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Prospectus filed pursuant
to Rule 424(b)(3)
PROSPECTUS
METROMEDIA FIBER NETWORK, INC.
EXCHANGE OFFER FOR $650,000,000 OF ITS
10% SERIES A SENIOR NOTES DUE 2008
Terms of the exchange offer
- -- It expires at 5:00 p.m., New York City time, on May 26, 1999, unless
extended.
- -- All initial notes that are validly tendered and not withdrawn will be
exchanged.
- -- Tenders of initial notes may be withdrawn at any time before the expiration
of the exchange offer.
- -- The terms of the exchange notes we will issue in the exchange offer are
substantially identical to those of the initial notes, except that transfer
restrictions and registration rights relating to the initial notes will not
apply to the exchange notes.
- -- The exchange notes are new securities and there is currently no established
market for them.
BEFORE PARTICIPATING IN THIS EXCHANGE OFFER PLEASE REFER TO THE SECTION IN THIS
PROSPECTUS ENTITLED "RISK FACTORS" COMMENCING ON PAGE 11.
Neither the Securities and Exchange Commission nor any state commission has
approved the notes to be distributed in the exchange offer, nor have any of
these organizations determined that this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
------------------------
The date of this prospectus is April 23, 1999.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
SUMMARY.................................................................................................... 3
RISK FACTORS............................................................................................... 11
USE OF PROCEEDS............................................................................................ 23
CAPITALIZATION............................................................................................. 24
SELECTED CONSOLIDATED FINANCIAL DATA....................................................................... 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 27
BUSINESS................................................................................................... 32
MANAGEMENT................................................................................................. 54
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 62
SECURITY OWNERSHIP......................................................................................... 64
THE EXCHANGE OFFER......................................................................................... 66
DESCRIPTION OF THE EXCHANGE NOTES.......................................................................... 77
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS........................................................... 113
PLAN OF DISTRIBUTION....................................................................................... 117
LEGAL MATTERS.............................................................................................. 117
EXPERTS.................................................................................................... 118
AVAILABLE INFORMATION...................................................................................... 118
DOCUMENTS INCORPORATED BY REFERENCE........................................................................ 119
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-1
GLOSSARY................................................................................................... A-1
</TABLE>
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SOME INFORMATION FROM THIS PROSPECTUS. BECAUSE IT IS
A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE PARTICIPATING IN THE EXCHANGE OFFER. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS" AND THE
FINANCIAL STATEMENTS AND THE RELATED NOTES TO THOSE STATEMENTS INCLUDED IN THIS
PROSPECTUS. ALL SHARE AND PER SHARE INFORMATION IN THIS PROSPECTUS GIVES
RETROACTIVE EFFECT TO THE TWO-FOR-ONE STOCK SPLITS THAT BECAME EFFECTIVE ON
AUGUST 28, 1998 AND DECEMBER 22, 1998, OF THE SHARES OF CLASS A AND CLASS B
COMMON STOCK OF METROMEDIA FIBER NETWORK, UNLESS OTHERWISE INDICATED IN THIS
PROSPECTUS.
ABOUT OUR BUSINESS
GENERAL
We are a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate/government customers in the United States. A
facilities-based provider uses mainly its own telecommunications facilities to
provide service, in contrast with non facilities-based resellers who purchase
the services of other providers and then retail the services to customers.
Bandwidth is a measurement of information capacity for digital transmission
systems that measures the transmission rate in megabits per second.
High-bandwidth infrastructure carries a transmission rate greater than 1.5
megabits per second. Fiber optics is a technology in which light is used to
transmit information from one point to another.
We focus our operations on domestic intracity fiber optic networks in
clusters of the 15 largest cities in the United States based on population. We
currently operate high-bandwidth fiber optic communications networks in the New
York metropolitan area and the greater Philadelphia area and by the end of the
third quarter of 1999 expect to operate a similar network in Washington, D.C. We
have also begun engineering and constructing networks in Chicago, San Francisco
and Boston and within the next two years, we also plan to complete an expansion
into five additional markets including Los Angeles, Seattle, Dallas, Houston and
Atlanta. We expect that our domestic intracity networks, as currently planned,
will ultimately encompass approximately 810,000 fiber miles, covering
approximately 1,896 route miles. Fiber miles means the number of the strands of
fiber contained in a length of fiber optic cable multiplied by the length of the
cable in miles. Route miles means the number of miles spanned by fiber optic
cable calculated without including physically overlapping segments of cable.
We have also built or obtained intercity fiber optic capacity to link
certain of our intracity networks. We built a 250 route mile network from New
York to Washington D.C., which was put into operation during the first quarter
of 1999. When finally complete, as currently planned, we expect that this
network will cover approximately 180,000 fiber miles. We have also obtained
rights for fiber optic capacity with other facilities-providers, obtained fiber
optic capacity linking New York--Chicago, New York--Boston, and
Chicago--Seattle--Portland and plan to construct intracity networks in all of
these metropolitan areas, except Portland.
In addition, we have entered into a joint venture with a U.K.
telecommunications company to connect our New York network to London. We have
also formed a joint venture to construct a high-bandwidth fiber optic network
connecting 13 major cities in Germany and obtain additional fiber optic capacity
in Western Europe.
We expect that our entire network when completed, as currently planned, will
ultimately consist of approximately 1.1 million fiber miles covering
approximately 8,930 route miles.
Please refer to the sections in this prospectus entitled "Business" and
"Risk Factors--We may not be able to successfully implement our business
strategy because it depends on factors beyond our control, which could adversely
affect our results of operations."
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BUSINESS STRATEGY
Our objective is to become the preferred facilities-based provider of
broadband communications infrastructure to communications carriers, corporations
and government agencies, in our target markets. Broadband communications
infrastructure is the same as high-bandwidth infrastructure, except that the
data rate is greater than 45 megabits per second. Please refer to the section in
this prospectus entitled "Business--Business Strategy."
The key elements of our strategy to achieve this objective are to:
- Establish Metromedia Fiber Network as the preferred carriers' carrier of
broadband communications infrastructure.
- Position Metromedia Fiber Network as the preferred provider of broadband
communications infrastructure to corporate and government customers.
- Replicate successful business model in new markets.
- Create a low cost position.
- Leverage network assets and strategic relationships to expand the reach of
our networks.
- Install a technologically advanced network.
- Build on management experience and the relationship with Metromedia
Company, a partnership that together with one of its partners controls
approximately 69% of the voting power of our common stock.
Metromedia Fiber Network was founded in 1993 and is 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.
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SUMMARY OF THE EXCHANGE OFFER
We are offering to exchange $650,000,000 aggregate principal amount of our
exchange notes for a like aggregate principal amount of our initial notes. In
order to exchange your initial notes, you must properly tender them and we must
accept your tender. We will exchange all outstanding initial notes that are
validly tendered and not validly withdrawn.
EXPIRATION DATE
The exchange offer will expire at 5:00 p.m., New York City time, on, May 26,
1999, unless we decide to extend it.
CONDITIONS TO THE EXCHANGE OFFER
The exchange offer is subject to the following customary conditions:
- there is no change in the laws and regulations which would impair our
ability to proceed with the exchange offer,
- there is no change in the current interpretation of the staff of the
Securities and Exchange Commission which permits resales of the exchange
notes.
- there is no stop order issued by the staff of the Securities and Exchange
Commission which would suspend the effectiveness of the registration
statement of which this prospectus is a part,
- there is no litigation which would impair our ability to proceed with the
exchange offer,
- we obtain all the governmental approvals we deem necessary for the
exchange offer, and
- there is no change or development involving a prospective change in our
business or financial affairs which might materially impair our ability to
proceed with the exchange offer.
Please refer to the section in this prospectus entitled "The Exchange
Offer--Terms of the Exchange Offer--Conditions."
PROCEDURES FOR TENDERING INITIAL NOTES
To participate in the exchange offer, you must complete, sign and date the
letter of transmittal, or a facsimile of the letter of transmittal, and transmit
it together with all other documents required by the letter of transmittal,
including the initial notes to be exchanged, to IBJ Whitehall Bank & Trust
Company, as exchange agent, at the address indicated on the cover page of the
letter of transmittal. In the alternative, you can tender your initial notes by
following the procedures for book-entry transfer described in this prospectus.
If your initial notes are registered in the name of a broker, dealer, commercial
bank, trust company or other nominee, we urge you to contact that person
promptly to tender your initial notes in the exchange offer. For more
information on tendering your initial notes, please refer to the sections in
this prospectus entitled "The Exchange Offer--Terms of the Exchange
Offer--Procedures for Tendering" and "--Book Entry Transfer."
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your initial notes and you cannot get your required
documents to the exchange agent on time, you may tender your initial notes
according to the guaranteed delivery procedures described under the section of
this prospectus entitled "The Exchange Offer--Terms of the Exchange
Offer--Guaranteed Delivery Procedure."
WITHDRAWAL RIGHTS
You may withdraw the tender of your initial notes at any time before 5:00
p.m., New York City time, on the expiration date of the exchange offer. To
withdraw, you must send a written or facsimile transmission notice of withdrawal
to the exchange agent at its address indicated under the "The
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Exchange Offer--Terms of the Exchange Offer--Exchange Agent" before 5:00 p.m.,
New York City time, on the expiration date of the exchange offer.
ACCEPTANCE OF INITIAL NOTES AND DELIVERY OF EXCHANGE NOTES
If all conditions required for proper acceptance of initial notes are
fulfilled, we will accept any and all initial notes that are properly tendered
in the exchange offer on or before 5:00 p.m., New York City time, on the
expiration date. We will return any initial note that we do not accept for
exchange to you without expense as promptly as practicable after the expiration
date. We will deliver the exchange notes as promptly as practicable after the
expiration date and acceptance of the initial notes for exchange. Please refer
to the section in this prospectus entitled "The Exchange Offer--Terms of the
Exchange Offer."
FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE EXCHANGE OFFER
Exchanging your initial notes for exchange notes will not be a taxable event
to you for United States federal income tax purposes. Please refer to the
section of this prospectus entitled "Certain United States Federal Tax
Considerations."
EXCHANGE AGENT
IBJ Whitehall Bank & Trust Company is serving as exchange agent in the
exchange offer.
FEES AND EXPENSES
We will bear all expenses related to the exchange offer. Please refer to the
section in this prospectus entitled "The Exchange Offer--Terms of the Exchange
Offer--Fees and Expenses."
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the exchange notes. We
are making this exchange offer solely to satisfy certain of our obligations
under our registration rights agreement. Please refer to the sections in this
prospectus entitled "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for a discussion of our use of the proceeds from the issuance of the
initial notes.
CONSEQUENCES OF FAILURE TO EXCHANGE INITIAL NOTES
If you do not exchange your initial notes in this exchange offer, you will
no longer be able to obligate us to register the initial notes under the
Securities Act except in the limited circumstances provided under our
registration rights agreement. In addition, you will not be able to resell,
offer to resell or otherwise transfer the initial notes unless they are
registered under the Securities Act, or unless you resell, offer to resell or
otherwise transfer them under an exemption from the registration requirements
of, or in a transaction not subject to, the Securities Act. Please refer to the
section in this prospectus entitled "Risk Factors--Your failure to participate
in the exchange offer will have adverse consequences."
SUMMARY OF TERMS OF THE EXCHANGE NOTES
ISSUER
Metromedia Fiber Network, Inc.
NOTES OFFERED
$650,000,000 aggregate principal amount of our 10% series B senior notes due
2008. The form and terms of the exchange notes are the same as the form and
terms of the initial notes except that the exchange notes will be registered
under the Securities Act, will not bear legends restricting their
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transfer and will not be entitled to registration rights under our registration
rights agreement. The exchange notes will evidence the same debt as the initial
notes and both the initial notes and the exchange notes will be governed by the
same indenture.
MATURITY DATE
November 15, 2008.
INTEREST ON THE EXCHANGE NOTES
The exchange notes will accrue interest at the rate of 10% per year from
either the most recent date on which interest has been paid on the initial notes
you exchanged, or if no interest has been paid, from November 25, 1998. We will
pay interest, including any due and unpaid interest, on the exchange notes
semi-annually on May 15 and November 15 of each year, commencing on May 15,
1999.
SINKING FUND
None.
OPTIONAL REDEMPTION
Except as described below, we may not redeem the exchange notes before
November 15, 2003. After November 15, 2003, we may redeem the exchange notes, in
whole or in part, at any time, at the redemption prices described in the
prospectus under the heading "Description of the Exchange Notes," together with
accrued and unpaid interest, if any, to the date of redemption. In addition, at
any time and from time to time before November 15, 2001, we may redeem up to 35%
of the aggregate principal amount of the initial notes and exchange notes issued
at a redemption price equal to 110% of the principal amount of the initial notes
and exchange notes redeemed, 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 initial notes and
exchange notes issued remains outstanding immediately after giving effect
to this redemption.
Please refer to the section in this prospectus entitled "Description of the
Exchange Notes-- Optional Redemption."
CHANGE OF CONTROL
Upon a change of control of Metromedia Fiber Network, you will have the
right to require us to repurchase all of your exchange notes at a repurchase
price equal to 101% of the aggregate principal amount of these exchange notes,
together with accrued and unpaid interest, if any, to the date of repurchase. We
cannot assure you that we will have available or that we will be able to obtain
sufficient funds to repurchase your exchange notes when required upon a change
of control. Please refer to the section in this prospectus entitled "Description
of the Exchange Notes--Repurchase at the Option of Holders--Change of Control."
RANKING
The exchange notes will:
- be general unsecured obligations,
- rank without preference with all our other existing and future unsecured
senior indebtedness,
- be effectively junior in right of payment to all our existing and future
secured indebtedness to the extent of the assets that secure this
indebtedness and
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- be effectively junior in right of payment to all of our subsidiaries'
existing or future indebtedness, whether or not secured.
RESTRICTIVE COVENANTS
The indenture under which the exchange notes will be issued limit our and
our subsidiaries' ability to:
- incur additional indebtedness or preferred stock,
- pay dividends on, and repurchase or redeem our capital stock and our
subsidiaries' capital stock and repurchase or redeem our subordinated
obligations,
- invest and sell assets and subsidiary stock,
- engage in transactions with related entities, and
- grant or suffer to exist additional secured claims against our and our
subsidiaries' properties.
In addition, the indenture limits our ability to engage in consolidations,
mergers and transfers of substantially all of our assets and also contains
restrictions on distributions from our subsidiaries. All of these limitations
and prohibitions have a number of important qualifications and exceptions.
Please refer to the sections in this prospectus entitled "Risk
Factors--Restrictions imposed by our debt agreement may significantly limit our
ability to execute our business strategy and increase the risk of default under
our debt obligations" and "Description of the Exchange Notes--Certain
Covenants."
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The exchange notes are new securities and there is currently no established
market for them. We cannot assure you that a market for the exchange notes will
develop or be liquid. The initial notes are currently eligible for trading in
the Private Offerings, Resales and Trading through Automated Linkages market.
Following commencement of the exchange offer, you may continue to trade the
initial notes in the Private Offerings, Resales and Trading through Automated
Linkages market. The exchange notes will not be eligible for trading in this
market.
FORM OF EXCHANGE NOTES
The exchange notes will be represented by one or more permanent global
securities in bearer form deposited on behalf of The Depository Trust Company
with IBJ Whitehall Bank & Trust Company, as custodian. You will not receive
exchange notes in registered form unless one of the events described in the
section of this prospectus entitled "Description of the Exchange Notes--Book
Entry; Delivery and Form" occurs. Instead, beneficial interests in the exchange
notes will be shown on, and transfers of these interests will be effected only
through, records maintained in book-entry form by The Depository Trust Company
with respect to its participants.
RISK FACTORS
You should consider carefully the information provided in the section in
this prospectus entitled "Risk Factors" beginning on page 11 and all the other
information provided to you in this prospectus in deciding whether to tender
your initial notes in the exchange offer.
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SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below as of and for the
periods ended December 31, 1996, 1997 and 1998 have been derived from our
consolidated financial statements and the related notes included in this
prospectus 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, our independent auditors.
In the summary consolidated financial data presented below, 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 noncash 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.
You should read the following information in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," the consolidated financial statements of
Metromedia Fiber Network and the related notes and the other financial data
appearing in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------------------------
<S> <C> <C> <C>
1996 1997 1998
----------- ----------- ----------
STATEMENT OF OPERATIONS DATA:
Revenue................................................................... $ 236,000 $ 2,524,000 $36,436,000
Expenses:
Cost of sales........................................................... 699,000 3,572,000 13,937,000
Selling, general and administrative..................................... 2,070,000 6,303,000 14,712,000
Depreciation and amortization........................................... 613,000 757,000 1,532,000
Settlement agreement.................................................... -- -- 3,400,000
Consulting and employment incentives.................................... 3,652,000 19,218,000 248,000
----------- ----------- ----------
Income (loss) from operations............................................. (6,798,000) (27,326,000) 2,607,000
Interest income (expense), net............................................ (3,561,000) 1,067,000 1,927,000
(Loss) from joint venture................................................. -- -- (146,000)
Income taxes.............................................................. -- -- 3,402,000
----------- ----------- ----------
Net (loss) income......................................................... $(10,359,000) $(26,259,000) $ 986,000
----------- ----------- ----------
----------- ----------- ----------
Net (loss) income applicable to common stockholders per share............. $ (0.29) $ (0.56) $ .01
----------- ----------- ----------
----------- ----------- ----------
Weighted average number of shares outstanding............................. 35,858,000 47,447,000 93,495,000
----------- ----------- ----------
----------- ----------- ----------
EBITDA.................................................................... $(6,185,000) $(26,569,000) $3,993,000
Adjusted EBITDA........................................................... $(2,533,000) $(7,351,000) $7,641,000
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
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<S> <C>
1998
------------------
BALANCE SHEET DATA:
Cash.......................................................................................... $569,319,000
Pledged Securities............................................................................ 91,896,000
Fiber Optic Transmission Network and related equipment, net................................... 244,276,000
Property and equipment, net................................................................... 2,716,000
Total assets.................................................................................. 974,417,000
Senior notes payable.......................................................................... 650,000,000
Total liabilities............................................................................. 816,903,000
Stockholders' equity.......................................................................... $157,514,000
</TABLE>
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RATIO OF EARNINGS TO FIXED CHARGES
The following table contains our ratio of earnings to fixed charges for each
of the periods indicated. Earnings were insufficient to cover fixed charges for
each of our fiscal years until the fiscal year ended December 31, 1998, and we
expect earnings to be insufficient to cover fixed charges for some time
thereafter as a result of the issuance of the notes. The deficiency was
$874,000, $4,319,000, $10,359,000 and $26,260,000, for the years ended December
31, 1994, 1995, 1996 and 1997, respectively.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Ratio of earnings to fixed charges......................... -- -- -- -- 1.61
</TABLE>
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RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION BELOW, AS WELL AS ALL OTHER
INFORMATION PROVIDED TO YOU IN THIS PROSPECTUS, BEFORE TENDERING THE INITIAL
NOTES IN THE EXCHANGE OFFER, INCLUDING INFORMATION IN THE SECTION OF THIS
PROSPECTUS ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS."
WE HAVE A LIMITED HISTORY OF OPERATIONS WHICH PROVIDES YOU WITH LIMITED
INFORMATION ON WHICH TO BASE YOUR EVALUATION
You will have limited historical financial information upon which to base
your evaluation of our performance and an investment in the exchange notes.
Metromedia Fiber Network 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 AND NEGATIVE CASH FLOW FROM OPERATIONS
We cannot assure you that we will succeed in establishing an adequate
revenue base or that our services will generate profitability or positive cash
flow. In connection with the construction of our networks, we have incurred
substantial net losses, and we had never generated positive cash flow from
operations before the nine-month period ended September 30, 1998. We expect to
continue incurring losses while we concentrate on the development and
construction of additional fiber optic 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. Accordingly, we expect to continue experiencing net operating losses
and negative cash flows for the foreseeable future.
Continued losses and negative cash flow may prevent us from pursuing our
strategies for growth and could cause us to be unable to meet our debt service
obligations, including our obligations under the initial and exchange notes,
capital expenditure requirements or working capital needs. Please refer to the
section in this prospectus entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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 since the issuance of
the initial notes.
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 the initial or exchange 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
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additional equity capital or refinance or restructure our debt. Please refer to
the sections in this prospectus entitled "--We may not be able to successfully
implement our business strategy because it depends on factors beyond our
control, which could adversely affect our results of operations" and
"--Restrictions imposed by our debt agreement may significantly limit our
business strategy and increase the risk of default under our debt obligations."
If we are unable to meet our debt service obligations or comply with our
covenants, we will default under our existing debt agreements. 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 in the
sections entitled "Description of the Exchange Notes" and "Business--Business
Strategy."
RESTRICTIONS IMPOSED BY OUR DEBT AGREEMENT MAY SIGNIFICANTLY LIMIT OUR ABILITY
TO EXECUTE OUR BUSINESS STRATEGY AND INCREASE THE RISK OF DEFAULT UNDER OUR
DEBT OBLIGATIONS
The indenture for the initial and exchange notes contains a number of
significant covenants. These covenants will 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 related entities.
If we fail to comply with these covenants we will 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 entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources", "Business--Business Strategy" and
"Description of the Exchange Notes."
WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR BUSINESS STRATEGY BECAUSE IT
DEPENDS 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 described in this prospectus. 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.
WE CANNOT ASSURE YOU THAT WE WILL SUCCESSFULLY COMPLETE THE CONSTRUCTION OF OUR
NETWORKS AS PLANNED OR WITHIN OUR CURRENT BUDGET
The construction of future networks entails 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. In addition, 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
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increase completion costs. 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. 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
sufficient buildings in each market.
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. Some of these
contracts can be terminated on this basis. Terminating any of these contracts
could adversely affect our operations.
WE MAY NEED BUT 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 and 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 subject to additional or more restrictive
financial covenants and ratios. Please refer to the section in this prospectus
entitled "Business--Business Strategy."
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COMPETITORS IN THE TELECOMMUNICATIONS INDUSTRY COULD OFFER SERVICES SIMILAR TO
OURS IN OUR CURRENT OR PLANNED MARKETS, WHICH WOULD AFFECT OUR RESULTS OF
OPERATIONS
The telecommunications industry is 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.
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, many of which have greater financial, research and development and other
resources than we do. 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 services similar to those offered by us.
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 the city of New York and
other 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 of ours.
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 the city of New York and other 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. Please refer to the section in this prospectus
entitled "Business--Competition."
WE DEPEND ON A LIMITED NUMBER OF CUSTOMERS AND ARE MORE VULNERABLE TO CHANGING
ECONOMIC CONDITIONS AND CONSUMER PREFERENCES
We are also particularly dependent on customers, such as NextLink New York,
L.L.C. and WinStar Communications, Inc., and are therefore more susceptible to
the impact of poor economic conditions than our competitors with a more balanced
mix of business. Please refer to the section in this prospectus entitled
"Business--Customers."
THE HEAVY REGULATION OF THE TELECOMMUNICATIONS INDUSTRY MAY LIMIT THE
DEVELOPMENT OF OUR NETWORKS AND AFFECT OUR COMPETITIVE POSITION
Existing and future governmental regulations will greatly influence how we
operate our business, our business strategy and ultimately, our viability.
Federal and state telecommunications laws directly shape the telecommunications
market. Consequently, regulatory requirements and/or changes could adversely
affect our operations. However, we cannot predict the future regulatory
framework of our business. Please refer to the sections in this prospectus
entitled "Business--Regulation" and "Business--Regulation of International
Operations."
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FEDERAL LAWS MAY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS BY REGULATING
OUR OPERATIONS AND OUR CUSTOMERS' OPERATIONS
Federal telecommunications law imposes special legal requirements on common
carriers who engage in interstate or foreign communication by wire or radio, and
on telecommunications carriers. These regulatory requirements may have a
material adverse impact on our business and results of operation.
These laws and Federal Communications Commission regulatory decisions also
may affect our business indirectly by virtue of the interrelationships that
exist among us and many of these regulated telecommunications entities. For
example, the Federal Communications Commission has recently taken steps to
reduce access charges and to give the local telephone companies greater
flexibility in setting these charges. Access charges are the fees paid by long
distance carriers to local telephone companies for originating and terminating
long distance calls on the incumbent local exchange carriers' local networks.
