amortization of prepaid cash expenses that were
paid in a prior period), and other non-cash expenses (excluding any such
non-cash expense to the extent that it represents an accrual of or reserve for
cash expenses in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of the Company and its Consolidated
Subsidiaries for such period, minus (B) non-cash items increasing such
Consolidated Net Income for such period (other than items that were accrued in
the ordinary course of business), in each case, on a consolidated basis and
determined in accordance with GAAP. Notwithstanding the foregoing, the provision
for taxes on the income or profits of, and the depreciation and amortization and
other non-cash expenses of, a Restricted Subsidiary of the Company shall be
added to Consolidated Net Income to compute Consolidated Cash Flow of the
<PAGE>
Company only to the extent that a corresponding amount would be permitted at the
date of determination to be dividended to the Company by such Restricted
Subsidiary without prior governmental approval (that has not been obtained), and
without direct or indirect restriction pursuant to the terms of its charter and
all agreements, instruments, judgments, decrees, orders, statutes, rules and
governmental regulations applicable to that Restricted Subsidiary or its
shareholders.
"CONSOLIDATED LEVERAGE RATIO" means, with respect to the
Company, as of any date, the ratio of (i) the aggregate consolidated amount of
Indebtedness of the Company and its Restricted Subsidiaries then outstanding to
(ii) the annualized (that is, multiplied by four) Consolidated Cash Flow of the
Company and its Consolidated Subsidiaries for the most recently ended fiscal
quarter.
"CONSOLIDATED NET INCOME" means, with respect to the Company
for any period, the aggregate of the Net Income of the Company and its
Consolidated Subsidiaries for such period, on a consolidated basis, determined
in accordance with GAAP; PROVIDED that (i) the Net Income (but not loss) of any
Person that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the Company or a Consolidated Subsidiary thereof by such Person but not
in excess of the Company's Equity Interests in such Person, (ii) the Net Income
of any Restricted Subsidiary shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Restricted
Subsidiary of that Net Income is not at the date of determination permitted
without any prior governmental approval (that has not been obtained) or,
directly or indirectly, by operation of the terms of its charter or any
agreement, instrument, judgment, decree, order, statute, rule or governmental
regulation applicable to that Restricted Subsidiary or its shareholders, except
that the Company's equity in the net income of any such Restricted Subsidiary
for such period may be included in such Consolidated Net Income up to the
aggregate amount of cash that could have been distributed by such Restricted
Subsidiary during such period to the Company as a dividend, (iii) the Net Income
of any Person acquired in a pooling of interests transaction for any period
prior to the date of such acquisition shall be excluded, (iv) the equity of the
Company or any Restricted Subsidiary in the net income (if positive) of any
Unrestricted Subsidiary shall be included in such Consolidated Net Income up to
the aggregate amount of cash actually distributed by such Unrestricted
Subsidiary during such period to the Company or a Consolidated Subsidiary as a
dividend or other distribution (but not in excess of the amount of the Net
Income of such Unrestricted Subsidiary for such period) and (v) the cumulative
effect of a change in accounting principles shall be excluded.
"CONSOLIDATED NET WORTH" means, with respect to the Company as
of any date, the sum of (i) the consolidated equity of the common shareholders
of the Company and its Consolidated Subsidiaries that are Consolidated
Subsidiaries as of such date plus (ii) the respective amounts reported on the
Company's balance sheet as of such date with
<PAGE>
respect to any series of Preferred Stock (other than Disqualified Stock) that by
its terms is not entitled to the payment of dividends unless such dividends may
be declared and paid only out of net earnings in respect of the year of such
declaration and payment, but only to the extent of any cash received by the
Company upon issuance of such Preferred Stock, less (x) all write-ups (other
than write-ups resulting from foreign currency translations and write-ups of
tangible assets of a going concern business made within 12 months after the
acquisition of such business) subsequent to the Issue Date in the book value of
any asset owned by the Company or a Restricted Subsidiary that is a Consolidated
Subsidiary of the Company, (y) all outstanding net Investments as of such date
in unconsolidated Restricted Subsidiaries and in Persons that are not Restricted
Subsidiaries (except, in each such case, Permitted Investments), and (z) all
unamortized debt discount and expense and unamortized deferred charges as of
such date, all of the foregoing determined in accordance with GAAP.
"CONSOLIDATED SUBSIDIARY" means, for any Person, each
Restricted Subsidiary of such Person (whether now existing or hereafter created
or acquired) the financial statements of which are consolidated for financial
statement reporting purposes with the financial statements of such Person in
accordance with GAAP.
"CONTINUING DIRECTORS" means individuals who at the beginning
of the period of determination constituted the Board of Directors of the
Company, together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the Company
was approved by a vote of a majority of the directors of the Company then still
in office who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved or is the
designee of any one of the Permitted Holders or any combination thereof or was
nominated or elected by any such Permitted Holder(s) or any of their designees.
"CORPORATE TRUST OFFICE OF THE TRUSTEE" shall be at the
address of the Trustee specified in Section 12.02 hereof or such other address
as to which the Trustee may give notice to the Company.
"CREDIT AGREEMENT" means one or more credit agreements, loan
agreements or similar facilities, secured or unsecured, entered into from time
to time by the Company and its Restricted Subsidiaries, and including any
related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified, restated or replaced from time to time.
"CURRENCY AGREEMENT" means, with respect to any Person, any
foreign exchange contract, currency swap agreement or other similar agreement as
to which such Person is a party or beneficiary.
<PAGE>
"DEFAULT" means any event that is, or with the passage of time
or the giving of notice or both would be, an Event of Default.
"DEFINITIVE NOTE" means a certificated Note registered in the
name of the Holder thereof and issued in accordance with Section 2.07 hereof, in
the form of EXHIBIT A-1 hereto (in the case of a Dollar Note) or EXHIBIT A-2 (in
the case of a Euro Note) except that such Note shall not bear the Global Note
Legend and shall not have the "Schedule of Exchanges of Interests in the Global
Note" attached thereto.
"DEPOSITARY" means, with respect to the Notes issuable or
issued in whole or in part in global form, the Persons specified in Section 2.03
hereof as the Depositary with respect to the Notes, and any and all successors
thereto appointed as depositary hereunder and having become such pursuant to the
applicable provision of this Indenture.
"DISQUALIFIED STOCK" means any Capital Stock that, by its
terms (or by the terms of any security into which it is convertible, or for
which it is exchangeable, in each case at the option of the holder thereof), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant
to a sinking fund obligation or otherwise, or redeemable at the option of the
Holder thereof, in whole or in part, on or prior to the date that is 91 days
after the date on which the Notes mature; PROVIDED, HOWEVER, that any Capital
Stock that would constitute Disqualified Stock solely because the holders
thereof have the right to require the Company to repurchase such Capital Stock
upon the occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with Section 4.07 hereof.
"DOLLARS" or "$" or "U.S. DOLLARS" means the lawful currency
of the United States of America and, in relation to any amount to be advanced or
paid under this Indenture or the Note, funds having immediate value.
"DOLLAR NOTE" has the meaning assigned to it in the preamble
to this Indenture.
"DOLLAR GLOBAL NOTE" means the Global Note in the form of
EXHIBIT A-1 hereto.
"DOLLAR PAYING AGENT" means an office or agency of the Company
where Dollar Notes may be presented for payment.
"DOLLAR REGISTRAR" means an office or agency of the Company,
where Dollar Notes may be presented for registration of transfer or exchange.
<PAGE>
"DTC" means The Depository Trust Company, its nominees and
successors.
"EEA GOVERNMENT OBLIGATION" means direct non-callable
obligations of, or non-callable obligations guaranteed by, any member nation of
the European Union for the payment of which obligation or guarantee the full
faith and credit of the respective nation is pledged; PROVIDED that such nation
has a credit rating at least equal to that of the highest rated member nation of
the European Economic Area.
"EQUITY INTERESTS" means Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding any debt
security that is convertible into, or exchangeable for, Capital Stock).
"EURO" or "[EURO]" means the currency adopted by those
countries participating in the third stage of European monetary union.
"EURO GLOBAL NOTE" means the Global Note in the form of
EXHIBIT A-2 hereto.
"EURO NOTE" has the meaning assigned to it in the preamble to
this Indenture.
"EUROCLEAR" means Morgan Guaranty Trust Company of New York,
Brussels office, as operator of the Euroclear system.
"EUROPEAN ECONOMIC AREA" means the member nations of the
European Economic Area pursuant to the Oporto Agreement on the European Economic
Area dated May 2, 1992 as amended.
"EUROPEAN UNION" means the member nations to the third stage
of economic and monetary union pursuant to the treaty of Rome establishing the
European Community, as amended by the Treaty on European Union, signed at
Maastricht on February 7, 1992.
"EURO PAYING AGENT" means an office or agency of the Company
where Euro Notes may be presented for payment.
"EURO REGISTRAR" means an office or agency of the Company
where Euro Notes may be presented for registration of transfer or exchange.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended (or any successor Act), and the rules and regulations promulgated
thereunder (or respective successor thereto).
<PAGE>
"EXISTING ASSETS" means property, plant and equipment and
other tangible business assets existing as of the Issue Date used in a
Telecommunications Business of the Company, but does not include cash or Cash
Equivalents existing on the Issue Date, and the proceeds from the sale,
disposition or other transfer of any Existing Assets outside the ordinary course
of business.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and
its Restricted Subsidiaries in existence on the Issue Date, until such amounts
are repaid.
"FOREIGN SUBSIDIARY" means any Restricted Subsidiary of the
Company which (i) is not organized under the laws of the United States, any
state thereof or the District of Columbia, and (ii) conducts substantially all
of its business operations outside the United States of America.
"FOREIGN SUBSIDIARY CREDIT AGREEMENT" means one or more credit
agreements, loan agreements or similar facilities, secured or unsecured, entered
into from time to time by one or more of the Company's Foreign Subsidiaries, and
including any related notes, Guarantees, collateral documents, instruments and
agreements executed in connection therewith, as the same may be amended,
supplemented, modified, restated or replaced from time to time.
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect on the Issue Date.
"GERMAN JOINT VENTURE" means the Person(s) formed or organized
to engineer, develop, construct and own a fiber optic telecommunications network
in Germany.
"GLOBAL NOTE LEGEND" means the legend set forth in Section
2.07(f), which is required to be placed on all Global Notes issued under this
Indenture.
"GLOBAL NOTES" means, collectively, the Global Notes, in the
form of EXHIBIT A-1 (in the case of the Dollar Notes) or EXHIBIT A-2 (in the
case of the Euro Notes) hereto issued in accordance with Section 2.01 hereof and
bearing the Global Note Legend.
"GOVERNMENT SECURITIES" means securities that are (a) direct
obligations (or certificates representing an ownership interest in such
obligations) of the United States of America (including any agency or
instrumentality thereof) of the payment of which the
<PAGE>
full faith and credit of the United States of America is pledged, (b)
obligations of a Person controlled or supervised by and acting as an agency or
instrumentality of the United States of America the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America or (c) obligations of a Person the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America.
"GUARANTEE" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness of any other
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness of such other Person (whether arising by virtue of
partnership arrangements, or by agreement to keep-well, to purchase assets,
goods, securities or services, to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of assuring
in any other manner the obligee of such Indebtedness of the payment thereof or
to protect such obligee against loss in respect thereof (in whole or in part);
PROVIDED, HOWEVER, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning.
"HEDGING OBLIGATIONS" means, with respect to any Person, the
obligations of such Person under any Interest Rate Agreement or Currency
Agreement.
"HOLDER" means a Person in whose name a Note is registered on
the Registrar's or any co-registrar's books.
"INDEBTEDNESS" means, with respect to any Person, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing Capital Lease Obligations or the balance of the
deferred and unpaid of the purchase price of any property or representing any
Hedging Obligations, except any such balance that constitutes an accrued expense
or trade payable, if and to the extent any of the foregoing (other than letters
of credit (or reimbursement agreements in respect thereof), banker's
acceptances and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
Indebtedness of others secured by a Lien on any asset of such Person (whether or
not such Indebtedness is assumed by such Person), Disqualified Stock of such
Person and Preferred Stock of such Person's Restricted Subsidiaries and, to the
extent not otherwise included, the Guarantee by such Person of any Indebtedness
of any other Person. The amount of any Indebtedness outstanding as of any date
shall be (i) the accreted value thereof, in the case of any Indebtedness issued
with original issue discount, but the accretion of original issue discount in
accordance with the original terms of Indebtedness issued with an original issue
discount will not be deemed to be an incurrence, and (ii) the principal amount
<PAGE>
thereof, together with any interest thereon that is more than 30 days past due,
in the case of any other Indebtedness.
"INDENTURE" means this Indenture, as amended or supplemented
from time to time.
"INDIRECT PARTICIPANT" means a Person who holds a beneficial
interest in a Global Note through a Participant.
"INTEREST PAYMENT DATE" shall have the meaning assigned to
such term in the Notes.
"INTEREST RATE AGREEMENT" means, with respect to any Person,
any interest rate protection agreement, interest rate future agreement, interest
rate option agreement, interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate hedge agreement or
other similar agreement or arrangement to which such Person is a party or
beneficiary.
"INVESTMENTS" means, with respect to any Person, all
investments by such Person in other Persons (including Affiliates) in the forms
of direct or indirect loans (including Guarantees of Indebtedness or other
obligations), advances or capital contributions (excluding commission, travel
and similar advances to directors, officers and employees made in the ordinary
course of business), purchases or other acquisitions for consideration of
Indebtedness, Equity Interests or other securities, together with all items that
are or would be classified as investments on a balance sheet prepared in
accordance with GAAP. If the Company or any of its Restricted Subsidiaries sells
or otherwise disposes of any Equity Interests of any direct or indirect
Subsidiary such that, after giving effect to any such sale or disposition, such
Person is no longer a Subsidiary of the Company or such Restricted Subsidiary,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Subsidiary not sold or disposed of in an amount determined as provided in
the final paragraph of Section 4.07 hereof.
"ION" means International Optical Network, L.L.C., a Delaware
limited liability company.
"ISSUE DATE" means the date of first issuance of the Notes
under the Indenture.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which
banking institutions in The City of New York or at a place of payment are
authorized by law, regulation or executive order to remain closed. If a payment
date is a Legal Holiday at a place of payment, payment may be made at that place
on the next succeeding day that is
<PAGE>
not a Legal Holiday, and no interest shall accrue on such payment for the
intervening period.
"LIEN" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in, and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"MANAGEMENT ADVANCES" means loans or advances made to
directors, officers or employees of the Company or any Restricted Subsidiary (i)
in respect of travel, entertainment or moving-related expenses incurred in the
ordinary course of business, (ii) in respect of moving-related expenses incurred
in connection with any closing or consolidation of any facility, or (iii)
otherwise in the ordinary course of business not exceeding $3.0 million in the
aggregate at any time outstanding.
"MANAGEMENT AGREEMENT" means the management agreement between
the Company and Metromedia Company, dated as of January 2, 1998, as the same may
be amended, supplemented, modified, restated or replaced from time to time with
the approval of a majority of the disinterested members of the Board of
Directors.
"NET CASH PROCEEDS" means the aggregate amount of cash or Cash
Equivalents received by the Company in the case of a sale, or Capital
Contribution in respect, of Capital Stock and by the Company and its Restricted
Subsidiaries in respect of an Asset Sale plus, in the case of an issuance of
Capital Stock upon any exercise, exchange or conversion of securities (including
options, warrants, rights and convertible or exchangeable debt) of the Company
that were issued for cash on or after the Issue Date, the amount of cash
originally received by the Company upon the issuance of such securities
(including options, warrants, rights and convertible or exchangeable debt) less,
in each case, the sum of all payments, fees, commissions and reasonable and
customary expenses (including, without limitation, the fees and expenses of
legal counsel and investment banking fees and expenses) incurred in connection
with such Asset Sale or sale of Capital Stock, and, in the case of an Asset Sale
only, less the amount (estimated reasonably and in good faith by the Company) of
income, franchise, sales and other applicable federal, state, provincial,
foreign or local taxes required to be paid or accrued as a liability by the
Company or any of its respective Restricted Subsidiaries in connection with such
Asset Sale in the taxable year that such sale is consummated or in the
immediately succeeding taxable year, the computation of which shall take into
account the reduction in tax liability resulting from any available operating
losses and net operating loss carryovers, tax credits and tax credit
carryforwards, and similar tax attributes.
<PAGE>
"NET INCOME" means, with respect to any Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale or (b) the
disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary gain or loss, together
with any related provision for taxes on such extraordinary gain or loss.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither
the Company nor any Restricted Subsidiary (a) provides any Guarantee or credit
support of any kind (including any undertaking, guarantee, indemnity, agreement
or instrument that would constitute Indebtedness) or (b) is directly or
indirectly liable (as a guarantor or otherwise) and (ii) no default with respect
to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default under such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its Stated Maturity.
"NOTE CUSTODIAN" means the Person specified in Section 2.03
hereof as the Note Custodian with respect to the Global Notes or any successor
entity thereto appointed as Note Custodian hereunder and having become such
pursuant to the applicable provision of this Indenture.
"NOTES" has the meaning assigned to it in the preamble to this
Indenture.
"OFFICER" means the President, the Chief Executive Officer,
any Executive Vice President and the Chief Financial Officer of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed by two
Officers.
"OPINION OF COUNSEL" means an opinion from legal counsel who
is reasonably acceptable to the Trustee and that meets the requirements of
Section 12.05 hereof. The counsel may be an employee of or counsel to the
Company, any subsidiary of the Company, any Affiliate of the Company or the
Trustee.
"PARI PASSU INDEBTEDNESS" means Indebtedness of the Company
ranking PARI PASSU in right of payment with the Notes.
"PARTICIPANT" means, with respect to the Depositary, Euroclear
or CEDEL Bank, a Person who has an account with the Depositary, Euroclear or
CEDEL Bank, respectively (and, with respect to The Depositary Trust Company,
shall include Euroclear
<PAGE>
and CEDEL Bank).
"PERMITTED HOLDER" means Metromedia Company, its general
partners and their respective Related Persons and Persons that would constitute
a Class B Permitted Holder as defined in the Company's Amended and Restated
Certificate of Incorporation.
"PERMITTED INVESTMENTS" means (a) any Investment in the
Company or in a Consolidated Subsidiary of the Company that is engaged entirely
or substantially entirely in a Telecommunications Business; (b) any Investment
in Cash Equivalents; (c) any Guarantee of Indebtedness of the Company or a
Restricted Subsidiary to the extent such Indebtedness is permitted under Section
4.09 hereof; and (d) any Investment by the Company or any of its Restricted
Subsidiaries in a Person, if as a result of such Investment (i) such Person
becomes a Consolidated Subsidiary of the Company that is engaged entirely or
substantially entirely in a Telecommunications Business or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Consolidated Subsidiary of the Company that is engaged entirely or substantially
entirely in a Telecommunications Business.
"PERMITTED LIENS" means (i) Liens to secure Indebtedness
permitted by clauses (e), (f), (g) and (h) of the second paragraph of Section
4.09 hereof or any Permitted Refinancing Indebtedness, PROVIDED that with
respect to Liens to secure Indebtedness permitted by clause (f) thereof or any
Permitted Refinancing Indebtedness of such Indebtedness, such Lien must cover
only the assets acquired with such Indebtedness; (ii) Liens in favor of the
Company or any Restricted Subsidiary; (iii) Liens on property of a Person
existing at the time such Person is merged with or into or consolidated with the
Company or any of its Restricted Subsidiaries, PROVIDED that such Liens were in
existence prior to the contemplation of such merger or consolidation and do not
extend to any assets other than those of the Person merged into or consolidated
with the Company or such Restricted Subsidiary; (iv) Liens on property existing
at the time of acquisition thereof by the Company or any of its Restricted
Subsidiaries, PROVIDED that such Liens were in existence prior to the
contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vi)
Liens existing on the Issue Date; (vii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, PROVIDED that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(viii) zoning restrictions, rights-of-way, easements and similar charges or
encumbrances incurred in the ordinary course which in the aggregate do not
detract from the value of the property thereof, and (ix) Liens incurred in the
ordinary course of business of the Company or any of its Restricted Subsidiaries
with respect to obligations that do not exceed $5.0 million at any one time
outstanding and that (a) are
<PAGE>
not incurred in connection with the borrowing of money or the obtaining of
advances or credit (other than trade credit in the ordinary course of business)
and (b) do not in the aggregate materially detract from the value of the
property or materially impair the use thereof in the operation of business by
the Company or such Restricted Subsidiary.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of
the Company or any of its Restricted Subsidiaries issued in exchange for, or the
net proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); PROVIDED that: (i) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of such
Indebtedness or otherwise reasonably determined by the Company to be necessary
and reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is expressly subordinated in right of payment to, the Notes on terms at
least as favorable to the Holders of the Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iv) such Indebtedness is incurred solely by the
Company or the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and (v)
such Indebtedness is secured only by the assets, if any, that secured the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"PERSON" means any individual, corporation, partnership, joint
venture, limited liability company, incorporated or unincorporated association,
joint-stock company, trust, unincorporated organization or government or other
agency or political subdivision thereof or other entity of any kind.
"PREFERRED STOCK" means any Equity Interest of any class or
classes of a Person (however designated) which is preferred as to payments of
dividends, or as to distributions upon any liquidation or dissolution, over
Equity Interests of any other class of such Person.
"PUBLIC EQUITY OFFERING" means an underwritten offering of
common stock of the Company for cash pursuant to an effective registration
statement under the
<PAGE>
Securities Act.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness (including
Acquired Debt, in the case of leases, Capital Lease Obligations, mortgage
financings and purchase money obligations) incurred for the purpose of financing
all or any part of the cost of the engineering, construction, installation,
acquisition, lease (other than pursuant to a sale and leaseback of Existing
Assets), development or improvement of any Telecommunications Assets used by the
Company or any Restricted Subsidiary, in the case of Indebtedness incurred by
the Company, or any Foreign Subsidiary in the case of Indebtedness incurred by
any Foreign Subsidiary, including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"RECORD DATE" for the interest payable on any Interest Payment
Date means the June 1 or December 1 (whether or not a Business Day), as the case
may be, next preceding such Interest Payment Date.
"RELATED PERSON" means any Person who controls, is controlled
by or is under common control with a Permitted Holder; PROVIDED, that for
purposes of this definition "control" means the beneficial ownership of more
than 50% of the total voting power of a Person normally entitled to vote in the
election of directors, managers or trustees, as applicable, of a Person.
"RESPONSIBLE OFFICER," shall mean, when used with respect to
the Trustee, any officer within the corporate trust department of the Trustee,
including any vice president, assistant vice president, assistant secretary,
assistant treasurer, trust officer or any other officer of the Trustee who
customarily performs functions similar to those performed by the Persons who at
the time shall be such officers, respectively, or to whom any corporate trust
matter is referred because of such person's knowledge of and familiarity with
the particular subject and who shall have direct responsibility for the
administration of this Indenture.
"RESTRICTED INVESTMENT" means any Investment other than a
Permitted Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of
the referent Person that is not an Unrestricted Subsidiary. Unless the context
specifically requires otherwise, Restricted Subsidiary means a direct or
indirect Restricted Subsidiary of the Company.
"SEC" means the Securities Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended
(or any
<PAGE>
successor Act), and the rules and regulations promulgated thereunder (or
respective successor thereto).
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that
would be a "significant subsidiary" as defined in Article 1, Rule 1-02 of
Regulation S-X, promulgated pursuant to the Act, as such Regulation is in effect
on the date hereof.
"SPECIAL RECORD DATE" for the payment of any Defaulted
Interest means a date fixed by the Trustee pursuant to Section 2.12 hereof.
"STATED MATURITY" means, with respect to any installment of
interest or principal (including any mandatory sinking fund payment of interest
or principal) on any series of Indebtedness, the date on which such payment of
interest or principal (including any mandatory sinking fund payment of interest
or principal) was scheduled to be paid in the original documentation governing
such Indebtedness, and shall not include any contingent obligations to repay,
redeem or repurchase any such interest or principal prior to the date originally
scheduled for the payment thereof.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company
that is subordinated in right of payment by its terms or the terms of any
document or instrument or instrument relating thereto to the Notes, in any
respect.
"SUBSIDIARY" means, with respect to any Person, (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"TELECOMMUNICATIONS ASSETS" means all assets, rights
(contractual or otherwise) and properties, whether tangible or intangible, used
or intended for use in connection with a Telecommunications Business and the
Equity Interests of a Person engaged entirely or substantially entirely in a
Telecommunications Business.
"TELECOMMUNICATIONS BUSINESS" means the business of (i)
transmitting, or providing services relating to the transmission of, voice,
video or data through owned or leased transmission facilities, (ii)
constructing, creating, developing or marketing communications related network
equipment, software and other devices for use in a telecommunications business
or (iii) evaluating, participating or pursuing any other activity or opportunity
that is primarily related to those identified in (i) or (ii) above;
<PAGE>
PROVIDED, THAT, the determination of what constitutes a Telecommunications
Business shall be made in good faith by the Board of Directors of the Company.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C.
Sections 77aaa-77bbbb) as in effect on the date on which this Indenture is
qualified under the TIA, except as set forth in Section 9.03.
"TRUSTEE" means the party named as such above until a
successor replaces it in accordance with the applicable provisions of this
Indenture and thereafter means the successor serving hereunder.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the
Company that is designated by the Board of Directors as an Unrestricted
Subsidiary pursuant to a Board Resolution; but only to the extent that such
Subsidiary at the time of such designation: (a) has no Indebtedness other than
Non-Recourse Debt; (b) is a Person with respect to which neither the Company nor
any of its Restricted Subsidiaries has any direct or indirect obligation to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; and (c) has not Guaranteed
or otherwise directly or indirectly provided credit support for any Indebtedness
of the Company or any of its Restricted Subsidiaries. Any such designation by
the Board of Directors shall be evidenced by filing with the Trustee a certified
copy of the Board Resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
conditions and was permitted by the covenant described under Section 4.07
hereof. The Board of Directors of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
is permitted under the covenant described under Section 4.09 hereof calculated
on a pro forma basis as if such designation had occurred at the beginning of the
applicable reference period, and (ii) no Default or Event of Default would be in
existence following such designation.