While we cannot predict the precise effect the access charge changes will have
on our operations, reduced access charges will likely make it more attractive
for long distance carriers to use local telephone companies facilities, which
could have a material adverse effect on long distance carriers' use of our fiber
optic telecommunications network.
Decisions by either the Federal Communications Commission or additional
states or courts to require unbundling of local telephone companies' dark fiber
could decrease the demand for our dark fiber, and thereby have an adverse effect
on the results of our operations.
STATE LEGISLATION COULD AFFECT OUR PRICING POLICIES AND IMPACT OUR COSTS
State regulators have the authority to determine both the rates we will pay
to local telephone companies 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 ours. We cannot assure you that these decisions, as well as future
regulatory, judicial, or legislative action, will not have a material adverse
effect on us. 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. 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 impacts our business. These
regulations may have an adverse effect on our business. For example, local
governments, such as the city of New York, typically retain the ability to
license public rights-of-way, subject to the limitation that local governments
may not prohibit persons from providing telecommunications services. Local
authorities 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, WHICH ADDS 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. The Federal
Communications Commission 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
Federal Communications Commission will resolve the various pending international
policy issues and the effect of these resolutions on us. Please refer to the
section in this prospectus entitled "Business--Regulation of International
Operations."
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Our U.K. joint venture is a U.S. international common carrier subject to
U.S. regulation under Title II of the Communications Act of 1934. Metromedia
Fiber Network, through a wholly-owned subsidiary, has also applied to become a
U.S. international common carrier subject to this regulation. Regulatory burdens
could adversely impact our business if we were deemed a dominant carrier under
these rules. Our U.K. joint venture is, and Metromedia Fiber Network will be,
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 particular 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. Failure to obtain an appropriate U.S. license for
international service or the revocation of a license could have a material
adverse effect on our future operations.
To the extent that our U.K. joint venture and Metromedia Fiber Network
operate as international common carriers, they will also be required to comply
with the rules of the Federal Communications Commission regarding the
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 international services provided by our U.K. joint venture are and our
future international services may also be subject to regulation in the United
Kingdom, Germany and other European jurisdictions in which we may operate.
National regulations of relevant European countries, as well as policies and
regulations on the European Union 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 CANCELLED OR NOT RENEWED, WHICH
WOULD IMPAIR THE DEVELOPMENT OF OUR NETWORKS IN MAJOR TELECOMMUNICATIONS
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 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. Please refer to the section in this prospectus entitled
"Business--Franchise, License and Related Agreements."
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(s) 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 fiber optic cable from under the streets or abandon our
networks, the termination would have a material adverse effect on our
operations.
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
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Corporation and its 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 fiber optic
cable. We cannot predict the effect of technological changes on our business. We
also cannot assure you that technological changes in the communications industry
will not have a material adverse effect on our operations.
WE MAY EXPERIENCE ADDITIONAL RISKS AS A RESULT OF EXPANDING OUR NETWORKS INTO
EUROPEAN AND OTHER FOREIGN COUNTRIES, WHICH MAY ADVERSELY AFFECT OUR RESULTS
OF OPERATION
Our strategy includes expanding our services to provide fiber optic cable in
Europe, particularly Germany and London, England. The following are particular
risks we may experience as a result of doing business in Germany, England and
other foreign countries in which we may expand our networks:
- difficulties in staffing and managing our operations in London, England
and Germany,
- longer payment cycles,
- problems in collecting accounts receivable,
- political instability or changes in the political landscape of Germany,
England or other countries in which we may operate,
- fluctuations in the European currency exchange rates,
- delays from customs brokers or government agencies encountered as a result
of transacting business between us in the United States and our business
associates in Germany, England or other countries in which we may operate,
and
- potentially adverse consequences resulting from operating in multiple
European countries such as Germany and England which have different 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. Please refer to the
sections in this prospectus entitled "--The heavy regulation of the
telecommunications industry may limit the development of our networks and affect
our competitive position," "--Competitors in the telecommunications industry
could offer services similar to ours in our current or planned markets, which
would affect our results of operations," "Business--Regulation" and
"Business--Regulation of International Operations."
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
In the future, we may acquire or try to acquire customer bases and
businesses from, make investments in, or enter into strategic alliances with,
companies which have customer bases, switching capabilities or existing networks
in our current markets or in areas into which we intend to expand our
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networks. Any future 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 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 these acquisitions, investments,
strategic alliances or related efforts. Please refer to the sections in this
prospectus entitled "--We may not be able to successfully implement our business
strategy because it depends on factors beyond our control, which could adversely
affect our results of operations" and "Business--Business Strategy."
IN THE TELECOMMUNICATIONS INDUSTRY, CONTINUED PRICING PRESSURES FROM OUR
COMPETITORS 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 certain regional Bell operating
companies, that increase the parties' purchasing power.
Please refer to the section in this prospectus entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
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.
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METROMEDIA COMPANY EFFECTIVELY CONTROLS METROMEDIA FIBER NETWORK AND HAS THE
POWER TO CAUSE OR PREVENT A CHANGE OF CONTROL
Metromedia Company and one of its partners currently own 100% of the class B
common stock, which represents approximately 69% of Metromedia Fiber Network's
total current voting power. Accordingly, Metromedia Company is able to control
the board of directors and all stockholders' 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 Metromedia Fiber Network's assets, without the
consent of Metromedia Fiber Network's other stockholders. In addition,
Metromedia Company has the power to prevent or cause a change in control of
Metromedia Fiber Network. Please refer to the sections in this prospectus
entitled "Security Ownership" and "Certain Relationships and Related
Transactions."
WE ARE INVOLVED IN TWO LEGAL PROCEEDINGS WHICH COULD ADVERSELY AFFECT OUR
FINANCIAL CONDITION
We are involved in two legal proceedings, one in connection with the sale of
900,000 shares of class A common stock, and the other relating to a finder's fee
agreement.
If we are unsuccessful in defending against the allegations made in these
proceedings, an award of the magnitude being sought in these legal proceedings
would have a material adverse effect on our financial condition and results of
operations. 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. Please refer to the section in this prospectus
entitled "Business-- Legal Proceedings."
OUR SERVICES ARE LIMITED TO LEASING FIBER OPTIC CAPACITY, WHICH MAY LIMIT OUR
REVENUES
We derive substantially all of our revenue from the leasing of fiber optic
capacity to our customers, many of whom transmit voice, data and/or video
information or provide switched voice and data services. We are not currently
engaged in the transmission of voice, data or video services and do not provide
switched voice and data services, unlike other telecommunications companies.
While we may later decide to provide those services, the limited nature of our
current services could limit potential revenues and result in our having lower
revenues than competitors which provide a wider array of services. Please refer
to the sections in this prospectus entitled "Business--Customers" and
"Business-- Competition."
WE HAVE SUBSTANTIAL HOLDINGS OF SECURITIES AND THE APPLICATION OF THE INVESTMENT
COMPANY ACT COULD ADVERSELY AFFECT OUR BUSINESS AND OPERATIONS
We have invested approximately $91.5 million of the net proceeds of the
offering of the initial notes in a portfolio of U.S. government securities which
we pledged to secure the payment in full of the interest on the initial and
exchange notes through May 15, 2000. We have invested the balance of these
proceeds in short-term instruments with prudent cash management and not
primarily for the purpose of achieving investment returns. Investment in
securities primarily for the purpose of achieving investment returns could
result in Metromedia Fiber Network being treated as an investment company under
the Investment Company Act of 1940. The Investment Company Act requires
investment companies to register with the Securities and Exchange Commission and
imposes various substantive restrictions on investment companies with respect to
matters such as their capital structure, management, operations and transactions
with related persons. A company is considered an investment company under the
Investment Company Act if it holds itself out as primarily in the business of
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investing, reinvesting or trading in securities. A company can also be
considered an investment company if it fails certain numerical tests as to the
composition of its assets and the sources of its income, even if it is primarily
engaged in a business other than investing, reinvesting, owning, holding or
trading in securities.
We believe that we will not be considered to be engaged in investing,
reinvesting, owning, holding or trading securities, and therefore, will not be
regarded as an investment company within the meaning of the Investment Company
Act. However, application of this Act to us would materially adversely affect
our business, financial condition and results of operations.
FAILURE TO ADDRESS THE YEAR 2000 PROBLEM MAY CAUSE DISRUPTIONS IN THE OPERATION
OF OUR NETWORKS AND OUR SERVICES TO CUSTOMERS, WHICH WOULD AFFECT OUR RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
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 software 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 these 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 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. Please
refer to the section in this prospectus entitled "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Year 2000 System
Modifications."
PAYMENT OF PRINCIPAL AND INTEREST ON THE NOTES EFFECTIVELY DEPENDS ON RECEIVING
INCOME FROM OUR SUBSIDIARIES WHICH HAVE NO OBLIGATIONS TO MAKE ANY PAYMENTS ON
THE NOTES
We are a holding company with few direct operations and few assets of
significance other than the stock of our subsidiaries. As such, we are 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 have no obligation to pay any amounts due under the exchange
notes or to make any funds available for payments due under the exchange notes,
whether by dividends, loans or other payments. Our subsidiaries do not guarantee
the payment of the notes. The exchange notes will therefore be effectively
junior in right of payment to the claims of the creditors of our subsidiaries,
including trade creditors and holders of indebtedness of these 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 entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-- Liquidity and Capital Resources," "Business" and "Description of
the Exchange Notes."
PAYMENT OF PRINCIPAL AND INTEREST ON THE EXCHANGE NOTES IS EFFECTIVELY JUNIOR IN
RIGHT OF PAYMENT TO THE CLAIMS OF OUR SECURED CREDITORS AND OUR SUBSIDIARIES'
CREDITORS WHO WOULD BE ENTITLED TO REALIZE THEIR CLAIMS ON OUR ASSETS BEFORE
YOU
The exchange notes are unsecured and therefore will be effectively junior in
right of payment to all our existing and future secured indebtedness to the
extent of the value of the assets securing this
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indebtedness. In addition, the exchange notes will also be effectively junior in
right of payment to all of our subsidiaries' existing or future indebtedness,
whether or not secured. The indenture for the initial and exchange notes permits
us and our subsidiaries to incur an unlimited amount of secured indebtedness to
finance the acquisition of equipment, inventory, construction, installation,
lease, development or improvement of network assets. Please refer to the section
of this prospectus entitled "Description of the Exchange Notes."
Consequently, in the event of a bankruptcy, liquidation, dissolution,
reorganization or similar proceeding of Metromedia Fiber Network, the assets of
Metromedia Fiber Network will be available to satisfy obligations of any secured
debt before any payment may be made on the exchange notes. In addition, to the
extent our assets cannot satisfy in full the secured indebtedness, the holders
of this indebtedness would have a claim for any shortfall that would rank
equally in right of payment with the exchange notes. If the indebtedness were
issued by a subsidiary, the holders' claim for any shortfall would effectively
rank senior to the exchange notes with respect to such subsidiary's assets.
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
exchange notes.
A COURT COULD DECLARE THE EXCHANGE NOTES VOID, JUNIOR IN RIGHT OF PAYMENT OR
TAKE OTHER ACTIONS DETRIMENTAL TO YOU
An unpaid creditor or representative of creditors, such as a trustee in
bankruptcy or Metromedia Fiber Network as a debtor-in-possession in a bankruptcy
proceeding, could file a lawsuit claiming that the issuance of the exchange
notes constitutes a fraudulent conveyance. If the court were to make such a
finding, it could:
- void our obligations under the exchange notes,
- declare the exchange notes junior in right of payment to other
indebtedness, or
- take other actions detrimental to you as a holder of the exchange notes.
To make this determination, a court would have to find that:
- we did not receive fair consideration or reasonably equivalent value for
the exchange notes, and that,
- at the time the exchange notes were issued, we were insolvent or rendered
insolvent by the issuance of the exchange notes; were engaged in a
business or transaction for which our remaining assets constituted
unreasonably small capital; or intended to incur, or believed that we
would incur, debts which it would be beyond our ability to pay as they
matured.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction and upon the valuation assumptions and the methodology
applied by the court.
Moreover, regardless of solvency, a court could also void the issuance of
the exchange notes if it determined that the transaction was made with intent to
hinder, delay or defraud creditors, or a court could subordinate the exchange
notes to the claims of all existing and future creditors on similar grounds.
YOU MAY FIND IT DIFFICULT TO SELL YOUR EXCHANGE NOTES
The exchange notes will be registered under the Securities Act but will not
be eligible for trading on the Private Offerings, Resales and Trading through
Automated Linkages market. The exchange
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notes will constitute a new issue of securities with no established trading
market, and there can be no assurance as to:
- the development of any market for the exchange notes,
- the liquidity of any market for the exchange notes that may develop,
- your ability to sell your exchange notes, or
- the price at which you would be able to sell your exchange notes.
We have been advised by the initial purchasers for the initial notes that
they presently intend to make a market in the exchange notes. However, they are
not obligated to do so and may discontinue any market-making activity with
respect to the exchange notes at any time without notice. If a market for the
exchange notes were to exist, the exchange notes could trade at prices that may
be higher or lower than their principal amount or purchase price, depending on
many factors, including prevailing interest rates, the market for similar
debentures and the financial performance of Metromedia Fiber Network.
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 exchange notes. We cannot assure you that the market for the
exchange notes, if any, will not be subject to similar disruptions. Any
disruption may adversely affect you as a holder of the exchange notes.
THE ISSUANCE OF THE EXCHANGE NOTES MAY ADVERSELY AFFECT THE MARKET FOR THE
INITIAL NOTES
Following commencement of the exchange offer, you may continue to trade the
initial notes in the Private Offerings, Resales and Trading through Automated
Linkages market. If initial notes are tendered for exchange and accepted in the
exchange offer, the trading market for the untendered and tendered but
unaccepted initial notes could be adversely affected. Please refer to the
section in this prospectus entitled "--Your failure to participate in the
exchange offer will have adverse consequences."
YOUR FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE CONSEQUENCES
The initial notes were not registered under the Securities Act or under the
securities laws of any state and you may not resell them, offer them for resale
or otherwise transfer them unless they are subsequently registered or resold
under an exemption from the registration requirements of the Securities Act and
applicable state securities laws. If you do not exchange your initial notes for
exchange notes pursuant to the exchange offer, or if you do not properly tender
your initial notes in the exchange offer, you will not be able to resell, offer
to resell or otherwise transfer the initial notes unless they are registered
under the Securities Act or unless you resell them, offer to resell or otherwise
transfer them under an exemption from the registration requirements of, or in a
transaction not subject to, the Securities Act. In addition, you will no longer
be able to obligate us to register the initial notes under the Securities Act
except in the limited circumstances provided under our registration rights
agreement.
CERTAIN PERSONS WHO PARTICIPATE IN THE EXCHANGE OFFER MUST DELIVER A PROSPECTUS
IN CONNECTION WITH RESALES OF THE EXCHANGE NOTES
Based on certain no-action letters issued by the staff of the Securities and
Exchange Commission, we believe that you may offer for resale, resell or
otherwise transfer the exchange notes without compliance with the registration
and prospectus delivery requirements of the Securities Act. However, in some
instances described in this prospectus under "The Exchange Offer", you will
remain obligated to comply with the registration and prospectus delivery
requirements of the Securities Act to transfer
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your exchange notes. In these cases, if you transfer any exchange note without
delivering a prospectus meeting the requirements of the Securities Act or
without an exemption from registration of your exchange notes under this Act,
you may incur liability under the Securities Act. We do not and will not assume
or indemnify you against this liability.
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the exchange
notes in exchange for the outstanding initial notes. We are making this exchange
offer solely to satisfy our obligations under our registration rights agreement.
In consideration for issuing the exchange notes, we will receive initial notes
in like aggregate principal amount.
The net proceeds to Metromedia Fiber Network from the original issuance of
the initial notes, after deducting discounts, commissions and expenses, were
approximately $630 million. We invested approximately $91.5 million of these net
proceeds in a portfolio of U.S. government securities, which we then pledged as
security for the payment in full of interest on the initial and exchange notes
through May 15, 2000. We intend to use the balance of these net proceeds to
complete the construction of our intra-city and inter-city networks in the
United States and Europe and for other capital expenditures, working capital and
general corporate purposes, including possible acquisitions of other companies
or assets. We currently intend to allocate substantial proceeds to each of these
uses. However, the precise allocation of funds among these uses will depend on
future technological, regulatory and other developments in or affecting our
business, the competitive climate in which we operate and the emergence of
future opportunities.
We have invested these proceeds in U.S. government securities or other
short-term, interest bearing, investment grade securities. We are not currently
and do not expect as a result to become subject to the registration requirements
of the Investment Company Act of 1940. Please refer to the section in this
prospectus entitled "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
23
<PAGE>
CAPITALIZATION
The following table shows our capitalization as of December 31, 1998. You
should read this table together with the consolidated financial statements and
related notes included in this prospectus beginning on page F-1 and the
information in the section entitled "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources."
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1998
-------------
(IN
THOUSANDS)
<S> <C>
Cash and cash equivalents................................................................ $ 569,319
-------------
-------------
Pledged securities: (1).................................................................. $ 91,896
-------------
-------------
Debt:
Capital lease obligations less current portion......................................... $ 22,675
10% series A senior notes due 2008..................................................... 650,000
-------------
Total debt............................................................................. 672,675
-------------
Stockholders' equity
Class A common stock, $.01 par value, 180,000,000 shares authorized; 77,605,110 shares
issued and outstanding............................................................... 776
Class B common stock, $.01 par value; 20,000,000 shares authorized; 16,884,636 shares
issued and outstanding............................................................... 169
Additional paid-in capital............................................................... 198,806
Accumulated deficit...................................................................... (42,237)
-------------
Total stockholders' equity............................................................. 157,514
-------------
Total capitalization..................................................................... $ 830,189
-------------
-------------
</TABLE>
- ------------------------
(1) Represents amounts deposited and accrued interest with the security agent
pursuant to our security agreement to make payments of interest on the
initial and exchange notes through May 15, 2000.
24
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
years ended December 31, 1994, 1995, 1996, 1997 and 1998, have been derived from
our consolidated financial statements and the related notes included in this
prospectus 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.
In the selected consolidated financial data presented below, 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.
You should read the following information in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," the consolidated financial statements of
Metromedia Fiber Network and the related notes and the other financial data
appearing in this prospectus.
25
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1994 1995 1996 1997
------------ ------------ ------------- -------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ -- $ 56,000 $ 236,000 $ 2,524,000
Expenses:
Cost of sales............................................. -- -- 699,000 3,572,000
Selling, general and administrative......................... 874,000 3,886,000 2,070,000 6,303,000
Depreciation and amortization............................. -- 162,000 613,000 757,000
Settlement agreement...................................... -- -- -- --
Consulting and employment incentives........................ -- -- 3,652,000 19,218,000
------------ ------------ ------------- -------------
Income (loss) from operations............................... (874,000) (3,992,000) (6,798,000) (27,326,000)
Interest income (expense), net.............................. -- (327,000) (3,561,000) 1,067,000
(Loss) from joint venture................................... -- -- -- --
Income taxes................................................ -- -- -- --
------------ ------------ ------------- -------------
Net (loss) income........................................... (874,000) (4,319,000) (10,359,000) (26,259,000)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Net (loss) income applicable to common stockholders per
share..................................................... $ (0.04) $ (0.17) $ (0.29) $ (0.56)
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Weighted average number of shares outstanding............... 23,336,000 24,829,000 35,858,000 47,447,000
------------ ------------ ------------- -------------
------------ ------------ ------------- -------------
Ratio of Earnings to fixed charges(1)....................... -- -- -- --
EBITDA...................................................... $ (874,000) $ (3,830,000) $ (6,185,000) $ (26,569,000)
Adjusted EBITDA............................................. $ (874,000) $ (3,830,000) $ (2,533,000) $ (7,351,000)
<CAPTION>
1998
-------------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenue..................................................... $ 36,436,000
Expenses:
Cost of sales............................................. 13,957,000
Selling, general and administrative......................... 14,712,000
Depreciation and amortization............................. 1,532,000
Settlement agreement...................................... 3,400,000
Consulting and employment incentives........................ 248,000
-------------
Income (loss) from operations............................... 2,607,000
Interest income (expense), net.............................. 1,927,000
(Loss) from joint venture................................... (146,000)
Income taxes................................................ 3,402,000
-------------
Net (loss) income........................................... 986,000
-------------
-------------
Net (loss) income applicable to common stockholders per
share..................................................... $ .01
-------------
-------------
Weighted average number of shares outstanding............... 93,495,000
-------------
-------------
Ratio of Earnings to fixed charges(1)....................... 1.61
EBITDA...................................................... $ 3,993,000
Adjusted EBITDA............................................. $ 7,641,000
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------
<S> <C> <C>
1997 1998
------------- -------------
BALANCE SHEET DATA
Cash............................................................................................. $ 138,846,000 $ 569,319,000
Pledged Securities............................................................................... -- 91,896,000
Property and equipment, net...................................................................... 759,000 2,716,000
Total assets..................................................................................... 167,378,000 974,417,000
Senior notes payable............................................................................. 650,000,000
Total liabilities................................................................................ 17,838,000 816,903,000
Stockholders' equity............................................................................. $ 149,540,000 $ 157,514,000
</TABLE>
- ------------------------
(1) Earnings were insufficient to cover fixed charges until the fiscal year
ended December 31, 1998, and we expect earnings to be insufficient to cover
fixed charges for some time thereafter as a result of the issuance of the
notes. The deficiency was $874,000, $4,319,000, $10,359,000 and $26,260,000,
for the years ended December 31, 1994, 1995, 1996 and 1997, respectively.
26
<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 BEGINNING
ON PAGE F-1. THERE ARE SOME FORWARD-LOOKING STATEMENTS IN THIS SECTION. YOU
SHOULD READ THE INFORMATION UNDER "SPECIAL NOTE REGARDING FORWARD-LOOKING
STATEMENTS" LATER IN THIS SECTION FOR SPECIAL INFORMATION ABOUT OUR PRESENTATION
OF FORWARD-LOOKING INFORMATION.
GENERAL
We are a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate/government customers in the United States. We focus our
operations on domestic intracity fiber optic networks in clusters of the 15
largest cities throughout the United States based on population. We currently
operate high-bandwidth fiber optic communications networks in the New York
metropolitan area and the greater Philadelphia area and by the end of the third
quarter in 1999 expect to be operating a similar network in Washington, D.C. We
have also begun engineering and constructing networks in Chicago, San Francisco
and Boston and within the next two years, we plan to complete an expansion into
five additional markets including Los Angeles, Seattle, Dallas, Houston and
Atlanta. We expect that our domestic intracity 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.
We have also built or obtained intercity fiber optic capacity that links
certain of our intracity networks. We built a 250 route mile network from New
York to Washington, D.C., which was put into operation during the first quarter
of 1999. When finally complete, as currently planned, we expect that this
network will cover approximately 180,000 fiber miles. We have also obtained
rights for fiber optic capacity with other facilities-providers, obtained fiber
optic capacity linking New York--Chicago, New York--Boston, and
Chicago--Seattle--Portland and plan to construct intracity networks in all of
these metropolitan areas except Portland.
In addition, we have entered into a joint venture with a U.K.
telecommunications company to connect our New York network to London. We have
also formed a joint venture to construct a high-bandwidth fiber optic network
connecting 13 major cities in Germany and obtain additional fiber optic capacity
in Western Europe. Please refer to the sections in this prospectus entitled
"Business" and "Risk Factors--We may not be able to successfully implement our
business strategy because of factors beyond our control, which could adversely
affect our results of operations."
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997:
REVENUES. Revenues for 1998 were $36.4 million, a 1,356% increase as
compared to 1997 revenues of $2.5 million. The revenue increase for 1998 as
compared to 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 for 1998 was $13.9 million, an increase of 286%
over cost of sales in 1997 of $3.6 million. Cost of sales increased for 1998 as
compared to 1997 due to:
- costs associated with the commencement of service to customers,
27
<PAGE>
- 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. Cost of sales as a percentages of revenue declined as a
result of the significant increase in the number of customers and revenues.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. During 1998, selling, general
and administrative expenses increased to $14.7 million, from $6.3 million during
1997, an increase of $8.4 million, or 133%. 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 a $3.4 million expense 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. During 1998, depreciation and
amortization expense was $1.5 million, as compared to $0.8 million during 1997,
an increase of $0.7 million, or 88%. Depreciation and amortization expense
increased as a result of increased investment in our completed fiber optic
network and property and equipment.