"VOTING STOCK" of any Person as of any date means the Capital
Stock of such Person that is at the time entitled to vote in the election of the
Board of Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any
Indebted ness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii)
<PAGE>
the then outstanding principal amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock or
other ownership interests of which (other than directors' qualifying shares)
shall at the time be owned by such Person or by one or more Wholly Owned
Restricted Subsidiaries of such Person and one or more Wholly Owned Restricted
Subsidiaries of such Person.
SECTION 1.02 OTHER DEFINITIONS.
<TABLE>
<CAPTION>
Defined in
Term Section
------------
<S> <C>
"AFFILIATE TRANSACTION" 4.11
"ASSET SALE OFFER" 4.10
"AUTHENTICATION ORDER" 2.02
"CHANGE OF CONTROL OFFER" 4.14
"CHANGE OF CONTROL PAYMENT" 4.14
"CHANGE OF CONTROL PAYMENT DATE" 4.14
"COVENANT DEFEASANCE" 8.03
"DESIGNATION" 4.07
"EVENT OF DEFAULT" 6.01
"EXCESS PROCEEDS" 4.10
"INCUR" 4.09
"JUDGMENT CURRENCY" 12.15
LEGAL DEFEASANCE" 8.02
"OFFER AMOUNT " 3.09
"OFFER PERIOD" 3.09
"PAYING AGENT " 2.03
"PERMITTED INDEBTEDNESS" 4.09
"PURCHASE DATE" 3.09
"REGISTRAR " 2.03
"RESTRICTED PAYMENTS" 4.07
"REVOCATION" 4.07
</TABLE>
SECTION 1.03 TRUST INDENTURE ACT DEFINITIONS
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the
following
<PAGE>
meanings:
"INDENTURE SECURITIES" means the Notes;
"INDENTURE SECURITY HOLDER" means a Holder of a Note;
"INDENTURE TO BE QUALIFIED" means this Indenture;
"INDENTURE TRUSTEE" or "INSTITUTIONAL TRUSTEE" means the
Trustee; and
"OBLIGOR" on the Notes means the Company and any successor
obligor upon the Notes.
All other terms used but not otherwise defined in this
Indenture that are defined by the TIA, defined by TIA reference to another
statute or defined by SEC rule under the TIA have the meanings so assigned to
them.
SECTION 1.04 RULES OF CONSTRUCTION
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the
meaning assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the
plural include the singular;
(5) provisions apply to successive events and
transactions; and
(6) references to sections of or rules under the
Securities Act shall be deemed to include substitute, replacement of
successor sections or rules adopted by the SEC from time to time.
ARTICLE 2.
THE NOTES
SECTION 2.01 FORM AND DATING.
<PAGE>
(a) GENERAL.
The Notes and the Trustee's certificate of authentication
shall be substantially in the form of EXHIBITS A-1 and A-2 hereto. The Notes may
have notations, legends or endorsements required by law, stock exchange rule or
usage or agreements to which the Company is subject. Each Note shall be dated
the date of its authentication. The Dollar Notes shall be in denominations of
$1,000 and integral multiples thereof. The Euro Notes shall be in denominations
of [EURO]1,000 and integral multiples thereof.
The terms and provisions contained in the Notes shall
constitute, and are hereby expressly made, a part of this Indenture and the
Company and the Trustee, by their execution and delivery of this Indenture,
expressly agree to such terms and provisions and to be bound thereby. However,
to the extent any provision of any Note conflicts with the express provisions of
this Indenture, the provisions of this Indenture shall govern and be
controlling.
(b) GLOBAL NOTES.
Dollar Notes issued in global form shall be substantially in
the form of EXHIBIT A-1 and Euro Notes issued in global form shall be
substantially in the form of EXHIBIT A-2 attached hereto (in both cases,
including the Global Note Legend thereon and the "Schedule of Exchanges of
Interests in the Global Note" attached thereto). Dollar Notes issued in
definitive form shall be substantially in the form of EXHIBIT A-1 and Euro Notes
issued in definitive form shall be substantially in the form of EXHIBIT A-2
attached hereto (but, in both cases, without the Global Note Legends thereon and
without the "Schedule of Exchanges of Interests in the Global Note" attached
thereto). Each Global Note shall represent such of the aggregate principal
amount of the outstanding Notes as shall be specified therein and each shall
provide that it shall represent the aggregate principal amount of outstanding
Notes from time to time endorsed thereon and that the aggregate principal amount
of outstanding Notes represented thereby may from time to time be reduced or
increased, as appropriate, to reflect exchanges, repurchases and redemptions.
Any endorsement of a Global Note to reflect the amount of any increase or
decrease in the aggregate principal amount of outstanding Notes represented
thereby shall be made by the Trustee or the Note Custodian, at the direction of
the Trustee, in accordance with instructions given by the Holder thereof as
required by Section 2.07 hereof.
(c) EUROCLEAR AND CEDEL BANK PROCEDURES APPLICABLE.
The provisions of the "Operating Procedures of the Euroclear
System" and "Terms and Conditions Governing Use of Euroclear" and the "General
Terms and Conditions of CEDEL Bank" and "Customer Handbook" of CEDEL Bank shall
be applicable to transfers of beneficial interests in the Global Notes that are
held by
<PAGE>
Participants through Euroclear or CEDEL Bank.
SECTION 2.02 EXECUTION AND AUTHENTICATION.
Two Officers or one Officer and the Secretary or an Assistant
Secretary of the Company shall sign the Notes for the Company by manual or
facsimile signature.
If an Officer, Secretary or Assistant Secretary whose
signature is on a Note no longer holds that office at the time a Note is
authenticated, the Note shall nevertheless be valid.
A Note shall not be valid until authenticated by the manual
signature of the Trustee. The signature shall be conclusive evidence that the
Note has been authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed
by two Officers or one officer and the Secretary or an Assistant Secretary of
the Company (an "AUTHENTICATION ORDER"), authenticate Notes for original issue
up to the aggregate principal amount stated in paragraph 4 of the Notes. The
aggregate principal amount of Notes outstanding at any time may not exceed such
amount except as provided in Section 2.07 hereof.
The Trustee may appoint an authenticating agent acceptable to
the Company to authenticate Notes. An authenticating agent may authenticate
Notes whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as an Agent to deal with Holders or an
Affiliate of the Company.
[In authenticating such Notes, and accepting the additional
responsibilities under this Indenture in relation to such Notes, the Trustee
shall be entitled to receive, and shall be fully protected in relying upon:
(1) A copy of the resolution or resolutions of the Board
of Directors in or pursuant to which the terms and form of the Notes
were established, certified by the Secretary or an Assistant Secretary
of the Company to have been duly adopted by the Board of Directors and
to be in full force and effect as of the date of such certificate, and
if the terms and form of such Notes are established by an Officers'
Certificate pursuant to general authorization of the Board of
Directors, such Officers' Certificate;
(2) an executed supplemental indenture, if any is
required under the Indenture;
<PAGE>
(3) an Officers' Certificate delivered in accordance
with Section 12.04, if required;
(4) an Opinion of Counsel, if any is required under the
Indenture, which shall state:
(i) that the form of such Notes has been established by a
supplemental indenture or by or pursuant to a resolution of the Board
of Directors and in conformity with the provisions of this Indenture;
(ii) that the terms of such Notes have been established in
accordance with Section 2.01 and in conformity with the other
provisions of this Indenture;
(iii) that such Notes, when authenticated and delivered by the
Trustee and issued by the Company in the manner and subject to any
conditions specified in such Opinion of Counsel, will constitute valid
and legally binding obligations of the Company, enforceable in
accordance with their terms, subject to bankruptcy, insolvency,
reorganization and other laws of general applicability relating to or
affecting the enforcement of creditors' rights and to general equity
principles; and
(iv) that all laws and requirements in respect of the
execution and delivery by the Company of such Notes have been complied
with.
The Trustee shall have the right to decline to authenticate
and deliver any Notes under this Section if the Trustee, being advised by
counsel, determines that such action may not lawfully be taken or if the Trustee
in good faith shall determine that such action would expose the Trustee to
personal liability to existing Holders.]
SECTION 2.03 REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency where Notes may
be presented for registration of transfer or for exchange ("REGISTRAR", which
term shall also include any co-registrar) and any office or agency where Notes
may be presented for payment ("PAYING AGENT"). The Registrar shall keep a
register of the Notes and of their transfer and exchange. The Company may
appoint one or more co-registrars and one or more additional paying agents. The
term "REGISTRAR" includes any co-registrar and the term "PAYING AGENT" includes
any additional paying agent. The Company may change any Paying Agent or
Registrar without notice to any Holder. The Company shall notify the Trustee in
writing of the name and address of any Agent not a party to this Indenture. If
the Company fails to appoint or maintain another entity as Registrar or Paying
Agent, the Trustee shall act as such. The Company or any of its Subsidiaries may
act as Paying Agent or Registrar.
<PAGE>
The Company initially appoints The Depository Trust Company
("DTC") to act as Depositary with respect to the Dollar Global Notes.
The Company initially appoints The Bank of New York, London
branch, to act as the Depositary with respect to the Euro Global Notes.
The Company initially appoints the Trustee to act as the
Registrar and Paying Agent and to act as Note Custodian with respect to the
Global Notes.
The Trustee is authorized to enter into a letter of
representations with DTC in the form provided to the Trustee by the Company and
to act in accordance with such letter.
SECTION 2.04 PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the
Trustee to agree in writing that the Paying Agent will hold in trust for the
benefit of Holders or the Trustee all money held by the Paying Agent for the
payment of principal and premium, if any, or interest on the Notes, and will
notify the Trustee of any default by the Company in making any such payment.
While any such default continues, the Trustee may require a Paying Agent to pay
all such money held by it to the Trustee. The Company at any time may require a
Paying Agent to pay all such money held by it to the Trustee. Upon payment over
to the Trustee, the Paying Agent (if other than the Company or a Subsidiary)
shall have no further liability for the money. If the Company or a Subsidiary
acts as Paying Agent, it shall segregate and hold in a separate trust fund for
the benefit of the Holders all money held by it as Paying Agent. Upon any
bankruptcy or reorganization proceedings relating to the Company, the Trustee
shall serve as Paying Agent for the Notes.
SECTION 2.05 HOLDER LISTS.
The Trustee shall preserve in as current a form as is
reasonably practicable the most recent list available to it of the names and
addresses of all Holders and shall otherwise comply with TIA Section 312(a). If
the Trustee is not the Registrar, the Company shall furnish to the Trustee at
least seven Business Days before each Interest Payment Date and at such other
times as the Trustee may request in writing, a list in such form and as of such
date as the Trustee may reasonably require of the names and addresses of the
Holders of Notes and the Company shall otherwise comply with TIA Section 312(a).
SECTION 2.06 BOOK-ENTRY PROVISIONS FOR GLOBAL NOTES, CERTIFICATED NOTES
Except as indicated below in this Section 2.06, the Notes
shall be represented only by Global Notes. The Global Notes shall be deposited
with a
<PAGE>
Depositary for such Notes (and shall be registered in the name of such
Depositary or its nominee). The Depositary for the Dollar Notes shall be DTC
unless the Company appoints a successor Depositary by delivery of a Company
Order to the Trustee specifying such successor Depositary. The Depositary for
the Euro Notes shall be The Bank of New York, London branch, unless Euroclear
and CEDEL Bank appoint a successor Depositary (which shall be a Common
Depositary of Euroclear and CEDEL Bank).
All payments on a Dollar Global Note will be made to DTC or
its nominee, as the case may be, as the registered owner and Holder of such
Dollar Global Note. All payments on a Euro Global Note will be made to the order
of the Common Depositary or its nominee, as the case may be, as the registered
holder of such Euro Global Note. In each case, the Company will be fully
discharged by payment to or to the order of such Depositary from any
responsibility or liability in respect of each amount so paid. Upon receipt of
any such payment in respect of a Dollar Global Note, DTC will credit
Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Dollar Global
Note as shown on the records of DTC. The Common Depositary will instruct the
Euro Paying Agent to make payments in respect of the Euro Notes to Euroclear and
CEDEL Bank in amounts proportionate to their respective beneficial interests in
the principal amount of each Euro Global Note, and Euroclear and CEDEL Bank will
credit Participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note as
shown on the records of Euroclear and CEDEL Bank.
Unless and until it is exchanged in whole or in part for
Definitive Notes, a Global Note may not be transferred except as a whole by the
relevant Depositary or nominee thereof to another nominee of the Depositary or
to a successor of the Depositary or a nominee of such successor.
Owners of beneficial interests in Global Notes shall be
entitled or required, as the case may be, but only under the circumstances
described in this Section 2.06, to receive physical delivery of Definitive
Notes.
Interests in a Global Note shall be exchangeable or
transferable, as the case may be, for Definitive Notes if (i) in the case of a
Dollar Global Note, DTC notifies the Company that it is unwilling or unable to
continue as Depositary for such Dollar Global Note, or DTC ceases to be a
"Clearing Agency" registered under the United States Securities Exchange Act of
1934, and a successor depositary is not appointed by the Company within one
hundred twenty (120) days, (ii) in the case of a Euro Global Note, Euroclear and
CEDEL Bank notify the Company that they are unwilling or unable to continue as
clearing agencies for such Euro Global Note, (iii) in the case of a Euro Global
Note, the Common Depositary notifies the Company that it is unwilling or unable
to continue as Depositary for such Euro Global Note, and a successor Common
Depositary
<PAGE>
is not appointed within one hundred twenty (120) days or (iv) in the case of any
Global Note, an Event of Default has occurred and is continuing with respect
thereto and the owner of a beneficial interest therein requests such exchange or
transfer. Upon the occurrence of any of the events described in the preceding
sentence, the Company shall cause the appropriate Definitive Notes to be
delivered to the owners of beneficial interests in the Global Notes or the
Participants in DTC, Euroclear or CEDEL Bank through which such owners hold
their beneficial interest. Definitive Notes shall be exchangeable or
transferable for interests in other Definitive Notes as described herein.
SECTION 2.07 TRANSFER AND EXCHANGE
(a) GENERAL PROVISIONS RELATING TO TRANSFERS AND EXCHANGES.
(i) To permit registrations of transfers and exchanges, the
Company shall, subject to the other provisions of this Section 2.07,
execute and the Trustee shall authenticate Global Notes and Definitive
Notes upon the Company's order or at the Registrar's request.
(ii) No service charge shall be made to a holder of a
beneficial interest in a Global Note or to a Holder of a Definitive
Note for any registration of transfer or exchange, but the Company may
require payment of a sum sufficient to cover any transfer tax or
similar governmental charge payable in connection therewith (other than
any such transfer taxes or similar governmental charge payable upon
exchange or transfer pursuant to Sections 2.11, 3.06, 3.09, 4.10, 4.14
and 9.05 hereof).
(iii) The Registrar shall not be required to register the
transfer of or exchange any Note selected for redemption in whole or in
part, except the unredeemed portion of any Note being redeemed in part.
(iv) All Global Notes and Definitive Notes issued upon any
registration of transfer or exchange of Global Notes or Definitive
Notes shall be the valid obligations of the Company, evidencing the
same debt, and entitled to the same benefits under this Indenture, as
the Global Notes or Definitive Notes surrendered upon such registration
of transfer or exchange.
(v) The Company shall not be required (A) to issue, to
register the transfer of or to exchange any Notes during a period
beginning at the opening of business 15 Business Days before the day of
the mailing of a notice of redemption or repurchase under Section 3.02
or 4.14 hereof, as applicable, and ending at the close of business on
such day, (B) to register the transfer of or to exchange any Note so
selected for redemption or repurchase in whole or in part, except the
unredeemed portion of any Note being redeemed or repurchased in part or
(C) to
<PAGE>
register the transfer of or to exchange a Note between a Record Date
and the next succeeding Interest Payment Date.
(vi) Prior to due presentment for the registration of a
transfer of any Note, the Trustee, any Agent and the Company may deem
and treat the Person in whose name any Note is registered as the
absolute owner of such Note for the purpose of receiving payment of
principal of and interest on such Notes and for all other purposes, and
none of the Trustee, any Agent or the Company shall be affected by
notice to the contrary.
(vii) The Trustee shall authenticate Global Notes and
Definitive Notes in accordance with the provisions of Section 2.02
hereof.
(viii) All certifications, certificates and Opinions of
Counsel required to be submitted to the Registrar pursuant to this
Section 2.07 to effect a registration of transfer or exchange may be
submitted by facsimile.
(ix) Each Holder of a Note agrees to indemnify the Trustee and
the Registrar against any liability that may result from the transfer,
exchange or assignment of such Holder's Note in violation of any
provision of this Indenture and/or applicable United States federal or
state securities law.
(x) Neither the Trustee nor the Registrar shall have any
obligation or duty to monitor, determine or inquire as to compliance
with any restrictions on transfer imposed under this Indenture or under
applicable law with respect to any transfer of any interest in any Note
(including any transfers between or among Participants or beneficial
owners of interests in any Global Note) other than to require delivery
of such certificates and other documentation or evidence as are
expressly required by, and to do so if and when expressly required by
the terms of, this Indenture, and to examine the same to determine
substantial compliance as to form with the express requirements hereof.
(xi) Dollar Notes shall not be exchangeable for Euro Notes, or
vice versa.
(b) OBLIGATIONS WITH RESPECT TO TRANSFERS AND EXCHANGES OF NOTES.
Upon surrender for registration of transfer of any Note of a
series to the appropriate Registrar, and subject to the other provisions of this
Section 2.07, the Company shall execute, and the Trustee shall authenticate and
deliver, in the name of the designated transferee or transferees, one or more
new Notes of such series of any authorized denominations and of a like aggregate
principal amount.
At the option of the Holder, and subject to the other
provisions of this
<PAGE>
Section 2.07, Notes of any series may be exchanged for other Notes of such
series of any authorized denominations and of a like aggregate principal amount,
upon surrender of the Notes to be exchanged at such office or agency. Whenever
any Notes are so surrendered for exchange, and subject to the other provisions
of this Section 2.07, the Company shall execute, and the Trustee shall
authenticate and deliver, the Notes which the Holder making the exchange is
entitled to receive.
All Notes issued upon any registration of transfer or exchange
of Notes shall be the valid obligations of the Company, evidencing the same
Indebtedness, and subject to the other provisions of this Section 2.07, entitled
to the same benefits under this Indenture, as the Notes surrendered upon such
registration of transfer or exchange.
Every Note presented or surrendered for registration of
transfer or for exchange shall (if so required by the Company, the Trustee or
the Depositary) be duly endorsed, or be accompanied by a written instrument of
transfer in form satisfactory to the Company or the appropriate Registrar and be
duly executed by the Holder thereof or his attorney duly authorized in writing.
No service charge shall be made for any registration of
transfer or exchange of Notes, but the Company may require payment of a sum
sufficient to cover any tax or governmental charge payable in connection with
any registration of transfer or exchange of Notes.
(c) TRANSFER AND EXCHANGE OF DOLLAR GLOBAL NOTES.
Notwithstanding any provisions of this Indenture or the Notes,
transfers of a Dollar Global Note, in whole or in part, and transfers and
exchanges of interests therein shall be made only in accordance with this
Section 2.07. Transfers and exchanges subject to this Section 2.07 shall also be
subject to the other provisions of this Indenture that are not inconsistent with
this Section 2.07. A Dollar Global Note may not be transferred, in whole or in
part, to any Person other than DTC or a nominee thereof or a successor to DTC or
its nominee, and no such transfer to any such other Person may be registered. No
transfer of a Dollar Note of any series to any Person shall be effective under
this Indenture or the Dollar Notes of such series unless and until such Dollar
Note has been registered in the name of such Person. Nothing in this Section
2.07(c) shall prohibit or render ineffective any transfer of a beneficial
interest in a Dollar Global Note effected in accordance with the other
provisions of this Section 2.07.
(d) TRANSFER AND EXCHANGE OF EURO GLOBAL NOTES.
Notwithstanding any provisions of this Indenture or the Euro
Notes, transfers of a Euro Global Note, in whole or in part, and transfers and
exchanges of interests therein shall be made only in accordance with this
Section 2.07. Transfers and
<PAGE>
exchanges subject to this Section 2.07 shall also be subject to the other
provisions of this Indenture that are not inconsistent with this Section 2.07. A
Euro Global Note may not be transferred, in whole or in part, to any Person
other than the Common Depositary or a nominee thereof or a successor Common
Depositary or its nominee, and no such transfer to any such other Person may be
registered; PROVIDED that this clause (i) shall not prohibit any transfer of a
Euro Note that is issued in exchange for a Euro Global Note but is not itself a
Euro Global Note. No transfer of a Euro Note to any Person shall be effective
under this Indenture or the Euro Notes unless and until such Euro Note has been
registered in the name of such Person. Nothing in this Section 2.07(d) shall
prohibit or render ineffective any transfer of a beneficial interest in a Euro
Global Note effected in accordance with the other provisions of this Section
2.07.
INTEREST IN EURO GLOBAL NOTE TO BE HELD THROUGH EUROCLEAR OR
CEDEL BANK. Interests in a Euro Global Note may be held only through Agent
Members acting for and on behalf of Euroclear and CEDEL Bank.
(e) GLOBAL NOTES. The provisions of clauses (i), (ii), (iii), and (iv)
below shall apply only to Global Notes;
(i) GENERAL. Each Global Note authenticated under this
Indenture shall be registered in the name of the appropriate Depositary
or a nominee thereof and delivered to such Depositary or a nominee
thereof or custodian therefor.
(ii) TRANSFER TO PERSONS OTHER THAN DEPOSITARY.
Notwithstanding any other provision in this Indenture or the Notes, no
Global Note may be exchanged in whole or in part for Notes registered,
and no transfer of a Global Note in whole or in part may be registered,
in the name of any person other than the appropriate Depositary
or a nominee thereof unless (A) in the case of a Dollar Global Note,
DTC notifies the Company that it is unwilling or unable to continue as
Depositary for such Global Note, or DTC ceases to be a "Clearing
Agency" registered under the United States Securities Exchange Act of
1934, and a successor depositary is not appointed by the Company within
one hundred twenty (120) days, (B) in the case of a Euro Global Note,
Euroclear and CEDEL Bank notify the Company that they are unwilling or
unable to continue as clearing agencies for such Euro Global Note, (C)
in the case of a Euro Global Note, the Common Depositary notifies the
Company that it is unwilling or unable to continue as Depositary for
such Euro Global Note, and a successor Common Depositary is not
appointed within one hundred twenty (120) days or (D) in the case of
any Global Note, an Event of Default has occurred and is continuing
with respect thereto and the owner of a beneficial interest therein
requests such exchange or transfer. Any Global Note exchanged pursuant
to clause (A), (B) or (C) above shall be so exchanged in whole and not
in part and any Global Note exchanged pursuant to clause (D) above may
be exchanged in whole or from time to time in part as
<PAGE>
directed by DTC. Any Note issued in exchange for a Global Note or any
portion thereof shall be a Global Note, PROVIDED that any such Note so
issued that is registered in the name of a Person other than the
appropriate Depositary or a nominee thereof shall not be a Global Note.
(iii) GLOBAL NOTE TO DEFINITIVE NOTE. Notes issued in exchange
for a Global Note or any portion thereof pursuant to clause (ii) above
shall be issued in definitive, fully registered form without interest
coupons, shall have an aggregate principal amount equal to that of such
Global Note or portion thereof to be so exchanged, shall be registered
in such names and be in such authorized denominations as the
appropriate Depositary shall designate and shall bear any legends
required hereunder. Any Global Note to be exchanged in whole shall be
surrendered by the appropriate Depositary to the Note Registrar. With
regard to any Global Note to be exchanged in part, either such Global
Note shall be so surrendered for exchange or, in the case of a Dollar
Global Note, if the Trustee is acting as custodian for DTC or its
nominee with respect to such Global Note or, in the case of a Euro
Global Note, if the Common Depositary is acting as Depositary for
Euroclear and CEDEL Bank, the principal amount thereof shall be
reduced, by an amount equal to the portion thereof to be so exchanged,
by means of an appropriate adjustment made on the records of the
Trustee, as Authenticating Agent, or of the Common Depositary. Upon any
such surrender or adjustment, the Trustee shall authenticate and
deliver the Note issuable on such exchange to or upon the order of the
appropriate Depositary or an authorized representative thereof.
(iv) In the event of the occurrence of any of the events
specified in clause (ii) above, the Company will promptly make
available to the Trustee a supply of Definitive Notes in definitive,
fully registered form, without interest coupons, sufficient to meet the
Trustee's requirements hereunder.
(v) NO RIGHTS OF AGENT MEMBERS IN GLOBAL NOTE. No Agent Member
of any Depositary nor any other Persons on whose behalf Agent Members
may act (including Euroclear and CEDEL Bank and account Holders and
Participants therein) shall have any rights under the Indenture with
respect to any Global Note, or under any Global Note, and each
Depositary or its nominee, as the case may be, may be treated by the
Company, the Trustee and any agent of the Company or the Trustee as the
absolute owner and Holder of such Global Note for all purposes
whatsoever. Notwithstanding the foregoing, nothing herein shall prevent
the Company, the Trustee or any agent of the Company or the Trustee
from giving effect to any written certification, proxy or other
authorization furnished by the applicable Depositary or such nominee,
as the case may be, or impair, as between DTC, Euroclear and CEDEL
Bank, their respective Agent Members and any other person on whose
behalf an Agent Member may act, the operation of customary
<PAGE>
practices of such Persons governing the exercise of the rights of a
Holder of any Note.
(f) LEGENDS. The following legend shall appear on the face of all
Global Notes issued under this Indenture unless specifically stated otherwise in
the applicable provisions of this Indenture:
"THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE
INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR
THE BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT
TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES EXCEPT THAT
(I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE
REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS
GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT
TO SECTION 2.07 OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY
BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT TO
SECTION 2.12 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE
TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN
CONSENT OF THE COMPANY."