INTEREST INCOME (EXPENSE). During 1998, interest income was $8.8 million as
compared to $1.8 million during 1997, an increase of $7.0 million, or 389%.
During 1998, we derived interest income by investing our excess cash proceeds we
received from our initial public offering in October 1997, and the additional
cash received in November 1998 from the proceeds from the issuance of the
initial notes. Interest expense increased in 1998 to $6,861,000 as compared to
$741,000 in 1997. The increase in interest expense reflects interest that has
accrued for the initial notes issued in November 1998.
INCOME (LOSS) FROM JOINT VENTURE. In 1998, we recorded a $146,000 loss,
which reflected our 50% share of our International Optical Network joint
venture's loss. 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 of
77.5%, for federal and state taxes.
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 $.56 for 1997. On a diluted
basis, net income per share for 1998 was $0.01.
Results for 1998 improved primarily because of:
- 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 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
28
<PAGE>
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 increased to $6.3 million in 1997 from $2.1 million in
1996, a 200% increase. 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. A consulting and employment
incentives expense of $19.2 million was recorded in 1997 as compared to $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. Please refer to the
section in this prospectus entitled "Certain Relationships and Related
Transactions."
NET LOSS. We recorded a net loss of $26.2 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, these 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
On November 3, 1997, our initial public offering of 36,432,000 shares of
class A common stock generated net proceeds of $133.9 million, after deducting
the underwriters' commission and expenses related to this initial public
offering.
For 1998, our operating activities generated $18.0 million of cash, compared
with $2.2 million during 1997. Operations generated an increased amount of cash
primarily because of the increase in advance payments received from customers,
as well as the improvement in net income as a result of increases in revenues
and interest income in 1998 as compared to 1997. For 1998, we used $218.0
million of cash for investing activities as compared to $19.7 million for 1997.
The amount of cash used for investments increased primarily because of our
investments in the expansion of our networks and related construction in
progress, as well as capital contributions to our International Optical Network
joint venture and a deposit on our German network build. In 1998, we received
$630.4 million of net cash from financing activities, compared to $155.9 million
for 1997. The cash from financing activities in 1998 came mainly from the
issuance and sale of the initial notes in November 1998. The 1997 amount related
to the sale of securities of Metromedia Fiber Network net of the repayment of
certain of our indebtedness.
29
<PAGE>
Cash used for operating activities during 1996 was $2.8 million. Cash was
utilized to support the operations through our startup phase. Cash flows used in
investing activities were $1.1 million in 1996. The investing activities cashout
flows in both years were primarily used for the building of our New York/New
Jersey network. With the issuance of equity and debt, financing activities
provided cash flows of $4.3 million in 1996. The cash flows from financing
activities in 1996 were utilized to fund our operating and investing activities.
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 $300 million for the year ending December 31, 1999, and
approximately $200 million for the year ending December 31, 2000 on the
build-out of our fiber optic networks in 11 of the 15 largest cities in the
United States based on population and our planned international networks. We
believe that the net proceeds from the issuance and sale of the initial notes in
November 1998, other cash on hand, certain vendor financing and cash generated
in 1999 and 2000 (including advance customer payments), will be sufficient to
fund the planned build-out of our fiber optic networks and our other working
capital needs through the year ended December 31, 2000. The indenture for the
initial and exchange notes permits us to incur additional indebtedness to
finance the construction of our networks. As a result, we may also consider from
time to time private or public sales of additional equity or debt securities,
entering into senior credit facilities and other financings, depending upon
market conditions, in order to finance the continued build-out of our network,
for working capital purposes and for acquisitions. We cannot assure you that we
will be able to successfully consummate any such financing at all, or on
acceptable terms. Accordingly, we expect to continue experiencing net operating
losses and negative cash flows 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.
We have completed a questionnaire and project plan to our systems and
operating personnel to identify all business and computer applications so that
we can identify potential compliance problems. We 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 begun to compile a database of information based upon
these responses, which we expect to complete during the second quarter of 1999.
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 before January 1, 2000.
Based on preliminary data, we estimate 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. These costs
will be expensed as incurred, except to the extent these 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
30
<PAGE>
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
1996.
As of December 31, 1998, 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 will be 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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statements in this prospectus about our expectations, beliefs, plans,
objectives, assumptions or future events or performance are not historical facts
and are forward-looking statements. 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 prospectus. 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 prospectus. 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;
- competition in the telecommunications industry; industry capacity; general
risks of the telecommunications industries;
- success of acquisitions and operating initiatives; 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 judgment of
personnel; availability of qualified personnel; labor and employee benefit
costs;
- development risks; risks relating to the availability of financing; and
- other factors referenced in this prospectus.
These and other factors are discussed in "Risk Factors" and elsewhere in
this prospectus.
Because 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.
31
<PAGE>
BUSINESS
THE COMPANY
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. A
facilities-based provider uses mainly its own telecommunications facilities to
provide service, in contrast with non facilities-based resellers who purchase
the services of other providers and then retail the services to customers.
Bandwidth is a measurement of information capacity for digital transmission
systems that measures the rate in megabytes per second. High-bandwidth equals a
rate greater than 1.5 megabytes per second and less than 45 megabytes per
second.
THE INTRACITY NETWORKS. We have installed local intracity networks that as
of December 31, 1998, consisted of approximately 160,000 fiber miles, covering
approximately 400 route miles in New York, Philadelphia, Washington, D.C. and
Chicago. Fiber miles means the number of strands of fiber 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 counting more
than once physically overlapping segments of cable. These four major
metropolitan areas constitute key telecommunications markets among the 15
largest cities in the United States based on population. We currently operate
high bandwidth fiber optic communications networks in the New York metropolitan
area and the greater Philadelphia area and by the end of the third quarter of
1999 will be operating a similar network in the Washington, D.C. metropolitan
area.
We are currently planning to expand our existing local intracity networks in
these metropolitan areas, which will bring our total infrastructure in these
markets to approximately 357,000 fiber miles covering approximately 846 route
miles. We have also begun engineering and constructing networks in the San
Francisco and Boston metropolitan areas.
Within the next two years, we plan to complete an expansion into five
additional markets: Los Angeles, Seattle, Dallas, Houston and Atlanta. We
anticipate that our total intracity network infrastructure, as currently
planned, will encompass ultimately approximately 810,000 fiber miles covering
approximately 1,896 route miles in the aggregate. We are currently in the
planning process for construction of those networks.
THE INTERCITY NETWORKS. In addition to intracity networks in these 11 major
metropolitan areas, we are expanding the capacity of our intercity network
between the New York and Washington, D.C. metropolitan areas to a total of
approximately 250 route miles. When finally complete, as currently planned, we
expect that this network will cover approximately 180,000 fiber miles. We have
also obtained, through exchanges of fiber capacity or fiber swaps with other
carriers and in certain instances, the payment of additional consideration, the
right to use fiber optic strands linking New York-- Chicago,
Chicago--Seattle--Portland and New York--Boston. These intercity networks give
us the ability to offer our customers not only capacity both within the 11 major
metropolitan areas where we will operate networks within the United States and
between many of these same markets.
TRANSATLANTIC CONNECTIVITY. We have entered into a 50/50 joint venture,
called International Optical Network, with Racal Telecommunications, Inc., a
United Kingdom manufacturer of electronics and other equipment and a provider of
telecommunications services. Through this joint venture, we are able to offer
our customers seamless broadband connectivity between our New York and other
U.S. networks and London.
32
<PAGE>
THE EUROPEAN NETWORKS. We also plan to offer our customers an expanded
presence in Europe through:
- a joint venture with Carrier 1 Holdings, Ltd. and Viatel, Inc. that will
engineer and construct a 1,350 route miles fiber optic telecommunications
network in Germany connecting to 13 of its largest cities, including
Hamburg, Berlin, Munich, Frankfurt and Dusseldorf, and
- a fiber lease with Viatel under which we will receive the right to use
approximately 3,880 fiber miles covering approximately 970 route miles of
a broadband fiber optic network that will travel between Germany, France,
The Netherlands and the United Kingdom.
Following completion of the German network, our joint venture with Carrier 1
and Viatel will dissolve and we will end up owning our own conduit of fiber
infrastructure in Germany
GENERAL. We focus on leasing or otherwise making available for use our
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. Broadband communications
is the same as high-bandwidth, except that the data rate is greater than 45
megabits per second. Our target carrier customers include a broad range of
communications companies such as:
- incumbent local exchange carriers, which are companies historically
providing local telephone service, such as the regional Bell operating
companies,
- competitive local exchange carriers, which are companies competing with
incumbent local exchange carriers in the local services market,
- long distance carriers,
- paging, cellular and personal communications service or system companies,
which are a broad range of wireless and wired communications services that
enable communications with persons in any location,
- cable companies, and
- vendors providing direct access to the internet.
These carrier customers typically lease fiber optic capacity with which they
develop their own communications networks as a low-cost alternative to building
their own infrastructure or purchasing metered services from incumbent local
exchange carriers or facilities-based competing carriers in the local services
market. Our corporate and government customers typically lease fiber optic
infrastructure and other broadband services on a point-to-point basis for
high-bandwidth, secure voice and data networks. We believe that we are
well-positioned to penetrate the corporate and government markets since we plan
to continue to install most of our fiber in top 15 cities in the United States
based on population. Please refer to the section in this prospectus entitled
"--Customers."
The fiber communications infrastructure leased to our customers provides
high-bandwidth capacity for customers that seek to establish secure
communications networks for the transmission of large amounts of voice, data and
video. For example, a pair of our fiber optic strands can transmit up to 8.6
gigabits of data per second or the equivalent of approximately 129,000
simultaneous voice conversations.
We tailor the amounts of capacity leased to the needs of our customers. Some
customers that lease fiber optic capacity from us connect their own transmission
equipment to the leased fiber, and therefore obtain a fixed-cost, secure
telecommunications alternative to the metered communications services offered by
traditional providers. Other customers that require lesser amounts of
transmission capacity will have the option to lease a much smaller broadband
capacity on our network, as we are
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able to divide a single strand of fiber into multiple smaller communications
channels. We believe that we have installation, operating, and maintenance cost
advantages per fiber mile relative to our competitors because we generally
install our networks with 432 fibers and may install as many as 864 fibers per
route mile as compared to a generally lower number of fibers in existing
competitive networks.
Our intracity networks support a self-healing synchronous optical network
architecture, which is an electronics and network architecture for variable
bandwith products which enables transmission of voice, data and video at very
high speeds and minimizes the risk of downtime in the event of a fiber cut and
provides our customers with high security and reliability. We install most of
our fiber inside high density polyethylene conduit to protect the cable and,
where practicable, we install additional unused conduits to accommodate future
network expansion.
We benefit from the support of our controlling stockholder Metromedia
Company. On April 30, 1997, Metromedia Company and one of its partners made a
substantial equity investment in Metromedia Fiber Network. Metromedia Company
and one of its partners own all of the outstanding shares of class B common
stock. The 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 a
result, on a fully diluted basis, Metromedia Company and its partners
beneficially own and control approximately 69% of the outstanding voting power
of Metromedia Fiber Network. On October 28, 1997, we successfully completed our
initial public offering generating proceeds to Metromedia Fiber Network of
$135.5 million, after deducting underwriting discounts but not deducting
offering expenses.
Metromedia Fiber Network was founded in 1993 and is a Delaware corporation.
BUSINESS STRATEGY
Our objective is to become the preferred facilities-based provider of
broadband communications infrastructure 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 METROMEDIA FIBER NETWORK AS THE PREFERRED CARRIERS' CARRIER OF
BROADBAND COMMUNICATIONS INFRASTRUCTURE.
We lease broadband communications infrastructure on a fixed-cost basis to
various communications carriers, enabling them to compete in markets which were
previously difficult to penetrate due to limited and/or costly access to
high-bandwidth communications infrastructure. Specifically, we plan to lease
fiber infrastructure capacity within our target markets thereby enabling our
carrier customers to bypass the incumbent local exchange carriers and
facilities-based competing carriers in the local services markets. We believe
that we are currently the only company whose principal business is providing
dark fiber on a fixed-cost basis locally, in selected top 15 cities in the
United States based on population. Additionally, we plan to lease capacity on
our high-bandwidth, long-haul intercity network to provide seamless connectivity
between our various intracity networks. Our fixed-cost, long-term contracts
allow our carrier customers to access these selected markets without incurring
the high capital expenditures, many of the franchise and licensing fees and long
lead times usually associated with building their own networks. We also believe
that communications carriers may be more likely to lease capacity from us rather
than from a competitor since we currently have no plans to offer communications
infrastructure services on a metered basis, choosing instead to position
ourselves as a noncompeting provider of infrastructure alternatives for local
exchange carriers and long distance carrriers. Please refer to the section in
this prospectus entitled "--Customers."
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POSITION METROMEDIA FIBER NETWORK AS THE PREFERRED PROVIDER OF BROADBAND
COMMUNICATIONS INFRASTRUCTURE TO CORPORATE AND GOVERNMENT CUSTOMERS.
Our fiber optic network is expected to serve the top 15 cities in the United
States based on population in which there are a large number of corporations and
government agencies that we believe have significant unmet demand for
communications capacity. These customers typically lease broadband
communications infrastructure from us connecting two or more of their locations,
creating secure networks for voice, video or data communications. Our primary
target customers are those with significant transmission needs or who require a
high degree of security. However, customers seeking lesser amounts of broadband
transmission capacity will have the option of leasing smaller amounts of
capacity from us. By providing leased capacity on a fixed-cost rather than a
metered basis, we believe our network will be more economical for our corporate
and government customers, while also providing the ability to expand their usage
for low marginal costs and enhanced reliability and security. Please refer to
the section in this prospectus entitled "--Customers."
REPLICATE SUCCESSFUL BUSINESS MODEL IN NEW MARKETS.
We seek to leverage the success we have begun to demonstrate in our existing
markets by replicating a similar network architecture in a number of additional
markets. Specifically we intend to:
- begin the engineering and construction of five additional intracity
networks bringing the number of our intracity networks to a total of
eleven, and
- replicate our successful domestic strategy in selected European markets.
We expect that our entire network when completed, as currently planned, will
ultimately consist of approximately 1.1 million fiber miles covering
approximately 8,930 route miles. Please refer to the section in this prospectus
entitled "Risk Factors--We may not be able to successfully implement our
business strategy because it depends on factors beyond our control, which could
adversely affect our results of operations."
CREATE A LOW COST POSITION.
We believe that we have established a low cost position relative to other
communications carriers primarily for the following reasons:
- we generally install trunks of 432 fibers and may install up to as many as
864 fibers per route mile, which we believe is substantially more fiber
than many other communications carriers install, thereby reducing the per
fiber mile cost to construct and operate our networks,
- we will have a newly-constructed network with advanced fiber optic
technology which we believe offers operating and maintenance cost
advantages,
- we believe that some of our rights-of-way and franchises are valuable
assets that will be costly and difficult for others to procure in the
future, and
- where practicable, we install spare conduits which will allow for expanded
fiber optic capacity at a cost significantly below the cost of new
construction.
Our low cost position should allow us to remain price competitive with other
providers of fiber optic infrastructure and to lease our fiber infrastructure at
a price which customers will find more attractive than the cost of constructing
their own networks.
LEVERAGE NETWORK ASSETS AND STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF
OUR NETWORKS.
We have also obtained long haul fiber capacity between certain of our
intracity networks on a selective basis which we can provide to customers as a
value-added service. As a result, at little
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incremental cost, we have successfully been able to expand the reach of our
network. In addition, we plan to continue to enter into strategic partnerships
with other communications providers. For example, we seek to establish
additional relationships such as the one we have established with Racal
Telecommunications, Inc. This relationship established a 50/50 joint venture to
link our U.S. network to Racal Telecommunications' U.K. network to offer each of
our customers seamless broadband connectivity between New York and London.
INSTALL A TECHNOLOGICALLY ADVANCED NETWORK.
We have installed a technologically advanced network that we believe
provides the high levels of reliability, security and flexibility that our
target customers typically demand. Our domestic intracity networks support a
self-healing synchronous optical network architecture that minimizes
interruption to service in the event of a fiber cut. We also continuously
monitor and maintain high quality control of our network on a 24-hour basis
through our network operations center. Our network is capable of using the
highest commercially available capacity transmission, OC192, and thereby can
support advanced, capacity-intensive data applications such as frame relay, a
high-speed data-packet switching service used to transmit data between
computers, asynchronous transfer mode, multimedia and internet-related
applications. Please refer to page A-1 of the glossary for the definition of
frame relay, asynchronous transfer mode and OC192.
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 in 1993 with what is now MCI/WorldCom, Inc.
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 Metromedia Fiber Network's shares of class B common
stock, Metromedia Company and its partners control the 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. Please refer to the sections in this prospectus entitled "Risk
Factors--Metromedia Company effectively controls Metromedia Fiber Network and
has the power to cause or prevent a change of control" and "Certain
Relationships and Related Transactions."
BUILD-OUT OF NETWORKS
We have concentrated on developing and constructing our networks. As we
discuss in more detail below 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 and easements and manage deployment plans.
Firms with whom we are allied in this regard have deployed local loop network
infrastructure for regional Bell operating companies as well as for competing
carriers in the local services markets. Though we anticipate outsourcing 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 commercially available advanced 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.
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We intend to finance the build-out of our networks with the net proceeds we
received from the issuance of the initial notes, additional cash on hand and
cash generated from the sale of capacity on our networks, including substantial
up-front payments for certain long term leases and rights to use agreements,
which are already under contract. Please refer to the section in this prospectus
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
THE NEW YORK NETWORK. When complete, our intracity network in the New
York/New Jersey metropolitan area as currently planned will be approximately
169,400 fiber miles covering approximately 440 route miles. As expanded, the
entire New York/New Jersey network will create a synchronous optical network
capable fiber ring focused in Manhattan and extending into each of the other
four boroughs, as well as east to Brookhaven, Long Island, north to Stamford,
Connecticut, and west to Northern and Central New Jersey.
THE PHILADELPHIA NETWORK. When complete, our network in the Philadelphia
metropolitan area as currently planned will be approximately 29,000 fiber miles
covering approximately 67 route miles. As completed, the entire Philadelphia
network will create a synchronous optical network capable fiber ring throughout
Center City Philadelphia as well as the surrounding areas of Bala-Cynwyd, Bryn
Mawr, Radnor, Berwyn, Paoli, Malvern and King of Prussia.
THE WASHINGTON, D.C. NETWORK. When complete, our network in the Washington,
D.C. metropolitan area as currently planned will be approximately 55,000 fiber
miles covering approximately 127 route miles. As completed, the entire
Washington network will create a synchronous optical network capable fiber ring
throughout Washington, D.C. and will extend to vital government and business
centers in Arlington, Fairfax, the Dulles airport area, Bethesda, Rockville,
Silver Spring and other locations in northern Virginia and suburban Maryland.
THE CHICAGO NETWORK. When complete, our network in the Chicago metropolitan
area as currently planned will be approximately 104,000 fiber miles covering
approximately 212 route miles. As completed, the entire Chicago network will
create a synchronous optical network capable fiber ring throughout Chicago and
will extend to Oak Brook, Downers Grove, Franklin Park, Arlington Heights, Des
Plaines, Rosemont, Schaumburg and O'Hare Airport.
THE OTHER INTRACITY NETWORKS. Subject to the receipt of the necessary
franchises, licenses and rights-of-way, we plan to construct additional fiber
optic communications networks in San Francisco, Boston, Los Angeles, Seattle,
Dallas, Houston and Atlanta. Although we cannot assure you that we will obtain
the necessary franchises, licenses and rights-of-way in these cities or that
these franchises, licenses and rights-of-way will provide all of the rights
needed to implement our strategy on acceptable terms, we are not aware of any
reason why we will not be able to obtain them and we plan to construct our
networks in these cities in a manner similar to our existing networks.
Construction is under way in the San Francisco and the Boston metropolitan
areas. When complete, our network in the San Francisco metropolitan area as
currently planned will be approximately 65,000 fiber miles covering
approximately 150 route miles with a synchronous optical network capable fiber
ring through San Francisco, San Mateo and San Jose. When complete, our network
in the Boston metropolitan area as currently planned will be approximately
32,000 fiber miles covering approximately 75 route miles with a synchronous
optical network capable fiber ring through Cambridge, Newton, Wellesley, Bedford
and Redford. We are currently in the planning process for the construction of
the other intracity networks. In March 1999, we acquired a provider of dark
fiber that is constructing an intracity network in Dallas.
THE INTERCITY NETWORKS. We built a 250 route mile network between New York
City and Washington, D.C., which was put into operation. When we complete its
construction, this intercity network will cover approximately 180,000 fiber
miles. When completed, this network will extend from New York to Washington,
D.C. and will pass through Philadelphia, Pennsylvania, Wilmington,
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Delaware, and Baltimore, Maryland. We have obtained all of the necessary
rights-of-way for this network.
We have also obtained, through exchanges of fiber capacity or fiber swaps
with other carriers and the payment of other consideration, the right to use
fiber optic strands linking New York and Chicago, Chicago and Seattle, Seattle
and Portland and New York and Boston. As a result of these transactions, we have
obtained approximately 33,000 fiber miles covering approximately 4,474 route
miles of broadband fiber optic capacity. We believe we have the ability to lease
broadband capacity between our intracity networks that will enhance our ability
to market our intracity networks to both our carrier and corporate customers.
These intercity network agreements will give us the ability to offer our
customers not only capacity within 11 major metropolitan areas within the United
States but also seamless connectivity from coast to coast.
THE INTERNATIONAL NETWORKS. We have entered into a forty-year agreement
with a subsidiary of Racal Telecommunications, Inc., a United Kingdom
manufacturer of electronics and other equipment and a provider of
telecommunications services, to create International Optical Network, a joint
venture in which we hold a 50% equity interest. International Optical Network
has obtained transatlantic fiber optic cable rights on Gemini and AC-1, two
undersea fiber optic cables that link our New York network to London, England.
Through this joint venture, we are able to offer our customers seamless
broadband transatlantic communications services between New York and London.
Under the joint venture agreement, each party may contribute additional capital
as agreed by the parties. As of December 31, 1998, we had made capital
contributions of approximately $4.3 million to International Optical Network. In
May 1998, this joint venture was awarded a 25 year term contract providing for
payments in excess of $25 million from a leading provider of undersea cable
capacity to provide inland capacity services from this provider's undersea cable
landing stations in the U.K. and the U.S.
We have entered into an agreement with Carrier 1 and Viatel to develop,
jointly, the German network of approximately 64,800 fiber miles covering
approximately 1,350 route miles. The German network will include 13 of Germany's
largest cities such as Hamburg, Berlin, Munich, Frankfurt and Dusseldorf. We
have also entered into an additional agreement to acquire fiber optic capacity
from Viatel. Under this second agreement, we will receive the right to use
approximately 3,880 fiber miles covering approximately 970 route miles on the
European network that will travel between France, Germany, The Netherlands and
the United Kingdom. We anticipate that both the German network and the European
network will be high-capacity broadband networks capable of supporting
high-quality voice, video, internet protocol and data traffic and built using a
self-healing synchronous optical network architecture. Following completion of
the German network, our joint venture with Carrier 1 and Viatel would dissolve
and we would end up owning our own conduit of fiber infrastructure in Germany.
We believe that the German network will be completed in stages with the first
segment available by the third quarter of 1999.
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 ultrathin 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. The backbone is the part of the telecommunications system
which carries the most traffic. It is the through-portion of a transmission
network, as opposed to spurs which branch off the through-portion. Using current
electronic transmitting devices, a single pair of glass fibers used by our
network can transmit up to 8.6 gigabits of
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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, OC192, and
thereby can handle advanced, capacity-intensive data applications such as voice
over internet protocol, video teleconferencing, frame relay, asynchronous
transfer mode, multimedia and internet-related applications.
In our intracity networks, we offer end-to-end fiber optic capacity, capable
of utilizing synchronous optical network 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. 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.
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. These licenses, permits and franchises are generally for a term
of limited duration. Where possible, rights-of-way are leased under multiyear
agreements with renewal options and are generally nonexclusive. We lease
underground conduit and pole space and other rights-of-way from entities such as
incumbent local exchange carriers, utilities, railroads, long distance carriers,
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. We currently have all
rights-of-way and other authorizations necessary for our intracity networks in
the New York, Philadelphia and Chicago metropolitan areas.