(g) CANCELLATION AND/OR ADJUSTMENT OF GLOBAL NOTES.
At such time as all beneficial interests in a particular
Global Note have been exchanged for Definitive Notes or a particular Global Note
has been redeemed, repurchased or canceled in whole and not in part, each such
Global Note shall be returned to or retained and canceled by the Trustee in
accordance with Section 2.12 hereof.
SECTION 2.08 REPLACEMENT NOTES
If any mutilated Note is surrendered to the Trustee or the
Company and the Trustee receives evidence to its satisfaction of the
destruction, loss or theft of any Note, the Company shall issue and the Trustee,
upon receipt of an Authentication Order, shall authenticate a replacement Note
if the Trustee's requirements are met. If required by the Trustee or the
Company, an indemnity bond must be supplied by the Holder that is sufficient in
the judgment of the Trustee and the Company to protect the Company, the Trustee,
any Agent and any authenticating agent from any loss that any of them may suffer
if a Note is replaced. The Company may require the payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in relation
thereto, and may charge for its expenses (including the fees and expenses of the
Trustee and reasonable attorney's fees and expenses) in replacing a Note.
<PAGE>
Every replacement Note is an additional obligation of the
Company and shall be entitled to all of the benefits of this Indenture equally
and proportionately with all other Notes duly issued hereunder.
If any mutilated, lost, stolen or destroyed Note has become or
is about to become due and payable, the Company, in its sole discretion, may,
instead of issuing a new Note, pay such Note.
SECTION 2.09 OUTSTANDING NOTES.
The Notes outstanding at any time are all the Notes
authenticated by the Trustee except for those cancelled by it, those delivered
to it for cancellation, those reductions in the interest in a Global Note
effected by the Trustee in accordance with the provisions hereof, and those
described in this Section as not outstanding. Except as set forth in Section
2.10 hereof, a Note does not cease to be outstanding because the Company or an
Affiliate of the Company holds the Note; HOWEVER, Notes held by the Company or a
Subsidiary of the Company shall not be deemed to be outstanding for purposes of
Section 3.07(b) hereof.
If a Note is replaced pursuant to Section 2.08 hereof, it
ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Note is held by a bona fide purchaser or protected purchaser.
If the principal amount of any Note is considered paid under
Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
If the Paying Agent (other than the Company, a Subsidiary or
an Affiliate of any thereof) holds, on a redemption date or maturity date, money
sufficient to pay Notes payable on that date, then on and after that date such
Notes shall be deemed to be no longer outstanding and shall cease to accrue
interest.
SECTION 2.10 TREASURY NOTES
In determining whether the Holders of the required aggregate
principal amount of Notes have concurred in any direction, waiver or consent,
Notes owned by the Company, or by any Person directly or indirectly controlling
or controlled by or under direct or indirect common control with the Company,
shall be considered as though not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Notes that the Trustee knows are so owned
shall be so disregarded.
SECTION 2.11 TEMPORARY NOTES
<PAGE>
Until certificates representing Notes are ready for delivery,
the Company may prepare and the Trustee, upon receipt of an Authentication
Order, shall authenticate temporary Notes. Temporary Notes shall be
substantially in the form of certificated Notes but may have variations that the
Company considers appropriate for temporary Notes and as shall be reasonably
acceptable to the Trustee. Without unreasonable delay, the Company shall prepare
and the Trustee shall authenticate definitive Notes in exchange for temporary
Notes.
Holders of temporary Notes shall be entitled to all of the
benefits of this Indenture.
SECTION 2.12 CANCELLATION.
The Company at any time may deliver Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Notes surrendered to them for registration of transfer, exchange or payment. The
Trustee and no one else shall cancel all Notes surrendered for registration of
transfer, exchange, payment, replacement or cancellation and shall return
cancelled Notes (subject to the record retention requirements of the Exchange
Act) to the Company upon a Company Order. The Company may not issue new Notes to
replace Notes that it has paid or that have been delivered to the Trustee for
cancellation.
SECTION 2.13 DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the Notes,
it shall pay the defaulted interest in any lawful manner plus, to the extent
lawful, interest payable on the defaulted interest, to the Persons who are
Holders on a subsequent Special Record Date, in each case at the rate provided
in the Notes and in Section 4.01 hereof. The Company shall notify the Trustee in
writing of the amount of defaulted interest proposed to be paid on each Note and
the date of the proposed payment. The Company shall fix or cause to be fixed
each such Special Record Date and payment date, provided that no such Special
Record Date shall be less than 10 days prior to the related payment date for
such defaulted interest. At least 15 days before the Special Record Date, the
Company (or, upon the written request of the Company, the Trustee in the name
and at the expense of the Company) shall mail or cause to be mailed to Holders a
notice that states the Special Record Date, the related payment date and the
amount of such interest to be paid. The defaulted interest shall be considered
paid upon deposit with the Trustee or the Paying Agent of an amount of money
equal to the aggregate amount proposed to be paid in respect of such defaulted
interest, and interest on such defaulted interest shall thereafter cease to
accrue from that date. The Company may make payment of any defaulted interest in
any other lawful manner not inconsistent with the requirements of any securities
exchange or other trading market on which the securities of the Company are
listed or traded, and upon such notice as may be required by such exchange or
trading
<PAGE>
market, if, after written notice given by the Company to the Trustee of the
proposed payment, such manner of payment shall be deemed practicable by the
Trustee.
SECTION 2.14 CUSIP AND ISIN NUMBERS.
The Company in issuing the Notes may use "CUSIP" and/or "ISIN"
number (if then generally in use), and, if so, the Trustee and the Common
Depositary shall use CUSIP and/or ISIN numbers in notices of redemption as a
convenience to Holders; PROVIDED that any such notice may state that no
representation is made as to the correctness of such numbers either as printed
on the Notes or as contained in any notice of a redemption and that reliance may
be placed only on the other identification numbers printed on the Notes, and any
such redemption shall not be affected by any defect in or the omission of such
numbers. The Company will promptly notify the Trustee and the Common Depositary
of any change in the CUSIP and/or ISIN numbers.
ARTICLE 3.
REDEMPTION AND PREPAYMENT
SECTION 3.01 NOTICES TO TRUSTEE.
If the Company elects to redeem Notes pursuant to the optional
redemption provisions of Section 3.07 hereof, it shall furnish to the Trustee,
at least 30 days but not more than 60 days before a redemption date, an
Officers' Certificate setting forth (i) the clause of this Indenture pursuant to
which the redemption shall occur, (ii) the redemption date, (iii) the principal
amount of Notes to be redeemed, (iv) the redemption price and (v) the CUSIP
numbers of the Notes to be redeemed.
SECTION 3.02 SELECTION OF NOTES TO BE REDEEMED.
If less than all of the Notes are to be redeemed at any time,
the Trustee shall select the Notes to be redeemed or purchased among the Holders
of the Notes in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not so listed, on a PRO RATA basis, by lot or in accordance with any other
method the Company considers fair and appropriate; provided that no Notes of
$1,000 or (U)1,000, as the case may be, or less shall be redeemed in part. In
the event of partial redemption by lot, the particular Notes to be redeemed
shall be selected, unless otherwise provided herein, not less than 30 nor more
than 60 days prior to the redemption date by the Trustee from the outstanding
Notes not previously called for redemption.
The Trustee shall promptly notify the Company in writing of
the Notes selected for redemption and, in the case of any Note selected for
partial redemption, the principal amount thereof to be redeemed. Notes and
portions of Notes selected shall be in
<PAGE>
amounts of $1,000 or [Euro] 1,000, as the case may be, or whole multiples of
$1,000 or [Euro] 1,000, as the case may be; except that if all of the Notes
of a Holder are to be redeemed, the entire outstanding amount of Notes held
by such Holder, even if not a multiple of $1,000 or [Euro] 1,000, as the case
may be, shall be redeemed. Except as provided in the preceding sentence,
provisions of this Indenture that apply to Notes called for redemption also
apply to portions of Notes called for redemption.
SECTION 3.03 NOTICE OF REDEMPTION
Subject to the provisions of Section 3.09 hereof, at least 30
days but not more than 60 days before a redemption date, the Company shall mail
or cause to be mailed, by first class mail, a notice of redemption to each
Holder whose Notes are to be redeemed at its registered address.
The notice shall identify the Notes (including any CUSIP
and/or ISIN number, if any) to be redeemed and shall state:
(a) the redemption date;
(b) the redemption price;
(c) if any Note is being redeemed in part, the portion of the principal
amount of such Note to be redeemed and that, after the redemption date upon
surrender of such Note, a new Note or Notes in principal amount equal to the
unredeemed portion shall be issued upon cancellation of the original Note;
(d) the name and address of the Paying Agent;
(e) that Notes called for redemption must be surrendered to the Paying
Agent to collect the redemption price;
(f) that, unless the Company defaults in making such redemption
payment, interest on Notes called for redemption ceases to accrue on and after
the redemption date;
(g) the paragraph of the Notes and/or Section of this Indenture
pursuant to which the Notes called for redemption are being redeemed; and
(h) that no representation is made as to the correctness or accuracy of
the CUSIP number, if any, listed in such notice or printed on the Notes.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at its expense; PROVIDED, HOWEVER, that the
Company shall have delivered to the Trustee, at least 45 days prior to the
redemption date, an Officers'
<PAGE>
Certificate requesting that the Trustee give such notice and setting forth the
information to be stated in such notice as provided in the preceding paragraph.
SECTION 3.04 EFFECT OF NOTICE OF REDEMPTION
Once notice of redemption is mailed in accordance with Section
3.03 hereof, Notes called for redemption become irrevocably due and payable on
the redemption date at the redemption price. A notice of redemption may not be
conditional.
SECTION 3.05 DEPOSIT OF REDEMPTION PRICE
Prior to 12:00 noon New York City time on the redemption date,
the Company shall deposit with the Trustee or with the Paying Agent money
sufficient to pay the redemption price of and accrued interest on all Notes to
be redeemed on that date. The Trustee or the Paying Agent shall promptly return
to the Company any money deposited with the Trustee or the Paying Agent by the
Company in excess of the amounts necessary to pay the redemption price of, and
accrued interest on, all Notes to be redeemed.
If the Company complies with the provisions of the preceding
paragraph, on and after the redemption date, interest shall cease to accrue on
the Notes or the portions of Notes called for redemption. If a Note is redeemed
on or after a Record Date but on or prior to the related Interest Payment Date,
then any accrued and unpaid interest shall be paid to the Person in whose name
such Note was registered at the close of business on such Record Date. If any
Note called for redemption shall not be so paid upon surrender for redemption
because of the failure of the Company to comply with the preceding paragraph,
interest shall be paid on the unpaid principal, from the redemption date until
such principal is paid, and to the extent lawful on any interest not paid on
such unpaid principal, in each case at the rate provided in the Notes and in
Section 4.01 hereof.
SECTION 3.06 NOTES REDEEMED IN PART
Upon surrender of a Note that is redeemed in part, the Company
shall issue and, upon the Company's written, request, the Trustee shall
authenticate, for the Holder at the expense of the Company a new Note equal in
principal amount to the unredeemed portion of the Note surrendered.
SECTION 3.07 OPTIONAL REDEMPTION.
(a) Except as set forth in Sections 3.07(b) and (c) below, the Notes
shall not be redeemable at the Company's option prior to December 15, 2004.
Thereafter, the Notes shall be subject to redemption at any time at the option
of the Company, in whole or in part, upon not less than 30 nor more than 60
days' notice, at the redemption prices (expressed as percentages of principal
amount) set forth below, plus accrued and unpaid interest thereon to the
applicable redemption date (subject to the right of Holders of
<PAGE>
record on the relevant Record Date to receive interest due on the relevant
Interest Payment Date), if redeemed during the twelve-month period beginning on
December 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE
OF PRINCIPAL
YEAR AMOUNT
- ---- --------------------
<S> <C>
2004............................................... [ ]%
2005............................................... [ ]%
2006............................................... [ ]%
2007 and thereafter................................ [ ]%
</TABLE>
(b) Notwithstanding the foregoing, at any time prior to December 15,
2002, the Company may, on any one or more occasions, redeem up to 35% of the
aggregate principal amount of each of the Dollar Notes and the Euro Notes
(determined separately) originally issued pursuant to this Indenture at a
redemption price of [ ]% of the principal amount of the Dollar Notes and [ ]% of
the principal amount of the Euro Notes, in each case plus accrued and unpaid
interest thereon to the redemption date (subject to the right of Holders of
record on the relevant Record Date to receive interest due on the relevant
Interest Payment Date), with the Net Cash Proceeds received from any Public
Equity Offering made by the Company resulting in gross proceeds to the Company
of at least $100 million; PROVIDED that at least 65% of the aggregate principal
amount of the Dollar Notes and the Euro Notes (determined separately) originally
issued pursuant to this Indenture remain outstanding immediately after the
occurrence of any such redemption. The Company may make any such redemption upon
not less than 30 nor more than 60 days' notice (but in no event more than 90
days after the closing of the related Public Equity Offering).
(c) Any redemption pursuant to this Section 3.07 shall be made pursuant
to the provisions of Section 3.01 through 3.06 hereof.
SECTION 3.08 MANDATORY REDEMPTION.
The Company shall not be required to make mandatory redemption
or sinking fund payments with respect to the Notes.
SECTION 3.09 OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS.
In the event that, pursuant to Section 4.10 hereof, the
Company shall be required to commence an Asset Sale Offer, it shall follow the
procedures specified below.
The Asset Sale Offer shall remain open for a period of 20
Business Days
<PAGE>
following its commencement and no longer, except to the extent that a longer
period is required by applicable law (the "OFFER PERIOD"). No later than five
Business Days after the termination of the Offer Period (the "PURCHASE DATE"),
the Company shall purchase the principal amount of Notes required to be
purchased pursuant to Section 4.10 hereof (the "OFFER AMOUNT") or, if less than
the Offer Amount has been tendered, all Notes tendered in response to the Asset
Sale Offer. Payment for any Notes so purchased shall be made in the same manner
as interest payments are made.
If the Purchase Date is on or after a Record Date and on or
before the related Interest Payment Date, any accrued and unpaid interest shall
be paid to the Person in whose name a Note is registered at the close of
business on such Record Date, and no additional interest shall be payable to
Holders who tender Notes pursuant to the Asset Sale Offer.
Upon the commencement of an Asset Sale Offer, the Company
shall send, by first class mail, a notice to the Trustee and each of the
Holders, with a copy to the Trustee. The notice shall contain all instructions
and materials necessary to enable such Holders to tender Notes pursuant to the
Asset Sale Offer. The Asset Sale Offer shall be made to all Holders. The notice,
which shall govern the terms of the Asset Sale Offer, shall state:
(a) that the Asset Sale Offer is being made pursuant to this Section
3.09 and Section 4.10 hereof and the length of time the Asset Sale Offer shall
remain open;
(b) the Offer Amount, the purchase price and the Purchase Date;
(c) that any Note not tendered or accepted for payment shall continue
to accrue interest;
(d) that, unless the Company defaults in making such payment, any Note
accepted for payment pursuant to the Asset Sale Offer shall cease to accrue
interest after the Purchase Date;
(e) that Holders electing to have a Note purchased pursuant to an Asset
Sale Offer may only elect to have all of such Note purchased and may not elect
to have only a portion of such Note purchased;
(f) that Holders electing to have a Note purchased pursuant to any
Asset Sale Offer shall be required to surrender the Note, with the form entitled
"Option of Holder to Elect Purchase" on the reverse of the Note completed, or
transfer by book-entry transfer, to the Company, a depositary, if appointed by
the Company, or a Paying Agent at the address specified in the notice at least
three days before the Purchase Date;
<PAGE>
(g) that Holders shall be entitled to withdraw their election if the
Company, the depositary or the Paying Agent, as the case may be, receives, not
later than the expiration of the Offer Period, a telegram, telex, facsimile
transmission or letter setting forth the name of the Holder, the aggregate
principal amount of the Note the Holder delivered for purchase and a statement
that such Holder is withdrawing his election to have such Note purchased;
(h) that, if the aggregate principal amount of Notes surrendered by
Holders exceeds the Offer Amount, the Company shall select the Notes to be
purchased on a PRO RATA basis (with such adjustments as may be deemed
appropriate by the Company so that only Notes in denominations of $1,000 or
[Euro] 1,000, as the case may be, or integral multiples thereof, shall be
purchased); and
(i) that Holders whose Notes were purchased only in part shall be
issued new Notes equal in principal amount to the unpurchased portion of the
Notes surrendered (or transferred by book-entry transfer).
On or before 12:00 noon New York City time on the Purchase
Date, the Company shall, to the extent lawful, accept for payment, on a PRO RATA
basis to the extent necessary, the Offer Amount or portions thereof tendered
pursuant to the Asset Sale Offer, or if less than the Offer Amount has been
tendered, all Notes tendered, and shall deliver to the Trustee an Officers'
Certificate stating that such Notes or portions thereof were accepted for
payment by the Company in accordance with the terms of this Section 3.09. The
Company, the Depositary or the Paying Agent, as the case may be, shall promptly
(but in any case not later than five days after the Purchase Date) mail or
deliver to each tendering Holder an amount equal to the purchase price of the
Notes tendered by such Holder and accepted by the Company for purchase, and the
Company shall promptly issue a new Note, and the Trustee, upon written request
from the Company, shall authenticate and mail or deliver such new Note to such
Holder, in a principal amount equal to any unpurchased portion of the Note
surrendered. Any Note not so accepted shall be promptly mailed or delivered by
the Company to the Holder thereof. The Company shall publicly announce the
results of the Asset Sale Offer on the Purchase Date.
Other than as specifically provided in this Section 3.09, any
purchase pursuant to this Section 3.09 shall be made pursuant to the provisions
of Sections 3.01 through 3.06 hereof.
ARTICLE 4.
COVENANTS
SECTION 4.01 PAYMENT OF NOTES
The Company shall pay or cause to be paid the principal of,
premium, if
<PAGE>
any, and interest on the Notes on the dates and in the manner provided in the
Notes. Principal, premium, if any, and interest shall be considered paid on the
date due if the Paying Agent, if other than the Company or a Subsidiary thereof,
holds as of 12:00 noon New York City time on the due date money deposited by the
Company in immediately available funds and designated for and sufficient to pay
all principal, premium, if any, and interest then due.
Notwithstanding anything to the contrary in this Indenture,
the Company may, to the extent it is required to do so by law, deduct or
withhold income or other similar taxes imposed by the United States of America
from principal or interest payments hereunder.
The Company shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue principal at the
rate equal to 1% per annum in excess of the then applicable interest rate on the
Notes to the extent lawful; it shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue installments of
interest (without regard to any applicable grace period) at the same rate to the
extent lawful.
SECTION 4.02 MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in The City of New York and
London, and for so long as the Notes are listed on the Luxembourg Stock
Exchange, in Luxembourg, an office or agency where Notes may be presented or
surrendered for payment, where Notes may be surrendered for registration of
transfer or exchange and where notices and demands (other than service of
process) to or upon the Company in respect of the Notes and this Indenture may
be served. The Corporate Trust Office of the Trustee shall be such office or
agency of the Company, unless the Company shall designate and maintain some
other office or agency for one or more of such purposes. The Company shall give
prompt written notice to the Trustee of any change in the location of any such
office or agency. If at any time the Company shall fail to maintain any such
required office or agency or shall fail to furnish the Trustee with the address
thereof, such presentations, surrenders, notices and demands may be made or
served at the Corporate Trust Office of the Trustee, and the Company hereby
appoints the Trustee as its agent to receive all such presentations, surrenders,
notices and demands.
The Company hereby initially designates (i) the
Trustee at its address set forth in Section 12.02 hereof as its office or agency
in New York, for such purposes, (ii)The Bank of New York, London branch, as its
office or agency in London for such purposes, and (iii) [Luxembourg Paying
Agent], at its office or agency in Luxembourg for such purposes.
The Company may also from time to time designate one
or more
<PAGE>
other offices or agencies (in or outside of The City of New York) where the
Notes may be presented or surrendered for any or all such purposes and may from
time to time rescind any such designation; PROVIDED, HOWEVER, that no such
designation or rescission shall in any manner relieve the Company of its
obligation to maintain an office or agency in The City of New York and, for so
long as the Notes are listed on the Luxembourg Stock Exchange, in Luxembourg,
for such purposes. The Company shall give prompt written notice to the Trustee
of any such designation or rescission and any change in the location of any such
other office or agency.
SECTION 4.03 REPORTS.
Whether or not required by the rules and regulations
of the SEC, so long as any Notes are outstanding, the Company will furnish to
the Trustee and the Holders of the Notes (i) all quarterly and annual financial
information that would be required to be contained in a filing with the SEC on
Forms 10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations of
the Company and its consolidated Subsidiaries and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants, and (ii) all current reports that would be required to be filed
with the SEC on Form 8-K if the Company were required to file such reports, in
each case within the time periods specified in the SEC's rules and regulations.
RIDER 4.03
----------
Delivery of such reports, information and documents
to the Trustee is for informational purposes only and the Trustee's receipt of
such shall not constitute constructive notice of any information contained
therein or determinable from information contained therein, including the
Company's compliance with any of its covenants hereunder (as to which the
Trustee is entitled to rely exclusively on Officers' Certificates). The Company
shall at all times comply with TIA Section 314(a).
SECTION 4.04 COMPLIANCE CERTIFICATE.
(a) The Company shall deliver to the Trustee within 90 days after the
end of each fiscal year, beginning 2000, an Officers' Certificate stating that a
review of the activities of the Company and its Subsidiaries during the
preceding fiscal year has been made under the supervision of the signing
Officers with a view to determining whether the Company has kept, observed,
performed and fulfilled its obligations under this Indenture, and further
stating, as to each such Officer signing such certificate, that to the best of
his or her knowledge the Company has kept, observed, performed and fulfilled
each and every covenant contained in this Indenture and is not in default in the
performance or observance of any of the terms, provisions and conditions of this
Indenture (or, if a Default or Event of Default shall have occurred, describing
all such
<PAGE>
Defaults or Events of Default of which he or she may have knowledge and what
action the Company is taking or proposes to take with respect thereto) and that
to the best of his or her knowledge no event has occurred and remains in
existence by reason of which payments on account of the principal of or
interest, if any, on the Notes is prohibited or if such event has occurred, a
description of the event and what action the Company is taking or proposes to
take with respect thereto. For purposes of this paragraph, such compliance shall
be determined without regard to any period of grace or requirement of notice
provided under this Indenture.
(b) So long as not contrary to the then current recommendations of the
American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.03 hereof shall be accompanied by a
written statement of the Company's independent public accountants (who shall be
a firm of established national reputation) that in making the examination
necessary for certification of such financial statements, nothing has come to
their attention that would lead them to believe that the Company has violated
any provisions of Article 4 or Article 5 hereof or, if any such violation has
occurred, specifying the nature and period of existence thereof, it being
understood that such accountants shall not be liable directly or indirectly to
any Person for any failure to obtain knowledge of any such violation.
(c) The Company shall, so long as any of the Notes are outstanding,
deliver to the Trustee, within five days upon any Officer becoming aware of any
Default or Event of Default, an Officers' Certificate specifying such Default or
Event of Default and what action the Company is taking or proposes to take with
respect thereto.
SECTION 4.05 TAXES.
The Company shall pay, and shall cause each of its
Subsidiaries to pay, prior to delinquency, all material taxes, assessments, and
governmental levies except such as are contested in good faith and by
appropriate proceedings or where the failure to effect such payment is not
adverse in any material respect to the Holders of the Notes.
SECTION 4.06 STAY, EXTENSION AND USURY LAWS.
The Company covenants (to the extent that it may lawfully do
so) that it shall not at any time insist upon, plead, or in any manner
whatsoever claim or take the benefit or advantage of, any stay, extension or
usury law wherever enacted, now or at any time hereafter in force, that may
affect the covenants or the performance of this Indenture; and the Company (to
the extent that it may lawfully do so) hereby expressly waives all benefit or
advantage of any such law, and covenants that it shall not, by resort to any
such law, hinder, delay or impede the execution of any power herein granted to
the Trustee, but shall suffer and permit the execution of every such power as
through no such law has been enacted.
<PAGE>
SECTION 4.07 RESTRICTED PAYMENTS.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any other payment or distribution on account of the Company's
or any of its Restricted Subsidiaries' Equity Interests or to the direct or
indirect holders of the Company's or any of its Restricted Subsidiaries' Equity
Interests in their capacity as stockholders (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of the
Company or to the Company or a Restricted Subsidiary of the Company); (ii)
purchase, redeem or otherwise acquire or retire for value any Equity Interests
of the Company or any of its Restricted Subsidiaries or any direct or indirect
parent of the Company (other than any such Equity Interests owned by the Company
or any Consolidated Subsidiary of the Company); (iii) make any payment on or
with respect to, or purchase, redeem, defease or otherwise acquire or retire for
value any Subordinated Indebtedness, except a payment of interest or principal
at Stated Maturity; or (iv) make any Restricted Investment (all such payments
and other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless:
(a) at the time of and after giving effect to such
Restricted Payment, no Default or Event of Default shall have
occurred and be continuing or would occur as a consequence
thereof,
(b) the Company would, at the time of such Restricted
Payment and after giving pro forma effect thereto as if such
Restricted Payment had been made at the beginning of the
applicable period, have been permitted to incur at least $1.00
of additional Indebtedness pursuant to either clause (i) or
(ii) of the first paragraph of Section 4.09 hereof; and
(c) such Restricted Payment, together with the
aggregate amount of all other Restricted Payments made by the
Company and its Restricted Subsidiaries on and after the Issue
Date (excluding Restricted Payments permitted by, and made
pursuant to, clauses (ii) and (iii) and (viii) of the next
succeeding paragraph), is less than the sum, without
duplication and except as credited in the next succeeding
paragraph, of (i) 50% of the Consolidated Net Income of the
Company for the period (taken as one accounting period)
beginning on the last day of the fiscal quarter immediately
preceding the Issue Date and ending on the last day of the
fiscal quarter immediately preceding the date of such
Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate Net Cash Proceeds received by the
Company on and after November 25, 1998 as a Capital
Contribution or from the issue or sale of Equity Interests of
the Company
<PAGE>
(other than Disqualified Stock) or from the issue or sale of
Disqualified Stock or debt securities of the Company that
have been converted or exchanged into such Equity Interests
(other than Equity Interests (or Disqualified Stock or
converted debt securities) sold to a Subsidiary of the
Company), plus the amount of Net Cash Proceeds received by
the Company upon such conversion or exchange, plus (iii) the
aggregate amount equal to the net reduction in Investments
in Unrestricted Subsidiaries on and after the Issue Date
resulting from (x) dividends, distributions, interest
payments, return of capital, repayments of Investments or
other transfers of assets to the Company or any Restricted
Subsidiary from any Unrestricted Subsidiary, (y) proceeds
realized by the Company or any Restricted Subsidiary upon
the sale of such Investment to a Person other than the
Company or any Subsidiary of the Company, or (z) the
redesignation of any Unrestricted Subsidiary as a Restricted
Subsidiary, not to exceed in the case of any of the
immediately preceding clauses (x), (y) or (z) the aggregate
amount of Restricted Investments made by the Company or any
Restricted Subsidiary in such Unrestricted Subsidiary on and
after the Issue Date, plus (iv) to the extent that any
Restricted Investment that was made on and after the Issue
Date is sold for cash or otherwise liquidated or repaid for
cash, the lesser of, to the extent paid to the Company or a
Restricted Subsidiary, (A) the cash return of capital with
respect to such Restricted Investment (less the cost of
disposition, if any) and (B) the initial amount of such
Restricted Investment.