NEW YORK. We have entered into a 15-year nonexclusive franchise agreement
with the city of New York to install, operate, repair, maintain, remove and
replace cable, wire, fiber or other transmission media that may be used in lieu
of cable, wire or fiber on, over and under the inalienable property of the city
of New York to provide telecommunications services which originate and/or
terminate in or transit the city of New York. This agreement expires in December
2008 and provides that we may submit a written petition to the city of New York
to renew the term of the franchise at least 12 months, but not more than 18
months, before the expiration of the 15 year term. However, the city of New York
has no obligation to renew this agreement. We believe that the city of New York
has granted approximately 11 franchises to date. However, we are not aware of
any limit on the number of franchises that the city of New York may grant and
believe that the city of New York has begun the process that will result in the
awarding of additional licenses.
This agreement requires us to provide the city of New York with certain
telecommunications infrastructure and, by November 1999, to complete
construction of our initial network in the manner described in the agreement. We
believe that we are on schedule to complete this construction by November 1999.
On December 21, 1998, this agreement was amended to extend the period of time to
June 30, 2001 to complete construction of the initial backbone to the borough of
Staten Island.
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Both the city of New York and we have the right, at any one time after
December 20, 2000, upon six months notice, to renegotiate in good faith certain
terms of this agreement, including the annual compensation payable to the city
of New York, based on changes in technological, regulatory or market conditions
which may occur after the effective date of the agreement. If we cannot reach an
agreement during any of these renegotiations, the agreement will be subject to
early termination on a date which would be one half of the number of days
between the date of the notice to renegotiate and January 1, 2009.
Under the agreement, we are obligated to pay the city of New York an annual
franchise fee at a rate of 5% of gross revenues for each year of the franchise.
All revenues received directly or indirectly by us or any of our affiliates from
or in connection with telecommunications services which originate in, terminate
in, or transit the city of New York constitute gross revenues for purposes of
the agreement. Revenues that are generated from transmissions which transit the
city of New York, but also include transmission through other areas, must be
prorated. We are obligated to pay a minimum franchise fee to the city of New
York of $200,000 per year.
The agreement requires that we obtain the consent of the city of New York
for any acquisition of 5% or more of the shares of Metromedia Fiber Network by
any person other than Mr. Stephen A. Garofalo, Metromedia Company, Mr. Howard M.
Finkelstein, Mr. Peter Sahagen or any other 5% stockholder on the date of the
completion of our initial public offering.
We entered into a nonexclusive conduit occupancy agreement with Bell
Atlantic Corporation in May 1993. This agreement authorizes us to install our
cable facilities in Bell Atlantic's conduit system throughout the state of New
York. We are required to pay Bell Atlantic certain rates and charges under this
agreement. Either party may terminate this conduit occupancy agreement without
cause upon three months' written notice. Under certain circumstances, a petition
may be brought to the Public Services Commission requesting that it decide a
dispute arising over termination prior to the termination of this conduit
occupancy agreement.
On June 16, 1998, we entered into a nonexclusive franchise agreement with
the city of White Plains, New York, that grants us the necessary rights for our
expanded New York/New Jersey network in the White Plains area. Under this
agreement, we are obligated to pay the city of White Plains an annual franchise
fee at the rate of 5% of gross revenues generated from the network within the
White Plains area for fifteen years, renewable once. We do not anticipate that
this fee will result in a material cost to us. Upon termination of this
agreement, ownership of the telecommunications network in the White Plains area
will revert to the city of White Plains at fair market value.
PHILADELPHIA. We have obtained all necessary rights-of-way and
authorizations for the Philadelphia network in the Philadelphia metropolitan
area under an ordinance from the city of Philadelphia. The ordinance allows us,
under certain conditions to be detailed in the license agreement that we are
currently negotiating with the city of Philadelphia, to construct, maintain and
operate, replace and remove a telecommunications system in, under and across the
public rights-of-way and city streets and/or to place such telecommunications
system within the existing facilities owned by Bell Atlantic, PECO Energy
Company, Southeastern Pennsylvania Transportation Authority, Consolidated Rail
Corporation or any other entity holding a grant by way of ordinances from the
city of Philadelphia within the Philadelphia metropolitan area.
CHICAGO. In Chicago, we have also obtained the required franchises,
licenses, permits and other agreements needed to complete our Chicago network.
In addition, we have entered into agreements with various entities, which
provide us with infrastructure of approximately 4,300 fiber miles along
approximately 40 route miles on key routes within our Chicago market, in
addition to the necessary easements and rights-of-way for the Chicago network.
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WASHINGTON D.C. In Washington, D.C., we have obtained rights-of-way and
authorizations for the Washington network in the District of Columbia under a
Certificate of Public Convenience and are in the process of obtaining all
necessary permits for the network in the downtown area. We do not anticipate any
difficulty in obtaining such permits. We are currently negotiating the necessary
franchise agreements with some other municipalities that make up part of the
expanded Washington network.
We are currently pursuing our efforts to obtain all rights-of-way and
authorizations for the build-out of our networks in Los Angeles, San Francisco,
Boston, Seattle, Dallas, Houston and Atlanta. We have recently signed a conduit
agreement within the Bay Area Rapid Transit and San Mateo County Transit
District rights-of-way for portions of the network in the San Francisco area,
and have obtained the necessary permits for our intracity network in the
downtown San Francisco area. In March 1999, we acquired a provider of dark fiber
that is constructing an intracity network in Dallas.
SALES AND MARKETING
Our sales and marketing strategy includes:
- positioning ourselves as the preferred carriers' carrier of broadband
communications infrastructure,
- focusing on high dollar volume corporate and government customers, and
- 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.
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 Metromedia Fiber
Network, 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. We plan to continue this strategy.
CUSTOMERS
CARRIERS. We expect that communications carriers will account for a
majority of our business in the near term. We currently target the major
carriers, such as resellers, data services, regional Bell operating companies,
long distance carriers, competing local exchange carriers, vendors providing
direct access to the internet, wireless providers, and major information service
providers. We believe that we can compete effectively with other providers due
to our rapid deployment, pricing, reliability, customer service and the capacity
of our networks. We traditionally lease dark fiber to communications carriers,
providing them with point-to-point and long distance carriers point of presence
to end user non-switched access, which connects their customers to our network.
This enables them to eliminate or reduce costly access charges.
We have entered into contracts with approximately 19 communications
carriers, including providers of wireless, cellular, internet, interexchange and
competitive local exchange services, as of January 1, 1999. In addition, we are
currently in the process of negotiating agreements with certain other major
communications carriers and will continue to target such carriers in the future.
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NEXTLINK AGREEMENTS. In June 1997 and February 1998, we entered into two
major agreements with NextLink New York, L.L.C., a competitive local exchange
carrier, which provide NextLink with certain exclusive long-term rights to
certain fiber strands and innerducts on specified intracity routes.
Pursuant to the agreements, we received $11.0 million in scheduled up-front
payments with respect to one agreement and will receive an additional $92.0
million in additional payments from NextLink with respect to the second
agreement. Of the $92.0 million, $11.75 million was paid up-front and $80.25
million has been placed in escrow and will be released to us periodically as
delivery of the fibers and innerducts are completed during 1999 in accordance
with the agreement.
We have also entered into an agreement with NextLink Illinois, Inc. which
provides for the sharing of certain construction costs in connection with the
build-out of our Chicago network.
WINSTAR AGREEMENTS. We are a party to agreements with WinStar
Communications, Inc., a national competitive local exchange carrier, for long
term leases of high-capacity fiber optic infrastructure on our intracity
networks in the New York, Washington, D.C., Philadelphia, Chicago and San
Francisco areas and on our intercity network from New York to Washington, D.C.
Pursuant to the agreements, we will receive in excess of $40.0 million in
payments from WinStar.
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CORPORATE/GOVERNMENT CUSTOMERS. We expect that our corporate and government
customers, including members of the international financial and commercial
community, will primarily be entities with multiple locations and high volume
communications requirements. We expect to provide these customers with dedicated
point-to-point communications that have the capacity to carry a wide range of
communications services. An example of one of these communication services is
high speed intranet access. We offer our high-bandwidth services to these
customers at prices that are lower than those currently offered by regulated
competitive local exchange carriers and incumbent local exchange carriers.
However, our customers currently provide their own transmission or switching
equipment.
We believe that we can effectively compete for corporate and government
customers based upon price, nonmetered usage, reliability and solutions tailored
to the customers' needs. In addition, our New York/New Jersey and Philadelphia
networks utilize, and the other intracity networks will permit use of,
synchronous optical network technology, which offers reliability that we believe
is generally superior to that provided by the incumbent local exchange carriers.
We currently have dark fiber infrastructure leasing arrangements with a variety
of financial services firms, including investment and commercial banks,
securities and accounting firms and a financial exchange, although we have not
yet completed installation of the dark fiber to be leased pursuant to certain of
the contracts.
COMPETITION
Fiber optic systems are currently under construction both locally and
nationally. In the city of New York, for example, we believe that approximately
11 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 incumbent local exchange carriers and long distance
carriers. Currently, we do not provide or plan to provide these services.
In the cities of New York, Philadelphia, Washington, D.C., and the other
cities where we plan to deploy fiber optic communications networks, we face
significant competition from the incumbent local exchange carriers, which
currently dominate their local communications markets. We also face competition
from competitive local exchange carriers 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 competitive local exchange carriers generally provide a wider
array of services to their customers than we presently provide to our customers,
competitive local exchange carriers nevertheless represent an alternative means
by which our potential customers could obtain direct access to a long distance
carrier point of presence or other site of the customer's choosing. Thus,
competitive local exchange carriers 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.
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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 competitive local exchange carriers, long distance carriers, vendors
providing direct access to the internet, wireless carriers and corporate and
government customers on which we focus will have distinct requirements,
including maximum reliability, consistent high quality transmissions, capacity
for highspeed data transmissions, diverse routing and responsive customer
service. We believe that we will be able to satisfy the needs of these
customers.
REGULATION
As explained in the section of this prospectus entitled "Business--The
Company," we plan to offer telecommunications infrastructure to customers in two
forms. First, customers may lease fiber optic capacity from us and attach their
own transmission equipment. We call this dark fiber. Second, customers will have
the option to lease smaller amounts of broadband capacity--less than a full
strand of fiber--which we will provide using, at least in part, our own
transmission equipment. We call this transmission services. These two offerings
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 and various state regulatory
bodies. 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. Telecommunications facilities and services are
subject to varying degrees of regulation by the Federal Communications
Commission pursuant to the provisions of the Communications Act of 1934, as
amended by the Telecommunications Act of 1996, and the Federal Communications
Commission regulations issued under these laws.
Federal telecommunications law imposes special legal requirements on common
carriers who engage in interstate or foreign communication by wire or radio, and
on telecommunications carriers. Telecommunications carriers and common carriers
are essentially the same, and are companies that provide communications services
directly to the public or to all potential users on an indiscriminate basis
subject to standardized rates, terms, and conditions.
DARK FIBER. We believe that we are not a telecommunications carrier or
common carrier with respect to our leasing of dark fiber, and therefore that
these leases 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 Federal Communications Commission
regulation. The Federal Communications Commission 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. Second, we do
not intend to offer dark fiber facilities as a common carrier, I.E., to all
potential users on an indiscriminate basis. Instead, we intend to enter into
individualized negotiations on a selective basis with prospective lessees of our
dark fiber 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 Federal Communications Commission or to the common
carrier provisions of the Communications Act of 1934.
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, could be assessed for the Federal Communications Commission's Universal
Service Fund, a fund that was established by the Federal Communications
Commission under the Telecommunications Act of 1996 to assist in ensuring the
universal availability of basic telecommunications services at affordable
prices. These assessments could create a liability equal to a
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percentage of these gross revenues. We anticipate that the rate of assessment
would be approximately 4% of gross interstate and 1% of gross intrastate
end-user revenues for the year 1999, and may be higher in subsequent 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
transmission services, we will likely offer some of these services as a common
carrier. For example, we will offer such transmission services to all potential
users indiscriminately. Therefore, we will be subject to the regulatory
requirements applicable to these carriers. For example, we will be required,
with respect to our transmission services, to:
- provide such services indiscriminately upon any reasonable request;
- charge rates and adopt practices, classifications and regulations that are
just and reasonable; and
- 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 Federal Communications Commission policies, these
regulatory requirements should not impose any substantial burdens on us. The
Federal Communications Commission has recently determined, for example, that
providers of access services need not file tariffs and may offer such services
to customers on a private, contractual basis. Access services are intracity
transmission services used to originate and/or terminate interstate and foreign
communications. Our revenues from transmission services will also be subject to
Federal Communications Commission Universal Service Fund assessments as
discussed above, to the extent that these services are purchased by end users
and to other Federal Communications Commission fees and assessments. Since the
revenues of our competitors will be subject to comparable assessments, this
should not reduce our competitiveness.
Also, having some of our services regulated as a telecommunications carrier
will give us certain legal benefits. In particular, we will be entitled, like
other competing local exchange carriers, to insist upon access to the existing
telecommunications infrastructure by interconnecting our fiber-optic networks
with incumbent local exchange carrier central offices and other facilities.
Under the Telecommunications Act of 1996, incumbent local exchange carriers
must, among other things: (1) interconnect at any technically feasible point and
provide service equal in quality to that provided to others, (2) provide
unbundled access to network elements, and (3) provide access to their poles,
ducts, conduits and other rights-of-way.
Incumbent local exchange carriers must also provide physical collocation for
other telecommunications carriers. Physical collocation is an offering by an
incumbent local exchange carrier that enables another telecommunications carrier
to enter the incumbent local exchange carrier's premises to install, maintain
and repair its own equipment that is necessary for interconnection or access to
the incumbent local exchange carrier's network elements. An incumbent local
exchange carrier allocates 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 incumbent local exchange carrier must
offer virtual collocation, by which the other carrier may specify incumbent
local exchange carrier 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
incumbent local exchange carriers. 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 Federal Communications Commission has responsibility under the
interconnection provisions of the Telecommunications Act of 1996 to determine
what elements of an incumbent local exchange carrier's network must be provided
to competitors on an unbundled basis. The Federal
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Communications Commission has decided not to declare dark fiber an unbundled
network element under these provisions but has announced that state commissions
may decide to add network elements to the Federal Communications Commission's
list of elements that incumbent carriers are required to unbundle. This decision
is currently subject to petitions for reconsideration before the Federal
Communications Commission. To date, state commissions in several states,
including New York, have either refused to require incumbent local exchange
carriers to offer dark fiber to competitors or have stated that the issue would
be addressed at a later time. On the other hand, other state commissions have
found dark fiber to be a network element and required the incumbent local
exchange carriers to offer it on an unbundled basis to competitive local
exchange carriers. In addition, a federal district court in North Carolina has
interpreted the Telecommunications Act of 1996 to include dark fiber as a
network element.
However, the U.S. Supreme Court recently directed the Federal Communications
Commission to change its rules defining unbundled network elements because the
existing rules fail to recognize statutory limits to the incumbent carrier's
unbundling obligation. These decisions may have to be reconsidered once the
Federal Communications Commission completes its review of its rules. Although we
cannot predict the specific results of future federal and state regulatory
proceedings, it is likely that the Supreme Court's decision will result in a
narrowing, rather than an expansion, of the available unbundled network
elements. This development should be beneficial to us because the unbundling of
incumbent carriers' dark fiber as a network element could reduce the demand for
our dark fiber capacity.
Incumbent local exchange carriers, competitive local exchange carriers and
long distance carriers are subject to additional federal telecommunications
laws. These laws may affect our business by virtue of the interrelationships
that exist among us and many of these regulated telecommunications entities. For
example, the Federal Communications Commission recently issued an order
requiring, among other things, that access charges shift in part from being
usage driven to a fixed flat cost-based structure. Access charges are fees
charged by incumbent local exchange carriers to long distance carriers for use
of local telephone facilities for the origination and termination of
long-distance calls. The Federal Communications Commission has also asked for
public comments on proposed rules that would grant incumbent local exchange
carriers greater pricing flexibility for their access services, both switched
and non-switched, which may permit the incumbent local exchange carriers 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 long distance carriers, likely making the use of incumbent local exchange
carriers facilities by long distance providers/interexchange carriers more
attractive. This could have a material adverse effect on the use of our fiber
optic telecommunications networks by long distance carriers.
STATE
The Telecommunications Act of 1996 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. This provision of the Telecommunications Act of 1996
should enable us and our customers to provide telecommunications services in
states that previously prohibited competitive entry.
However, states retain jurisdiction under the Telecommunications Act of 1996
to adopt regulations necessary to preserve universal service, protect public
safety and welfare, ensure the continued quality of communications services and
safeguard the rights of consumers.
States continue to determine the rates that incumbent local exchange
carriers can charge for most of their services. They are also responsible for
mediating and arbitrating incumbent local exchange carriers' 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 certain telecommunications-related services
as common carriers, as public utilities, or under similar rubrics. As with the
federal regulatory scheme, we believe that the offering of dark fiber facilities
is not 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 intrastate use. Even though many of our facilities will be
physically intrastate, 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 Federal Communications Commission
policies, any dedicated transmission service or facility that is used more than
10% of the time for the purpose of interstate or foreign communication is
subject to Federal Communications Commission jurisdiction to the exclusion of
any state regulation. Therefore, only a small portion of our business should be
subject to 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, Connecticut, Delaware, District of Columbia, Illinois,
Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island,
Virginia, and Washington, and have an application pending in Oregon. 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. 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 intrastate 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.
As a result of the Telecommunications Act of 1996, Bell Atlantic unbundled
its local loop in October 1996. This enables carriers such as us to be permitted
to access Bell Atlantic's existing wiring infrastructure in buildings on an
economical basis, which we believe enhances the strategic value of the New
York/New Jersey network to potential customers. By virtue of the unbundling,
Bell Atlantic must make a significant portion of its in-house apartment wiring
available for $2 per month per apartment. We expect that the availability of an
unbundled local loop will enable new carriers to enter the residential voice
market on a competitive basis with Bell Atlantic, and these carriers will be
potential customers for our services.
LOCAL
In addition to federal and state laws, local governments exercise legal
authority that may impact our business. For example, local governments, such as
the city of New York, typically retain the ability to license public
rights-of-way, subject to the limitation that local governments may not prohibit
persons from providing telecommunications services. Local authorities affect the
timing and costs associated with our use of public rights-of-way. 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 attempt to enter international markets. Although we have not
fully determined our international business strategy, we have entered into a
50/50 foreign joint venture, International Optical Network, with a subsidiary of
Racal Telecommunications 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. International Optical Network is a U.S.
international common carrier subject to U.S. regulation under Title II of the
Communications Act of 1934, and, through a wholly-owned subsidiary, we have also
applied to become a U.S. international common carrier subject to the same
regulations. Under current Federal Communications Commission rules,
international carriers that do not exercise market power and that are not
affiliated with dominant foreign carriers such as carriers possessing market
power in their local markets, are subject to relatively relaxed U.S. regulation
as non-dominant international carriers. As such a non-dominant common carrier,
International Optical Network is and we will be subject to, among other
policies, the common carrier obligations of nondiscrimination. In addition,
Federal Communications Commission rules prohibit U.S. carriers from bargaining
for special concessions from certain foreign partners. International Optical
Network is and we will also be required, under Sections 214 and 203 of the
Communications Act of 1934, to obtain authorization and file an international
service tariff containing rates, terms and conditions prior to initiating
service. As a non-dominant carrier, International Optical Network has obtained
and we have sought global authorization under Section 214 to operate as
facilities-based and/or resale carriers. 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.
To the extent that we and International Optical Network operate as
international common carriers, we and International Optical Network may also be
required to comply with the Federal Communications Commission's International
Settlement 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 International Settlement Policy is
designed to eliminate a foreign carrier's opportunity to discriminate among
different U.S. carriers by bargaining for accounting rates or other terms that
benefit the foreign carrier but is inconsistent with the U.S. public interest.
The International Settlement Policy generally provides that, absent a waiver
U.S. carriers may only enter into foreign carrier agreements for the exchange of
switched traffic that contain the same accounting rate and settlement rate,
which is typically one-half of the accounting rate offered to all other U.S.
carriers. The International Settlement Policy also requires U.S. carriers to
adhere to the principle of proportionate return so that competing U.S. carriers
have comparable opportunities to receive the return traffic that reduces the
marginal cost of providing international service.
If we provide public switched services over international private lines, we
would be subject to Federal Communications Commission rules governing such
activity rather than to the International Settlement Policy. These rules limit
us from providing switched services over international private lines between the
United States and certain countries and impose certain conditions on carriers
engaging in such activity.
The Federal Communications Commission continues to refine its international
service rules to promote competition, reflect and encourage liberalization in
foreign countries, and reduce accounting rates toward cost. Among other things,
the Federal Communications Commission has recognized the advent of competition
in the U.K. market by designating the U.K. as a country that offers U.S.
carriers effective competitive opportunities. The Federal Communications
Commission has also amended its rules to reflect the U.S. participation in the
WTO Agreement on Basic Telecommunications Services in which 72 countries have
agreed to eliminate barriers to competition in their markets for basic
telecommunications services. For example, the Federal Communications Commission
has decided to permit U.S. carriers to enter into flexible termination
arrangements with carriers in WTO countries, unless such arrangements would not
promote competition. By taking these actions, the Federal Communications
Commission has relaxed or eliminated regulatory limitations on many U.S. carrier
services between the U.S. and the U.K. as well as between the U.S. and other
members of the WTO.
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Recently, the FCC streamlined its procedures for authorizing new carriers to
provide international services, making it easier for such carriers to obtain and
transfer or assign authorizations. The Federal Communications Commission has
also proposed to eliminate the International Settlements Policy and contract
filing requirements for agreements with certain carriers in certain foreign
countries. In addition, the Federal Communications Commission has established
reduced benchmark rates for the amounts U.S. carriers will be allowed to pay
foreign carriers for terminating U.S.-originated traffic. For example, effective
as of January 1, 1999, U.S. carriers may ask the Federal Communications
Commission to require that U.S. carriers pay foreign carriers in high income
countries such as the United Kingdom no more than $.15 per minute to terminate
such calls. Different rates would apply at different deadlines in different
countries depending on the countries' income level.
Regulation of the international telecommunications industry is changing
rapidly. We are unable to predict how the Federal Communications Commission will
resolve the various pending international policy issues and the effect of such
resolutions on us.
REGULATION OF INTERNATIONAL OPERATIONS
Our international services would also be 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 impact on Metromedia Fiber Network. 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 was established by the Treaty of Rome and subsequent
treaties. European Union member states are required to implement directives
issued by the European Commission and the European Council by passing national
legislation. The European Commission and European Council have issued a number
of key directives establishing basic principles for the liberalization of the
European Union 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. European Union 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, International Optical Network's
operations in the U.K., our operation with respect to the German network and
European network may require that International Optical Network or Metromedia
Fiber Network, respectively, be subject to an individual licensing system rather
than to a general authorization in the majority of European Union 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
European Union member state in which International Optical Network currently
conducts or we intend to conduct our business has a different regulatory regime
and such differences are expected to continue. The requirement that
International Optical Network or we obtain necessary approvals varies
considerably from country to country.
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UNITED KINGDOM
The U.K. Telecommunications Act of 1984 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 is
responsible for granting licenses under the U.K. Telecommunications Act of 1984
and for overseeing telecommunications policy, while the Director General of
Telecommunications and his office, the Office of Telecommunications, are
responsible, among other things, for enforcing the terms of such licenses.
Operators wishing to use their own facilities to provide international services
are currently required to obtain an international facilities license. An
international facilities license licenses the running of telecommunication
systems within the U.K. and permits the licensee to connect U.K. systems to
overseas systems, and to offer international services subject to certain
restrictions. International Optical Network was awarded an international
facilities license on December 9, 1998. The U.K. government is currently
consulting on proposals to amend licenses to create one license authorizing both
international and domestic services. The changes are expected to come into force
in 1999 and may result in International Optical Network being licensed to
provide both international and domestic services. We have not applied for an
international facilities license or any other authorization for the U.K. portion
of our European network. On April 13, 1999, the Office of Telecommunications
published its policy statement on which operators will have the right and
obligation to interconnect with the networks of other operators under the regime
established by the Interconnection Directive. Currently all operators with
international facilities licenses have the right and obligation to interconnect.