The foregoing provisions will not prohibit (i) the payment
of any dividend within 60 days after the date of declaration thereof, if at said
date of declaration such payment would have complied with the foregoing
provisions; (ii) the redemption, repurchase, retirement, defeasance or other
acquisition of any Subordinated Indebtedness or Equity Interests of the Company
in exchange for, or out of the Net Cash Proceeds of the substan tially
concurrent sale (other than to a Subsidiary of the Company) of, Equity Interests
of the Company (other than any Disqualified Stock); PROVIDED that the amount of
any such Net Cash Proceeds that are utilized for, and the Equity Interests
issued or exchanged for, any such redemption, repurchase, retirement, defeasance
or other acquisition shall be excluded from clause (c) of the preceding
paragraph and each other clause of this paragraph; (iii) the defeasance,
redemption, retirement, repurchase or other acquisition of Subordinated
Indebtedness with the Net Cash Proceeds from, or issued in exchange for, a
substantially concurrent incurrence of Permitted Refinancing Indebtedness;
PROVIDED that the amount of any such Net Cash Proceeds that are utilized for any
such redemption, repurchase, retirement, defeasance or other acquisition shall
be excluded from clause (c) of the preceding paragraph and each other clause of
this paragraph; (iv) the payment of any dividend or other distribution by a
Restricted Subsidiary of the Company to the holders of its Equity Interests on a
pro rata basis; (v)
<PAGE>
the repurchase, redemption or other acquisition or retirement for value of any
Equity Interests of the Company or any of its Restricted Subsidiaries held by
any member of the Company's or such Restricted Subsidiary's management; PROVIDED
that the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests shall not exceed $1.0 million in any fiscal year; (vi)
retiring any Equity Interests of the Company to the extent necessary (as
determined in good faith by a majority of the disinterested members of the Board
of Directors, whose determination shall be evidenced by a resolution thereof) to
prevent the loss, or to secure the renewal or reinstatement, of any license or
franchise held by the Company or any Restricted Subsidiary from any governmental
agency; (vii) Investments in Telecommunications Assets, PROVIDED that the
aggregate fair market value (measured on the date each such Investment was made
or returned, as applicable), when taken together with all other Investments made
pursuant to this clause (vii) that are at the time outstanding, does not exceed
the sum of (y) $15.0 million, plus (z) the aggregate amount equal to the net
reduction in Investments made pursuant to this clause (vii) on and after the
Issue Date resulting from dividends, distributions, interest payments, return of
capital, repayments of such Investments or Net Cash Proceeds realized by the
Company or any Restricted Subsidiary upon the sale of such Investment to a
Person other than the Company or any Subsidiary of the Company, except to the
extent any such net reduction amount is included in the amount calculated
pursuant to clause (c) of the preceding paragraph or any other clause of this
paragraph; (viii) Investments in Telecommunications Assets made after November
25, 1998 with the (x) Net Cash Proceeds, (y) the fair market value of
Telecommunications Assets or (z) Equity Interests of a Person that becomes a
Restricted Subsidiary (PROVIDED that the assets of such Person consist entirely
or substantially entirely of Telecommunications Assets), in each case, received
from the issuance or sale (other than to a Subsidiary of the Company) of Equity
Interests of the Company (other than any Disqualified Stock) PROVIDED, that the
amount of any such Net Cash Proceeds that are utilized for any such Investment
shall be excluded from clause (c) of the preceding paragraph and each other
clause of this paragraph; (ix) Investments in ION, PROVIDED that the aggregate
fair market value thereof (measured on the date each such Investment was made or
returned, as applicable), when taken together with all other Investments made
pursuant to this clause (ix) does not exceed the sum of (I) $15.0 million, plus,
(II) for each fiscal year, an amount equal to the amount of cash received by the
Company or any of its Restricted Subsidiaries from ION or any of its
Subsidiaries during such fiscal year, except to the extent any such amount is
included in the amount calculated pursuant to clause (c) of the preceding
paragraph or any other clause of this paragraph, plus (III), to the extent
necessary to pay reasonable and necessary operating expenses of ION, an amount
not to exceed $1.0 million in each fiscal year; and (x) Investments in the
German Joint Venture, PROVIDED that the aggregate fair market value (measured on
the date each such Investment was made or returned, as applicable), when taken
together with all other Investments made pursuant to this clause (x) that are at
the time outstanding, does not exceed the sum of (y) $100.0 million, plus (z)
the aggregate amount equal to the net reduction in Investments made pursuant to
this clause (x) on and after the Issue Date resulting from dividends,
<PAGE>
distributions, interest payments, return of capital, repayments of such
Investments or Net Cash Proceeds realized by the Company or any Restricted
Subsidiary upon the sale of such Investment to a Person other than the Company
or any Subsidiary of the Company, except to the extent such amount is included
in the amount calculated pursuant to clause (c) of the preceding paragraph or
any other clause of this paragraph.
The Board of Directors may not designate any Subsidiary of the
Company (other than a newly created Subsidiary in which no Investment has
previously been made (other than any de minimus amount required to capitalize
such Subsidiary in connection with its organization)) as an Unrestricted
Subsidiary (a "Designation") unless: (i) no Default or Event of Default shall
have occurred and be continuing at the time of or after giving effect to such
Designation; (ii) the Company would, immediately after giving effect to such
Designation, have been permitted to incur at least $1.00 of additional
Indebtedness pursuant to either clause (i) or (ii) of the first paragraph of
Section 4.09 hereof and (iii) the Company would not be prohibited under the
Indenture from making an Investment at the time of such Designation (assuming
the effectiveness of such Designation for purposes of this Section 4.07) in an
amount equal to the fair market value of the net Investment of the Company and
all Restricted Subsidiaries in such Subsidiary on such date.
In the event of any such Designation, all outstanding
Investments owned by the Company and its Restricted Subsidiaries in the
Subsidiary so designated will be deemed to be an Investment made as of the time
of such Designation and will reduce the amount available for Restricted Payments
under the first or second paragraph of this covenant, as applicable. All such
outstanding Investments will be deemed to constitute Restricted Payments in an
amount equal to the fair market value of such Investments at the time of such
Designation.
A Designation may be revoked and an Unrestricted Subsidiary
may thus be redesignated a Restricted Subsidiary (a "Revocation") by a
resolution of the Board of Directors delivered to the Trustee; PROVIDED that the
Company will not make any Revocation unless: (i) no Default or Event of Default
shall have occurred and be continuing at the time of or after giving effect to
such Designation; and (ii) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately following such Revocation would, if incurred
at such time, have been permitted to be incurred at such time for all purposes
under this Indenture.
The amount of all Restricted Payments (other than cash) shall
be the fair market value on the date of the Restricted Payment of the asset(s)
or securities proposed to be transferred or issued by the Company (or such
Restricted Subsidiary, as the case may be) pursuant to the Restricted Payment.
The fair market value of any asset(s) or securities that are required to be
valued by this covenant shall be determined in good faith by the Board of
Directors (such determination to be based upon an opinion or appraisal
<PAGE>
issued by an accounting, appraisal or investment banking firm of national
standing if such fair market value exceeds $15.0 million).
SECTION 4.08 DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Restricted Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any indebtedness owed to the Company or any
of its Restricted Subsidiaries, (ii) make loans or advances to the Company or
any of its Restricted Subsidiaries or (iii) transfer any of its properties or
assets to the Company or any of its Restricted Subsidiaries. However, the
foregoing restrictions shall not apply to encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the Issue Date,
(b) this Indenture, the Notes and the Exchange Notes, and Indebtedness ranking
PARI PASSU with the Notes provided such provisions are no more restrictive than
the Notes (c) the Credit Agreement and any Foreign Subsidiary Credit Agreement,
PROVIDED that the restrictions contained in the Credit Agreement are no more
restrictive, taken as a whole, than those contained in a credit agreement with
terms that are commercially reasonable for a borrower that has substantially
comparable Indebtedness and PROVIDED, FURTHER, that no such provision in the
Credit Agreement shall prohibit or restrict the ability of any Restricted
Subsidiary to pay dividends or make other upstream distributions or other
payments to the Company or any of its Restricted Subsidiaries, (d) applicable
law, (e) any instrument governing Indebtedness or Capital Stock of a Person or
assets acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Indebtedness
was incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person, or the property or assets of the
Person, so acquired; PROVIDED, that in the case of Indebtedness, such
Indebtedness was permitted by the terms of the Indenture to be incurred, (f)
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices, (g) purchase money
obligations (including pursuant to Purchase Money Indebtedness obligations) for
property acquired in the ordinary course of business that impose restrictions of
the nature described in clause (iii) above on the property so acquired,
constructed, leased or improved, (h) any agreement for the sale or other
disposition of a Restricted Subsidiary that restricts distributions by that
Restricted Subsidiary pending its sale or other disposition, PROVIDED that the
consummation of such transaction would not result in an Event of Default or an
event that, with the passing of time or giving of notice or both, would
constitute an Event of Default, that such restriction terminates if such
transaction is not consummated and that the consummation
<PAGE>
or abandonment of such transaction occurs within one year of the date such
agreement was entered into, (i) Permitted Refinancing Indebtedness, PROVIDED
that the restrictions contained in the agreements governing such Permitted
Refinancing Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded, (j) Liens securing
Indebtedness otherwise permitted to be incurred pursuant to Section 4.12 hereof
that limit the right of the Company or any of its Restricted Subsidiaries to
dispose of the assets subject to such Lien, (k) provisions with respect to the
disposition or distribution of assets or property in joint venture agreements
and other similar agreements entered into in the ordinary course of business,
and (l) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.
SECTION 4.09 INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise (including by way of merger, consolidation or
acquisition), with respect to (collectively, "incur") any Indebtedness and the
Company shall not issue or incur any Disqualified Stock and shall not permit any
of its Restricted Subsidiaries to issue or incur any shares of Preferred Stock;
PROVIDED, HOWEVER, that the Company may incur Indebtedness or issue or incur
shares of Disqualified Stock and its Restricted Subsidiaries may incur Acquired
Debt or Acquired Preferred Stock if either:
(i) the Consolidated Leverage Ratio at the end of the
Company's most recently ended fiscal quarter (the "Reference
Period") for which a consolidated balance sheet of the Company
is available immediately preceding the date on which such
additional Indebtedness is incurred or such Preferred Stock is
issued or incurred would have been less than 5.5 to 1.0 (if
the Reference Period ends on or prior to December 31, 2001),
or 5.0 to 1.0 (if the Reference Period ends subsequent to
December 31, 2001), determined on a pro forma basis
(including, a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been
incurred, or the Preferred Stock had been issued, as the case
may be, at the beginning of the Reference Period; or
(ii) the Consolidated Capital Ratio at the end of the
Reference Period would have been less than 2.0 to 1.0,
determined after giving effect to the incurrence or issuance
of such Indebtedness or Preferred Stock and on a pro forma
basis (including a pro forma application of the net proceeds
therefrom).
<PAGE>
Notwithstanding the foregoing, the provisions of the paragraph
set forth immediately above will not prohibit the incurrence of any of the
following items of Indebtedness (collectively, "Permitted Indebtedness"):
(a) the incurrence by the Company of Indebtedness
represented by the Notes and the Exchange Notes;
(b) the incurrence by the Company or any of its Restricted
Subsidiaries of Existing Indebtedness;
(c) the incurrence of Indebtedness by the Company to any
Consolidated Subsidiary or Indebtedness of any Restricted
Subsidiary to the Company or any Consolidated Subsidiary (but
such Indebtedness shall be deemed to be incurred upon such
Indebtedness being held by any person other than the Company or
such Consolidated Subsidiary including upon Designation and upon
such Restricted Subsidiary otherwise no longer being a
Consolidated Subsidiary); PROVIDED that in the case of
Indebtedness of the Company, such obligations shall be unsecured
and subordinated in all respects to the Company's obligations
pursuant to the Notes;
(d) the incurrence by the Company of Indebtedness in an
aggregate amount incurred and outstanding at any time pursuant to
this clause (d) (plus any Permitted Refinancing Indebtedness
incurred pursuant to clause (j) hereof to retire, defease,
refinance, replace or refund such Indebtedness) of up to $25
million;
(e) the incurrence by the Company, or any Guarantee thereof
by any Restricted Subsidiary (other than any Foreign Subsidiary),
of Indebted ness pursuant to the Credit Agreement in an aggregate
amount incurred and outstanding at any time pursuant to this
clause (e) (plus any Permitted Refinancing Indebtedness incurred
pursuant to clause (j) hereof to retire, defease, refinance,
replace or refund such Indebtedness) of up to $300 million, minus
the amount of any such Indebtedness (i) retired with the Net Cash
Proceeds from any Asset Sale applied to permanently reduce the
outstanding amounts or the commitments with respect to such
Indebtedness pursuant to Section 4.10 hereof or (ii) assumed by a
transferee in an Asset Sale;
(f) the incurrence by the Company or any of its Foreign
Subsidiaries of Purchase Money Indebtedness; PROVIDED that in
each case, such Indebtedness shall not constitute more than 100%
of the cost (deter mined in accordance with GAAP in good faith by
the Board of
<PAGE>
Directors of the Company) to the Company or such Foreign
Subsidiary, as applicable, of the property so purchased,
developed, acquired, constructed, improved or leased;
(g) the incurrence by the Company or any of its Restricted
Subsidiaries of Hedging Obligations that are incurred for the
purpose of fixing or hedging interest or foreign currency
exchange rate risk with respect to any floating rate Indebtedness
or foreign currency based Indebtedness, respectively, that is
permitted by the terms of the Indenture to be outstanding;
PROVIDED that the notional amount of any such Hedging Obligation
does not exceed the amount of Indebtedness or other liability to
which such Hedging Obligation relates;
(h) the incurrence by a Foreign Subsidiary of Indebtedness
pursuant to a Foreign Subsidiary Credit Agreement (or any
Guarantee thereof by any other Foreign Subsidiary) in an
aggregate principal amount incurred and outstanding at any time
pursuant to this clause (h) (plus any Permitted Refinancing
Indebtedness incurred pursuant to clause (j) hereof to retire,
defease, refinance, replace or refund such Indebtedness) of up to
$150.0 million (or the equivalent thereof at the time of
incurrence in the applicable foreign currencies), minus the
amount of any such Indebtedness (i) retired with the Net Cash
Proceeds from any Asset Sale applied to permanently reduce the
outstanding amounts or the commitments with respect to such
Indebtedness pursuant to Section 4.10 hereof or (ii) assumed by a
transferee of an Asset Sale;
(i) the Company and its Restricted Subsidiaries may incur
Indebtedness solely in respect of bankers acceptances, letters of
credit and performance bonds, all in the ordinary course of
business in accordance with customary industry practices, in
amounts and for the purposes customary in the Company's industry
(other than to the extent supporting Indebtedness); and
(j) the incurrence by the Company or any of its Restricted
Subsidiaries, as applicable, of Permitted Refinancing
Indebtedness in exchange for, or the net proceeds of which are
used to refund, refinance or replace Indebtedness that was
incurred pursuant to the first paragraph hereof or clauses (a),
(b), (d), (e), (f), (h) or this clause (j) of this paragraph.
Indebtedness or Preferred Stock of any Person which is
outstanding at the time such Person becomes a Restricted Subsidiary of the
Company (including upon designation of any Subsidiary or other Person as a
Restricted Subsidiary or upon a
<PAGE>
Revocation such that such Subsidiary becomes a Restricted Subsidiary) or is
merged with or into or consolidated with the Company or a Restricted Subsidiary
of the Company shall be deemed to have been incurred at the time such Person
becomes such a Restricted Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Restricted Subsidiary of the Company, as
applicable.
Upon each incurrence, the Company may designate pursuant to
which provision of this covenant such Indebtedness is being incurred and such
Indebtedness shall not be deemed to have been incurred by the Company under any
other provision of this covenant, except as stated otherwise in the foregoing
provisions.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, incur any Indebtedness (including Permitted
Indebtedness) that is contractually subordinated in right of payment to any
other Indebtedness of the Company unless such Indebtedness is also contractually
subordinated in right of payment to the Notes on substantially identical terms;
PROVIDED, HOWEVER, that no Indebtedness of the Company shall be deemed to be
contractually subordinated in right of payment to any other Indebtedness of the
Company solely by virtue of being unsecured.
SECTION 4.10 ASSET SALES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, consummate any Asset Sale,
unless (i) the Company (or such Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the fair
market value (as determined in good faith by the Board of Directors (including
as to the value of all noncash consideration) and set forth in an Officer's
Certificate delivered to the Trustee) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 75% of the consideration
therefor is in the form of cash and/or Cash Equivalents or Telecommunications
Assets, and (iii) the Net Cash Proceeds received by the Company (or such
Restricted Subsidiary, as the case may be) from such Asset Sale are applied
within 360 days following the receipt of such Net Cash Proceeds, to the extent
the Company (or such Restricted Subsidiary, as the case may be) elects, (a) to
the permanent redemption or repurchase of outstanding Indebtedness (other than
Subordinated Indebtedness) that is secured Indebtedness (including that in the
case of a revolver or similar arrangement that makes credit available, such
commitment is so permanently reduced by such amount) or Indebtedness of the
Company or such Restricted Subsidiary that ranks equally with the Notes but has
a maturity date that is prior to the maturity date of the Notes and/or (b) to
reinvest such Net Cash Proceeds (or any portion thereof) in Telecommunica tions
Assets. Notwithstanding anything herein to the contrary, with respect to the
reinvestment of Net Cash Proceeds, only proceeds from an Asset Sale of assets,
or Equity Interests, of a Foreign Subsidiary may be used to retire Indebtedness
of a Foreign Subsidiary or reinvest in assets or Equity Interests of a Foreign
Subsidiary. The balance of such Net Cash
<PAGE>
Proceeds, after the application of such Net Cash Proceeds as described in the
immediately preceding clauses (a) and (b), shall constitute "Excess Proceeds."
When the aggregate amount of Excess Proceeds equals or exceeds
$15.0 million (taking into account income earned on such Excess Proceeds), the
Company will be required to make a pro rata offer to all Holders of Notes and
PARI PASSU Indebtedness with comparable provisions requiring such Indebtedness
to be purchased with the proceeds of such Asset Sale (an "Asset Sale Offer") to
purchase the maximum principal amount or accreted value in the case of
Indebtedness issued with an original issue discount of Notes and PARI PASSU
Indebtedness that may be purchased out of the Excess Proceeds, at a purchase
price in cash in an amount equal to 100% of the principal amount thereof or the
accreted value thereof, as applicable, plus accrued and unpaid interest thereon
to the date of purchase (subject to the right of Holders of record on the
relevant Record Date to receive interest due on the relevant Interest Payment
Date), in accordance with the procedures set forth in Article 3 of this
Indenture and the agreements governing such PARI PASSU Indebtedness. To the
extent that any Excess Proceeds remain after consummation of an Asset Sale
Offer, the Company may use such Excess Proceeds for any purpose not otherwise
prohibited by this Indenture. If the aggregate principal amount of Notes and
PARI PASSU Indebtedness tendered into such Asset Sale Offer surrendered by
Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes and PARI PASSU Indebtedness to be purchased on a pro rata basis in
proportion to the respective principal amounts (or accreted values in the case
of Indebtedness issued with an original issue discount) of the Notes and such
other Indebtedness. Upon completion of such Asset Sale Offer, the amount of
Excess Proceeds shall be reset at zero for purposes of the first sentence of
this paragraph.
The amount of (x) any liabilities (as shown on the Company's
(or such Restricted Subsidiary's, as the case may be) most recent balance
sheet), other than Subordinated Indebtedness of the Company or any Restricted
Subsidiary that are assumed by the transferee of any such assets pursuant to an
agreement that immediately releases the Company and all of its Restricted
Subsidiaries from all liability in respect thereof, (y) Indebtedness of any
Restricted Subsidiary that is no longer a Restricted Subsidiary as a result of
such Asset Sale, if the Company and all of its Restricted Subsidiaries are
immediately released from all Guarantees of payment of such Indebtedness and
such Indebtedness is no longer the liability of the Company or any of its
Restricted Subsidiaries, and (z) any securities, notes or other obligations
received by the Company (or such Restricted Subsidiary, as the case may be) from
such transferee that are contemporaneously (subject to ordinary settlement
periods) converted by the Company (or such Restricted Subsidiary, as the case
may be) into cash and/or Cash Equivalents (to the extent of the cash and/or Cash
Equivalents received), will be deemed to be cash and/or Cash Equivalents for
purposes of this provision.
To the extent that the provisions of any securities laws or
regulations shall
<PAGE>
conflict with the Asset Sale provisions of this Indenture, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under the Asset Sale provisions of this
Indenture by virtue thereof.
SECTION 4.11 TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any transaction,
contract, agreement, understanding, loan, advance or Guarantee with, or for the
benefit of, any Affiliate (each of the foregoing, an "Affiliate Transaction"),
unless (i) such Affiliate Transaction is on terms that are not materially less
favorable to the Company or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (ii) with respect to any
Affiliate Transaction or series of related Affiliate Transactions (A) involving
aggregate consideration in excess of $5.0 million, the Company delivers to the
Trustee a resolution of the Board of Directors set forth in an Officers'
Certificate that such Affiliate Transaction is approved by a majority of the
disinterested members of the Board of Directors and that, except with respect to
matters governed by the Management Agreement, certifying that such Affiliate
Transaction complies with clause (i) above and is in the best interests of the
Company or such Restricted Subsidiary and (B) if involving aggregate
consideration in excess of $15.0 million, a favorable written opinion as to the
fairness to the Company of such Affiliate Transaction from a financial point of
view is also obtained by the Company from an accounting, appraisal or investment
banking firm of national standing. Notwithstanding the foregoing, the following
items shall not be deemed to be Affiliate Transactions: (i) (a) the entering
into, maintaining or performance of any employment contract, collective
bargaining agreement, benefit plan, program or arrangement, related trust
agreement or any other similar arrangement for or with any employee, officer or
director heretofore or hereafter entered into in the ordinary course of
business, including vacation, health, insurance, deferred compensation,
retirement, savings or other similar plans, (b) the payment of compensation,
performance of indemnification or contribution obligations, or an issuance,
grant or award of stock, options, or other equity-related interests or other
securities, to employees, officers or directors in the ordinary course of
business, (c) any transaction with an officer or director in the ordinary course
of business not involving more than $100,000 in any one case, or (d) Management
Advances and payments in respect thereof, (ii) transactions between or among the
Company and/or its Restricted Subsidiaries, (iii) payment of reasonable
directors fees, (iv) any sale or other issuance of Equity Interests (other than
Disqualified Stock) of the Company, (v) Affiliate Transactions in effect or
approved by the Board of Directors on the Issue Date, including any amendments
thereto (PROVIDED that the terms of such amendments are not materially less
favorable to the Company than the terms of such agreement prior to such
amendment), (vi) transactions with respect to capacity between the Company or
any
<PAGE>
Restricted Subsidiary and any Unrestricted Subsidiary or other Affiliate and
joint sales and marketing pursuant to an agreement or agreements between the
Company or any Restricted Subsidiary and any Unrestricted Subsidiary or other
Affiliate (PROVIDED that in the case of this clause (vi), such agreements are on
terms that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that could have been obtained at the time of such
transaction in an arm's-length transaction with an unrelated third party or, in
the case of a transaction with an Unrestricted Subsidiary, ION or another
Affiliate, are either (x) entered into in connection with a transaction
involving the selection by a customer of cable system capacity entered into in
the ordinary course of business or (y) involve the provision by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary, ION or another Affiliate of
sales and marketing services, operations, administra tion and maintenance
services or development services for which the Company or such Restricted
Subsidiary receives a fair rate of return (as determined by the Board of
Directors and set forth in an Officers' Certificate delivered to the Trustee)
above its expenses of providing such services), and (vii) Restricted Payments
that are permitted by Section 4.07 hereof.
SECTION 4.12 LIENS.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, create, incur, assume or
otherwise cause or suffer to exist or become effective any Lien of any kind
(other than Permitted Liens) upon any of their property or assets, now owned or
hereafter acquired, or upon any income or profits therefrom unless all payments
due under this Indenture and the Notes are secured (except as provided in the
next clause) on an equal and ratable basis with the obligations so secured and
no Lien shall be granted or be allowed to exist which secures Subordinated
Indebtedness except with respect to Acquired Debt, in which case, however, such
Liens must be made junior and subordinate to the Liens granted to the Holders of
the Notes.
SECTION 4.13 CORPORATE EXISTENCE.
Subject to Article 5 hereof, the Company shall do or cause to
be done all things necessary to preserve and keep in full force and effect (i)
its corporate existence, and the corporate, partnership or other existence of
each of its Subsidiaries, in accordance with the respective organizational
documents (as the same may be amended from time to time) of the Company or any
such Subsidiary and (ii) the rights (charter and statutory), licenses and
franchises of the Company and its Subsidiaries; provided, however, that the
Company shall not be required to preserve any such right, license or franchise,
or the corporate, partnership or other existence of any of its Subsidiaries, if
the Board of Directors shall determine that the preservation thereof is no
longer desirable in the conduct of the business of the Company and its
Subsidiaries, taken as a whole, and that the loss thereof is not adverse in any
material respect to the Holders of the Notes.
<PAGE>
SECTION 4.14 CHANGE OF CONTROL.
(a) Upon the occurrence of a Change of Control, each Holder of
Notes will have the right to require the Company to purchase all or any part
(equal to $1,000 or (U)1,000, as the case may be, or an integral multiple
thereof, as the case may be) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at a purchase price in cash
equal to 101% of the aggregate principal amount thereof (the "Change of Control
Payment") plus accrued and unpaid interest thereon to the date of purchase
(subject to the right of Holders of record on the relevant Record Date to
receive interest due on the relevant Interest Payment Date), PROVIDED, however,
that the Company shall not be obligated to repurchase Notes pursuant to this
covenant in the event that it has exercised its rights to redeem all of the
Notes as describe in Section 3.07 hereof. Within 30 days following any Change of
Control, the Company will mail a notice to each Holder (with a copy to the
Trustee) describing the transaction or transactions that constitute the Change
of Control and offering to purchase Notes on the date specified in such notice,
which date shall be no earlier than 30 and no later than 60 days from the date
such notice is mailed (the "Change of Control Payment Date"), in accordance with
the procedures required by this Indenture and described in such notice.
The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations to the
extent such laws and regulations are applicable in connection with the purchase
of Notes as a result of a Change of Control. To the extent that the provisions
of any securities laws or regulations conflict with any of the provisions of
this Section 4.14, the Company will comply with the applicable securities laws
and regulations and will be deemed not to have breached its obligations under
this covenant by virtue thereof.
(b) On the Change of Control Payment Date, the Company
will, to the extent lawful, (1) accept for payment all Notes or portions
thereof properly tendered pursuant to the Change of Control Offer, (2)
deposit with the Paying Agent an amount equal to the Change of Control
Payment plus accrued and unpaid interest thereon, in respect of all Notes or
portions thereof so tendered and (3) deliver or cause to be delivered to the
Trustee Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by
the Company. The Paying Agent will promptly mail or deliver to each Holder of
Notes so tendered the Change of Control Payment plus accrued and unpaid
interest thereon, for such Notes, and upon written direction of the Company,
the Trustee will promptly authenticate and mail or deliver (or cause to be
transferred by book entry) to each Holder a new Note equal in principal
amount to any unpurchased portion of Notes surrendered, if any; PROVIDED that
each such new Note will be in a principal amount of $1,000 or [Euro] 1,000,
as the case may be, or an integral multiple thereof, as the case may be. The
Company will publicly announce the results of the Change of Control Offer on
or as soon as practicable after the Change of Control Payment Date.
<PAGE>
(c) Notwithstanding anything to the contrary set forth in this
Section 4.14, the Company shall not be required to make a Change of Control
Offer upon the occurrence of a Change of Control if a third party makes the
Change of Control Offer in the manner, at the times and otherwise in compliance
with the requirements set forth in this Section 4.14, and purchases all Notes
validly tendered and not withdrawn under such Change of Control Offer.
SECTION 4.15 BUSINESS ACTIVITIES.
The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, engage, to more than a de minimus extent, in any
business other than a Telecommunica tions Business.
SECTION 4.16 PAYMENTS FOR CONSENT.
Neither the Company nor any of its Restricted Subsidiaries
shall, directly or indirectly, pay or cause to be paid any consideration,
whether by way of interest, fee or otherwise, to any Holder of any Notes for or
as an inducement to any consent, waiver or amendment of any of the terms or
provisions of this Indenture or the Notes unless such consideration is offered
to be paid or is paid to all Holders of the Notes that consent, waive or agree
to amend such terms or provisions of this Indenture or the Notes in the time
frame set forth in the solicitation documents relating to such consent, waiver
or agreement.
SECTION 4.17 MONEY FOR PAYMENTS TO BE HELD IN TRUST.
If the Company shall at any time act as its own Paying Agent,
it will, on or before each due date of the principal, premium or interest with
respect to the Notes, segregate and hold in trust for the benefit of the Persons
entitled thereto a sum sufficient to pay the principal, premium or interest so
becoming due until such sums shall be paid to such Persons or otherwise disposed
of as herein provided, and will promptly notify the Trustee of its action or
failure so to act.
Whenever the Company shall have one or more Paying Agents for
the Notes, it will, on or before each due date of the principal, premium or
interest with respect to the Notes, deposit with a Paying Agent a sum in same
day funds (or New York Clearing House funds if such deposit is made prior to the
date on which such deposit is required to be made) sufficient to pay the
principal, premium or interest so becoming due (or at the option of the Company,
payment of interest may be mailed by check to the Holders of the Notes at their
respective addresses set forth in the register of Holders of Notes; PROVIDED
that all payments with respect to Notes represented by one or more permanent
global Notes will be paid by wire transfer of immediately available funds to
<PAGE>
the account of the Depository Trust Company in the case of the Dollar Notes, or
any successor thereto, or to the Common Depositary, in the case of the Euro
Notes, or any successor thereto) such sum to be held in trust for the
benefit of the Persons entitled to such principal, premium or interest and
(unless such Paying Agent is the Trustee) the Company will promptly notify the
Trustee of such action or any failure so to act.
The Company will cause each Paying Agent other than the
Trustee to execute and deliver to the Trustee an instrument in which such Paying
Agent shall agree with the Trustee, subject to the provisions of this Section,
that such Paying Agent will:
(a) hold all sums held by it for the payment of the principal of,
premium, if any, or interest on Notes in trust for the benefit of the Persons
entitled thereto until such sums shall be paid to such Persons or otherwise
disposed of as herein provided;
(b) give the Trustee written notice of any default by the Company (or
any other obligor upon the Notes) in the making of any payment of principal,
premium or interest;
(c) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent; and
(d) acknowledge, accept and agree to comply in all respects with the
provisions of this Indenture relating to the duties, rights and obligations of
such Paying Agent.
The Company may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
direct any Paying Agent to pay, to the Trustee all sums held in trust by the
Company or such Paying Agent, such sums to be held by the Trustee upon the same
trusts as those upon which such sums were held by the Company or such Paying
Agent; and, upon such payment by any Paying Agent to the Trustee, such Paying
Agent shall be released from all further liability with respect to such money.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal, premium or
interest with respect to a Note and remaining unclaimed for two years after such
principal, premium, if any, or interest has become due and payable shall be paid
to the Company at the written request of the Company or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Note shall
thereafter, as an unsecured general creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or such
Paying Agent,
<PAGE>
before being required to make any such repayment, shall at the expense of the
Company cause notice to be promptly sent to each Holder that such money remains
unclaimed and that, after a date specified therein, which shall not be less than
30 days from the date of such notification any unclaimed balance of such money
then remaining will be repaid to the Company.
ARTICLE 5.
SUCCESSORS
SECTION 5.01 MERGER, CONSOLIDATION, OR SALE OF ASSETS.
(a) The Company shall not, directly or indirectly, consolidate
or merge with or into (whether or not the Company is the surviving corporation),
or sell, assign, transfer, convey or otherwise dispose of all or substantially
all of its properties or assets, in one or more related transactions, to another
Person unless: (i) the Company is the surviving corporation or the Person formed
by or surviving any such consolidation or merger (if other than the Company) or
to which such sale, assignment, transfer, conveyance or other disposition shall
have been made is a corporation organized or existing under the laws of the
United States, any state thereof or the District of Columbia; (ii) the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or the Person to which such sale, assignment, transfer, conveyance or
other disposition shall have been made assumes all the obligations of the
Company under the Registration Rights Agreement, the Notes, the Exchange Notes
and this Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (iii) no Default or Event of Default ( or an event
that, with the passing of time or giving of notice or both, would constitute an
Event of Default) shall exist or shall occur immediately after giving effect on
a pro forma basis to such transaction; (iv) except in the case of a merger of
the Company with or into a Wholly Owned Restricted Subsidiary of the Company,
the Company or the Person formed by or surviving any such consolidation or
merger (if other than the Company), or to which such sale, assignment, transfer,
conveyance or other disposition shall have been made will immediately after such
transaction and after giving pro forma effect thereto and any related financing
transactions as if the same had occurred at the beginning of the applicable
period, be permitted to incur at least $1.00 of additional Indebtedness pursuant
to either clause (i) or (ii) of the first paragraph of Section 4.09 hereof; (v)
if, as a result of any such transaction, property or assets of the Company would
become subject to a Lien subject to the provisions of Section 4.12 hereof, the
Company or the successor entity to the Company shall have secured the Notes as
required by said covenant; and (vi) the Company shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, each stating that
such consolidation, merger or transfer and such supplemental indenture (if any)
comply with the Indenture. The Company shall not, directly or indirectly, lease
all or substantially all of its properties or assets, in one or more related
transactions, to any other Person. The provisions of this covenant will not be
applicable to a sale,
<PAGE>
assignment, transfer, conveyance or other disposition of assets solely between
or among the Company and its Wholly Owned Restricted Subsidiaries.
(b) For purposes of this Article 5, the transfer (by
assignment, sale or otherwise) of all or substantially all of the properties and
assets of one or more Subsidiaries, the Company's interest in which constitutes
all or substantially all of the properties and assets of the Company, shall be
deemed to be the transfer of all or substantially all of the properties and
assets of the Company.
SECTION 5.02 SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger or any transfer of all or
substantially all of the assets of the Company in accordance with Section 5.01
hereof, the successor Person formed by such consolidation or into which the
Company is merged or to which such transfer is made shall succeed to and (except
in the case of a lease) be substituted for (so that from and after the date of
such consolidation, merger or transfer, the provisions of this Indenture
referring to the "Company" shall refer instead to the successor Person and not
to the Company), and may exercise every right and power of, the Company under
this Indenture with the same effect as if such successor Person had been named
herein as the Company, and (except in the case of a lease) the Company shall be
released from the obligations under the Notes and this Indenture except with
respect to any obligations that arise from, or are related to, such transaction.
ARTICLE 6.
DEFAULTS AND REMEDIES
SECTION 6.01 EVENTS OF DEFAULT.
"Event of Defaults" are:
(i) default for 30 days in the payment when due of interest
on the Notes;
(ii) default in the payment when due of the principal of, or
premium, if any, on the Notes;
(iii) failure by the Company or any of its Restricted
Subsidiaries to comply with Sections 4.10 or 4.14;
(iv) failure by the Company or any of its Restricted
Subsidiaries for 60 days after notice to comply with any of
its other agreements in this Indenture or the Notes;
<PAGE>
(v) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or evidenced
any Indebtedness for money borrowed by the Company or any of its
Restricted Subsidiaries (or the payment of which is Guaranteed by the
Company or any of its Restricted Subsidiar ies) whether such
Indebtedness or Guarantee now exists, or is created after the Issue
Date, which default results in the acceleration of such Indebtedness
prior to its express maturity and, in each case, the amount of any such
Indebtedness, together with the amount of any other such Indebtedness
or the maturity of which has been so accelerated, aggregates $15.0
million or more;
(vi) failure by the Company or any of its Restricted
Subsidiaries to pay final judgments not subject to appeal aggregating
in excess of $15.0 million (net of applicable insurance coverage which
is acknowledged in writing by the insurer), which judgments are not
paid, vacated, discharged or stayed for a period of 60 days;
(vii) the Company or any of its Restricted Subsidiaries:
(a) commences a voluntary case under any Bankruptcy Law,
(b) consents to the entry of an order for relief against
it in an involuntary case under any Bankruptcy Law,
(c) consents to the appointment of a custodian of it or
for all or substantially all of its property,
(d) makes a general assignment for the benefit of its
creditors, or
(e) generally is not paying its debts as they become due;
and
(viii) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(a) is for relief against the Company or any of its
Restricted Subsidiaries
(b) appoints a custodian of the Company or any of its
Restricted Subsidiaries or for all or substantially all of
the property of the Company or any of its Restricted
Subsidiaries; or
(c) orders the liquidation of the Company or any of its
Restricted Subsidiaries;
<PAGE>
and the order or decree remains unstayed and in effect for 60
consecutive days.
SECTION 6.02 ACCELERATION
If any Event of Default occurs and is continuing, the Trustee
or the Holders of at least 25% in aggregate principal amount of the then
outstanding Notes may declare all the Notes to be due and payable immediately.
Notwithstanding the foregoing, if an Event of Default specified in clause (vii)
or (viii) of Section 6.01 hereof occurs with respect to the Company, any of its
Restricted Subsidiaries that constitutes a Significant Subsidiary or any group
of Restricted Subsidiaries that, taken as a whole, would constitute a
Significant Subsidiary, all outstanding Notes shall be due and payable
immediately without further action or notice. The Holders of a majority in
aggregate principal amount of the then outstanding Notes by written notice to
the Trustee may on behalf of all of the Holders rescind an acceleration and its
consequences if the rescission would not conflict with any judgment or decree
and if all existing Events of Default (except nonpayment of principal, interest
or premium that has become due solely because of the acceleration) have been
cured or waived.
SECTION 6.03 OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee
may pursue any available remedy to collect the payment of principal, premium, if
any, and interest on the Notes or to enforce the performance of any provision of
the Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Notes or does not produce any of them in the proceeding. A
delay or omission by the Trustee or any Holder of a Note in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.
SECTION 6.04 WAIVER OF PAST DEFAULTS.
Holders of not less than a majority in aggregate principal
amount of the then outstanding Notes (or, with respect to a provision of this
Indenture that may only be amended by the Holders of not less than 662/3% in
aggregate principal amount of the then outstanding Notes, the Holders of not
less than 662/3% in aggregate principal amount of the then outstanding Notes) by
written notice to the Trustee may on behalf of the Holders of all of the Notes
waive an existing Default or Event of Default and its consequences hereunder,
except a continuing Default or Event of Default in the payment of the principal
of, premium, if any, or interest on, the Notes (including in connection with an
offer to purchase). Upon any such waiver, such Default shall cease to exist, and
any Event of Default arising therefrom shall be deemed to have been cured for
every purpose of this Indenture, but no such waiver shall extend to any
subsequent or other Default or
<PAGE>
impair any right consequent thereon.
SECTION 6.05 CONTROL BY MAJORITY.
Holders of Notes may not enforce this Indenture or the Notes
except as provided herein. Holders of a majority in principal amount of the then
outstanding Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture or that the Trustee
determines may be unduly prejudicial to the rights of other Holders of Notes or
that may involve the Trustee in personal liability.
SECTION 6.06 LIMITATION ON SUITS.
A Holder of a Note may pursue a remedy with respect to this
Indenture or the Notes only if:
(a) the Holder of a Note gives to the Trustee written notice of a
continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the then
outstanding Notes make a written request to the Trustee to pursue the remedy;
(c) such Holder of a Note or Holders of Notes offer and, if requested,
provide to the Trustee indemnity satisfactory to the Trustee against any loss,
liability or expense;
(d) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and, if requested, the provision of
indemnity; and
(e) during such 60-day period the Holders of a majority in principal
amount of the then outstanding Notes do not give the Trustee a direction
inconsistent with the request.
A Holder of a Note may not use this Indenture to prejudice the
rights of another Holder of a Note or to obtain a preference or priority over
another Holder of a Note.
SECTION 6.07 RIGHTS OF HOLDERS OF NOTES TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the
right of any Holder of a Note to receive payment of principal, premium, if any,
and interest on the Note, on or after the respective due dates expressed in the
Note (including in connection with an offer to purchase), or to bring suit for
the enforcement of any such payment on or
<PAGE>
after such respective dates, shall not be impaired or affected without the
consent of such Holder.
SECTION 6.08 COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.01(i) or (ii)
hereof occurs and is continuing, the Trustee is authorized to recover judgment
in its own name and as trustee of an express trust against the Company for the
whole amount of principal of, premium, if any, and interest remaining unpaid on
the Notes and interest on overdue principal and, to the extent lawful, interest
and such further amount as shall be sufficient to cover the costs and expenses
of collection, including the reasonable compensation, expenses, disbursements
and advances of the Trustee, its agents and counsel.
SECTION 6.09 TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee is authorized to file such proofs of claim and
other papers or documents as may be necessary or advisable in order to have the
claims of the Trustee (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel) and
the Holders of the Notes allowed in any judicial proceedings relative to the
Company (or any other obligor upon the Notes), its creditors or its property and
shall be entitled and empowered to participate as a member, voting or otherwise,
of any official committee of creditors appointed in such matter and shall be
entitled and empowered to collect, receive and distribute any money or other
property payable or deliverable on any such claims and any custodian in any such
judicial proceeding is hereby authorized by each Holder to make such payments to
the Trustee, and in the event that the Trustee shall consent to the making of
such payments directly to the Holders, to pay to the Trustee any amount due to
it for the reasonable compensation, expenses, disburse ments and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07 hereof. To the extent that the payment of any such compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, and
any other amounts due the Trustee under Section 7.07 hereof out of the estate in
any such proceeding, shall be denied for any reason, payment of the same shall
be secured by a Lien on, and shall be paid out of, any and all distributions,
dividends, money, securities and other properties that the Holders may be
entitled to receive in such proceeding whether in liquidation or under any plan
of reorganization or arrangement or otherwise. Nothing herein contained shall be
deemed to authorize the Trustee to authorize or consent to or accept or adopt on
behalf of any Holder any plan of reorganization, arrangement, adjustment or
composition affecting the Notes or the rights of any Holder, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.
SECTION 6.10 PRIORITIES.
If the Trustee collects any money pursuant to this Article 6,
it shall pay out
<PAGE>
the money in the following order:
FIRST: to the Trustee, its agents and counsel for amounts due
under Section 7.07 hereof, including payment of all compensation, expense and
liabilities incurred, and all advances made, by the Trustee and the costs and
expenses of collection;
SECOND: to Holders of Notes for amounts due and unpaid on the
Notes for principal, premium, if any, and interest, ratably, without preference
or priority of any kind, according to the amounts due and payable on the Notes
for principal, premium, if any, and interest, respectively, and
THIRD: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any
payment to Holders of Notes pursuant to this Section 6.10.
SECTION 6.11 UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the cost of the suit, and the
court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section 6.11 does not apply to a suit by the Trustee, a suit by a Holder of
a Note pursuant to Section 6.07 hereof, or a suit by Holders of more than 10% in
principal amount of the then outstanding Notes.
ARTICLE 7.
TRUSTEE
SECTION 7.01 DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the Trustee
shall exercise such of the rights and powers vested in it by this Indenture, and
use the same degree of care and skill in its exercise, as a prudent man would
exercise or use under the circumstances in the conduct of his own affairs.
(b) Except during the occurrence and continuance of an Event of
Default:
(i) the duties of the Trustee shall be determined solely by
the express provisions of this Indenture and the Trustee need perform
only those duties that are specifically set forth in this Indenture and
no others, and no implied covenants
<PAGE>
or obligations shall be read into this Indenture against the Trustee;
and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of be opinions expressed therein, upon certificates (or
similar documents) or opinions furnished to the Trustee and conforming
to the requirements of this Indenture. However, the Trustee shall
examine the certificates (or similar documents) and opinions to
determine whether or not they conform to the requirements of this
Indenture (but need not confirm or investigate the accuracy of
mathematical calculations or other facts stated therein or otherwise
verify the contents thereof).
(c) The Trustee may not be relieved from liabilities for its own
grossly negligent action, its own grossly negligent failure to act, or its own
willful misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b) of
this Section 7.01;
(ii) the Trustee shall not be liable for any error of judgment
made in good faith by a Responsible Officer, unless it is proved that
the Trustee was grossly negligent in ascertaining the pertinent facts;
and
(iii) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every provision of
this Indenture that in any way relates to the Trustee is subject to paragraphs
(a), (b), (c) and (e) of this Section 7.01.
(e) No provision of this Indenture shall require the Trustee to expend
or risk its own funds or incur any liability. The Trustee shall be under no
obligation to exercise any of its rights and powers under this Indenture at be
request of any Holders, unless such Holder shall have offered to the Trustee
security and indemnity satisfactory to it against any loss, liability or expense
including reasonable attorneys' fees that might be incurred by it in compliance
with such request or direction.
(f) The Trustee shall not be liable for interest on any money received
by it except as the Trustee may agree in writing with the Company. Money held in
trust by the Trustee need not be segregated from other funds except to the
extent required by law.
SECTION 7.02 RIGHTS OF TRUSTEE.
<PAGE>
(a) The Trustee may conclusively rely upon any document believed by it
to be genuine and to have been signed or presented by the proper Person. The
Trustee need not investigate any fact or matter stated in any such document. The
Trustee shall receive and retain financial reports and statements of the Company
as provided herein, but it shall have no duty to review or analyze such reports
or statements to determine compliance with covenants or other obligations of the
Company.
(b) Before the Trustee acts or refrains from acting, it may require an
Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not be
liable for any action it takes or omits to take in good faith in reliance on
such Officers' Certificate or Opinion of Counsel. The Trustee may consult with
counsel of its selection and the advice of such counsel or any Opinion of
Counsel shall be full and complete authorization and protection from liability
in respect of any action taken, suffered or omitted by it hereunder in good
faith and in reliance thereon.
(c) The Trustee may act through its attorneys and agents and shall not
be responsible for the misconduct or negligence of any such attorney or agent
appointed with due care.
(d) The Trustee shall not be liable for any action it takes or omits to
take in good faith that it believes to be authorized or within the rights or
powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any
demand, request. direction or notice from the Company shall be sufficient if
signed by an Officer of the Company.
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders unless such Holders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that might be incurred by it in compliance with such request or direction.
(g) Prior to the occurrence of an Event of Default hereunder and after
the curing of all Events of Default which may have occurred, the Trustee shall
not be bound to make any investigation into the facts or matters stated in any
resolution, certificate, statement, instrument, opinion, report, notice,
request, order, approval, bond or other paper or document unless requested in
writing to do so by the Holders representing more than 25% in aggregate
principal amount of Notes then outstanding; provided, however, that if the
payment within a reasonable time to the Trustee of the costs, expenses or
liabilities likely to be incurred by it in the making of such investigation is,
in the opinion of the Trustee, not reasonably assured to the Trustee by the
security afforded to it by the terms of this Indenture, the Trustee may require
indemnity reasonably satisfactory to it
<PAGE>
against such cost, expense or liability as a condition to so proceeding.
(h) The Trustee may execute any of the trusts or powers hereunder or
perform any duties hereunder either directly or by or through agents or
attorneys and the Trustee shall not be responsible for any misconduct or
negligence on the part of any agent or attorney appointed with due care by it
hereunder.
(i) The rights, privileges, protections, immunities and benefits given
to the Trustee, including, without limitation, its right to be indemnified, are
extended to, and shall be enforceable by, the Trustee in each of its capacities
hereunder, and to each agent, custodian and other Person employed to act
hereunder.
SECTION 7.03 INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become
the owner or pledgee of Notes and may otherwise deal with the Company or any
Affiliate of the Company with the same rights it would have if it were not
Trustee. However, in the event that the Trustee acquires any conflicting
interest it must eliminate such conflict within 90 days, apply to the SEC for
permission to continue as trustee or resign. Any Agent may do the same with like
rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof
SECTION 7.04 TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no
representation as to the validity or adequacy of this Indenture or the Notes, it
shall not be accountable for the Company's use of the proceeds from the Notes or
any money paid to the Company or upon the Company's direction under any
provision of this Indenture, it shall not be responsible for the use or
application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement or recital herein or any
statement in the Notes or any other document in connection with the sale of the
Notes or pursuant to this Indenture other than its certificate of
authentication.
SECTION 7.05 NOTICE OF DEFAULTS.
(a) The Trustee shall not be deemed to have notice of any Default or
Event of Default unless a Responsible Officer of the Trustee has actual
knowledge thereof or unless written notice of any event which is in fact such a
default is received by the Trustee at the Corporate Trust Office of the Trustee,
and such notice references the Notes and this Indenture.
(b) If a Default or Event of Default occurs and is continuing and if it
is known
<PAGE>
to the Trustee in accordance with the provisions of paragraph (a) of this
Section 7.05, the Trustee shall mail to Holders of Notes a notice of the Default
or Event of Default within 90 days after it occurs. Except in the case of a
Default or Event of Default in payment of principal of, premium, if any, or
interest on any Note, the Trustee may withhold the notice if and so long as a
committee of its Responsible Officers in good faith determines that withholding
the notice is in the interests of the Holders of the Notes.
SECTION 7.06 REPORTS BY TRUSTEE TO HOLDERS OF THE NOTES.
Within 60 days after each May 15 beginning with the May 15
following the date of this Indenture, and for so long as Notes remain
outstanding, the Trustee shall mail to the Holders of the Notes a brief
report dated as of such reporting date that complies with TIA Section 313(a)
(but if no event described in TIA Section 313(a) has occurred within the
twelve months preceding the reporting date, no report need be transmitted).
The Trustee also shall comply with TIA Section 313(b)(2). The Trustee shall
also transmit by mail all reports as required by TIA Section 313(c).
A copy of each report at the time of its mailing to the
Holders of Notes shall be mailed to the Company and filed with the SEC and each
stock exchange on which the Notes are listed in accordance with TIA Section
313(d). The Company shall promptly notify the Trustee when the Notes are listed
on any stock exchange.
SECTION 7.07 COMPENSATION AND INDEMNITY.