As a result of this statement, existing operators will need to apply to the
Office of Telecommunications by July 1, 1999, for registration under the
Interconnection Directive as an operator with the right and obligation to
interconnect. Therefore, International Optical Network has, and assuming it is
registered by the Office of Telecommunications, will continue to have the right
to request and receive interconnection from all other operators deemed to be
entitled to such rights and obligations, as notified by the Director General,
and also the obligation to offer to enter into an agreement to interconnect at
the request of any such operator. The U.K. Government is currently consulting on
changing the obligation to offer to enter into an agreement to interconnect to
an obligation to negotiate with a view to concluding an interconnection
agreement in response to the concern raised by operators that the current
obligation exceeds the requirements of the Interconnection Directive. The U.K.
government passed the Competition Act 1998 on November 9, 1998, which introduces
concurrent powers to the industry specific regulators and the Director General
of Fair Trading for the enforcement of prohibitions against anti-competitive
behavior modeled on Articles 85 and 86 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 new rules are expected to come into force on March 1, 2000. The Act
gives the Director General of Telecommunications power to exercise concurrent
powers with the Director General of Fair Trading in relation to commercial
activities connected with telecommunications. The Act will enable third parties
to seek court orders 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 of Telecommunications to issue an
enforcement order. Depending on how these provisions of the Act are implemented,
it may give Metromedia Fiber Network and its competitors greater ability to
challenge anti-competitive behavior in the U.K. telecommunications market.
GERMANY
The German Telecommunications Act of July 25, 1996 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.
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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).
Beside the infrastructure licenses, an additional license is required for the
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 onetime fee of DM 3,000,000. The
costs for a territorial class 3 license will be determined by the
Regulierungsbehorde fur Telekommunikation und Post, known as 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. A
recent decision by the administrative court of Cologne, in a preliminary
proceeding, held that the present amount of license fees under the License Fees
Ordinance could violate German and European telecommunications law. 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 largely on whether they operate a public telecommunications network. No
definition of public telecommunications network has yet been provided. A public
hearing on the regulatory treatment of carrier networks--defined in the German
Telecommunications Act as a telecommunications network to which customers are
not directly connected and which interconnects access networks--and public
telecommunications networks in respect of interconnection has recently been
conducted. On March 10, 1999, the RegTP published the outcome of the hearing in
its official Gazette. According to these final conclusions, a carrier network
constitutes a public telecommunications network if it consists of at least one
switch and more than two connected transmission lines and is used to provide
telecommunications services to the public, irrespective of whether or not
customers are directly or, in the case of a carrier network, indirectly
connected to such network. The RegTP indicated that it is not necessary to
establish a minimum number of points of interconnection for interconnections
with Deutsche Telekom. However, the RegTP acknowledged that carrier networks
with few points of interconnection may cause atypical traffic patterns on
Deutsche Telekom's network which may create additional costs to Deutsche
Telekom. The RegTP indicated that Deutsche Telekom will be allowed to recover
its additional costs incurred due to atypical traffic patterns from the
operations responsible for such traffic patterns if and to the extent that
Deutsche Telekom can prove such costs. On March 17, 1999, Deutsche Telekom filed
a formal request at the Reg TP to seek retroactive reimbursement, since January
1, 1998, from those carriers who were responsible for such atypical traffic. A
public hearing with regard to this proceeding took place on April 7, 1998. A
decision is expected on May 25, 1999.
In view of this situation, Deutsche Telekom has terminated a number of
interconnection agreements in December 1998, and has announced that it will
offer new standard interconnection agreements. In the last few months of 1998,
and in view of the public hearing, Deutsche Telekom was only willing to enter
into interim interconnection agreements and only if the companies requesting
interconnection have direct customer access, have a minimum of eight points of
interconnection in the startup phase or commit to establish this number of
points of interconnection as ports for
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interconnection become available and upgrade the network to 23 points of
interconnection in the initial phase. The same number of points of
interconnection was requested by Deutsche Telekom in a special network offer for
carrier networks. The rates offered by Deutsche Telekom to carrier network
operators were substantially higher than interconnection rates. In January 1999,
Deutsche Telekom presented new drafts for interconnection agreements which
significantly limit the ability of interconnection partners of Deutsche Telekom
to obtain Deutsche Telekom's services in connection with an interconnection at
favorable interconnection rates. Deutsche Telekom, for example, sets forth
requirements to establish additional points of interconnection if traffic at
existing points of interconnection increases beyond certain thresholds. These
drafts are currently subject to intense discussions between Deutsche Telekom,
other telecommunications companies and representatives of the RegTP. At the end
of February and in early March 1999, two telecommunications companies whose
temporary interconnections agreements with Deutsche Telekom had expired at the
end of February and who were not willing to accept the new interconnection
agreements of Deutsche Telekom started proceedings at the RegTP. These two
companies are seeking orders for continued interconnection with Deutsche Telekom
on conditions similar to the conditions which Deutsche Telekom offered until the
summer of 1998. A decision in the first proceeding is expected on May 6, 1999.
The rates of Deutsche Telekom's services in conjunction with interconnection and
special network access are subject to regulatory approval; such approval is
typically granted for a limited period of time. Licensed operators are under an
obligation to present their standard terms and conditions 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. We have applied for class 3
licenses under the German Telecommunications Act with regard to parts of the
German network.
EMPLOYEES
As of April 1, 1999, we employed 177 people, including 106 in engineering
and construction, 35 in sales and marketing and 36 administrative personnel. Our
employees are not represented by any labor union. We consider our relationship
with our employees to be good.
PROPERTIES
Our principal properties currently are our fiber network and its component
assets. We own and have contractual rights to use 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 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 of currently approximately 23,800 square feet under an agreement that
expires in March 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. We have a sales office at 685 Third
Avenue, New York, New York. We lease this space of approximately 9,670 square
feet under an agreement that expires in September 2003. We also lease 2,665
square feet of sales space in Malvern, Pennsylvania, and 3,438 square feet of
sales space in McLean, Virginia. We also lease additional space for our
operations in New York, New Jersey, Chicago, IL, Boston, MA, Philadelphia, PA,
Baltimore, MD, Wilmington, DE, and Washington, DC.
LEGAL PROCEEDINGS
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, 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. On or about May 29,
1998, Vento & Company
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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 class A common stock to Peter Sahagen
and some of the defendants in this lawsuit on January 13, 1997. The four causes
of action include:
(1) violation of Section 10(b) of the Securities Exchange Act of 1934 and
Rule 10b-5 promulgated under this Act;
(2) fraud and fraudulent concealment;
(3) breach of fiduciary duty; and
(4) 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 &
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, 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 he has incurred in this action. We have filed an answer
to the complaint and have 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 actions commenced against us by Vento & Company and Mr.
Contardi, 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 Metromedia Fiber Network and their
ages as of April 1, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Stephen A. Garofalo.................................. 47 Chairman of the Board and Chief Executive Officer
Howard M. Finkelstein................................ 45 President, Chief Operating Officer and Director
Vincent A. Galluccio................................. 53 Senior Vice President and Director
Gerard Benedetto..................................... 42 Vice President--Chief Financial Officer
Charlotte G. Denenberg............................... 51 Vice President--Chief Technology Officer
Nicholas M. Tanzi.................................... 40 Vice President--Sales
Silvia Kessel........................................ 48 Executive Vice President and Director
John W. Kluge........................................ 84 Director
David Rockefeller.................................... 83 Director
Stuart Subotnick..................................... 56 Director
Arnold L. Wadler..................................... 55 Executive Vice President, General Counsel, Secretary
and Director
Leonard White........................................ 59 Director
</TABLE>
STEPHEN A. GAROFALO founded the Company in April 1993, and has been serving
as Chairman of the board of directors since Metromedia Fiber Network's
inception. Mr. Garofalo served as Chief Executive Officer since October 1996, 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 Metromedia Fiber Network since April 1997. Prior to joining
Metromedia Fiber Network, 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 Metromedia Fiber Network since
February 1997 and has served as a Senior Vice President of Metromedia Fiber
Network since December 1995. During 1998, Mr. Galluccio served as President of
International Optical Network. 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 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.
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CHARLOTTE G. DENENBERG has served as Vice President--Chief Technology
Officer since December 1998. Prior to joining Metromedia Fiber Network, Ms.
Denenberg was employed by Southern New England Telecommunications Corporation,
since 1987 in a variety of positions. Ms. Denenberg held the position of Chief
Technology Officer for Southern New England Telecommunications Corporation from
1994 to November 1998. Before Southern New England Telecommunications
Corporation, Ms. Denenberg was employed by ITT Corporation as
Director--Technology Evaluation.
NICHOLAS M. TANZI has been Vice President--Sales 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 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 Metromedia Fiber Network 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 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 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., a
company listed on the American Stock Exchange that operates radio stations in
New York, Los Angeles and Chicago, and of Metromedia International Group.
JOHN W. KLUGE has been a Director of Metromedia Fiber Network 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 since 1995.
In addition, Mr. Kluge was Chairman of the board of directors and a Director of
Orion Pictures from 1992 until July 1997. He also serves as a Director of Conair
Corporation and Occidental Petroleum Corporation.
DAVID ROCKEFELLER has served as a Director of Metromedia Fiber Network since
October 1997. He 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., a privately owned
investment management firm, since 1994. 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 been a Director of Metromedia Fiber Network since July
1997. Mr. Subotnick has been the Vice Chairman of the board of directors of
Metromedia International Group since 1995 and President and Chief Executive
Officer of Metromedia International Group since December 1996. In addition, Mr.
Subotnick served as Vice Chairman of the board of directors of Orion Pictures
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 since November 1995 and President and Chief Executive
Officer of Metromedia International Group 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.
ARNOLD L. WADLER has served as Executive Vice President, General Counsel and
Secretary of Metromedia Fiber Network since October 1997 and has served as a
Director of Metromedia Fiber Network since July 1997. Mr. Wadler has served as
Executive Vice President, General Counsel and
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Secretary of Metromedia International Group since August 29, 1996 and, from
November 1, 1995 until that date, as Senior Vice President, General Counsel and
Secretary of Metromedia International Group and as the Executive Vice President,
General Counsel, Secretary and Director of Big City Radio since December 1997.
In addition, Mr. Wadler serves as a Director of Metromedia International Group
and has served as a Director of Orion Pictures 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 Metromedia Fiber Network 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 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, Big
City Radio and American Film Technologies, Inc.
BOARD OF DIRECTORS
There are presently nine members of the board of directors of Metromedia
Fiber Network. 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 six of the
nine directors are nominees of the holders of class B common stock. As a result,
holders of the class B 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 stockholders of
Metromedia Fiber Network entitled to vote for such directors. The directors hold
office for a one-year term.
COMPENSATION OF DIRECTORS
During 1998, each director of Metromedia Fiber Network who was not an
officer, employee or affiliate of Metromedia Fiber Network was 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 a in person or $500 for each
meeting of the board of directors in which this 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, Metromedia Fiber
Network's 1998 Incentive Stock Plan entitles any non-employee director who first
serves on the board of directors after the adoption of the 1998 Incentive Stock
Plan to receive awards under such plan of 20,000 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 20,000
shares of class A common stock.
Non-employee directors who meet the criteria for outside director under
Section 162(m) of the Internal Revenue Code are entitled to receive options to
purchase 20,000 shares of Metromedia Fiber Network's class A common stock under
Metromedia Fiber Network's 1997 Incentive Stock Plan. Under the 1997 Incentive
Stock Plan, each non-employee Director who was a director of Metromedia Fiber
Network on October 28, 1997 was granted an option to purchase 20,000 shares of
Metromedia Fiber Network's common stock at an exercise price of $4.00, the price
of the class A common stock on the date of our initial public offering.
The 1997 Incentive Stock Plan further provides that each person who becomes
a non-employee outside director of Metromedia Fiber Network after October 28,
1997 will receive an option to purchase 20,000 shares of Metromedia Fiber
Network's class A common stock on the day such director
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is elected as a director, at an exercise price equal to the closing price of the
common stock on the trading day preceding such director's election. Options
granted to these non-employee outside directors fully vest and become
exercisable as to all 20,000 shares on the date of grant.
In addition, on August 20, 1997, Metromedia Fiber Network granted to each of
Mr. Kluge and Mr. Subotnick options to purchase 1,014,000 shares of class A
common stock at an exercise price of $.49 per share and to each of Mr. Wadler
and Ms. Kessel options to purchase 202,800 shares of class A common stock at an
exercise price of $.49 per share.
EXECUTIVE COMPENSATION
The following table provides you with information on the compensation
awarded to, earned by or paid to our Chief Executive Officer and our four other
most highly compensated executive officers during the fiscal years ended
December 31, 1998, December 31, 1997 and December 31, 1996, for services
rendered in all capacities to Metromedia Fiber Network and our subsidiaries. The
persons listed in the table below are referred to as the named executive
officers.
The information presented in this table gives effect to our stock splits.
The information presented in the column entitled Other Annual Compensation
includes amounts paid as automobile allowances, insurance premiums and 401(k)
matching funds.
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
NUMBER OF
SHARES ALL
OTHER ANNUAL UNDERLYING OTHER
COMPENSATION STOCK COMPENS.
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($) OPTIONS ($)
- ----------------------------------- ---- --------- -------- ------------ ------------ --------
Stephen A. Garofalo................ 1998 328,385 100,000 23,301 -- --
Chairman and Chief 1997 295,000 50,000 14,157 1,521,000(1) --
Executive Officer 1996 225,000 -- -- -- --
Howard M. Finkelstein.............. 1998 321,462 100,000 24,074 -- --
President and Chief 1997 196,756 50,000 11,769 6,084,000(3) --
Operating Officer(2) 1996 -- -- -- -- --
Vincent A. Galluccio............... 1998 183,400 15,000 1,673 150,000(4) --
Senior Vice President 1997 181,522 -- -- 1,090,920(5) --
1996 127,087 -- -- -- --
Gerard Benedetto................... 1998 181,423 -- 3,355 550,000(7) --
Vice President--Chief 1997 -- -- -- -- --
Financial Officer(6) 1996 -- -- -- -- --
Nicholas M. Tanzi.................. 1998 158,000 65,000 2,819 150,000(4) --
Vice President--Sales(8) 1997 -- -- -- 360,840(9) --
1996 -- -- -- -- --
</TABLE>
- ------------------------
(1) Includes presently exercisable options to purchase 1,521,000 shares of class
A common stock at an exercise price of $.49 per share.
(2) Officer was hired by Metromedia Fiber Network during 1997, thus preceding
year's compensation is not applicable.
(3) Includes presently exercisable options to purchase 6,084,000 shares of class
A common stock at an exercise price of $.49 per share.
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(4) Includes options to purchase 150,000 shares of class A common stock at an
exercise price of $10.50 per share that will become exercisable ratably over
a four year period commencing August 31, 1999.
(5) Includes presently exercisable options to purchase 640,920 shares of class A
common stock at an exercise price of $.49 per share and the options to
purchase 150,000 shares of class A common stock which the officer exercised
during 1998. Also, includes options to purchase 300,000 shares of class A
common stock at an exercise price of $4.00 per share that will become
exercisable ratably over a four year period commencing October 28, 1998.
(6) Officer was hired by Metromedia Fiber Network during 1998, thus preceeding
years' compensation is not applicable.
(7) Includes options to purchase 400,000 and 150,000 shares of class A common
stock at an exercise price of $3.88 and $10.50 per share that will become
exercisable ratably over a four year period commencing January 6, 1999 and
August 31, 1999, respectively.
(8) Officer was hired by Metromedia Fiber Network during 1997, thus 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.
(9) Includes presently exercisable options to purchase 60,840 shares of class A
common stock at an exercise price of $1.91 per share and options to purchase
300,000 shares of class A common stock at an exercise price of $4.00 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 Metromedia Fiber Network , were employed and paid by
Metromedia Company pursuant to a management agreement with Metromedia Company
dated as of January 2, 1998. Please refer to the section in this prospectus
entitled "Certain Relationships and Related Transactions--Recent
Transactions--Management Agreement." Metromedia Fiber Network did not pay any
other amounts to the named executive officers during 1998 or 1997.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of the following 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 1,521,000
shares of class A common stock at an exercise price of $.49 per share. 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 our initial public offering.
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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:
- his monthly base salary as then in effect multiplied by the number of
months remaining in the term of his employment as of such termination date
and
- $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
Metromedia Fiber Network or a merger or consolidation of Metromedia Fiber
Network with any other corporation;
- a change in control of Metromedia Fiber Network, defined as any person or
entity becoming a beneficial owner as defined in Rule 13d-3 of the
Securities Exchange Act of 1934 directly or indirectly of securities of
Metromedia Fiber Network representing 50% or more of the combined voting
power of Metromedia Fiber Network's then outstanding securities; or
- a material breach by Metromedia Fiber Network of its affirmative or
negative covenants or undertakings in the employment agreement and a
failure to remedy such breach within 15 days.
Mr. Garofalo has agreed not to compete with Metromedia Fiber Network for a
period of one year following termination of his employment agreement. During
this 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 6,084,000 shares of class A common stock at an exercise price of
$.49 per share, which options are immediately exercisable and expire 10 years
from their grant. We registered such shares of class A common stock under the
Securities Act on Form S-8 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 times his base salary as then in effect.
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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
Metromedia Fiber Network or a merger or consolidation of Metromedia Fiber
Network with any other corporation;
- a change in control of Metromedia Fiber Network, 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 Metromedia Fiber Network representing 50% or more of the
combined voting power of Metromedia Fiber Network's then outstanding
securities; or
- a material breach by Metromedia Fiber Network of its affirmative or
negative covenants or undertakings in the employment agreement and a
failure to remedy such breach within 15 days.
Mr. Finkelstein has agreed not to compete with Metromedia Fiber Network for
a period of one year following termination of his employment agreement. During
this 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. It provides Mr. Galluccio with a
base salary of $183,400. Mr. Galluccio is also entitled to receive an annual
incentive bonus, which is dependent upon Metromedia Fiber Network's performance,
to be determined by the compensation committee of the board of directors. If
approved by the compensation committee, the incentive bonus has a 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 150,000 shares of class A common stock at an exercise price
of $10.50 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 Metromedia Fiber Network 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 Metromedia Fiber Network 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
Metromedia Fiber Network 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 a minimum base salary of $200,000 for each year. Mr. Benedetto is
also entitled to receive an annual incentive bonus,
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which is dependent upon Metromedia Fiber Network's performance, to be determined
by the compensation committee of the board of directors. If approved by the
compensation committee, the incentive bonus has a 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
150,000 shares of class A common stock at an exercise price of $10.50 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 Metromedia Fiber Network 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 Metromedia Fiber Network 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
Metromedia Fiber Network 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 a minimum base
salary of $175,000 for each year. Mr. Tanzi is also entitled to receive an
annual incentive bonus, which is dependent upon Metromedia Fiber Network's
performance, to be determined by the compensation committee of the board of
directors. If approved by the compensation committee, the incentive bonus has a
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 150,000 shares of class A common stock at an exercise price of
$10.50 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 Metromedia Fiber Network 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 Metromedia
Fiber Network 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 Metromedia Fiber or any affiliated
company for a period of two years following termination of his employment
agreement.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements with certain officers and
directors. The indemnification agreements provide for indemnification of such
officers and directors to the fullest extent authorized or permitted by law. The
indemnification agreements also provide that:
(1) we will advance all expenses incurred by the director or officer in
defending certain litigation,
(2) we will appoint in certain circumstances an independent legal counsel to
determine whether the director or officer is entitled to indemnification
and
(3) we will continue to maintain officers' and directors' liability
insurance, which currently consists of $25.0 million of primary coverage.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RECENT TRANSACTIONS
TRADEMARK LICENSE AGREEMENT. We are a party to a license agreement with
Metromedia Company, pursuant to which Metromedia Company has granted us a
nonexclusive, nontransferable, nonassignable right and license, without the
right to grant sublicenses, to use the trade name, trademark and corporate name
Metromedia in the United States and worldwide, royalty-free for a term of 10
years. The license agreement with Metromedia Company can be terminated by
Metromedia Company upon one month's prior written notice in the event that:
(1) Metromedia Company or its related entities own less than 20% of the
common stock;
(2) a change in control of Metromedia Fiber Network occurs; or
(3) 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 Metromedia Fiber Network 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 stock of Metromedia
Fiber Network;
- a change in the composition of board of directors whereby a majority of
the members thereof 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 Metromedia Fiber Network stock;
- a sale or other disposition of all or substantially all of the assets of
Metromedia Fiber Network; 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,
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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 terminated on December 31, 1998, and was renewed for a
one year term. This agreement is automatically renewable for successive one year
terms unless either party terminates upon 60 days prior written notice. The
management fee under the management agreement is $500,000 per year, payable
monthly at a rate of $41,667 per month. 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
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.
STOCK SPLITS. On July 23, 1998, the executive committee of the board of
directors approved a two-for-one stock split of the shares of class A common
stock and class B common stock in the form of a 100% stock dividend. The stock
dividend was issued to stockholders of record as of the close of business on
August 7, 1998. On August 28, 1998, the stock dividend was issued to those
stockholders. As of September 30, 1998, adjusted for the effect of such stock
split, we had 38,730,226 shares of class A common stock outstanding and
8,442,318 shares of class B common stock outstanding. On December 3, 1998, the
executive committee of the board of directors approved a two-for-one stock split
of the shares of class A common stock and class B common stock in the form of a
100% stock dividend. The stock dividend was issued to stockholders of record as
of the close of business on December 8, 1998. On December 22, 1998, the stock
dividend was issued to those stockholders. As of January 8, 1999, adjusted for
the effect of the stock splits, we had 77,605,110 shares of class A common stock
outstanding and 16,884,636 shares of class B common stock outstanding.
We recently announced a two-for-one stock split of the shares of class A
common stock and class B common stock in the form of a 100% stock dividend. This
stock split is subject to the approval of our shareholders of the additional
shares of class A common stock and class B common stock. The information in this
prospectus does not give effect to this stock split.
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SECURITY OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides you with certain information, as of March 11,
1999, regarding the beneficial ownership of our voting stock after giving effect
to the stock splits by:
(1) each of our directors and director nominees,
(2) each person whom we believe beneficially owns more than 5% of our
outstanding voting stock,
(3) each named executive officer and
(4) all our executive officers and directors as a group.
In accordance with the rules promulgated by the Securities and Exchange
Commission, this 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 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 this person. 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.
<TABLE>
<CAPTION>
CLASS A CLASS B
COMMON STOCK COMMON STOCK
--------------------- ----------------------
<S> <C> <C> <C> <C> <C>
PERCENT PERCENT
NUMBER OF NUMBER OF PERCENT OF
OF SHARES CLASS OF SHARES CLASS TOTAL VOTING POWER
----------- ----- ----------- ------ ------------------
Stephen A. Garofalo........... 22,747,756(1) 29.1% -- -- 9.2%
Metromedia Company............ -- * 15,731,024 93.2% 64.1%(2)
Putnam Investments, Inc....... 14,528,030(3) 19% -- -- 5.9%
FMR Corp...................... 6,672,000(4) 8.7% -- -- 2.7%
Howard M. Finkelstein......... 6,109,000(5) 7.4% -- -- 2.4%
Peter Sahagen................. 4,416,120(6) 5.8% -- -- 1.8%
Vincent A. Galluccio.......... 715,920(7) * -- -- *
Gerard Benedetto.............. 102,000(8) * -- -- *
Nicholas M. Tanzi............. 138,440(9) * -- -- *
Silvia Kessel................. 255,236(10) * -- -- *
John W. Kluge................. 1,014,000(11) 1.3% 15,731,024(12) 93.2% 64.2%
David Rockefeller............. 1,414,552(13) 1.8% -- -- *
Stuart Subotnick.............. 1,014,000(11) 1.3% 16,884,636(12) 100.0% 68.9%
Arnold L. Wadler.............. 307,672(10) * -- -- *
Leonard White................. 23,000(14) * -- -- *
All Directors and Executive
Officers as a Group......... 33,841,576(15) 38.6% 16,884,636 100.0% 79%
</TABLE>
- ------------------------
* less than 1.0%
(1) Includes presently exercisable options to purchase 1,521,000 shares of class
A common stock at an exercise price of $.49 per share. Mr. Garofalo's
address is One North Lexington Avenue, White Plains, New York 10601.
(2) Metromedia Company's address is One Meadowlands Plaza, East Rutherford, NJ
07073.
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(3) Based solely upon the Schedule 13-G, dated February 2, 1998, filed by Putnam
Investments, Inc. The Putnam Investments, Inc. address is One Post Office
Square, Boston, Massachusetts, 02109.