The Company shall pay to the Trustee from time to time such
compensation for its acceptance of this Indenture and services hereunder as the
parties shall agree from time to time. The Trustee's compensation shall not be
limited by any law on compensation of a trustee of an express trust. The Company
shall reimburse the Trustee promptly upon request for all reasonable
disbursements, advances and expenses incurred or made by it in addition to the
compensation for its services. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee and any predecessor
Trustee and hold it harmless against any and all losses, liabilities or
expenses, including taxes (other than taxes based upon, measured by, or
determined by the income of the Trustee) incurred by it arising out of or in
connection with the acceptance or administration of its duties under this
Indenture, including the costs and expenses of enforcing this Indenture against
the Company (including this Section 7.07) and defending itself against any claim
(whether asserted by the Company or any Holder or any other person) or liability
in connection with the exercise or performance of any of its powers or duties
hereunder, except to the extent any such loss, liability or expense may be
attributable to its gross negligence or bad faith. The Trustee shall notify the
Company promptly of any claim for
<PAGE>
which it may seek indemnity. Failure by the Trustee to so notify the Company
shall not relieve the Company of its obligations hereunder. The Company shall
defend the claim and the Trustee shall cooperate in the defense. The Trustee may
have separate counsel and the Company shall pay the reasonable fees and expenses
of such counsel. The Company need not pay for any settlement made without its
consent, which consent shall not be unreasonably withheld or delayed.
The obligations of the Company under this Section 7.07 shall
survive the satisfaction and discharge of this Indenture or the resignation or
removal of the Trustee.
To secure the Company's payment obligations in this Section,
the Trustee shall have a Lien prior to the Notes on all money or property held
or collected by the Trustee, except that held in trust to pay principal and
interest on particular Notes. Such Lien shall survive the satisfaction and
discharge of this Indenture.
When the Trustee incurs expenses or renders services after an
Event of Default specified in Section 6.01 (vii) or (viii) hereof occurs, the
expenses and the compensation for the services (including the fees and expenses
of its agents and counsel) are intended to constitute expenses of administration
under any Bankruptcy Law.
The Trustee shall comply with the provisions of TIA Section
313(b)(2) to the extent applicable.
SECTION 7.08 REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section 7.08.
The Trustee may resign in writing at any time and be
discharged from the trust hereby created by so notifying the Company. The
Holders of Notes of a majority in principal amount of the then outstanding Notes
may remove the Trustee by so notifying the Trustee and the Company in writing.
The Company may remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an order
for relief is entered with respect to the Trustee under any Bankruptcy Law;
(c) a custodian or public officer takes charge of the Trustee or
its property; or
(d) the Trustee becomes incapable of acting.
<PAGE>
If the Trustee resigns or is removed or if a vacancy exists in
the office of Trustee for any reason (the Trustee in such event being referred
to herein as the retiring Trustee), the Company shall promptly appoint a
successor Trustee. Within one year after the successor Trustee takes office, the
Holders of a majority in principal amount of the then outstanding Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 30 days
after the retiring Trustee resigns or is removed, the retiring Trustee, the
Company, or the Holders of Notes of at least 10% in principal amount of the then
outstanding Notes may petition any court of competent jurisdiction for the
appointment of a successor Trustee.
If the Trustee, after written request by any Holder of a Note
who has been a Holder of a Note for at least six months, fails to comply with
Section 7.10 hereof, such Holder of a Note may petition any court of competent
jurisdiction for the removal of the Trustee and the appointment of a successor
Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Notes. The retiring Trustee shall promptly transfer
all property held by it as Trustee to the successor Trustee, provided all sums
owing to the Trustee hereunder have been paid and subject to the Lien provided
for in Section 7.07 hereof. Notwithstanding replacement of the Trustee pursuant
to this Section 7.08, the Company's obligations under Section 7.07 hereof shall
continue for the benefit of the retiring Trustee.
SECTION 7.09 SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or
transfers all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.
SECTION 7.10 ELIGIBILITY; DISQUALIFICATION.
There shall at all times be a Trustee hereunder that is a
corporation organized and doing business under the laws of the United States of
America or of any state thereof that is authorized under such laws to exercise
corporate trustee power, that is subject to supervision or examination by
federal or state authorities and that has a combined capital and surplus of at
least $100.0 million as set forth in its most recent published annual report of
condition.
<PAGE>
This Indenture shall always have a Trustee who satisfies the
requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to
TIA Section 310(b).
SECTION 7.11 PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee is subject to TIA Section 311 (a), excluding any
creditor relationship listed in TIA Section 311 (b). A Trustee who has resigned
or been removed shall be subject to TIA Section 311 (a) to the extent indicated
therein.
SECTION 7.12 MONEY HELD IN TRUST.
Money held by the Trustee in trust hereunder need not be
segregated from other funds except to the extent required by law. The Trustee
shall be under no liability for interest on any money received by it hereunder
except as otherwise agreed in writing with the Company.
ARTICLE 8.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.01 OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The Company may, at the option of its Board of Directors
evidenced by a resolution set forth in an Officers' Certificate, at any time,
elect to have either Section 8.02 or 8.03 hereof applied to all outstanding
Notes upon compliance with the conditions set forth below in this Article 8.
SECTION 8.02 LEGAL DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.01 hereof of the
option applicable to this Section 8.02, the Company shall, subject to the
satisfaction of the conditions set forth in Section 8.04 hereof, be deemed to
have been discharged from its obligations with respect to all outstanding Notes
on the date the conditions set forth below are satisfied (hereinafter, "LEGAL
DEFEASANCE"). For this purpose, Legal Defeasance means that the Company shall be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Notes, which shall thereafter be deemed to be "outstanding" only for
the purposes of Section 8.05 hereof and the other Sections of this Indenture
referred to in (a) and (b) below, and to have satisfied all of its obligations
under such Notes and this Indenture (and the Trustee, on demand of and at the
expense of the Company, shall execute proper instruments delivered to it by the
Company acknowledging the same), except for the following provisions which shall
survive until otherwise terminated or discharged hereunder: (a) the rights of
Holders of outstanding
<PAGE>
Notes to receive payments in respect of the principal of, premium, if any, and
interest on such Notes when such payments are due from the trust referred to
below; (b) the Company's obligations with respect to the Notes concerning
mutilated, destroyed, lost or stolen Notes and the maintenance of an office or
agency for payment and money for security payments held in trust; (c) the
rights, powers, trusts, duties and immunities of the Trustee, and the Company's
obligations in connection therewith; and (d) the Legal Defeasance provisions of
this Indenture. Subject to compliance with this Article 8, the Company may
exercise its option under this Section 8.02 notwithstanding the prior exercise
of its option under Section 8.03 hereof.
SECTION 8.03 COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.01 hereof of the
option applicable to this Section 8.03, the Company shall, subject to the
satisfaction of the conditions set forth in Section 8.04 hereof, be released
from its obligations under the covenants contained in Article V and in Sections
4.03, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14, 4.15 and 4.16 hereof with
respect to the outstanding Notes on and after the date the conditions set forth
in Section 8.04 are satisfied (hereinafter, "COVENANT DEFEASANCE"), and the
Notes shall thereafter be deemed not "outstanding" for the purposes of any
direction, waiver, consent or declaration or act of Holders (and the
consequences of any thereof) in connection with such covenants, but shall
continue to be deemed "outstanding" for all other purposes hereunder (it being
understood that such Notes shall not be deemed outstanding for accounting
purposes). For this purpose, Covenant Defeasance means that, with respect to the
outstanding Notes, the Company may omit to comply with and shall have no
liability in respect of any term, condition or limitation set forth in any such
covenant, whether directly or indirectly, by reason of any reference elsewhere
herein to any such covenant or by reason of any reference in any such covenant
to any other provision herein or in any other document and such omission to
comply shall not constitute a Default or an Event of Default under Section 6.01
hereof, but, except as specified above, the remainder of this Indenture and such
Notes shall be unaffected thereby. In addition, upon the Company's exercise
under Section 8.01 hereof of the option applicable to this Section 8.03, subject
to the satisfaction of the conditions set forth in Section 8.04 hereof, Sections
6.01(iii) through 6.01(vi) hereof shall not constitute Events of Default.
SECTION 8.04 CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of
either Section 8.02 or 8.03 hereof to the outstanding Notes:
In order to exercise either Legal Defeasance or Covenant
Defeasance:
(a) the Company must irrevocably deposit, or cause to be deposited,
with the
<PAGE>
Trustee, in trust, for the benefit of the Holders of the Notes, (a) cash in U.S.
dollars, non-callable Government Securities, or a combination thereof (with
respect to the Dollar Notes) and (b) legal tender in the countries constituting
the European Union, EEA Government Obligations, or a combination thereof (with
respect to the Euro Notes), in all cases in such amounts as will be sufficient,
in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the
outstanding Notes on the stated maturity thereof or on the applicable redemption
date, as the case may be, and the Company must specify whether the Notes are
being defeased to maturity or to a particular redemption date;
(b) in the case of Legal Defeasance, the Company must deliver to the
Trustee an Opinion of Counsel in the United States reasonably acceptable to the
Trustee confirming that, since the Issue Date, the Company has received from, or
there has been published by, the Internal Revenue Service a ruling, or there has
been a change in the applicable United States federal income tax law, in either
case to the effect that, and based thereon such Opinion of Counsel shall confirm
that, the Holders of the outstanding Notes will not recognize income, gain or
loss for United States federal income tax purposes as a result of such Legal
Defeasance, and will be subject to United States federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(c) in the case of Covenant Defeasance, the Company must deliver to the
Trustee an Opinion of Counsel in the United States reasonably acceptable to the
Trustee confirming that the Holders of the outstanding Notes will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such Covenant Defeasance, and such Holders will be subject to United States
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and be
continuing on the date of such deposit (other than a Default or Event of Default
resulting from the borrowing of funds to be applied to such deposit) or insofar
as Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit;
(e) such Legal Defeasance or Covenant Defeasance will not result in a
breach or violation of, or constitute a default under, any material agreement or
instrument (other than this Indenture) to which the Company or any of its
Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound;
(f) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of the Notes over other creditors of the Company, or with
the intent of defeating,
<PAGE>
hindering, delaying or defrauding creditors of the Company or others;
(g) the Company must deliver to the Trustee an Officers' Certificate
and an Opinion of Counsel in the United States reasonably acceptable to the
Trustee, each stating that the conditions precedent provided for or relating to
Legal Defeasance or Covenant Defeasance, as applicable, in the case of the
Officers' Certificate, in clauses (a) through (f) and, in the case of the
Opinion of Counsel, in clauses (b) and (c) of this paragraph, have been complied
with.
SECTION 8.05 DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST;
OTHER MISCELLANEOUS PROVISIONS.
Subject to Section 8.06 hereof, all money and non-callable
Government Securities and EEA Government Obligations (including the proceeds
thereof) deposited with the Trustee (or other qualifying trustee, collectively,
and solely for purposes of this Section 8.05, the "Trustee") pursuant to Section
8.04 hereof in respect of the outstanding Notes shall be held in trust and
applied by the Trustee, in accordance with the provisions of such Notes and this
Indenture, to the payment, either directly or through any Paying Agent
(including the Company acting as Paying Agent) as the Trustee may determine, to
the Holders of such Notes of all sums due and to become due thereon in respect
of principal, premium, if any, and interest, but such money need not be
segregated from other funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any
tax, fee or other charge imposed on or assessed against the cash or non-callable
Government Securities deposited pursuant to Section 8.04 hereof or the principal
and interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding Notes.
Anything in this Article 8 to the contrary notwithstanding,
the Trustee shall deliver or pay to the Company from time to time upon the
request of the Company any money or non-callable Government Securities or EEA
Government Obligations held by it as provided in Section 8.04 hereof which, in
the opinion of a nationally recognized firm of independent public accountants
expressed in a written certification thereof delivered to the Trustee (which may
be the opinion delivered under Section 8.04(a) hereof), are in excess of the
amount thereof that would then be required to be deposited to effect an
equivalent Legal Defeasance or Covenant Defeasance.
SECTION 8.06 REPAYMENT TO COMPANY.
Any money deposited with the Trustee or any Paying Agent, or
then held by the Company, in trust for the payment of the principal of, premium
or interest on any Note and remaining unclaimed for two years after such
principal, and premium, if any, or
<PAGE>
interest has become due and payable shall be paid to the Company on its request
or (if then held by the Company) shall be discharged from such trust; and the
Holder of such Note shall thereafter, as an unsecured creditor, look only to the
Company for payment thereof, and all liability of the Trustee or such Paying
Agent with respect to such trust money, and all liability of the Company as
trustee thereof, shall thereupon cease; PROVIDED, HOWEVER, that the Trustee or
such Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in the NEW YORK TIMES and THE
WALL STREET JOURNAL (national edition), notice that such money remains unclaimed
and that, after a date specified therein, which shall not be less than 30 days
from the date of such notification or publication, any unclaimed balance of such
money then remaining will be repaid to the Company.
SECTION 8.07 REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any money or
non-callable Government Securities or EEA Government Obligations in accordance
with Section 8.02 or 8.03 hereof, as the case may be, by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, then the Company's obligations under
this Indenture and the Notes shall be revived and reinstated as though no
deposit had occurred pursuant to Section 8.02 or 8.03 hereof until such time as
the Trustee or Paying Agent is permitted to apply all such money in accordance
with Section 8.02 or 8.03 hereof, as the case may be; PROVIDED, HOWEVER, that,
if the Company makes any payment of principal of, premium, if any, or interest
on any Note following the reinstatement of its obligations, the Company shall be
subrogated to the rights of the Holders of such Notes to receive such payment
from the money held by the Trustee or Paying Agent.
SECTION 8.08 SURVIVAL.
The Trustee's rights under this Article 8 shall survive
termination of this Indenture.
ARTICLE 9.
AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.01 WITHOUT CONSENT OF HOLDERS OF NOTES
Notwithstanding Section 9.02 hereof, the Company and the
Trustee may amend or supplement this Indenture or the Notes without the consent
of any Holder of a Note:
(a) to cure any ambiguity, omission, defect or inconsistency;
<PAGE>
(b) to provide for uncertificated Notes in addition to or in place of
certificated Notes or to alter the provisions of Article 2 hereof (including the
related definitions) in a manner that does not materially adversely affect any
Holder;
(c) to provide for the assumption of the Company obligations to the
Holders of the Notes by a successor to the Company pursuant to Article 5 hereof;
(d) to make any change that would provide any additional rights or
benefits to the Holders of the Notes or that does not adversely affect the legal
rights hereunder of any Holder of the Note;
(e) to comply with requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA;
(f) to add to the covenants of the Company for the benefit of the
Holders or to surrender any right or power herein conferred upon the Company;
(g) to provide for the issuance of the Unrestricted Notes under the
Exchange Offer contemplated by the Registration Rights Agreement; or
(h) to effect any change to the transfer and exchange restrictions and
security delivery procedures contained in Article 2 in order to conform with
changes in any applicable law or Applicable Procedures.
Upon the request of the Company accompanied by a resolution of
its Board of Directors authorizing the execution of any such amended or
supplemental indenture, and upon receipt by the Trustee of the documents
described in Section 7.02 hereof, the Trustee shall join with the Company in the
execution of any amended or supplemental indenture authorized or permitted by
the terms of this Indenture and to make any further appropriate agreements and
stipulations that may be therein contained, but the Trustee shall not be
obligated to enter into such amended or supplemental indenture that affects its
own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.02 WITH CONSENT OF HOLDERS OF NOTES.
Except as provided below in this Section 9.02, the Company and
the Trustee, may amend or supplement this Indenture (including Section 3.09 and
4.10 hereof) and the Notes with the consent of the Holders of a majority in
aggregate principal amount of the then outstanding Notes voting as a single
class (including consents obtained in connection with a tender offer or exchange
offer for, or purchase of, the Notes), and, subject to Sections 6.04 and 6.07
hereof, any existing Default or Event of Default (other than a Default or Event
of Default in the payment of the principal of,
<PAGE>
premium, if any, or interest on the Notes, except a payment default resulting
from an acceleration that has been rescinded) or compliance with any provision
of this Indenture or the Notes may be waived with the consent of the Holders of
a majority in aggregate principal amount of the then outstanding Notes voting as
a single class (including consents obtained in connection with a tender offer or
exchange offer for, or purchase of, the Notes).
Notwithstanding the foregoing, without the consent of
Holders of at least 66 2/3% in principal amount of the then outstanding Notes
voting as a single class, the Company and the Trustee may not: (i) modify the
provisions (including the defined terms used therein) of Section 4.14 hereof
in a manner adverse to the Holders or (ii) release or modify a Lien granted
to the Holders of the Notes.
Upon the request of the Company accompanied by a resolution of
its Board of Directors authorizing the execution of any such amended or
supplemental indenture, and upon the filing with the Trustee of evidence
satisfactory to the Trustee of the consent of the Holders of Notes as aforesaid,
and upon receipt by the Trustee of the documents described in Section 7.02
hereof, the Trustee shall join with the Company in the execution of such amended
or supplemental indenture unless such amended or supplemental indenture directly
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise, in which case the Trustee may in its discretion, but shall not be
obligated to, enter into such amended or supplemental indenture.
It shall not be necessary for the consent of the Holders of
Notes under this Section 9.02 to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section
9.02 becomes effective, the Company shall mail to the Holders of Notes affected
thereby a notice briefly describing the amendment, supplement or waiver. Any
failure of the Company to mail such notice, or any defect therein, shall not,
however, in any way impair or affect the validity of any such amended or
supplemental indenture or waiver. Subject to the provisions of this Section 9.02
and Sections 6.04 and 6.07 hereof, the Holders of a majority in aggregate
principal amount of the Notes then outstanding voting as a single class may
waive compliance in a particular instance by the Company with any provision of
this Indenture or the Notes. However, without the consent of each Holder
affected, an amendment or waiver under this Section 9.02 may not (with respect
to any Notes held by a non-consenting Holder):
(a) change the Stated Maturity on any Note, or reduce the principal
thereof or the rate (or extend the time for payment) of interest thereon or any
premium payable upon the redemption at the option of the Company thereof, or
change the place of payment where, or the coin or currency in which, any Note or
any premium or the interest thereon
<PAGE>
is payable, or impair the right to institute suit for the enforcement of any
such payment on or after the Stated Maturity thereof (or, in the case of
redemption at the option of the Company, on or after the redemption date), or
reduce the Change of Control Payment or the Asset Sale Offer Price after the
corresponding Asset Sale or Change of Control has occurred;
(b) alter the provisions (including the defined terms used herein)
regarding the right of the Company to redeem the Notes as a right, or at the
option, of the Company in a manner adverse to the Holders;
(c) reduce the percentage in principal amount of Notes outstanding
whose Holders must consent to an amendment, supplement or waiver provided for in
this Indenture;
(d) modify any of the waiver provisions, except to increase any
required percentage or to provide that certain other provisions of this
Indenture cannot be modified or waived without the consent of the Holder of each
outstanding Note affected thereby;
(e) cause the Notes to become subordinate in right of payment to any
other Indebtedness; or
SECTION 9.03 COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment or supplement to this Indenture or the Notes
shall be set forth in a amended or supplemental indenture that complies with the
TIA as then in effect.
SECTION 9.04 REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a
consent to it by a Holder of a Note is a continuing consent by the Holder of a
Note and every subsequent Holder of a Note or portion of a Note that evidences
the same debt as the consenting Holder's Note, even if notation of the consent
is not made on any Note. However, any such Holder of a Note or subsequent Holder
of a Note may revoke the consent as to its Note if the Trustee receives written
notice of revocation before the date the waiver, supplement or amendment becomes
effective. An amendment, supplement or waiver becomes effective in accordance
with its terms and thereafter binds every Holder. An amendment or waiver shall
become effective upon receipt by the Trustee of the requisite number of written
consents under Section 9.01 or 9.02 as applicable.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Holders of Notes entitled to give their
consent or take any other action described above or required or permitted to be
taken pursuant to this
<PAGE>
Indenture. If a record date is fixed, then notwithstanding the immediately
preceding paragraph, those Persons who held Notes at such record date (or their
duly designated proxies), and only those Persons, shall be entitled to give such
consent or to revoke any consent previously given or to take any such action,
whether or not such Persons continue to be Holders after such record date.
SECTION 9.05 NOTATION ON OR EXCHANGE OF NOTES.
The Trustee may place an appropriate notation about an
amendment, supplement or waiver on any Note thereafter authenticated. The
Company in exchange for all Notes may issue and the Trustee shall, upon receipt
of an Authentication Order, authenticate new Notes that reflect the amendment,
supplement or waiver.
Failure to make the appropriate notation or issue a new Note
shall not affect the validity and effect of such amendment, supplement or
waiver.
SECTION 9.06 TRUSTEE TO SIGN AMENDMENTS, ETC.
Trustee shall sign any amended or supplemental indenture
authorized pursuant to this Article 9 if the amendment or supplement does not
adversely affect the rights, duties, liabilities or immunities of the Trustee
and all other conditions to the execution and delivery of such amendment or
supplement set forth in this Article 9 are fulfilled. The Company may not sign
an amendment or supplemental indenture until the Board of Directors approves it.
In executing any amended or supplemental indenture, the Trustee shall be
entitled to receive and (subject to Section 7.01 hereof) shall be fully
protected in relying upon an Officer's Certificate and an Opinion of Counsel
stating that the execution of such amended or supplemental indenture is
authorized or permitted by this Indenture and that such amendment is the legal,
valid and binding obligation of the Company, enforceable against it in
accordance with its terms, subject to customary exceptions, and complies with
the provisions hereof (including Section 9.03).
ARTICLE 10.
SATISFACTION AND DISCHARGE
SECTION 10.01 SATISFACTION AND DISCHARGE OF INDENTURE.
This Indenture shall be discharged and will cease to be of
further effect as to all Notes issued hereunder, when either
(a) all such Notes theretofore authenticated and delivered (except
lost, stolen or destroyed Notes which have been replaced or paid and Notes for
whose payment money has theretofore been deposited in trust and thereafter
repaid to the Company) have been delivered to the Trustee for cancellation; or
<PAGE>
(b) (i) all such Notes not theretofore delivered to such
Trustee for cancellation have become due and payable
by reason of the making of a notice of redemption,
repurchase or otherwise or will become due and
payable within one year and the Company, has
irrevocably deposited or caused to be deposited with
such Trustee as trust funds in trust an amount of
money sufficient to pay and discharge the entire
Indebted ness on such Notes not theretofore delivered
to the Trustee for cancellation for principal,
premium and accrued interest to the date of maturity,
redemption or repurchase;
(ii) no Default or Event of Default with respect to this
Indenture or the Notes shall have occurred and be
continuing on the date of such deposit or shall occur
as a result of such deposit and such deposit mill not
result in a breach or violation of or constitute a
default under, any other instrument to which the
Company is a party or by which the Company is bound;
(iii) the Company has paid or caused to be paid all sums
payable by it under this Indenture; and
(iv) the Company has delivered irrevocable written
instructions to the Trustee under this Indenture to
apply the deposited money toward the payment of such
Notes at maturity or the redemption date, as the case
may be.
In addition, the Company must deliver an Officers' Certificate
and an Opinion of Counsel to the Trustee stating that all conditions precedent
to satisfaction and discharge have been satisfied.
SECTION 10.02 APPLICATION OF TRUST MONEY.
Subject to the provisions of the last paragraph of Section
4.17 hereof, all money deposited with the Trustee pursuant to Section 10.01
hereof shall be held in trust and applied by it, in accordance with the
provisions of the Notes and this Indenture, to the payment, either directly or
through any Paying Agent (including the Company acting as Paying Agent) as the
Trustee may determine, to Persons entitled thereto, of the principal (and
premium, if any), and interest, for whose payment such money has been deposited
with the Trustee.
If the Trustee or Paying Agent is unable to apply any money or
Government Securities in accordance with Section 10.01 hereof by reason of any
legal proceeding or by reason of any order or judgment of any court or
governmental authority
<PAGE>
enjoining, restraining or otherwise prohibiting such application, the Company's
obligations under this Indenture and the Notes shall be revived and reinstated
as though such deposit had occurred pursuant to Section 10.01 hereof, PROVIDED
that if the Company has made any payment of principal of, premium, if any, or
interest on any Notes because of the reinstatement of its obligations, the
Company shall be subrogated to the rights of the Holders of such Notes to
receive such payment from the money or Government Securities held by the Trustee
or Paying Agent.
ARTICLE 11.
[INTENTIONALLY OMITTED]
ARTICLE 12.
MISCELLANEOUS
SECTION 12.01 TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies or
conflicts with the duties imposed by TIA Section 318(c), the imposed duties
shall control.
SECTION 12.02 NOTICES.
Any notice or communication by the Company or the Trustee to
the others is duly given if in writing and delivered in person or mailed by
first class mail (registered or certified, return receipt requested), telecopier
or overnight air courier guaranteeing next day delivery, to the others' address:
If to the Company:
Metromedia Fiber Network Services, Inc.
c/o Metromedia Fiber Network, Inc.
One North Lexington Avenue
White Plains, NY 10601
Attention: Chief Financial Officer
With a copy to:
Metromedia Company
One Meadowlands Plaza
East Rutherford, NJ 07073-2137
Attention: General Counsel
<PAGE>
and a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019
Attention: Douglas A. Cifu, Esq.
If to the Trustee:
The Bank of New York
101 Barclay Street, 21 West
New York, New York 10286
Attn: Corporate Trust Administration
Re: Metromedia Fiber Network, Inc.
The Company or the Trustee, by notice to the others may
designate additional or different addresses for subsequent notices or
communications.
All notices and communications (other than those sent to
Holders) shall be deemed to have been duly given: at the time delivered by hand,
if personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when receipt acknowledged by the sender's
telecopier, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by
first class mail, certified or registered, return receipt requested, or by
overnight air courier guaranteeing next day delivery to its address shown on the
register kept by the Registrar. Any notice or communication shall also be so
mailed to any Person described in TIA Section 313(c), to the extent required by
the TIA. Failure to mail a notice or communication to a Holder or any defect in
it shall not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided
above within the time prescribed, it is duly given, whether or not the addressee
receives it, except that any notice or communication to the Trustee shall be
deemed to have been duly given to the Trustee when received at the Corporate
Trust Office of the Trustee.
If the Company mails a notice or communication to Holders, it
shall mail a copy to the Trustee and each Agent at the same time.
SECTION 12.03 COMMUNICATION BY HOLDERS OF NOTES WITH OTHER HOLDERS OF NOTES.
<PAGE>
Holders may communicate pursuant to TIA Section 312(b) with
other Holders with respect to their rights under this Indenture or the Notes.
The Company, the Trustee, the Registrar and anyone else shall have the
protection of TIA Section 312(c).
SECTION 12.04 CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee
to take any action under this Indenture, except with respect to the initial
authentication of Notes on the date of this Indenture, the Company shall furnish
to the Trustee:
(a) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth in
Section 12.05 hereof) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been satisfied; and
(b) an Opinion of Counsel in form and substance reasonably satisfactory
to the Trustee (which shall include the statements set forth in Section 12.05
hereof) stating that, in the opinion of such counsel, all such conditions
precedent and covenants have been satisfied.
SECTION 12.05 STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA Section314(a)(4)) shall comply with the provisions of
TIA Section 314(e) and shall include:
(a) a statement that the Person making such certificate or opinion has
read such covenant or condition;
(b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he or she has or
they have made such examination or investigation as is necessary to enable him
to express an informed opinion as to whether or not such covenant or condition
has been satisfied; and
(d) a statement as to whether or not, in the opinion of such Person,
such condition or covenant has been satisfied.
SECTION 12.06 RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by or at a
meeting of Holders. The Registrar or Paying Agent may make reasonable rules and
set reasonable
<PAGE>
requirements for its functions.
SECTION 12.07 NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
SHARE HOLDERS.
No past, present or future director, officer, employee,
incorporator, agent or shareholder of the Company, as such, shall have any
liability for any obligations of the Company under the Notes, this Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the Notes.
SECTION 12.08 GOVERNING LAW.
THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, INCLUDING,
WITHOUT LIMITATION SECTION 5-1401 OF THE NEW YORK GENERAL OBLIGATIONS LAW.
SECTION 12.09 CONSENT TO JURISDICTION AND SERVICE.
To the fullest extent permitted by applicable law, the Company
hereby irrevocably submits to the jurisdiction of any Federal or State court
located in the Borough of Manhattan in The City of New York, New York in any
suit, action or proceeding based on or arising out of or relating to this
Agreement or any Notes or Exchange Notes, and irrevocably agree that all claims
in respect of such suit or proceeding may be determined in any such court. The
Company irrevocably waives, to the fullest extent permitted by law, any
objection which they may have to the laying of the venue of any such suit,
action or proceeding brought in such a court and any claim that any suit, action
or proceeding brought in such a court has been brought in an inconvenient forum.
The Company agrees that final judgment in any such suit, action or proceeding
brought in such a court shall be conclusive and binding upon the Company and may
be enforced in the courts of any jurisdiction to which the Company is subject by
a suit upon such judgment, PROVIDED that service of process is effected upon the
Company in the manner specified herein or as otherwise permitted by law. To the
extent that the Company has or hereafter may acquire any immunity from
jurisdiction of any court or from any legal process (whether through service of
now, attachment prior to judgment, attachment in aid of execution, executor or
otherwise) with respect to itself or its property, the Company hereby
irrevocably waives such immunity in respect of their respective obligations
under this Agreement, to the extent permitted by law.
SECTION 12.10 NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret any other
indenture, loan or debt agreement of the Company or its Subsidiaries or of any
other Person. Any such
<PAGE>
indenture, loan or debt agreement may not be used to interpret this Indenture.
SECTION 12.11 SUCCESSORS.
All agreements of the Company in this Indenture and the Notes
shall bind its successors. All agreements of the Trustee in this Indenture shall
bind its successors.
SECTION 12.12 SEVERABILITY.
In case any provision in this Indenture or in the Notes shall
be invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
SECTION 12.13 COUNTERPART ORIGINALS.
The parties may sign any number of copies of this Indenture.
Each signed copy shall be an original, but all of them together represent the
same agreement.
SECTION 12.14 TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of
the Articles and Sections of this Indenture have been inserted for convenience
of reference only, are not to be considered a part of this Indenture and shall
in no way modify or restrict any of the terms or provisions hereof.
SECTION 12.15 JUDGMENT CURRENCY.
The Company hereby agrees to indemnify the Trustee, its directors, its
officers and each person, if any, who controls the Trustee within the meaning of
Section 15 of the Securities Act or Section 20 of the Exchange Act against any
loss incurred by such person as a result of any judgment or order being given or
made against the Company for any U.S. Dollar amount due under this Agreement and
such judgment or order being expressed and paid in a currency (the "Judgment
Currency") other than United States Dollars and as a result of any variation as
between (i) the rate of exchange at which the United States Dollar amount is
converted into the Judgment Currency for the purpose of such judgment or order
and (ii) the spot rate of exchange in The City of New York at which such party
on the date of payment of such judgment or order is able to purchase United
States Dollars with the amount of the Judgment Currency actually received by
such party. The foregoing indemnity shall continue in full force and effect
notwithstanding any such judgment or order as aforesaid. The term "spot rate of
exchange" shall include any premiums and costs of exchange payable in connection
with the purchase of, or conversion into, United States Dollars.
<PAGE>
[INDENTURE SIGNATURE PAGE(S)]
Dated as of November __, 1999
METROMEDIA FIBER NETWORK,
INC.
By:
Name:
Title:
THE BANK OF NEW YORK
as Trustee
By:
Name:
Title:
<PAGE>
EXHIBIT A-1
(FACE OF DOLLAR NOTE)
[REMOVE THE GLOBAL NOTE LEGEND BELOW, IF APPLICABLE PURSUANT TO THE
PROVISIONS OF THE INDENTURE] THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS
DEFINED IN THE INDENTURE GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE
BENEFIT OF THE BENEFICIAL OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON
UNDER ANY CIRCUMSTANCES EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS
HEREON AS MAY BE REQUIRED PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS
GLOBAL NOTE MAY BE EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.07
OF THE INDENTURE, (III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR
CANCELLATION PURSUANT TO SECTION 2.12 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE
MAY BE TRANSFERRED TO A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF
THE COMPANY.
CUSIP
$[ ]% SENIOR NOTES DUE 2009
No.$
METROMEDIA FIBER NETWORK, INC.
promises to pay to Cede & Co. or registered assigns, the principal sum of [ ]
Dollars on December 15, 2009.
Interest Payment Dates: June 15 and December 15.
Record Dates: June 1 and December 1.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to
be signed manually or by facsimile by its duly authorized officer.
Dated: [ ], 1999
METROMEDIA FIBER NETWORK, INC.
By:
Name:
Title:
By:
Name:
Title:
<PAGE>
This is one of the Notes
referred to in the
within-mentioned Indenture:
THE BANK OF NEW YORK
as Trustee
By: Dated:
Name:
Title:
<PAGE>
(BACK OF DOLLAR NOTE)
$[ ]% Senior Notes due 2009
Capitalized terms used herein shall have the meanings assigned
to them in the Indenture referred to below unless otherwise indicated.
1. INTEREST. Metromedia Fiber Network, Inc., a Delaware
corporation (the "Company"), promises to pay interest on the principal amount of
this Dollar Note at [ ]% per annum from the date of issuance and authentication
of this Dollar Note (November , 1999) until maturity payable in accordance with
the provisions of the following paragraph. The Company shall pay interest
semi-annually on June 15 and December 15 of each year, or if any such day is not
a Business Day, on the next succeeding Business Day (each an "INTEREST PAYMENT
DATE"). Interest on the Dollar Notes shall accrue from the most recent date to
which interest has been paid or, if no interest has been paid, from the date of
issuance; PROVIDED that if there is no existing Default or Event of Default
relating to the payment of interest, and if this Dollar Note is authenticated
between a Record Date referred to on the face hereof and the next succeeding
Interest Payment Date, interest shall accrue from such next succeeding Interest
Payment Date; PROVIDED, FURTHER, that the first Interest Payment Date shall be
June 15, 2000. The Company shall pay interest (including post-petition interest
in any proceeding under any Bankruptcy Law) on overdue principal and premium, if
any, from time to time on demand at a rate that is 1.0% per annum in excess of
the rate then in effect; it shall pay interest (including post-petition interest
in any proceeding under any Bankruptcy Law) on overdue installments of interest
(without regard to any applicable grace periods) from time to time on demand at
the same rate to the extent lawful. Interest shall be computed on the basis of a
360-day year of twelve 30-day months.
2. METHOD OF PAYMENT. The Company shall pay interest on the
Dollar Notes (except defaulted interest) to the Persons who are registered
Holders of Dollar Notes at the close of business on the June 1 or December 1
next preceding the Interest Payment Date, even if such Dollar Notes are canceled
after such Record Date and on or before such Interest Payment Date, except as
provided in Section 2.13 of the Indenture with respect to defaulted interest.
The Dollar Notes shall be payable as to principal, premium, if any, and interest
at the office or agency of the Company maintained for such purpose within or
outside of the City and State of New York, or, at the option of the Company,
payment of interest may be made by check mailed to the Holders at their
addresses set forth in the register of Holders kept by the Registrar, and
PROVIDED that payment by wire transfer of immediately available funds shall be
required with respect to principal of and interest and premium on, all Dollar
Global Notes and all other Dollar Notes the Holders of which shall have provided
wire transfer instructions to the Company or the Paying Agent. Such payment
shall be in such coin or currency of the United States of America as at the time
of payment is legal tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, The Bank of New
York, the Trustee under the Indenture, shall act as Paying Agent and Registrar
and [ ] will act as Paying Agent in Luxembourg. The Company may change any
Paying Agent or Registrar without notice to any Holder. The Company or any of
its Restricted Subsidiaries may act in any such capacity.
4. INDENTURE. The Company issued the Dollar Notes under an
Indenture dated as of [ 1999] ("INDENTURE") between the Company and
the Trustee. The terms of the Dollar Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
<PAGE>
Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the
"TIA"). The Dollar Notes are subject to all such terms, and Holders are referred
to the Indenture and the TIA for a statement of such terms. To the extent any
provision of this Dollar Note conflicts with the express provisions of the
Indenture, the provisions of the Indenture shall govern and be controlling. The
Dollar Notes are obligations of the Company limited to $[ ] million in aggregate
principal amount.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in subparagraphs (b) and (c) below,
the Dollar Notes shall not be redeemable at the Company's option prior to
December 15, 2004. Thereafter, the Dollar Notes shall be subject to redemption
at any time at the option of the Company, in whole or in part, upon not less
than 30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below, plus accrued and unpaid
interest thereon to the applicable redemption date (subject to the right of
Holders of record on the relevant Record Date to receive interest due on the
relevant Interest Payment Date), if redeemed during the twelve-month period
beginning on December 15 of the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
<S> <C>
2004 %
2005 %
2006 %
2007 and thereafter %
</TABLE>
(b) Notwithstanding the foregoing, at any time prior to
December 15, 2002, the Company may, on any one or more occasions, redeem up to
35% of the aggregate principal amount of each of the Dollar Notes and the Euro
Notes (determined separately) originally issued pursuant to the Indenture at a
redemption price of [ ]% of the principal amount of the Dollar Notes, plus
accrued and unpaid interest thereon to the redemption date (subject to the right
of Holders of record on the relevant Record Date to receive interest due on the
relevant Interest Payment Date), with the Net Cash Proceeds received from any
Public Equity Offering made by the Company resulting in gross proceeds to the
Company of at least $100 million; PROVIDED that at least 65% of the aggregate
principal amount of the Dollar Notes and the Euro Notes (determined separately)
originally issued pursuant to the Indenture remain outstanding immediately after
the occurrence of any such redemption. The Company may make any such redemption
upon not less than 30 nor more than 60 days' notice (but in no event more than
90 days after the closing of the related Public Equity Offering).
(c) Any redemption pursuant to this Section 5 shall be made
pursuant to the provisions of Section 3.01 through 3.06 of the Indenture.
6. MANDATORY REDEMPTION.
The Company shall not be required to make mandatory redemption
or sinking fund payments with respect to the Dollar Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) Upon the occurrence of a Change of Control, each Holder of
Dollar Notes will have the right to require the Company to purchase all or any
part (equal to $1,000 or an integral multiple thereof) of such Holder's Dollar
Notes pursuant to the offer described below (the "Change of Control
<PAGE>
Offer") at a purchase price in cash equal to 101% of the aggregate principal
amount thereof (the "Change of Control Payment") plus accrued and unpaid
interest thereon to the date of purchase (subject to the right of Holders of
record on the relevant Record Date to receive interest due on the relevant
Interest Payment Date). Within 30 days following any Change of Control, the
Company will mail a notice to each Holder setting forth the procedures governing
the Change of Control Offer as required by the Indenture.
(b) The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, consummate any Asset Sale,
unless (i) the Company (or such Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the fair
market value (as determined in good faith by the Board of Directors (including
as to the value of all noncash consideration) and set forth in an Officer's
Certificate delivered to the Trustee) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 75% of the consideration
therefor is in the form of cash and/or Cash Equivalents or Telecommunications
Assets, and (iii) the Net Cash Proceeds received by the Company (or such
Restricted Subsidiary, as the case may be) from such Asset Sale are applied
within 360 days following the receipt of such Net Cash Proceeds, to the extent
the Company (or such Restricted Subsidiary, as the case may be) elects, (a) to
the permanent redemption or repurchase of outstanding Indebtedness (other than
Subordinated Indebtedness) that is secured Indebtedness (including that in the
case of a revolver or similar arrangement that makes credit available, such
commitment is so permanently reduced by such amount) or Indebtedness of the
Company or such Restricted Subsidiary that ranks equally with the Notes but has
a maturity date that is prior to the maturity date of the Notes and/or (b) to
reinvest such Net Cash Proceeds (or any portion thereof) in Telecommunications
Assets. Notwithstanding anything herein to the contrary, with respect to the
reinvestment of Net Cash Proceeds, only proceeds from an Asset Sale of assets,
or Equity Interests, of a Foreign Subsidiary may be used to retire Indebtedness
of a Foreign Subsidiary or reinvest in assets or Equity Interests of a Foreign
Subsidiary. The balance of such Net Cash Proceeds, after the application of such
Net Cash Proceeds as described in the immediately preceding clauses (a) and (b),
shall constitute "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals or
exceeds $15.0 million (taking into account income earned on such Excess
Proceeds), the Company will be required to make a pro rata offer to all Holders
of Notes and PARI PASSU Indebtedness with comparable provisions requiring such
Indebtedness to be purchased with the proceeds of such Asset Sale (an "Asset
Sale Offer") to purchase the maximum principal amount or accreted value in the
case of Indebtedness issued with an original issue discount of Notes and PARI
PASSU Indebtedness that may be purchased out of the Excess Proceeds, at a
purchase price in cash in an amount equal to 100% of the principal amount
thereof or the accreted value thereof, as applicable, plus accrued and unpaid
interest thereon to the date of purchase (subject to the right of Holders of
record on the relevant Record Date to receive interest due on the relevant
Interest Payment Date), in accordance with the procedures set forth in Article 3
of the Indenture and the agreements governing such PARI PASSU Indebtedness. To
the extent that any Excess Proceeds remain after consummation of an Asset Sale
Offer, the Company may use such Excess Proceeds for any purpose not otherwise
prohibited by the Indenture. If the aggregate principal amount of Notes and PARI
PASSU Indebtedness tendered into such Asset Sale Offer surrendered by Holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes and PARI PASSU Indebtedness to be purchased on a pro rata basis in
proportion to the respective principal amounts (or accreted values in the case
of Indebtedness issued with an original issue discount) of the Notes and such
other Indebtedness. Upon completion, of such Asset Sale Offer, the amount of
Excess Proceeds shall be reset at zero for purposes of the first sentence of
this paragraph.
8. NOTICE OF REDEMPTION. Notice of redemption shall be mailed
at least 30 days but not more than 60 days before the redemption date to each
Holder whose Notes are to be redeemed at its registered address. Dollar Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Dollar Notes held by a Holder are to be
redeemed. On and after the redemption date interest shall cease to accrue on
Notes or portions thereof called for redemption.
<PAGE>
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Dollar Notes are in
registered form without coupons in denominations of $1,000 and integral
multiples of $1,000. The transfer of Notes may be registered and Notes may be
exchanged as provided in the Indenture. The Registrar and the Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Indenture. The Company need not
exchange or register the transfer of any Note or portion of a Note selected for
redemption, except for the unredeemed portion of any Note being redeemed in
part. Also, the Company need not exchange or register the transfer of any Notes
for a period of 15 days before a selection of Notes to be redeemed or during the
period between a Record Date and the corresponding Interest Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Note on
the Registrar's books may be treated as its owner for all purposes under the
Indenture.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain
exceptions, the Indenture and the Notes may be amended or supplemented with the
consent of the Holders of at least a majority in aggregate principal amount of
the then outstanding Notes voting as a single class, and any existing default or
compliance with any provision of the Indenture or the Note may be waived with
the consent of the Holders of a majority in aggregate principal amount of the
then outstanding Notes voting as a single class. Without the consent of any
Holder of a Note, the Indenture or the Notes may be amended or supplemented,
among other things, to cure any ambiguity, omission, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
the Notes in case of a merger or consolidation or sale of all or substantially
all of the Company's assets in accordance with the terms of the Indenture, to
make any change that would provide any additional rights or benefits to the
Holders of the Notes or that does not adversely affect the legal rights under
the Indenture of any such Holder, to comply with the requirements of the SEC in
order to effect or maintain the qualification of the Indenture under the TIA, to
add to the covenants of the Company for the benefit of the Holders or to
surrender any right or power conferred by the Indenture upon the Company, or to
effect any change to the transfer and exchange restrictions and security
delivery procedures contained in the Indenture in order to conform with changes
in any applicable law or Applicable Procedures.
12. DEFAULTS AND REMEDIES.
(a) Events of Default under the Indenture include: (i) the
failure to pay interest the Notes, when the same becomes due and payable if such
default continues for a period of 30 days, (ii) the failure to pay principal of
any Notes when such principal becomes due and payable, at maturity, upon
redemption or otherwise; (iii) failure by the Company or any Restricted
Subsidiary to comply with Sections 4.10 or 4.14 of the Indenture; (iv) failure
by the Company or any Restricted Subsidiary for 60 days after notice to comply
with any of its other agreements in the Indenture or this Note; (v) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness for money borrowed
by the Company or any of its Restricted Subsidiaries (or the payment of which is
Guaranteed by the Company or any of its Restricted Subsidiaries) whether such
Indebtedness or Guarantee now exists, or is created after the Issue Date, which
default results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness or the
maturity of which has been so accelerated, aggregates $15.0 million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to pay final
judgments not subject to appeal aggregating in excess of $15.0 million (net of
applicable insurance coverage which is acknowledged in writing by the insurer),
which judgments are not paid, vacated, discharged or stayed for a period of 60
days; and (vii) certain events of bankruptcy or insolvency with respect to the
Company or any of the Company's Restricted Subsidiaries.
<PAGE>
(b) If any Event of Default occurs and is continuing, the
Trustee or the Holders of at least 25% in aggregate principal amount of the then
outstanding Notes may declare all the Notes to be due and payable.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, all outstanding Notes shall become
due and payable without further action or notice. Holders may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest. Except as provided in the Indenture, the Holders of a majority in
principal amount of the then outstanding Notes by notice to the Trustee may on
behalf of the Holders of all of the Notes waive any existing Default or Event of
Default and its consequences under the Indenture, except a continuing Default or
Event of Default in the payment of interest on, or principal of, the Notes. The
Company shall deliver to the Trustee annually a statement regarding compliance
with the Indenture, and the Company, upon becoming aware of any Default or Event
of Default, deliver to the Trustee a statement specifying such Default or Event
of Default.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Company or its Affiliates, and may otherwise deal with
the Company or its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or shareholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
15. AUTHENTICATION. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the
name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT
(= tenants by the entirety), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. CUSIP, ISIN OR COMMON CODE NUMBERS. The Company has caused
CUSIP, ISIN or Common Code numbers, as applicable, to be printed on the Notes
and the Trustee may use CUSIP, ISIN or Common Code numbers, as applicable, in
notices of redemption as a convenience to Holders. No representation is made as
to the accuracy of such numbers either as printed on the Notes or as contained
in any notice of redemption and reliance may be placed only on the other
identification numbers placed thereon.
18. GOVERNING LAW. This Dollar Note and the Indenture shall be
governed by, and construed in accordance with, the laws of The State of New
York, including, without limitation, Section 5- 1401of the New York General
Obligations Law.
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture. Requests may be made to:
Metromedia Fiber Network Services, Inc.
c/o Metromedia Fiber Network, Inc.
One North Lexington Avenue
<PAGE>
White Plains, NY 10601
Attention: Chief Financial Officer
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
(Insert assignee's soc. sec. or tax I.D. no.)
(Print or type assignee's name, address and zip code)
and irrevocably appoint
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
Date: Your Signature:
(Sign exactly as your name appears on
the face of this Note)
Tax Identification No:
SIGNATURE GUARANTEE:
Signatures must be guaranteed by an
"eligible guarantor institution" meeting
the requirements of the Registrar, which
requirements include membership or
participation in the Security Transfer
Agent Medallion Program ("STAMP") or
such other "signature guarantee program"
as may be determined by the Registrar in
addition to, or in substitution for,
STAMP, all in accordance with the
Securities Exchange Act of 1934, as
amended.
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the
Company pursuant to Section 4.10 or 4.14 of the Indenture, check the box below:
/ / Section 4. 10 / / Section 4.14
If you want to elect to have only part of the Note purchased
by the Company pursuant to Section 4. 10 or Section 4.14 of the Indenture, state
the amount you elect to have purchased: $
Date: Your Signature:
(Sign exactly as your name appears on the
face of this Note)
Tax Identification No:
SIGNATURE GUARANTEE:
Signatures must be guaranteed by an
"eligible guarantor institution" meeting
the requirements of the Registrar, which
requirements include membership or
participation in the Security Transfer
Agent Medallion Program ("STAMP") or
such other "signature guarantee program"
as may be determined by the Registrar in
addition to, or in substitution for,
STAMP, all in accordance with the
Securities Exchange Act of 1934, as
amended.
<PAGE>
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE1/
The following exchanges of a part of this Global Note for an
interest in another Global Note or for a Definitive Note, or exchanges of a part
of another Global Note or Definitive Note for an interest in this Global Note,
have been made:
<TABLE>
<CAPTION>
Principal Amount
Amount of decrease Amount of increase of this Global Note Signature of
in Principal in Principal following such authorized officer
Amount of this Amount of this decrease of Trustee or
Date of Exchange Global Note Global Note (or increase) Note Custodian
- ---------------------- --------------------- --------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
</TABLE>
- --------
1 THIS SHOULD BE INCLUDED ONLY IF THE NOTE IS ISSUED IN GLOBAL FORM.
<PAGE>
EXHIBIT A-2
(FACE OF NOTE)
[REMOVE THE GLOBAL NOTE LEGEND BELOW, IF APPLICABLE PURSUANT TO THE PROVISIONS
OF THE INDENTURE]
THIS GLOBAL NOTE IS HELD BY THE DEPOSITARY (AS DEFINED IN THE INDENTURE
GOVERNING THIS NOTE) OR ITS NOMINEE IN CUSTODY FOR THE BENEFIT OF THE BENEFICIAL
OWNERS HEREOF, AND IS NOT TRANSFERABLE TO ANY PERSON UNDER ANY CIRCUMSTANCES
EXCEPT THAT (I) THE TRUSTEE MAY MAKE SUCH NOTATIONS HEREON AS MAY BE REQUIRED
PURSUANT TO SECTION 2.07 OF THE INDENTURE, (II) THIS GLOBAL NOTE MAY BE
EXCHANGED IN WHOLE BUT NOT IN PART PURSUANT TO SECTION 2.07 OF THE INDENTURE,
(III) THIS GLOBAL NOTE MAY BE DELIVERED TO THE TRUSTEE FOR CANCELLATION PURSUANT
TO SECTION 2.12 OF THE INDENTURE AND (IV) THIS GLOBAL NOTE MAY BE TRANSFERRED TO
A SUCCESSOR DEPOSITARY WITH THE PRIOR WRITTEN CONSENT OF THE COMPANY.
[ISIN][Common Code]_______
*[ ]% SENIOR NOTES DUE 2009
No. *
METROMEDIA FIBER NETWORK, INC.
promises to pay to The Bank of New York, London branch, or registered assigns,
the principal sum of [ ] Euros on December 15, 2009.
Interest Payment Dates: June 15 and December 15.
Record Dates: June 1 and December 1.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be signed
manually or by facsimile by its duly authorized officer.
Dated: [ ], 1999
METROMEDIA FIBER NETWORK, INC.
By:
Name:
Title:
By:
Name:
Title:
<PAGE>
This is one of the
Notes referred to in
the within-mentioned
Indenture:
THE BANK OF NEW YORK
as Trustee
By: Dated:
Name:
Title:
<PAGE>
(BACK OF EURO NOTE)
(*)[ ]% Senior Notes due 2009
Capitalized terms used herein shall have the meanings assigned
to them in the Indenture referred to below unless otherwise indicated.
1. INTEREST. Metromedia Fiber Network, Inc., a Delaware
corporation (the "Company"), promises to pay interest on the principal amount of
this Euro Note at [ ]% per annum from from the date of issuance and
authentication of this Euro Note (November , 1999) until maturity payable in
accordance with the provisions of the following paragraph. The Company shall pay
interest semi-annually on June 15 and December 15 of each year, or if any such
day is not a Business Day, on the next succeeding Business Day (each an
"INTEREST PAYMENT DATE"). Interest on the Euro Notes shall accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of issuance; PROVIDED that if there is no existing Default or
Event of Default relating to the payment of interest, and if this Euro Note is
authenticated between a Record Date referred to on the face hereof and the next
succeeding Interest Payment Date, interest shall accrue from such next
succeeding Interest Payment Date; PROVIDED, FURTHER, that the first Interest
Payment Date shall be June 15, 2000. The Company shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
principal and premium, if any, from time to time on demand at a rate that is
1.0% per annum in excess of the rate then in effect; it shall pay interest
(including post-petition interest in any proceeding under any Bankruptcy Law) on
overdue installments of interest (without regard to any applicable grace
periods) from time to time on demand at the same rate to the extent lawful.