(4) Based solely upon the Schedule 13-G, dated February 16, 1999, filed by FMR
Corp., Edward C. Johnson 3d and Abigail Johnson. FMR Corp.'s address is 82
Devonshire Street, Boston, Massachusetts 02109.
(5) Includes presently exercisable options to purchase 6,084,000 shares of class
A common stock at an exercise price of $.49 per share and 25,000 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
10601.
(6) All shares are owned by an entity controlled by Mr. Sahagen. Mr. Sahagen's
address is 3590 South Ocean Boulevard, South Palm Beach, FL 33480.
(7) Represents presently exercisable options to purchase 640,920 and 75,000
shares of class A common stock at an exercise price of $.49 and $4.00 per
share, respectively.
(8) Includes presently exercisable options to purchase 100,000 shares of class A
common stock at an exercise price of $3.88 per share.
(9) Includes presently exercisable options to purchase 60,840 and 75,000 shares
of class A common stock at an exercise price of $1.91 and $4.00 per share,
respectively. Also, includes 2,600 shares of class A common stock owned by
members of Mr. Tanzi's family 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 202,800 presently exercisable options to acquire shares of class A
common stock at an exercise price of $.49 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 1,014,000 presently exercisable options to acquire shares of
class A common stock at an exercise price of $.49 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 15,731,024 shares owned by Metromedia Company. Messrs. Kluge and
Subotnick, Directors of Metromedia Fiber Network, are general partners of
Metromedia Company.
(13) Represents 1,394,552 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 20,000 shares
of class A common stock at an exercise price of $4.00 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 20,000 presently exercisable options to acquire shares of class A
common stock at an exercise price of $4.00 per share.
(15) Includes presently exercisable options to acquire 10,679,520, 60,840,
100,000 and 190,000 shares of class A common stock at an exercise price of
$.49, $1.91, $3.88 and $4.00 per share, respectively.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
Our registration rights agreement, requires us to file not later than
February 23, 1999, which is 90 days following the date of original issuance of
the initial notes, the registration statement of which this prospectus is a part
for a registered exchange offer with respect to an issue of new notes in
exchange for our initial notes. The exchange notes will be substantially
identical in all material respects to the initial notes except that the exchange
notes will be registered under the Securities Act, will not bear legends
restricting their transfer and will not be entitled to registration rights under
our registration rights agreement. This summary of the registration rights
agreement does not contain all the information that you should consider and we
refer you to the provisions of the registration rights agreement, which has been
filed as an exhibit to the registration statement of which this prospectus is a
part and a copy of which is available as indicated under the heading "Available
Information."
We are required to:
- use our reasonable best efforts to cause the registration statement to be
declared effective no later than May 24, 1999, which is 180 days after the
date of issuance of the initial notes,
- keep the exchange offer effective for not less than 20 business days, or
longer if required by applicable law, after the date that notice of the
exchange offer is mailed to holders of the initial notes, and
- use our reasonable best efforts to consummate the exchange offer no later
than June 23, 1999, which is 210 days after the date of issuance of the
initial notes.
The exchange offer being made here, if commenced and consummated within the
time periods described in this paragraph, will satisfy those requirements under
the registration rights agreement.
This prospectus, together with the letter of transmittal, is being sent to
all record holders of initial notes as of April 23, 1999.
Based on interpretations by the staff of the Securities and Exchange
Commission in no-action letters issued to third parties, we believe that the
exchange notes issued pursuant to the exchange offer may be offered for resale,
resold or otherwise transferred by each holder of exchange notes other than, (1)
a broker-dealer who acquires the initial notes directly from Metromedia Fiber
Network for resale pursuant to Rule 144A under the Securities Act or any other
available exemption under the Securities Act, and (2) any holder that directly
or indirectly through one or more intermediaries, controls or is controlled by,
or is under common control with, Metromedia Fiber Network, without compliance
with the registration and prospectus delivery provisions of the Securities Act,
so long as this holder:
- is acquiring the exchange notes in the ordinary course of its business,
- is not participating in, and does not intend to participate in, a
distribution of the exchange notes within the meaning of the Securities
Act and has no arrangement or understanding with any person to participate
in a distribution of the exchange notes within the meaning of the
Securities Act, and
- is not a person that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control
with, Metromedia Fiber Network.
By tendering the initial notes in exchange for exchange notes, each holder,
other than a broker-dealer, will be required to make representations to that
effect. If a holder of initial notes is participating in or intends to
participate in, a distribution of the exchange notes, or has any arrangement or
understanding with any person to participate in a distribution of the exchange
notes to be acquired in this exchange offer, this holder may be deemed to have
received restricted securities and
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may not rely on the applicable interpretations of the staff of the Securities
and Exchange Commission. Any such holder will have to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any secondary resale transaction.
Each broker-dealer that receives exchange notes for its own account in
exchange for initial notes may be deemed to be an underwriter within the meaning
of the Securities Act and must acknowledge that it will deliver a prospectus
meeting the requirements of the Securities Act in connection with any resale of
these exchange notes. The letter of transmittal states that by so acknowledging
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an underwriter within the meaning of the Securities Act. This prospectus,
as it may be amended or supplemented from time to time, may be used by a
broker-dealer in connection with offers to resell, resales and other transfers
of exchange notes received in exchange for initial notes which were acquired by
such broker-dealer as a result of market making or other trading activities. We
have agreed that we will make this prospectus available to any broker-dealer for
a period of time not to exceed 180 days after the consummation of the exchange
offer for use in connection with any such offer to resell, resale or other
transfer. Please refer to the section in this prospectus entitled "Plan of
Distribution."
SHELF REGISTRATION STATEMENT
In the event that:
(1) because of any change in law or applicable interpretations thereof by
the staff of the Securities and Exchange Commission, we are not permitted
to effect the exchange offer, or
(2) for any other reason, the exchange offer is not consummated within 180
days from the date of issuance of the initial notes, or
(3) any holder of initial notes notifies us within 20 days following the
consummation of the exchange offer that (x) this holder was prohibited by
law of policy of the Securities and Exchange Commission from
participating in the exchange offer, or (y) this holder may not resell
the exchange notes acquired by it in the exchange offer to the public
without delivering a prospectus and this prospectus is not appropriate or
available for such resale, or (z) this holder is a broker-dealer and
holds notes acquired directly from us or any of our affiliates (within
the meaning of the Securities Act),
then in the case of clauses (1) through (3) of this sentence, we will be
obligated, at our sole expense, to:
- use our reasonable best efforts, as promptly as practicable and in no
event more than 30 days following this request, to file with the
Securities and Exchange Commission a shelf registration statement covering
resales of the initial notes,
- use our reasonable best efforts to cause the shelf registration statement
to be declared effective under the Securities Act within 120 days after
the date we are required to file a shelf registration statement, and
- use our reasonable best efforts to keep the shelf registration statement
continuously effective, supplemented and amended as required by the
Securities Act, in order to permit the prospectus which is a part of this
shelf registration statement to be usable by holders for a period of two
years after the shelf registration statement is declared effective or the
shorter period of time that will terminate when all of the applicable
initial notes have been sold under this shelf registration statement.
We will, in the event that a shelf registration statement is filed, provide
to each holder of the initial notes being registered copies of the prospectus
that is a part of the shelf registration statement. We will also notify each of
these holders when the shelf registration statement has become effective
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<PAGE>
and take certain other actions as are required to permit unrestricted resales of
the initial notes being registered. A holder that sells initial notes pursuant
to the shelf registration statement will be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the registration rights agreement that are applicable to such a
holder, including indemnification rights and obligations.
LIQUIDATED DAMAGES
In the event that:
(1) we do not file the registration statement or the shelf registration
statement, as the case may be, with the Securities and Exchange
Commission on or before the dates specified above for these filings,
(2) the registration statement or the shelf registration statement, as the
case may be, is not declared effective on or before the dates specified
above for its effectiveness,
(3) the exchange offer is not consummated on or before June 23, 1999, or
(4) the shelf registration statement is filed and declared effective but
thereafter ceases to be effective or usable in connection with its
intended purpose, each such event referred to in clauses (1) through (4),
being called a registration default,
then we will be obligated to pay to each holder of transfer restricted
securities liquidated damages, as described below. Transfer restricted
securities means each initial note until:
(1) the date on which that initial note has been exchanged by a person other
than a broker-dealer for an exchange note in the registered exchange
offer,
(2) following the exchange by a broker-dealer in the registered exchange
offer of an initial note for an exchange note, the date on which this
exchange note is sold to a purchaser who receives from this broker-dealer
on or before the date of the sale a copy of the prospectus contained in
the exchange offer registration statement,
(3) the date on which the initial note has been effectively registered under
the Securities Act and disposed of in accordance with the shelf
registration statement,
(4) the date on which the initial note is distributed to the public under
Rule 144 promulgated under the Securities Act or
(5) the date on which the initial note is eligible for resale pursuant to
Rule 144 without volume restrictions.
Liquidated damages will accrue and be payable semi-annually on the initial
notes and the exchange notes, in addition to the stated interest on the initial
notes and the exchange notes in an amount equal to 0.50% per year during the
first 90-day period, which will increase by 0.25% per year for each subsequent
90-day period. In no event will this rate exceed 1.50% per year in the
aggregate, regardless of the number of registration defaults. Liquidated damages
will accrue from the date a registration default occurs until the date on which:
- the registration statement is filed,
- the registration statement or shelf registration statement is declared
effective and the exchange offer is consummated,
- the shelf registration statement is declared effective, or
- the shelf registration statement again becomes effective or made usable,
as the case may be.
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Following the cure of all registration defaults, the accrual of liquidated
damages will cease.
Upon completion of the exchange offer, holders of initial notes who do not
exchange their initial notes for exchange notes in the exchange offer will
generally no longer be entitled to registration rights and will not be able to
offer or sell their initial notes, unless such initial notes are subsequently
registered under the Securities Act, which, subject to certain limited
exceptions, we will have no obligation to do, or pursuant to an exemption from,
or in a transaction not subject to, the Securities Act and applicable state
securities laws. Please refer to the section in this prospectus entitled "Risk
Factors--Your failure to participate in the exchange offer will have adverse
consequences."
TERMS OF THE EXCHANGE OFFER
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The exchange offer will expire at 5:00 p.m., New York City time, on May 26,
1999, unless we extend it in our reasonable discretion. The expiration date of
the exchange offer will be at least 20 business days after the commencement of
the exchange offer in accordance with Rule 14e-1(a) under the Securities
Exchange Act of 1934 and our registration rights agreement.
To extend the expiration date, we will need to notify the exchange agent of
any extension by oral, promptly confirmed in writing, or written notice. We will
also need to notify the holders of the initial notes by mailing an announcement
or by means of a press release or other public announcement communicated, unless
otherwise required by applicable law or regulation, before 9:00 A.M., New York
City time, on the next business day after the previously scheduled expiration
date.
We expressly reserve the right:
- to delay acceptance of any initial notes, to extend the exchange offer or
to terminate the exchange offer and not permit acceptance of initial notes
not previously accepted if any of the conditions described below under
"--Conditions" have occurred and have not been waived by us, if permitted
to be waived, by giving oral or written notice of this delay, extension or
termination to the exchange agent, or
- to amend the terms of the exchange offer in any manner.
If we amend the exchange offer in a manner determined by us to constitute a
material change, we will promptly disclose this amendment in a manner reasonably
calculated to inform the holders of the initial notes of this amendment
including providing public announcement, or giving oral or written notice to the
holders of the initial notes. A material change in the terms of the exchange
offer could include, among other things, a change in the timing of the exchange
offer, a change in the exchange agent, and other similar changes in the terms of
the exchange offer. If any material change is made to terms of the exchange
offer, we will disclose this change by means of a post-effective amendment to
the registration statement of which this prospectus is a part and will
distribute an amended or supplemented prospectus to each registered holder of
initial notes. In addition, we will also extend the exchange offer for an
additional five to ten business days as required by the Securities Exchange Act
of 1934, depending on the significance of the amendment, if the exchange offer
would otherwise expire during this period. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral, promptly confirmed in writing, or written notice thereof to the
exchange agent.
PROCEDURES FOR TENDERING
To tender your initial notes in the exchange offer, you must complete, sign
and date the letter of transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the letter of transmittal, and mail or
otherwise deliver the letter of transmittal or the facsimile, or an agent's
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message, together with the certificates representing the initial notes being
tendered and any other required documents, to the exchange agent on or before
5:00 p.m., New York City time, on the expiration date. Alternatively, you may
either:
- send a timely confirmation of a book-entry transfer of the initial notes,
if this procedure is available, into the exchange agent's account at The
Depository Trust Company pursuant to the procedure for book-entry transfer
described below, on or before 5:00 p.m. on the expiration date, or
- comply with the guaranteed delivery procedures described below.
The term agent's message means a message, transmitted by The Depository
Trust Company to, and received by, the exchange agent and forming a part of a
book-entry confirmation, which states that The Depository Trust Company has
received an express acknowledgment from its participant tendering initial notes
which are the subject of this book-entry confirmation that this participant has
received and agrees to be bound by the terms of the letter of transmittal, and
that we may enforce this agreement against this participant.
THE METHOD OF DELIVERY OF THE INITIAL NOTES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT YOUR ELECTION AND RISK. INSTEAD OF DELIVERY
BY MAIL, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND-DELIVERY SERVICE. IF YOU
CHOOSE THE MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, PROPERLY INSURED,
WITH RETURN RECEIPT REQUESTED. IN ALL CASES, YOU SHOULD ALLOW SUFFICIENT TIME TO
ASSURE TIMELY DELIVERY. YOU SHOULD NOT SEND ANY LETTERS OF TRANSMITTAL OR
INITIAL NOTES TO US. You must deliver all documents to the exchange agent at its
address provided below. You may also request your respective brokers, dealers,
commercial banks, trust companies or nominees to tender your initial notes on
your behalf.
Your tender of initial notes will constitute an agreement between you and us
in accordance with the terms and subject to the conditions provided in this
prospectus and in the letter of transmittal.
Only a holder of initial notes may tender these initial notes in the
exchange offer. A holder, with respect to the exchange offer, is any person in
whose name initial notes are registered on our books or any other person who has
obtained a properly completed bond power from the registered holder.
If you are the beneficial owner of initial notes that are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
you wish to tender your initial notes, you should contact this registered holder
promptly and instruct this registered holder to tender on your behalf. If you
wish to tender on your own behalf, you must, before completing and executing the
letter of transmittal and delivering your initial notes, either make appropriate
arrangements to register ownership of the initial notes in your name or obtain a
properly completed bond power from the registered holder. The transfer of
registered ownership may take considerable time.
Signatures on a letter of transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an eligible guarantor institution within the meaning of Rule 17Ad-15
under the Securities Exchange Act of 1934, each referred to as an eligible
institution, unless the initial notes are tendered:
- by a registered holder, or by a participant in The Depository Trust
Company whose name appears on a security position listing as the owner,
who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the letter of transmittal if the
exchange notes are being issued directly to this registered holder, or
deposited into the participant's account at The Depository Trust Company,
or
- for the account of an eligible institution.
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If the letter of transmittal is signed by the recordholder(s) of the initial
notes tendered, the signature must correspond with the name(s) written on the
face of the initial notes without alteration, enlargement or any change
whatsoever. If the letter of transmittal is signed by a participant in The
Depository Trust Company, the signature must correspond with the name as it
appears on the security position listing as the holder of the initial notes.
If the letter of transmittal is signed by a person other than the registered
holder of any initial notes listed, such initial notes must be endorsed or
accompanied by bond powers and a proxy that authorize such person to tender the
initial notes on behalf of the registered holder in satisfactory form to us as
determined in our sole discretion, in each case as the name of the registered
holder or holders appears on the initial notes.
If the letter of transmittal or any initial notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing. Unless waived by us, evidence
satisfactory to us of their authority to so act must also be submitted with the
letter of transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed letter of transmittal accompanied by the initial
notes tendered, or a timely confirmation received of a book-entry transfer of
initial notes into the exchange agent's account at The Depository Trust Company
with an agent's message, or a notice of guaranteed delivery from an eligible
institution is received by the exchange agent. Issuances of exchange notes in
exchange for initial notes tendered pursuant to a notice of guaranteed delivery
by an eligible institution will be made only against delivery of the letter of
transmittal, and any other required documents, and the tendered initial notes,
or a timely confirmation received of a book-entry transfer of initial notes into
the exchange agent's account at The Depository Trust Company with an agent's
message, with the exchange agent.
All questions as to the validity, form, eligibility, including time of
receipt, acceptance and withdrawal of the tendered initial notes will be
determined by us in our sole discretion. Our determination will be final and
binding. We reserve the absolute right to reject any and all initial notes not
properly tendered or any initial notes which, if accepted, would, in our opinion
or our counsel's opinion, be unlawful. We also reserve the absolute right to
waive any conditions of the exchange offer or irregularities or defects in
tender as to particular initial notes. Our interpretation of the terms and
conditions of the exchange offer, including the instructions in the letter of
transmittal, will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of initial notes must be
cured within such time as we shall determine. We, the exchange agent or any
other person will be under no duty to give notification of defects or
irregularities with respect to tenders of initial notes. None of us or the
exchange agent will incur any liability for failure to give such notification.
Tenders of initial notes will not be deemed to have been made until such
irregularities have been cured or waived. Any initial notes received by the
exchange agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the exchange agent to the tendering holders of such initial notes, unless
otherwise provided in the letter of transmittal, as promptly as practicable
following the expiration date.
In addition, we reserve the right in our sole discretion, subject to the
provisions of the indenture for the initial and exchange notes, to:
- purchase or make offers for any initial notes that remain outstanding
subsequent to the expiration date, or, as described under "--Expiration
Date; Extensions; Amendments; Termination", to terminate the exchange
offer in accordance with the terms of our registration rights agreement,
and
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- to the extent permitted by applicable law, purchase initial notes in the
open market, in privately negotiated transactions or otherwise. The terms
of these purchases or offers could differ from the terms of the exchange
offer.
ACCEPTANCE OF INITIAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the exchange offer,
we will accept all initial notes properly tendered, promptly after the
expiration date, and will issue the exchange notes promptly after the expiration
date and acceptance of the initial notes. Please refer to the section of this
prospectus entitled "--Conditions" below. For purposes of the exchange offer,
initial notes will be deemed to have been accepted as validly tendered for
exchange when, as and if we had given oral or written notice to the exchange
agent.
In all cases, issuance of exchange notes for initial notes that are accepted
for exchange pursuant to the exchange offer will be made only after timely
receipt by the exchange agent of certificates for such initial notes or a timely
book-entry confirmation of such initial notes into the exchange agent's account
at the book-entry transfer facility, a properly completed and duly executed
letter of transmittal or an agent's message and all other required documents, in
each case, in form satisfactory to us and the exchange agent. If any tendered
initial notes are not accepted for any reason set forth in the terms and
conditions of the exchange offer or if initial notes are submitted for a greater
principal amount than the holder desires to exchange, such unaccepted or
non-exchanged initial notes will be returned without expense to the tendering
holder thereof, or, in the case of initial notes tendered by book-entry transfer
procedures described below, the non-exchanged initial notes will be credited to
an account maintained with the book-entry transfer facility, as promptly as
practicable after withdrawal, rejection of tender, the expiration date or
earlier termination of the exchange offer.
BOOK-ENTRY TRANSFER
The exchange agent will make a request to establish an account with respect
to the initial notes at The Depository Trust Company for purposes of the
exchange offer within two business days after the date of this prospectus. Any
financial institution that is a participant in The Depository Trust Company's
systems may make book-entry delivery of initial notes by causing The Depository
Trust Company to transfer such initial notes into the exchange agent's account
at The Depository Trust Company in accordance with The Depository Trust
Company's procedures for transfer.
However, although delivery of initial notes may be effected through
book-entry transfer into the exchange agent's account at The Depository Trust
Company, an agent's message or the letter of transmittal or facsimile thereof
with any required signature guarantees and any other required documents must, in
any case, be transmitted to and received by the exchange agent at the address
indicated below under "--Exchange Agent" on or before the expiration date or the
guaranteed delivery procedures described below must be complied with. DELIVERY
OF DOCUMENTS TO THE DEPOSITORY TRUST COMPANY DOES NOT CONSTITUTE DELIVERY TO THE
EXCHANGE AGENT. All references in the prospectus to deposit of initial notes
will be deemed to include The Depository Trust Company's book-entry delivery
method.
GUARANTEED DELIVERY PROCEDURE
If you are a registered holder of initial notes and desire to tender such
initial notes, and (1) the initial notes are not immediately available, or (2)
time will not permit your initial notes or other required documents to reach the
exchange agent before the expiration date, or (3) the procedures for book-entry
transfer cannot be completed on a timely basis and an agent's message delivered,
you may still tender in the exchange offer if:
- you tender through an eligible institution,
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- prior to the expiration date, the exchange agent receives from this
eligible institution a properly completed and duly executed letter of
transmittal, or facsimile thereof, and notice of guaranteed delivery,
substantially in the form provided by us, by facsimile transmission, mail
or hand delivery, setting forth your name and address as holder of the
initial notes and the amount of initial notes tendered, stating that the
tender is being made thereby and guaranteeing that within five business
days after the expiration date the certificates for all tendered initial
notes, in proper form for transfer, or a book-entry confirmation with an
agent's message, as the case may be, and any other documents required by
the letter of transmittal will be deposited by the eligible institution
with the exchange agent, and
- the certificates for all tendered initial notes, in proper form for
transfer, or a book-entry confirmation as the case may be, and all other
documents required by the letter of transmittal are received by the
exchange agent within five business days after the expiration date.
WITHDRAWAL OF TENDERS
Except as otherwise provided in this prospectus, you may withdraw tenders of
initial notes at any time before 5:00 p.m., New York City time, on the
expiration date.
For a withdrawal to be effective, you must send a written or facsimile
transmission notice of withdrawal to the exchange agent before 5:00 p.m., New
York City time, on the expiration date at the address provided below under
"--Exchange Agent" and before acceptance of the notes for exchange by us. Any
notice of withdrawal must:
- specify the name of the person having tendered the initial notes to be
withdrawn,
- identify the initial notes to be withdrawn, including, if applicable, the
registration number or numbers and total principal amount of these initial
notes,
- be signed by the person having tendered the initial notes to be withdrawn
in the same manner as the original signature on the letter of transmittal
by which these initial notes were tendered, including any required
signature guarantees, or be accompanied by documents of transfer
sufficient to permit the trustee with respect to the initial notes to
register the transfer of these initial notes into the name of the person
having made the original tender and withdrawing the tender,
- specify the name in which these initial notes are to be registered, if
different from that of the person having tendered the initial notes to be
withdrawn, and
- if applicable because the initial notes have been tendered pursuant to the
book-entry procedures, specify the name and number of the participant's
account at The Depository Trust Company to be credited, if different than
that of the person having tendered the initial notes to be withdrawn.
We will determine all questions as to the validity, form and eligibility,
including time of receipt, of notices of withdrawal and our determination will
be final and binding on all parties. Any initial notes so withdrawn will be
deemed not to have been validly tendered for exchange for purposes of the
exchange offer. Any initial notes which have been tendered for exchange which
are not exchanged for any reason will be returned to the holder thereof without
cost to such holder. In the case of initial notes tendered by book-entry
transfer into the exchange agent's account at The Depository Trust Company
pursuant to the book-entry transfer procedures described above, these initial
notes will be credited to an account maintained with The Depository Trust
Company for the initial notes, as promptly as practicable after withdrawal,
rejection of tender, expiration date or earlier termination of the exchange
offer. Properly withdrawn initial notes may be retendered by following one of
the
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procedures described under "--Procedures for Tendering" and "--Book-Entry
Transfer" above at any time on or before the expiration date.
CONDITIONS
Notwithstanding any other term of the exchange offer, we will not be
required to accept initial notes for exchange, or issue exchange notes in
exchange for any initial notes, and we may terminate or amend the exchange offer
as provided in this prospectus before the acceptance of these initial notes, if:
- an action or proceeding has been instituted or threatened in any court or
before any governmental agency or body that in our judgment would
reasonably be expected to prohibit, prevent or otherwise impair our
ability to proceed with the exchange offer;
- a change in the current interpretation of the staff of the Securities and
Exchange Commission has occurred which current interpretation permits the
exchange notes issued pursuant to the exchange offer in exchange for the
initial notes to be offered for resale, resold or otherwise transferred by
their holders, other than in certain circumstances;
- a law, statute, rule or regulation has been adopted or enacted which, in
our judgment, would reasonably be expected to impair our ability to
proceed with the exchange offer;
- a stop order has been issued by the Securities and Exchange Commission or
any state securities authority suspending the effectiveness of the
registration statement of which this prospectus is a part or the
qualification of the indenture for the notes under the Trust Indenture Act
of 1939 or proceedings shall have been initiated or, to our knowledge,
threatened for that purpose;
- a governmental approval has not been obtained, which approval we deem in
our sole discretion, necessary for the consummation of the exchange offer;
or
- a change, or a development involving a prospective change, in our business
or financial affairs has occurred which, in our sole judgment, might
materially impair our ability to proceed with the exchange offer.
These conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition or may be
waived by us, in whole or in part, at any time and from time to time, if we
determine in our reasonable discretion that any of the foregoing events or
conditions has occurred or exists or has not been satisfied, subject to
applicable law. Our failure at any time to exercise any of these rights will not
be deemed a waiver of any of these rights and each of these rights will be
deemed an ongoing right which we may assert at any time and from time to time.
If we determine that we may terminate the exchange offer, as provided above,
we may:
- refuse to accept any initial notes and return any initial notes that have
been tendered to their holders,
- extend the exchange offer and retain all initial notes tendered before the
expiration date, subject to the rights of such holders of tendered initial
notes to withdraw their tendered initial notes, or
- waive the termination event with respect to the exchange offer and accept
all properly tendered initial notes that have not been withdrawn or
otherwise amend the terms of the exchange offer in any respect as provided
under the section in this prospectus entitled "--Expiration Date;
Extensions; Amendments; Termination."
The exchange offer is not conditioned upon any minimum principal amount of
initial notes being tendered for exchange.
We have no obligation to, and will not knowingly, accept tenders of initial
notes from our affiliates, within the meaning of Rule 405 under the Securities
Act, or from any other holder or holders who are
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not eligible to participate in the exchange offer under applicable law or its
interpretation by the Securities and Exchange Commission, or if the exchange
notes to be received by the holder or holders of initial notes in the exchange
offer, upon receipt, will not be tradable by this holder without restriction
under the Securities Act and the Securities Exchange Act of 1934 and without
material restrictions under the blue sky or securities laws of substantially all
of the states of the United States.
ACCOUNTING TREATMENT
We will record the exchange notes at the same carrying value as the initial
notes, as reflected in our accounting records on the date of the exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes. We
will amortize the costs of the exchange offer and the unamortized expenses
related to the issuance of the exchange notes over the term of the exchange
notes.
EXCHANGE AGENT
We have appointed IBJ Whitehall Bank & Trust Company as exchange agent for
the exchange offer. You should direct all questions and requests for assistance
or additional copies of this prospectus or the letter of transmittal to the
exchange agent as follows:
By Mail:
IBJ Whitehall Bank & Trust Company
P.O. Box 84
Bowling Green Station
New York, NY 10274-0084
ATTN: Reorganization Operations Department
By Hand/Overnight Delivery:
IBJ Whitehall Bank & Trust Company
One State Street
New York, NY 10004
ATTN: Securities Processing Window, Subcellar One, (SC-1)
Facsimile Transmission: (212) 858-2611
Confirm by Telephone: (212) 858-2103
Via Telex No.: 177754
FEES AND EXPENSES
We will bear the expenses of soliciting tenders pursuant to the exchange
offer. The principal solicitation for tenders pursuant to the exchange offer is
being made by mail; however, our offices and regular employees may make
additional solicitations by telegraph, telephone, telecopy or in person.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of the exchange offer. However, we will pay the exchange
agent reasonable and customary fees for its services and will reimburse the
exchange agent for its reasonable out-of-pocket expenses in connection with the
exchange offer. We may also pay brokerage houses and other custodians, nominees
and fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of the prospectus, letters of transmittal and related
documents to the beneficial owners of the initial notes, and in handling or
forwarding tenders for exchange.
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We will pay the expenses incurred in connection with the exchange offer,
including fees and expenses of the exchange agent and trustee and accounting,
legal, printing and related fees and expenses.
We will pay all transfer taxes, if any, applicable to the exchange of
initial notes pursuant to the exchange offer. However, tendering holders will
pay the amount of any such transfer taxes, whether imposed on the registered
holder or any other persons, if:
- certificates representing exchange notes or initial notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or
are to be registered or issued in the name of, any person other than the
registered holder of the initial notes tendered, or
- tendered initial notes are registered in the name of any person other than
the person signing the letter of transmittal, or
- a transfer tax is imposed for any reason other than the exchange of
initial notes pursuant to the exchange offer.
If satisfactory evidence of payment of such taxes or exemption therefrom is
not submitted with the letter of transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
YOUR FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE CONSEQUENCES
If you do not exchange your initial notes for exchange notes pursuant to the
exchange offer or if you do not properly tender your initial notes in the
exchange offer, you will not be able to resell, offer to resell or otherwise
transfer the initial notes unless they are registered under the Securities Act
or unless you resell them, offer to resell or otherwise transfer them under an
exemption from the registration requirements of, or in a transaction not subject
to, the Securities Act. In addition, you will no longer be able to obligate us
to register the initial notes under the Securities Act except in the limited
circumstances provided under our registration rights agreement. The restrictions
on transfer of your initial notes arise because we issued the initial notes
pursuant to exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
addition, if you want to exchange your initial notes in the exchange offer for
the purpose of participating in a distribution of the exchange notes, you may be
deemed to have received restricted securities, and, if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. To the extent the
initial notes are tendered and accepted in the exchange offer, the trading
market, if any, for the initial notes would be adversely affected. Please refer
to the section in this prospectus entitled "Risk Factors."
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DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The form and terms of the exchange notes are the same as the form and terms
of the initial notes, except that the exchange notes have been registered under
the Securities Act, will not bear legends restricting the transfer thereof and
will not be entitled to registration rights under our registration rights
agreement. We issued the initial notes and will issue the exchange notes under
the indenture, dated as of November 25, 1998, between us and IBJ Whitehall Bank
& Trust Company, as trustee. The terms of the exchange notes will include those
stated in the indenture and the security agreement, dated as of November 25,
1998, among us, the trustee and IBJ Whitehall Bank & Trust Company as security
intermediary and those made part of the indenture by reference to the Trust
Indenture Act. The exchange notes will be subject to all such terms, and we
refer you to the indenture, the security agreement and the Trust Indenture Act
for a statement of such terms. Except as otherwise indicated, the following
description relates both to the initial notes and the exchange notes and is a
summary of the material provisions of the indenture and the security agreement.
It does not restate those agreements in their entirety. We urge you to read the
indenture and the security agreement because they, and not this description,
define your rights as holder of the exchange notes. We have filed copies of the
indenture and the security agreement as exhibits to the registration statement
which includes this prospectus. The definitions of certain terms used in the
following summary are indicated below under "--Certain Definitions." For
purposes of this summary, the term "Metromedia Fiber Network" refers only to
Metromedia Fiber Network, Inc. and not to any of its Subsidiaries. Also, in this
description "initial notes" and "exchange notes" are collectively referred to as
the "notes."
As of the Issue Date, all of our Subsidiaries will be Restricted
Subsidiaries. Under certain circumstances, we 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. Our investment in International Optical Network and our investment in
the joint venture constructing the German network will not be considered
Subsidiaries for purposes of the indenture.
TERMS OF NOTES
The notes:
- are general obligations of Metromedia Fiber Network,
- rank without preference in right of payment with all existing and future
unsecured senior Indebtedness of Metromedia Fiber Network,
- rank senior in right of payment to all subordinated Indebtedness of
Metromedia Fiber Network that may be issued in the future, if any, and
- are not secured by any assets, and, therefore, will be effectively
subordinated to any existing and future secured Indebtedness of Metromedia
Fiber Network and its Subsidiaries, including the Credit Agreement, to the
extent of the value of the assets securing such Indebtedness.
We conduct substantially all of our operations through our Subsidiaries and,
therefore, we are dependent on the cash flow of our Subsidiaries to meet our
obligations, including our 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 our
Subsidiaries, including any Guarantees of such Subsidiaries with respect to the
Credit Agreement. Any right of Metromedia Fiber Network to receive assets of any
of its Subsidiaries upon the liquidation or reorganization of such Subsidiary,
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 Metromedia Fiber Network is itself
recognized as a creditor of such Subsidiary. In such case the claims
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of Metromedia Fiber Network would still be subordinate to any security in the
assets of such Subsidiary and any indebtedness of such Subsidiary that is senior
to that held by Metromedia Fiber Network. Please refer to the sections in this
prospectus entitled "Risk Factors--Payment of principal and interest on the
exchange notes is effectively subordinated to the claims of our secured
creditors and our subsidiaries' creditors."
PRINCIPAL, MATURITY AND INTEREST
Metromedia Fiber Network will issue notes with a maximum aggregate principal
amount of $650.0 million. Metromedia Fiber Network will issue notes in
denominations of $1,000.00 and integral multiples of $1,000.00. For each initial
note accepted for exchange, the holder of such initial note will receive an
exchange note having a principal amount equal to that of the surrendered initial
note. The notes will mature on November 15, 2008.
Interest on the exchange notes will accrue at the rate of 10% per year and
will be payable semi-annually in arrears on May 15 and November 15, commencing
on May 15, 1999. Metromedia Fiber Network will make each interest payment to the
holders of record of these notes on the immediately preceding May 1 and November
1.
Interest on the exchange notes will accrue from the most recent date to
which interest has been paid on the initial notes or, if no interest has been
paid on the initial notes, from November 25, 1998. Accordingly, if the relevant
record date for interest payment occurs after the consummation of the exchange
offer, registered holders of exchange notes on such record date will receive
interest accruing from the most recent date to which interest has been paid on
the initial notes or, if no interest has been paid, from November 25, 1998.
Holders of initial notes whose initial notes are accepted for exchange will not
receive any payment in respect of interest on such initial notes otherwise
payable on any interest payment date the record date for which occurs on or
after the consummation of the exchange offer. If, however, the relevant record
date for interest payment occurs before the consummation of the exchange offer,
registered holders of initial notes on such record date will receive interest
accruing from the most recent date to which interest has been paid or, if no
interest has been paid, from November 25, 1998. Interest will cease to accrue on
initial notes accepted for exchange from and after the date of consummation of
the exchange offer, except as described in the immediately preceding sentence.
Interest is computed on the basis of a 360-day year comprised of twelve 30-day
months.
If a holder has given wire transfer instructions to Metromedia Fiber
Network, Metromedia Fiber Network will make all payments of principal, premium,
if any, and interest on the notes to such holder by wire transfer of immediately
available funds in accordance with those instructions. All other payments of
principal, premium, if any, and interest on the notes are payable at the office
or agency of Metromedia Fiber Network maintained for such purpose within the
city and state of New York unless Metromedia Fiber Network has elected to pay
interest on the notes by check mailed to the holders of the notes at their
respective addresses set indicated in the register of holders of notes by the
holders. Until otherwise designated by Metromedia Fiber Network, Metromedia
Fiber Network's office or agency in New York will be the office of the trustee
maintained for such purpose.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The trustee initially will be the paying agent and registrar under the
indenture, and Metromedia Fiber Network may act as paying agent or registrar
under the indenture.
THE SECURITY AGREEMENT
Metromedia Fiber Network's obligation to pay interest on the notes on May
15, 1999, November 15, 1999, and May 15, 2000 is secured by funds held by IBJ
Whitehall Bank & Trust
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Company, as security agent under an agreement between Metromedia Fiber Network
and the security agent. Concurrently with the closing of the offering of the
initial notes, Metromedia Fiber Network deposited with the security agent in the
security account approximately $91.5 million in U.S. Government Securities,
that, together with the proceeds from the investment thereof, will be sufficient
to pay when due the first three interest payments on the notes. Following the
third interest payment on the notes, any amounts remaining in the security
account will be released to Metromedia Fiber Network and will thereafter remain
subject to the applicable provisions of the indenture.
OPTIONAL REDEMPTION
Except as set forth below, the notes will not be redeemable at Metromedia
Fiber Network's option prior to November 15, 2003.
After November 15, 2003, Metromedia Fiber Network may redeem the notes, 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, provided below,
plus accrued and unpaid interest (and liquidated damages, if any, 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 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>
Notwithstanding the foregoing, at any time prior to November 15, 2001,
Metromedia Fiber Network may, on any one or more occasions, redeem up to 35% of
the aggregate principal amount of notes originally issued pursuant to the
indenture at a redemption price of 110% of the principal amount thereof, plus
accrued and unpaid interest, and liquidated damages, if any, 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, if:
- Metromedia Fiber Network uses the Net Cash Proceeds received from any
Public Equity Offering made by Metromedia Fiber Network resulting in gross
proceeds to Metromedia Fiber Network of at least $100 million, and
- at least 65% of the aggregate principal amount of the notes originally
issued pursuant to the Indenture remain outstanding immediately after the
occurrence of any such redemption.
Metromedia Fiber Network 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, the trustee
will select notes for redemption as follows:
- 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 Metromedia Fiber Network deems fair and appropriate.
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No notes of $1,000 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 before
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 of such
note to be redeemed. A new note in principal amount equal to the unredeemed
portion of such note will be issued in the name of the Holder of such original
note 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 Metromedia Fiber Network defaults in the payment of such interest.
MANDATORY REDEMPTION
Metromedia Fiber Network is 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
If a Change of Control occurs, each holder of notes will have the right to
require Metromedia Fiber Network to purchase all or any part, equal to $1,000 or
an integral multiple thereof, of that Holder's notes pursuant to the offer
described below, called the Change of Control Offer, at a purchase price in cash
equal to 101% of the aggregate principal amount thereof, called 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. However, Metromedia Fiber Network shall not be obligated to
repurchase notes pursuant to a Change of Control Offer if it has exercised its
rights to redeem all of the notes pursuant to the indenture. Within 30 days
following any Change of Control, Metromedia Fiber Network 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, called the Change of Control payment date, in
accordance with the procedures required by the Indenture and described in such
notice.
Metromedia Fiber Network will comply with the requirements of Rule 14e-1
under the Securities Exchange Act of 1934 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, Metromedia Fiber Network 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, Metromedia Fiber Network will, to the
extent lawful:
- accept for payment all notes or portions thereof properly tendered
pursuant to the Change of Control Offer,
- deposit with the paying agent an amount equal to the Change of Control
Payment plus accrued and unpaid interest thereon and liquidated damages,
if any, in respect of all notes or portions thereof so tendered, and
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- deliver or cause to be delivered to the trustee notes so accepted together
with an Officer's Certificate stating the aggregate principal amount of
notes or portions thereof being purchased by Metromedia Fiber Network.
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
and liquidated damages, if any, 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 in principal amount equal 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 an integral multiple thereof. Metromedia Fiber
Network 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 does not contain
provisions that permit the Holders of the notes to require that Metromedia Fiber
Network purchase or redeem the notes in the event of a takeover,
recapitalization or similar transaction.
Metromedia Fiber Network's ability to purchase notes upon a Change of
Control may be limited by Metromedia Fiber Network's then existing financial
resources. We cannot assure you that sufficient funds will be available when
necessary to make any such required purchases. Metromedia Fiber Network will 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 of the indenture and purchases all notes validly tendered and
not withdrawn.
ASSET SALES
Metromedia Fiber Network will not, and will not permit any of its Restricted
Subsidiaries to, directly or indirectly, consummate any Asset Sale, unless:
(i) Metromedia Fiber Network, 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 of the assets or Equity Interests issued or
sold or otherwise disposed of. For purposes of this covenant, fair
market value will be as determined in good faith by the Board of
Directors, including as to the value of all non cash consideration, and
set forth in an Officer's Certificate delivered to the trustee,
(ii) at least 75% of the consideration therefor is in the form of cash
and/or Cash Equivalents or Telecommunications Assets, and
(iii) Metromedia Fiber Network, or such Restricted Subsidiary, as the case
may be, applies the Net Proceeds received from such Asset Sale within
360 days following the receipt of such Net Cash Proceeds, to the extent
Metromedia Fiber Network 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 Metromedia
Fiber Network 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
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be used to retire Indebtedness of a Foreign Subsidiary or reinvest in assets or
Equity Interests of a Foreign Subsidiary.
The balance of the Net Cash Proceeds that are not applied or invested 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, Metromedia
Fiber Network 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, called 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 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, Metromedia Fiber Network 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.
For purposes of this provision, the following amounts will be deemed to be
cash and/or Cash Equivalents:
(i) any liabilities, as shown on Metromedia Fiber Network's, or such
Restricted Subsidiary's, as the case may be, most recent balance sheet,
other than Subordinated Indebtedness, of Metromedia Fiber Network or any
Restricted Subsidiary, that are assumed by the transferee of any such
assets pursuant to an agreement that immediately releases Metromedia
Fiber Network and all of its Restricted Subsidiaries from all liability
in respect thereof,
(ii) Indebtedness of any Restricted Subsidiary that is no longer a
Restricted Subsidiary as a result of such Asset Sale, if Metromedia
Fiber Network 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 Metromedia Fiber Network or
any of its Restricted Subsidiaries, and
(iii) any securities, notes or other obligations received by Metromedia Fiber
Network, or such Restricted Subsidiary, as the case may be, from such
transferee that are contemporaneously, subject to ordinary settlement
periods, converted by Metromedia Fiber Network, 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.
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CERTAIN COVENANTS
The indenture imposes certain covenants on Metromedia Fiber Network,
including the following covenants:
RESTRICTED PAYMENTS
Metromedia Fiber Network 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 Metromedia Fiber Network's or any of its Restricted Subsidiaries'
Equity Interests or to the direct or indirect holders of Metromedia Fiber
Network'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 Metromedia Fiber Network or
to Metromedia Fiber Network or a Restricted Subsidiary of Metromedia Fiber
Network,
(ii) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of Metromedia Fiber Network or any of its Restricted Subsidiaries or
any direct or indirect parent of Metromedia Fiber Network, other than any such
Equity Interests owned by Metromedia Fiber Network or any Consolidated
Subsidiary of Metromedia Fiber Network,
(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) Metromedia Fiber Network 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 Metromedia Fiber Network 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 Metromedia Fiber Network 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 Metromedia
Fiber Network on and after the Issue Date as a Capital Contribution
or from the issue or sale of Equity Interests of Metromedia Fiber
Network, other than Disqualified Stock, or from the issue or sale
of Disqualified Stock or debt securities of Metromedia Fiber
Network 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 Metromedia Fiber
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Network, plus the amount of Net Cash Proceeds received by
Metromedia Fiber Network 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
Metromedia Fiber Network or any Restricted Subsidiary from any
Unrestricted Subsidiary, (y) proceeds realized by Metromedia Fiber
Network or any Restricted Subsidiary upon the sale of such
Investment to a Person other than Metromedia Fiber Network or any
Subsidiary of Metromedia Fiber Network, 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
Metromedia Fiber Network 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 Metromedia
Fiber Network 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.
These 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 Metromedia Fiber Network
in exchange for, or out of the Net Cash Proceeds of the substantially concurrent
sale, other than to a Subsidiary of Metromedia Fiber Network, of, Equity
Interests of Metromedia Fiber Network, 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 Metromedia Fiber Network 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 Metromedia Fiber Network or any of its Restricted
Subsidiaries held by any member of Metromedia Fiber Network'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 Metromedia Fiber Network 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 Metromedia Fiber Network or
any Restricted Subsidiary from any governmental agency;
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(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
Metromedia Fiber Network or any Restricted Subsidiary upon the sale of such
Investment to a Person other than Metromedia Fiber Network or any Subsidiary of
Metromedia Fiber Network, 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 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 Metromedia Fiber Network,
of Equity Interests of Metromedia Fiber Network, 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 International Optical Network, 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 Metromedia Fiber Network or any of its Restricted Subsidiaries
from International Optical Network 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 International Optical Network, 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 (I) $100.0 million, plus (II) 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
Metromedia Fiber Network or any Restricted Subsidiary upon the sale of such
Investment to a Person other than Metromedia Fiber Network or any Subsidiary of
Metromedia Fiber Network, 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 Metromedia Fiber
Network, 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) Metromedia Fiber Network 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
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(iii) Metromedia Fiber Network 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 Metromedia Fiber Network
and all Restricted Subsidiaries in such Subsidiary on such date.
In the event of any such designation, all outstanding Investments owned by
Metromedia Fiber Network 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 Metromedia Fiber Network 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 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 Metromedia Fiber Network, 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
Metromedia Fiber Network 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 Metromedia Fiber Network 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. However,
Metromedia Fiber Network 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 Metromedia Fiber Network's
most recently ended fiscal quarter (the "reference period") for which a
consolidated balance sheet of Metromedia Fiber Network 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
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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 referred to as permitted indebtedness:
(a) the incurrence by Metromedia Fiber Network of Indebtedness represented
by the notes;
(b) the incurrence by Metromedia Fiber Network or any of its Restricted
Subsidiaries of Existing Indebtedness;
(c) the incurrence of Indebtedness by Metromedia Fiber Network to any
Consolidated Subsidiary or Indebtedness of any Restricted Subsidiary to
Metromedia Fiber Network or any Consolidated Subsidiary, but such
Indebtedness shall be deemed to be incurred upon such Indebtedness being
held by any person other than Metromedia Fiber Network 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 Metromedia Fiber
Network, such obligations shall be unsecured and subordinated in all
respects to Metromedia Fiber Network's obligations pursuant to the notes;
(d) the incurrence by Metromedia Fiber Network 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;
(e) the incurrence by Metromedia Fiber Network, 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
$150.0 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 Metromedia Fiber Network 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
Metromedia Fiber Network, to Metromedia Fiber Network or such Foreign
Subsidiary, as applicable, of the property so purchased, developed,
acquired, constructed, improved or leased;
(g) the incurrence by Metromedia Fiber Network 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 $50.0
million, or the equivalent
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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) Metromedia Fiber Network 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 Metromedia Fiber Network's industry, other than to
the extent not supporting Indebtedness, and
(j) the incurrence by Metromedia Fiber Network 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 Metromedia Fiber Network,
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 Metromedia Fiber
Network or a Restricted Subsidiary of Metromedia Fiber Network shall be deemed
to have been incurred at the time such Person becomes such a Restricted
Subsidiary of Metromedia Fiber Network or is merged with or into or consolidated
with Metromedia Fiber Network or a Restricted Subsidiary of Metromedia Fiber
Network, as applicable.
Upon each incurrence, Metromedia Fiber Network 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 Metromedia Fiber
Network under any other provision of this covenant, except as stated otherwise
in the foregoing provisions.
Metromedia Fiber Network 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
Metromedia Fiber Network unless such Indebtedness is also contractually
subordinated in right of payment to the notes on substantially identical terms;
PROVIDED, HOWEVER, that no Indebtedness of Metromedia Fiber Network shall be
deemed to be contractually subordinated in right of payment to any other
Indebtedness of Metromedia Fiber Network solely by virtue of being unsecured.
LIENS
Metromedia Fiber Network 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.
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DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
Metromedia Fiber Network 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 Metromedia Fiber
Network or any of its Restricted Subsidiaries (y) on its Capital Stock or (z)
with respect to any other interest or participation in, or measured by, its
profits, or
(b) pay any indebtedness owed to Metromedia Fiber Network or any of its
Restricted Subsidiaries,
(ii) make loans or advances to Metromedia Fiber Network or any of its
Restricted Subsidiaries or
(iii) transfer any of its properties or assets to Metromedia Fiber Network
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 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 Metromedia Fiber Network or any of its Restricted
Subsidiaries,
(d) applicable law,
(e) any instrument governing Indebtedness or Capital Stock of a Person or
assets acquired by Metromedia Fiber Network 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,
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(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 the provisions of the covenant described above under the caption
"--Liens" that limit the right of Metromedia Fiber Network 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
Metromedia Fiber Network may not, directly or indirectly, consolidate or
merge with or into, whether or not Metromedia Fiber Network 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) Metromedia Fiber Network is the surviving corporation or the Person
formed by or surviving any such consolidation or merger, if other than
Metromedia Fiber Network, 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 Metromedia Fiber Network, or the Person to which such sale,
assignment, transfer, conveyance or other disposition shall have been made
assumes all the obligations of Metromedia Fiber Network under our registration
rights agreement, the 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 Metromedia Fiber Network with or into
a Wholly Owned Restricted Subsidiary of Metromedia Fiber Network, Metromedia
Fiber Network or the Person formed by or surviving any such consolidation or
merger, if other than Metromedia Fiber Network, 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
Metromedia Fiber Network would become subject to a Lien subject to the
provisions of the indenture described under "--Liens" above, Metromedia Fiber
Network or the successor entity to Metromedia Fiber Network shall have secured
the notes as required by said covenant; and
(vi) Metromedia Fiber Network 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.