Interest shall be computed on the basis of a 360-day year of twelve 30-day
months.
2. METHOD OF PAYMENT. The Company shall pay interest on the
Euro Notes (except defaulted interest) to the Persons who are registered Holders
of Euro Notes at the close of business on the June 1 or December 1 next
preceding the Interest Payment Date, even if such Euro Notes are canceled after
such Record Date and on or before such Interest Payment Date, except as provided
in Section 2.13 of the Indenture with respect to defaulted interest. The Euro
Notes shall be payable as to principal, premium, if any, and interest at the
office or agency of the Company maintained for such purpose within or outside of
the City and State of New York, or, at the option of the Company, payment of
interest may be made by check mailed to the Holders at their addresses set forth
in the register of Holders kept by the Registrar, and PROVIDED that payment by
wire transfer of immediately available funds shall be required with respect to
principal of and interest and premium on, all Euro Global Notes and all other
Euro Notes the Holders of which shall have provided wire transfer instructions
to the Company or the Paying Agent. Such payment shall be in such coin or
currency of the United States of America as at the time of payment is legal
tender for payment of public and private debts.
3. PAYING AGENT AND REGISTRAR. Initially, The Bank of New
York, the Trustee under the Indenture, shall act as Paying Agent and Registrar
and [ ] will act as Paying Agent in Luxembourg. The Company may change any
Paying Agent or Registrar without notice to any Holder. The Company or any of
its Restricted Subsidiaries may act in any such capacity.
4. INDENTURE. The Company issued the Euro Notes under an
Indenture dated as of [ 1999] ("INDENTURE") between the Company and
the Trustee. The terms of the Euro Notes include those stated in the
Indenture and those made part of the Indenture by reference to the Trust
<PAGE>
Indenture Act of 1939, as amended (15 U.S. Code Sections 77aaa-77bbbb) (the
"TIA"). The Euro Notes are subject to all such terms, and Holders are
referred to the Indenture and the TIA for a statement of such terms. To the
extent any provision of this Euro Note conflicts with the express provisions
of the Indenture, the provisions of the Indenture shall govern and be
controlling. The Euro Notes are obligations of the Company limited to
[Euro][ ] million in aggregate principal amount.
5. OPTIONAL REDEMPTION.
(a) Except as set forth in subparagraphs (b) and (c) below,
the Euro Notes shall not be redeemable at the Company's option prior to December
15, 2004. Thereafter, the Euro Notes shall be subject to redemption at any time
at the option of the Company, in whole or in part, upon not less than 30 nor
more than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below, plus accrued and unpaid interest thereon to
the applicable redemption date (subject to the right of Holders of record on the
relevant Record Date to receive interest due on the relevant Interest Payment
Date), if redeemed during the twelve-month period beginning on December 15 of
the years indicated below:
<TABLE>
<CAPTION>
PERCENTAGE OF
PRINCIPAL
YEAR AMOUNT
<S> <C>
2004 %
2005 %
2006 %
2007 and thereafter %
</TABLE>
(b) Notwithstanding the foregoing, at any time prior to
December 15, 2002, the Company may, on any one or more occasions, redeem up to
35% of the aggregate principal amount of the Dollar Notes and the Euro Notes
(determined separately) originally issued pursuant to the Indenture at a
redemption price of [ ]% of the principal amount thereof, plus accrued and
unpaid interest thereon to the redemption date (subject to the right of Holders
of record on the relevant Record Date to receive interest due on the relevant
Interest Payment Date), with the Net Cash Proceeds received from any Public
Equity Offering made by the Company resulting in gross proceeds to the Company
of at least $100 million; PROVIDED that at least 65% of the aggregate principal
amount of the Dollar Notes and the Euro Notes (determined separately) originally
issued pursuant to the Indenture remain outstanding immediately after the
occurrence of any such redemption. The Company may make any such redemption upon
not less than 30 nor more than 60 days' notice (but in no event more than 90
days after the closing of the related Public Equity Offering).
(c) Any redemption pursuant to this Section 5 shall be made
pursuant to the provisions of Section 3.01 through 3.06 of the Indenture.
6. MANDATORY REDEMPTION.
The Company shall not be required to make mandatory redemption
or sinking fund payments with respect to the Euro Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) Upon the occurrence of a Change of Control, each Holder of
Euro Notes will have the right to require the Company to purchase all or any
part (equal to [Euro]1,000 or an integral multiple
<PAGE>
thereof) of such Holder's Euro Notes pursuant to the offer described below (the
"Change of Control Offer") at a purchase price in cash equal to 101% of the
aggregate principal amount thereof (the "Change of Control Payment") plus
accrued and unpaid interest thereon to the date of purchase (subject to the
right of Holders of record on the relevant Record Date to receive interest due
on the relevant Interest Payment Date). Within 30 days following any Change of
Control, the Company will mail a notice to each Holder setting forth the
procedures governing the Change of Control Offer as required by the Indenture.
(b) The Company shall not, and shall not permit any of its
Restricted Subsidiaries to, directly or indirectly, consummate any Asset Sale,
unless (i) the Company (or such Restricted Subsidiary, as the case may be)
receives consideration at the time of such Asset Sale at least equal to the fair
market value (as determined in good faith by the Board of Directors (including
as to the value of all noncash consideration) and set forth in an Officer's
Certificate delivered to the Trustee) of the assets or Equity Interests issued
or sold or otherwise disposed of and (ii) at least 75% of the consideration
therefor is in the form of cash and/or Cash Equivalents or Telecommunications
Assets, and (iii) the Net Cash Proceeds received by the Company (or such
Restricted Subsidiary, as the case may be) from such Asset Sale are applied
within 360 days following the receipt of such Net Cash Proceeds, to the extent
the Company (or such Restricted Subsidiary, as the case may be) elects, (a) to
the permanent redemption or repurchase of outstanding Indebtedness (other than
Subordinated Indebtedness) that is secured Indebtedness (including that in the
case of a revolver or similar arrangement that makes credit available, such
commitment is so permanently reduced by such amount) or Indebtedness of the
Company or such Restricted Subsidiary that ranks equally with the Notes but has
a maturity date that is prior to the maturity date of the Notes and/or (b) to
reinvest such Net Cash Proceeds (or any portion thereof) in Telecommunications
Assets. Notwithstanding anything herein to the contrary, with respect to the
reinvestment of Net Cash Proceeds, only proceeds from an Asset Sale of assets,
or Equity Interests, of a Foreign Subsidiary may be used to retire Indebtedness
of a Foreign Subsidiary or reinvest in assets or Equity Interests of a Foreign
Subsidiary. The balance of such Net Cash Proceeds, after the application of such
Net Cash Proceeds as described in the immediately preceding clauses (a) and (b),
shall constitute "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals or
exceeds $15.0 million (taking into account income earned on such Excess
Proceeds), the Company will be required to make a pro rata offer to all Holders
of Notes and PARI PASSU Indebtedness with comparable provisions requiring such
Indebtedness to be purchased with the proceeds of such Asset Sale (an "Asset
Sale Offer") to purchase the maximum principal amount or accreted value in the
case of Indebtedness issued with an original issue discount of Notes and PARI
PASSU Indebtedness that may be purchased out of the Excess Proceeds, at a
purchase price in cash in an amount equal to 100% of the principal amount
thereof or the accreted value thereof, as applicable, plus accrued and unpaid
interest thereon to the date of purchase (subject to the right of Holders of
record on the relevant Record Date to receive interest due on the relevant
Interest Payment Date), in accordance with the procedures set forth in Article 3
of the Indenture and the agreements governing such PARI PASSU Indebtedness. To
the extent that any Excess Proceeds remain after consummation of an Asset Sale
Offer, the Company may use such Excess Proceeds for any purpose not otherwise
prohibited by the Indenture. If the aggregate principal amount of Notes and PARI
PASSU Indebtedness tendered into such Asset Sale Offer surrendered by Holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes and PARI PASSU Indebtedness to be purchased on a pro rata basis in
proportion to the respective principal amounts (or accreted values in the case
of Indebtedness issued with an original issue discount) of the Notes and such
other Indebtedness. Upon completion, of such Asset Sale Offer, the amount of
Excess Proceeds shall be reset at zero for purposes of the first sentence of
this paragraph.
8. NOTICE OF REDEMPTION. Notice of redemption shall be
mailed at least 30 days but not more than 60 days before the redemption date
to each Holder whose Notes are to be redeemed at its registered address. Euro
Notes in denominations larger than [Euro]1,000 may be redeemed in part but
only in whole multiples of [Euro]1,000, unless all of the Euro Notes held by
a Holder are to be redeemed. On and
<PAGE>
after the redemption date interest shall cease to accrue on Notes or portions
thereof called for redemption.
9. DENOMINATIONS, TRANSFER, EXCHANGE. The Euro Notes are in
registered form without coupons in denominations of [Euro]1,000 and integral
multiples of [Euro]1,000. The transfer of Notes may be registered and Notes
may be exchanged as provided in the Indenture. The Registrar and the Trustee
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and the Company may require a Holder to pay any taxes
and fees required by law or permitted by the Indenture. The Company need not
exchange or register the transfer of any Note or portion of a Note selected
for redemption, except for the unredeemed portion of any Note being redeemed
in part. Also, the Company need not exchange or register the transfer of any
Notes for a period of 15 days before a selection of Notes to be redeemed or
during the period between a Record Date and the corresponding Interest
Payment Date.
10. PERSONS DEEMED OWNERS. The registered Holder of a Euro
Note on the Registrar's books may be treated as its owner for all purposes under
the Indenture.
11. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain
exceptions, the Indenture and the Notes may be amended or supplemented with the
consent of the Holders of at least a majority in aggregate principal amount of
the then outstanding Notes voting as a single class, and any existing default or
compliance with any provision of the Indenture or the Note may be waived with
the consent of the Holders of a majority in aggregate principal amount of the
then outstanding Notes voting as a single class. Without the consent of any
Holder of a Note, the Indenture or the Notes may be amended or supplemented,
among other things, to cure any ambiguity, omission, defect or inconsistency, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
the Notes in case of a merger or consolidation or sale of all or substantially
all of the Company's assets in accordance with the terms of the Indenture, to
make any change that would provide any additional rights or benefits to the
Holders of the Notes or that does not adversely affect the legal rights under
the Indenture of any such Holder, to comply with the requirements of the SEC in
order to effect or maintain the qualification of the Indenture under the TIA, to
add to the covenants of the Company for the benefit of the Holders or to
surrender any right or power conferred by the Indenture upon the Company, or to
effect any change to the transfer and exchange restrictions and security
delivery procedures contained in the Indenture in order to conform with changes
in any applicable law or Applicable Procedures.
12. DEFAULTS AND REMEDIES.
(a) Events of Default under the Indenture include: (i) the
failure to pay interest on the Notes, when the same becomes due and payable if
such default continues for a period of 30 days, (ii) the failure to pay
principal of any Notes when such principal becomes due and payable, at maturity,
upon redemption or otherwise; (iii) failure by the Company or any Restricted
Subsidiary to comply with Sections 4.10 or 4.14 of the Indenture; (iv) failure
by the Company or any Restricted Subsidiary for 60 days after notice to comply
with any of its other agreements in the Indenture or this Note; (v) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness for money borrowed
by the Company or any of its Restricted Subsidiaries (or the payment of which is
Guaranteed by the Company or any of its Restricted Subsidiaries) whether such
Indebtedness or Guarantee now exists, or is created after the Issue Date, which
default results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such Indebtedness,
together with the principal amount of any other such Indebtedness or the
maturity of which has been so accelerated, aggregates $15.0 million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to pay final
judgments not subject to appeal aggregating in excess of $15.0 million (net of
applicable insurance coverage which is acknowledged in writing by the insurer),
which judgments are not paid, vacated, discharged or stayed for a period of 60
<PAGE>
days; and (vii) certain events of bankruptcy or insolvency with respect to the
Company or any of the Company's Restricted Subsidiaries.
(b) If any Event of Default occurs and is continuing, the
Trustee or the Holders of at least 25% in aggregate principal amount of the then
outstanding Notes may declare all the Notes to be due and payable.
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency, all outstanding Notes shall become
due and payable without further action or notice. Holders may not enforce the
Indenture or the Notes except as provided in the Indenture. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Notes may direct the Trustee in its exercise of any trust or power. The Trustee
may withhold from Holders of the Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest. Except as provided in the Indenture, the Holders of a majority in
principal amount of the then outstanding Notes by notice to the Trustee may on
behalf of the Holders of all of the Notes waive any existing Default or Event of
Default and its consequences under the Indenture, except a continuing Default or
Event of Default in the payment of interest on, or principal of, the Notes. The
Company shall deliver to the Trustee annually a statement regarding compliance
with the Indenture, and the Company, upon becoming aware of any Default or Event
of Default, deliver to the Trustee a statement specifying such Default or Event
of Default.
13. TRUSTEE DEALINGS WITH COMPANY. The Trustee, in its
individual or any other capacity, may make loans to, accept deposits from, and
perform services for the Company or its Affiliates, and may otherwise deal with
the Company or its Affiliates, as if it were not the Trustee.
14. NO RECOURSE AGAINST OTHERS. A director, officer, employee,
incorporator or shareholder, of the Company, as such, shall not have any
liability for any obligations of the Company under the Notes or the Indenture or
for any claim based on, in respect of, or by reason of, such obligations or
their creation. Each Holder by accepting a Note waives and releases all such
liability. The waiver and release are part of the consideration for the issuance
of the Notes.
15. AUTHENTICATION. This Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating agent.
16. ABBREVIATIONS. Customary abbreviations may be used in the
name of a Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT
(= tenants by the entirety), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
17. CUSIP, ISIN OR COMMON CODE NUMBERS. The Company has caused
CUSIP, ISIN or Common Code numbers, as applicable, to be printed on the Notes
and the Trustee may use CUSIP, ISIN or Common Code numbers, as applicable, in
notices of redemption as a convenience to Holders. No representation is made as
to the accuracy of such numbers either as printed on the Notes or as contained
in any notice of redemption and reliance may be placed only on the other
identification numbers placed thereon.
18. GOVERNING LAW. This Euro Note and the Indenture shall be
governed by, and construed in accordance with, the laws of The State of New
York, including, without limitation, Section
<PAGE>
5- 1401of the New York General Obligations Law.
The Company will furnish to any Holder upon written request
and without charge a copy of the Indenture. Requests may be made to:
Metromedia Fiber Network Services, Inc.
c/o Metromedia Fiber Network, Inc.
One North Lexington Avenue
White Plains, NY 10601
Attention: Chief Financial Officer
<PAGE>
ASSIGNMENT FORM
To assign this Note, fill in the form below: (I) or (we) assign and transfer
this Note to
(Insert assignee's soc. sec. or tax I.D. no.)
(Print or type assignee's name, address and zip code)
and irrevocably appoint
to transfer this Note on the books of the Company. The agent may substitute
another to act for him.
Date: Your Signature:
(Sign exactly as your name appears
on the face of this Note)
Tax Identification No:
SIGNATURE GUARANTEE:
Signatures must be guaranteed by an
"eligible guarantor institution" meeting
the requirements of the Registrar, which
requirements include membership or
participation in the Security Transfer
Agent Medallion Program ("STAMP") or
such other "signature guarantee program"
as may be determined by the Registrar in
addition to, or in substitution for,
STAMP, all in accordance with the
Securities Exchange Act of 1934, as
amended.
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Note purchased by the
Company pursuant to Section 4.10 or 4.14 of the Indenture, check the box below:
/ / Section 4. 10 / / Section 4.14
If you want to elect to have only part of the Note purchased
by the Company pursuant to Section 4. 10 or Section 4.14 of the Indenture, state
the amount you elect to have purchased: (*)
Date: Your Signature:
(Sign exactly as your name appears on
the face of this Note)
Tax Identification No:
SIGNATURE GUARANTEE:
Signatures must be guaranteed by an
"eligible guarantor institution" meeting
the requirements of the Registrar, which
requirements include membership or
participation in the Security Transfer
Agent Medallion Program ("STAMP") or
such other "signature guarantee program"
as may be determined by the Registrar in
addition to, or in substitution for,
STAMP, all in accordance with the
Securities Exchange Act of 1934, as
amended.
<PAGE>
SCHEDULE OF EXCHANGES OF INTERESTS IN THE GLOBAL NOTE2/
The following exchanges of a part of this Global Note for an
interest in another Global Note or for a Definitive Note, or exchanges of a part
of another Global Note or Definitive Note for an interest in this Global Note,
have been made:
<TABLE>
<CAPTION>
Principal Amount
Amount of decrease Amount of increase of this Global Note Signature of
in Principal in Principal following such authorized officer
Amount of this Amount of this decrease of Trustee or
Date of Exchange Global Note Global Note (or increase) Note Custodian
- ---------------------- --------------------- --------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
</TABLE>
- --------
2 THIS SHOULD BE INCLUDED ONLY IF THE NOTE IS ISSUED IN GLOBAL FORM.
<PAGE>
Exhibit 5.2
October 26, 1999
Metromedia Fiber Network, Inc.
One North Lexington Avenue
White Plains, NY 10601
Metromedia Fiber Network, Inc.
Registration Statement on Form S-3 (File No. 333-89087)
-------------------------------------------------------
Ladies and Gentlemen:
In connection with the Registration Statement on Form S-3 (File No.
333-89087), as amended (the "Registration Statement"), filed by Metromedia Fiber
Network, Inc., a Delaware corporation (the "Company"), with the Securities and
Exchange Commission (the "Commission"), as provided by the Securities Act of
1933, as amended (the "Act"), and the rules and regulations under the Act, we
have been requested to render our opinion as to the legality of the securities
being registered under the Registration Statement. The Registration Statement
relates to the issuance and sale from time to time under Rule 415
<PAGE>
of the General Rules and Regulations of the Commission under the Act of the
following securities of the Company with an aggregate initial public offering of
up to $2,250,000,000 (or the equivalent in one or more foreign currencies):
(i) senior, senior subordinated or subordinated debt securities, in one
or more series, which may be issued under the indenture entered into among the
Company and the trustee or trustees to be appointed prior to the issuance of the
debt securities;
(ii) shares of preferred stock, par value $.01 per share, of the
Company, in one or more series;
(iii) warrants to purchase securities of the Company to be issued
pursuant to a warrant agreement between the Company and a warrant agent to be
appointed prior to the issuance of the Warrants; and
(iv) shares of Class A Common Stock, par value $.01 per share, of the
Company.
We have opined in our opinion dated as of October 14, 1999, which was
filed as Exhibit 5.1 to the Registration Statement, as to the legality of the
above listed securities. This opinion relates specifically to the debt
securities (the "Notes") issued under the indenture filed as Exhibit 4.3 to the
Registration Statement. Capitalized terms used in this letter and not otherwise
defined have the respective meanings given those terms in the Registration
Statement.
In connection with this opinion, we have examined originals, conformed
copies or photocopies, certified or otherwise identified to our satisfaction, of
the following documents (collectively, the "Documents"):
(i) the Registration Statement; and
<PAGE>
(ii) the form of indenture between the Company and The Bank of New
York, as trustee (the "Trustee"), relating to the dollar-denominated Senior
Notes due 2009 and the euro-denominated Senior Notes due 2009, filed as Exhibit
4.3 to the Registration Statement (the "High Yield Indenture").
In addition, we have examined: (i) those corporate records of the
Company as we have considered appropriate, including copies of its Amended and
Restated Certificate of Incorporation and By-laws, as in effect on the date of
this letter (collectively, the "Charter Documents"), and certified copies of
resolutions of the board of directors, or a committee of the board of directors,
of the Company relating to the issuance of the Notes; and (ii) those other
certificates, agreements and documents as we deemed relevant and necessary as a
basis for the opinions expressed below.
In our examination of the documents referred to above, we have assumed,
without independent investigation, (i) the enforceability of the documents
reviewed by us against each party to them other than the Company, (ii) that the
Notes will be substantially issued as described in the Registration Statement
and in the form reviewed by us and that any information omitted from the form
will be properly added, (iii) the genuineness of all signatures, (iv) the
authenticity of all documents submitted to us as originals, (v) the conformity
to the original documents of all documents submitted to us as certified,
photostatic, reproduced or conformed copies of validly existing agreements or
other documents, (vi) the authenticity of the latter documents, (vii) that the
statements regarding matters of fact in the certificates, records, agreements,
instruments and documents that we examined are accurate and complete, and (viii)
the legal capacity of all individuals who have executed or will execute any of
the documents which we examined.
<PAGE>
In expressing the opinion set forth below, we have relied upon the
factual matters contained in the representations and warranties of the Company
made in the documents and upon certificates of public officials and officers of
the Company.
Based on the foregoing, and subject to the stated assumptions,
exceptions and qualifications, we are of the opinion that:
1. The High Yield Indenture has been duly authorized and, when executed
and delivered by the Company and assuming due authorization, execution and
delivery by the Trustee, will be a valid and binding agreement, enforceable
against the Company in accordance with its terms, except as enforceability may
be subject to (a) bankruptcy, insolvency, fraudulent conveyance or transfer,
reorganization, moratorium or other similar laws affecting creditors' rights
generally, and (b) general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity at law).
2. With respect to any series of Notes issued under the High Yield
Indenture, when (i) the board of directors of the Company, or any appropriate
committee appointed by it, and appropriate officers of the Company have taken
all necessary corporate action to approve the issuance and terms of the Notes
and related matters, (ii) the terms of the Notes and of their issuance and sale
have been duly established in conformity with the High Yield Indenture so as not
to violate any applicable law or the Charter Documents or result in a default
under or breach of any agreement or instrument binding upon the Company and so
as to comply with any requirement or restriction imposed by any court or
governmental body having jurisdiction over the Company, (iii) the High Yield
Indenture has been duly executed and delivered by the Company and the Trustee,
and (iv) the Notes have been duly executed and authenticated in accordance with
the provisions of the High Yield Indenture and duly delivered to the purchasers
of those Notes upon payment of the agreed-upon consideration, the Notes, when
issued and sold in accordance with the High Yield Indenture and any other duly
authorized, executed and delivered applicable purchase agreement, will be valid
and binding obligations of the Company, enforceable against the Company in
accordance with their respective terms, except as enforceability may be subject
to (a) bankruptcy, insolvency, fraudulent conveyance of transfer,
reorganization, moratorium or other similar laws affecting creditors' rights
generally and (b) general principles of equity (regardless of whether
enforceability is considered in a proceeding in equity at law).
<PAGE>
Our opinions expressed above are limited to the laws of the State of
New York, the General Corporation Law of the State of Delaware and the federal
laws of the United States of America. Our opinions are rendered only with
respect to the laws, and the rules, regulations and orders under those laws,
that are currently in effect.
We hereby consent to the use of our name in the Registration Statement
and in the prospectus in the Registration Statement as it appears in the caption
"Legal Matters" and to the use of this opinion as an exhibit to the Registration
Statement. In giving this consent, we do not thereby admit that we come within
the category of persons whose consent is required by the Act or by the rules and
regulations under the Act.
Very truly yours,
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
<PAGE>
EXHIBIT 12.1
METROMEDIA FIBER NETWORK, INC.
STATEMENT REGARDING COMPUTATION OF RATIOS
(000'S)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------------- ---------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-tax profit (loss) from continuing
operations......................... $ (874) $ (4,319) $ (10,359) $ (26,259) $ 4,388 $ (2,056) $ (12,278)
--------- --------- ---------- ---------- --------- --------- ----------
Fixed charges:
Interest charges..................... 0 327 3,561 741 6,861 12 30,407
Rent expense......................... 0 49 53 89 319 134 664
--------- --------- ---------- ---------- --------- --------- ----------
Total fixed charges.................. 0 376 3,614 830 7,180 146 31,071
Earnings before income taxes and
fixed charges...................... $ (874) $ (3,943) $ (6,745) $ (25,429) $ 11,568 $ (1,910) $ 18,793
========= ========= ========== ========== ========= ========= ==========
Ratio of earnings to fixed charges
(n/a=negative)..................... n/a n/a n/a n/a 1.61 n/a n/a
</TABLE>
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3 No. 333-89087) and related Prospectus of
Metromedia Fiber Network, Inc. for the registration of Debt Securities,
Preferred Stock, Class A Common Stock and Warrants and to the incorporation by
reference therein of our report dated March 4, 1999, with respect to the
consolidated financial statements and schedules of Metromedia Fiber Network,
Inc. included in its Annual Report (Form 10-K) for the year ended December 31,
1998, filed with the Securities and Exchange Commission and to the use of our
report dated March 4, 1999 with respect to the financial statements of
Metromedia Fiber Network, Inc. as of December 31, 1998 and 1997 and for each of
the three years ended December 31, 1998 included in the prospectus supplement
which is part of this Registration Statement.
/s/ Ernst & Young LLP
New York, New York
October 26, 1999
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Amendment No. 1 to
Registration Statement No. 333-89087 of Metromedia Fiber Network, Inc. on Form
S-3 of our report with respect to AboveNet Communications, Inc. dated July 28,
1999 (September 8, 1999 as to Note 17), appearing in the Current Report on Form
8-K/A of Metromedia Fiber Network, Inc. dated October 26, 1999, and to the use
of our report with respect to AboveNet Communications, Inc. dated July 28, 1999
(September 8, 1999 as to Note 17), appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
October 27, 1999
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Registration Statement on Form S-3 of
Metromedia Fiber Network, Inc., of our reports dated June 15, 1999 relating to
the financial statements of the Palo Alto Internet Exchange (a business of
Compaq Computer Corporation), which appear in the Prospectus Supplement to such
Registration Statement. We also consent to the incorporation by reference in
this Registration Statement of our reports dated June 15, 1999 relating to the
financial statements of Palo Alto Internet Exchange, which appear in the
Registration Statement on Form S-4 (Registration No. 333-84541) of Metromedia
Fiber Network, Inc. filed with the Securities and Exchange Commission on
August 5, 1999. We also consent to the reference to us under the heading
"Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
Boston, Massachusetts
October 26, 1999