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The indenture will also provide that Metromedia Fiber Network 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 Metromedia
Fiber Network and its Wholly Owned Restricted Subsidiaries.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of Metromedia Fiber Network in accordance with the foregoing, the
successor corporation formed by such consolidation or into which Metromedia
Fiber Network 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, Metromedia Fiber Network under the indenture with the same effect
as if such successor corporation had been named therein as Metromedia Fiber
Network, and, except in the case of a lease, Metromedia Fiber Network 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.
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, Metromedia Fiber Network's interest in which constitutes all
or substantially all of the properties and assets of Metromedia Fiber Network,
shall be deemed to be the transfer of all or substantially all of the properties
and assets of Metromedia Fiber Network.
TRANSACTIONS WITH AFFILIATES
Metromedia Fiber Network 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 being called an Affiliate Transaction,
unless:
(i) such Affiliate Transaction is on terms that are not materially less
favorable to Metromedia Fiber Network or the relevant Restricted Subsidiary than
those that would have been obtained in a comparable transaction by Metromedia
Fiber Network 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, Metromedia Fiber Network 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 Metromedia Fiber Network 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 Metromedia
Fiber Network of such Affiliate transaction from a financial point of view is
also obtained by Metromedia Fiber Network 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,
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(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 Metromedia Fiber Network 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 Metromedia Fiber Network,
(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 Metromedia Fiber Network
than the terms of such agreement prior to such amendment,
(vi) transactions with respect to capacity between Metromedia Fiber Network
or any Restricted Subsidiary and any Unrestricted Subsidiary or another
Affiliate and joint sales and marketing pursuant to an agreement or agreements
between Metromedia Fiber Network 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
Metromedia Fiber Network 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, International Optical Network 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 Metromedia Fiber Network or a
Restricted Subsidiary to an Unrestricted Subsidiary, International Optical
Network or another Affiliate of sales and marketing services, operations,
administration and maintenance services or development services for which
Metromedia Fiber Network 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 the covenant described above
under the caption "--Restricted Payments."
BUSINESS ACTIVITIES
Metromedia Fiber Network 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
Metromedia Fiber Network and each of its Restricted Subsidiaries will not
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.
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REPORTS
Whether or not required by the rules and regulations of the Securities and
Exchange Commission, so long as any notes are outstanding, Metromedia Fiber
Network 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 Securities and Exchange Commission on Forms
10-Q and 10-K if Metromedia Fiber Network 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 Metromedia Fiber Network and its consolidated Subsidiaries and,
with respect to the annual information only, a report thereon by Metromedia
Fiber Network's certified independent accountants, and
(ii) all current reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if Metromedia Fiber Network were
required to file such reports, in each case within the time periods specified in
the Securities and Exchange Commission's rules and regulations.
In addition, following the consummation of the exchange offer, whether or
not required by the rules and regulations of the Securities and Exchange
Commission, Metromedia Fiber Network will file a copy of all such information
and reports with the Securities and Exchange Commission for public availability
within the time periods specified in the Commission's rules and regulations,
unless the Securities and Exchange Commission will not accept such a filing, and
make such information available to securities analysts and prospective investors
upon request.
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 Metromedia Fiber Network 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 Metromedia Fiber Network 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 Metromedia Fiber Network or any of its Restricted
Subsidiaries, or the payment of which is guaranteed by Metromedia Fiber Network
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 Metromedia Fiber Network 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 Metromedia
Fiber Network or any of its Restricted Subsidiaries.
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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 of bankruptcy or
insolvency, with respect to Metromedia Fiber Network, 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.
Metromedia Fiber Network will be required to deliver to the trustee annually
a statement regarding compliance with the indenture, and Metromedia Fiber
Network 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 Metromedia
Fiber Network, as such, will have any liability for any obligations of
Metromedia Fiber Network 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 Securities and Exchange
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
Metromedia Fiber Network 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 Metromedia Fiber Network may,
at its option and at any time, elect to have all of its obligations discharged
with respect to the outstanding notes also called 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) Metromedia Fiber Network'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;
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(iii) the rights, powers, trusts, duties and immunities of the trustee, and
Metromedia Fiber Network's obligations in connection therewith; and
(iv) the legal defeasance provisions of the indenture.
In addition, Metromedia Fiber Network 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 through a 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) Metromedia Fiber Network must irrevocably deposit, or cause to be
deposited, with the trustee, in trust, for the benefit of the holders of the
notes, cash in U.S. dollars, non-callable Government Securities, or a
combination thereof, 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 Metromedia Fiber Network must specify whether the notes are being
defeased to maturity or to a particular redemption date;
(ii) in the case of legal defeasance, Metromedia Fiber Network must deliver
to the trustee an opinion of counsel in the United States reasonably acceptable
to the trustee confirming that, since the Issue Date, Metromedia Fiber Network
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, Metromedia Fiber Network 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 Metromedia Fiber Network or any
of its Restricted Subsidiaries is a party or by which Metromedia Fiber Network
or any of its Restricted Subsidiaries is bound;
(vi) Metromedia Fiber Network must deliver to the trustee an Officers'
Certificate stating that the deposit was not made by Metromedia Fiber Network
with the intent of preferring the holders of the notes over other creditors of
Metromedia Fiber Network, or with the intent of defeating, hindering, delaying
or defrauding creditors of Metromedia Fiber Network or others; and
(vii) Metromedia Fiber Network 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
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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 Metromedia Fiber Network may require a holder to pay any taxes and fees
required by law or permitted by the indenture.
Metromedia Fiber Network will not be required to transfer or exchange any
note selected for redemption. Also, Metromedia Fiber Network 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 contains provisions permitting Metromedia Fiber Network 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, Metromedia Fiber Network and the trustee are permitted to amend or
supplement the indenture or any 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 Metromedia Fiber Network
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 Metromedia
Fiber Network, 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 Metromedia Fiber Network to redeem the notes as a right,
or at the option, of Metromedia Fiber Network 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
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(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, or
(vi) release any funds from the security account in any manner inconsistent
with the provisions of the security agreement as in effect on the Issue Date or
modify any provision of the security agreement in a manner adverse to the
holders of the notes.
Notwithstanding the foregoing, without the consent of any holder of notes,
Metromedia Fiber Network and the trustee may amend or supplement the indenture
or the notes:
(i) to cure any ambiguity, defect or inconsistency,
(ii) to provide for uncertificated notes in addition to or in place of
certificated notes,
(iii) to provide for the assumption of Metromedia Fiber Network's
obligations to holders of notes in the case of a merger or consolidation or sale
of all or substantially all of Metromedia Fiber Network's assets in accordance
with the terms of the indenture,
(iv) 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
(v) to comply with the requirements of the Securities and Exchange
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 Metromedia Fiber Network, 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 Securities and
Exchange 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.
GOVERNING LAW
The indenture and the notes are governed by and construed in accordance with
the laws of the State of New York.
Metromedia Fiber Network 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
We have provided below certain defined terms used in the indenture. We urge
you to read the indenture for a full disclosure of all such terms, as well as
any other capitalized terms used in this prospectus for which we have provided
no definition.
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"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 Metromedia Fiber
Network or any Restricted Subsidiary or of telecommunications capacity,
transmission rights, conduit or rights-of-way acquired by Metromedia
Fiber Network or any Restricted Subsidiary for use in a
Telecommunications Business of Metromedia Fiber Network or any
Restricted Subsidiary, PROVIDED that the sale, lease, transfer,
conveyance or other disposition of all or substantially all of the
assets of Metromedia Fiber Network 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 Metromedia Fiber Network 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 Metromedia Fiber Network to a
Consolidated Subsidiary or by a Subsidiary to Metromedia Fiber Network or to a
Consolidated Subsidiary, (ii) an issuance of Equity Interests by a Subsidiary to
Metromedia Fiber Network 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 Metromedia Fiber Network and its
Restricted Subsidiaries and that is disposed of in the ordinary course of
business, (vi) the surrender or waiver by Metromedia Fiber Network 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 Metromedia Fiber
Network or any of its Restricted Subsidiaries or the grant by Metromedia Fiber
Network 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.
"BOARD OF DIRECTORS" means the board of directors or other governing body of
Metromedia Fiber Network or, if Metromedia Fiber Network is owned or managed by
a single entity, the board of
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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 Metromedia
Fiber Network from a direct or indirect parent of Metromedia Fiber Network 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, (ii) securities issued
or directly and fully guaranteed or insured by 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) 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 Securities Exchange Act of 1934), 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 Metromedia Fiber Network 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 Metromedia Fiber
Network 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 Metromedia Fiber Network, 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
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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
Metromedia Fiber Network,
(iii) Metromedia Fiber Network consolidates or merges with or into any other
Person, other than a consolidation or merger (a) of Metromedia Fiber
Network into a Wholly Owned Restricted Subsidiary of Metromedia Fiber
Network or (b) pursuant to a transaction in which the outstanding
Voting Stock of Metromedia Fiber Network is changed into or exchanged
for cash, securities or other property with the effect that the
beneficial owners of the outstanding Voting Stock of Metromedia Fiber
Network 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 Metromedia Fiber Network
and its Restricted Subsidiaries taken as a whole to any person other
than a Wholly Owned Restricted Subsidiary of Metromedia Fiber Network
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
Metromedia Fiber Network or any Restricted Subsidiary or fiber optic or
of telecommunications capacity or transmission rights, rights-of-way or
conduit acquired by Metromedia Fiber Network or any Restricted
Subsidiary for use in the Telecommunications Business of Metromedia
Fiber Network or a Restricted Subsidiary, including, without
limitation, for sale, lease, transfer, conveyance or other disposition
to any customer of Metromedia Fiber Network 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 Metromedia Fiber Network and its Restricted Subsidiaries
taken as a whole. The indenture is 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 Metromedia Fiber Network to purchase such notes as a result of a sale,
lease, transfer, conveyance or other disposition of less than all of the assets
of Metromedia Fiber Network and its Restricted Subsidiaries taken as a whole to
another Person or group may be uncertain.
"CONSOLIDATED CAPITAL RATIO" means, with respect to Metromedia Fiber Network
as of any date, the ratio of (i) the aggregate consolidated amount of
Indebtedness of Metromedia Fiber Network and its Restricted Subsidiaries then
outstanding to (ii) the Consolidated Net Worth of Metromedia Fiber Network and
its Consolidated Subsidiaries as of such date.
"CONSOLIDATED CASH FLOW" means, with respect to Metromedia Fiber Network for
any period, the Consolidated Net Income of Metromedia Fiber Network 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 Metromedia Fiber Network and its
Consolidated Subsidiaries for such period, plus (ii) consolidated interest
expense of Metromedia Fiber Network and its Consolidated Subsidiaries for such
period,
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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 Metromedia Fiber Network 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 Metromedia Fiber Network shall be added to
Consolidated Net Income to compute Consolidated Cash Flow of Metromedia Fiber
Network only to the extent that a corresponding amount would be permitted at the
date of determination to be dividended to Metromedia Fiber Network 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 Metromedia Fiber
Network, as of any date, the ratio of (i) the aggregate consolidated amount of
Indebtedness of Metromedia Fiber Network and its Restricted Subsidiaries then
outstanding to (ii) the annualized Consolidated Cash Flow of Metromedia Fiber
Network and its Consolidated Subsidiaries for the most recently ended fiscal
quarter.
"CONSOLIDATED NET INCOME" means, with respect to Metromedia Fiber Network
for any period, the aggregate of the Net Income of Metromedia Fiber Network 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 Metromedia Fiber Network 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 Metromedia Fiber Network 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 Metromedia Fiber
Network 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,
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(iv) the equity of Metromedia Fiber Network 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 Metromedia
Fiber Network 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 Metromedia Fiber Network 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
Metromedia Fiber Network 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 Metromedia Fiber Network
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 Closing Date in the book value of any asset
owned by Metromedia Fiber Network or a Restricted Subsidiary that is a
Consolidated Subsidiary of Metromedia Fiber Network, (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 Metromedia Fiber Network,
together with any new directors whose election by such Board of Directors or
whose nomination for election by the shareholders of Metromedia Fiber Network
was approved by a vote of a majority of the directors of Metromedia Fiber
Network 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
Metromedia Fiber Network 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
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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 Metromedia
Fiber Network 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 Metromedia Fiber Network 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."
"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,.
"EXISTING ASSETS" means property, plant and equipment and other tangible
business assets existing as of the Closing Date used in a Telecommunications
Business of Metromedia Fiber Network, but does not include cash or Cash
Equivalents existing on the Closing 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 Metromedia Fiber Network and
its Restricted Subsidiaries in existence on the Closing Date, until such amounts
are repaid.
"FOREIGN SUBSIDIARY" means any Restricted Subsidiary of Metromedia Fiber
Network 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 Metromedia Fiber Network'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 Closing Date.
"GERMAN JOINT VENTURE" means the Person(s) formed or organized to engineer,
develop and construct 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
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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
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 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 Metromedia Fiber Network 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 Metromedia Fiber Network or such Restricted
Subsidiary, Metromedia Fiber Network 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 and Restricted Payments."
"INTERNATIONAL OPTICAL NETWORK" means International Optical Network, L.L.C.,
a Delaware limited liability company.
"ISSUE DATE" means the date of first issuance of the initial 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.
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"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 Metromedia Fiber Network 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 Metromedia
Fiber Network that were issued for cash on or after the Closing Date, the amount
of cash originally received by Metromedia Fiber Network 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 Metromedia Fiber Network, of income, franchise,
sales and other applicable federal, state, provincial, foreign and local taxes
required to be paid or accrued as a liability by Metromedia Fiber Network 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 Metromedia
Fiber Network 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
Metromedia Fiber Network 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 Metromedia Fiber Network.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers.
"PARI PASSU INDEBTEDNESS" means Indebtedness of Metromedia Fiber Network
ranking PARI PASSU in right of payment with the notes.
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"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 Metromedia Fiber Network's Amended and Restated Certificate
of Incorporation.
"PERMITTED INVESTMENTS" means (a) any Investment in Metromedia Fiber Network
or in a Consolidated Subsidiary of Metromedia Fiber Network that is engaged
entirely or substantially entirely in a Telecommunications Business; (b) any
Investment in Cash Equivalents; and (c) any Investment by Metromedia Fiber
Network or any of its Restricted Subsidiaries in a Person, if as a result of
such Investment (i) such Person becomes a Consolidated Subsidiary of Metromedia
Fiber Network 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, Metromedia Fiber Network or a Consolidated
Subsidiary of Metromedia Fiber Network 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 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 Metromedia Fiber Network 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 Metromedia Fiber Network 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
Metromedia Fiber Network or such Restricted Subsidiary; (iv) Liens on property
existing at the time of acquisition thereof by Metromedia Fiber Network 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 Closing 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 Metromedia Fiber Network 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 Metromedia Fiber Network or such
Restricted Subsidiary.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of Metromedia
Fiber Network 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 Metromedia Fiber Network 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 Metromedia
Fiber Network 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
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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 Metromedia Fiber Network 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
Metromedia Fiber Network 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 Metromedia
Fiber Network or any Restricted Subsidiary, in the case of Indebtedness incurred
by Metromedia Fiber Network, 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 Metromedia Fiber Network.
"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 Securities 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.
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"SUBORDINATED INDEBTEDNESS" means Indebtedness of Metromedia Fiber Network
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; PROVIDED, THAT, the
determination of what constitutes a Telecommunications Business shall be made in
good faith by the Board of Directors of Metromedia Fiber Network.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of Metromedia Fiber
Network 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 Metromedia
Fiber Network 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 Metromedia Fiber Network 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 and Restricted
Payments." The Board of Directors of Metromedia Fiber Network 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 Metromedia Fiber Network 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
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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.
BOOK-ENTRY, DELIVERY AND FORM
Except as described below, we will initially issue the exchange notes in the
form of one or more registered exchange notes in global form without coupons. We
will deposit each global note on the date of the closing of the Exchange Offer
with, or on behalf of, The Depository Trust Company in New York, New York, and
register the exchange notes in the name of The Depository Trust Company or its
nominee, or will leave such notes in the custody of the trustee.
DEPOSITORY PROCEDURES
We are providing you with the following description of the operations and
procedures of The Depository Trust Company, Euroclear and Cedel solely as a
matter of convenience. These operations and procedures are solely within the
control of the respective settlement systems and are subject to change by them
from time to time. We take no responsibility for these operations and procedures
and urge you to contact the system or their participants directly to discuss
these matters.
The Depository Trust Company has advised us that it is a limited-purpose
trust company created to hold securities for its participating organizations,
and to facilitate the clearance and settlement of transactions in those
securities between direct participants through electronic book-entry changes in
accounts of participants. The direct participants include securities brokers and
dealers, including the initial purchasers, banks, trust companies, clearing
corporations and certain other organizations, including Euroclear and Cedel.
Access to The Depository Trust Company's system is also available to other
entities that clear through or maintain a direct or indirect, custodial
relationship with a direct participant. The Depository Trust Company may hold
securities beneficially owned by other persons only through the direct or
indirect participants and such other persons' ownership interest and transfer of
ownership interest will be recorded only on the records of the direct and/or
indirect participant, and not on the records maintained by The Depository Trust
Company.
The Depository Trust Company has also advised us that, pursuant to its
procedures, (i) upon deposit of the global notes, The Depository Trust Company
will credit the accounts of the direct participants with an interest in the
global notes, and (ii) The Depository Trust Company will maintain records of the
ownership interests of these direct participants in the global notes and the
transfer of ownership interests by and between direct participants. The
Depository Trust Company will not maintain records of the ownership interests
of, or the transfer of ownership interests by and between, indirect participants
or other owners of beneficial interests in the global notes. Direct and indirect
participants must maintain their own records of ownership interests of, and the
transfer of ownership interests by and between, indirect participants and other
owners of beneficial interests in the global notes.
Investors in the global notes may hold their interests in these notes
directly through The Depository Trust Company if they are direct participants in
The Depository Trust Company or indirectly through organizations, including
Euroclear and Cedel, that are direct participants in The Depository Trust
Company. Euroclear and Cedel will hold interests in the global notes on behalf
of their participants through customers' securities accounts in their respective
names on the books of their respective depositories, which are Morgan Guaranty
Trust Company of New York, Brussels office, as
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operator of Euroclear, and Citibank, N.A., as operator of Cedel. All interests
in global notes, including those held through Euroclear or Cedel, may be subject
to the procedures and requirements of The Depository Trust Company. Interests
held through Euroclear or Cedel may also be subject to the procedures and
requirements of these systems.
The laws of some states require that certain persons may take physical
delivery in definitive, certificated form, of securities that they own. This may
limit or curtail the ability to transfer beneficial interests in a global note
to these persons. Because The Depository Trust Company can act only on behalf of
direct participants, which in turn act on behalf of indirect participants and
others, the ability of a person having a beneficial interest in a global note to
pledge this interest to persons or entities that are not direct participants in
The Depository Trust Company, or to otherwise take actions in respect of this
interest, may be affected by the lack of physical certificates evidencing this
interest.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
HOLDERS OF THE NOTES UNDER THE INDENTURE FOR ANY PURPOSE.
Payments with respect to the principal of, premium, if any, and interest on,
any exchange notes represented by a global note registered in the name of The
Depository Trust Company or its nominee on the applicable record date will be
payable by the trustee to or at the direction of The Depository Trust Company or
its nominee in its capacity as the registered holder of the global note
representing the exchange notes under the indenture. Under the terms of the
indenture, we and the trustee will treat the persons in whose names the notes
are registered, including notes represented by global notes, as the owners
thereof for the purpose of receiving payments and for any and all other purposes
whatsoever. Payments in respect of the principal, premium, liquidated damages,
if any, and interest on global notes registered in the name of The Depository
Trust Company or its nominee will be payable by the trustee to The Depository
Trust Company or its nominee as the registered holder under the indenture.
Consequently, none of us, the trustee or any of our agents, or the trustee's
agents has or will have any responsibility or liability for (i) any aspect of
The Depository Trust Company's records or any direct participant's or indirect
participant's records relating to or payments made on account of beneficial
ownership interests in the global notes or for maintaining, supervising or
reviewing any of The Depository Trust Company's records or any direct or
indirect participant's records relating to the beneficial ownership interests in
any global note or (ii) any other matter relating to the actions and practices
of The Depository Trust Company or any of its direct or indirect participants.
The Depository Trust Company has advised us that its current practice, upon
receipt of any payment in respect of securities such as the notes, including
principal and interest, is to credit the accounts of the relevant participants
with the payment on the payment date, in amounts proportionate to their
respective holdings in the principal amount of beneficial interest in the
relevant security as shown on the records of The Depository Trust Company,
unless The Depository Trust Company has reason to believe it will not receive
payment on the payment date. Payments by the direct and indirect participants to
the beneficial owners of interests in the global note will be governed by
standing instructions and customary practice and will be the responsibility of
the direct or indirect participants, as the case may be, and will not be the
responsibility of The Depository Trust Company, the trustee or us.
None of us or the trustee will be liable for any delay by The Depository
Trust Company or any direct or indirect participant in identifying the
beneficial owners of the related exchange notes and we and the trustee may
conclusively rely on, and will be protected in relying on, instructions from The
Depository Trust Company for all purposes, including with respect to the
registration and delivery, and the respective principal amounts, of the exchange
notes.
Cross-market transfers between the participants in The Depository Trust
Company, on the one hand, and Euroclear or Cedel participants, on the other
hand, will be effected through The Depository
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Trust Company in accordance with The Depository Trust Company's rules on behalf
of Euroclear or Cedel, as the case may be, by its respective depositary.
However, these cross market transactions will require delivery of instructions
to Euroclear or Cedel, 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 Cedel, 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 note in The Depository
Trust Company and making or receiving payment in accordance with normal
procedures for same-day funds settlement applicable to The Depository Trust
Company. Euroclear participants and Cedel participants may not deliver
instructions directly to the depositories for Euroclear or Cedel.
The Depository Trust Company has advised us that it will take any action
permitted to be taken by a holder of notes only at the direction of one or more
participants to whose account The Depository Trust Company has credited the
interests in the global notes 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 with respect to the notes, The Depository Trust Company reserves the
right to exchange the global notes for legended notes in certificated form, and
to distribute such notes to its participants.
Although The Depository Trust Company, Euroclear and Cedel have agreed to
the foregoing procedures to facilitate transfers of interests in the Regulation
S global notes and in the global notes among participants in The Depository
Trust Company, Euroclear and Cedel, they are under no obligation to perform or
to continue to perform these procedures, and these procedures may be
discontinued at any time. None of us, the trustee or any of our or the trustee's
respective agents will have any responsibility for the performance by The
Depository Trust Company, Euroclear or Cedel or their respective participants of
their respective obligations under the rules and procedures governing their
operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A global note is exchangeable for definitive notes in registered
certificated form if:
- The Depository Trust Company notifies us that it is unwilling or unable to
continue as depository for the global notes and we fail to appoint a
successor depository within 90 days, or
- The Depository Trust Company ceases to be a clearing agency registered
under the Securities Exchange Act of 1934, or
- we elect to cause the issuance of the certificated notes upon a notice to
the trustee, or
- a default or event of default under the notes has occurred and is
continuing, or
- such a request is made but only upon prior written notice given to the
trustee by or on behalf of The Depository Trust Company in accordance with
the indenture.
In all cases, certificated notes delivered in exchange for any global note
or beneficial interests in a global note will be registered in the names, and
issued in any approved denominations, requested by or on behalf of the
depositary, in accordance with its customary procedures.
EXCHANGE OF CERTIFICATED NOTES FOR BOOK-ENTRY NOTES
Notes issued in certificated form may not be exchanged for beneficial
interests in any global note unless the transferor first delivers to the trustee
a written certificate, in the form provided in the indenture, to the effect that
the transfer will comply with the appropriate transfer restrictions applicable
to these notes.
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SAME DAY SETTLEMENT AND PAYMENT
The indenture requires that payments in respect of the notes represented by
the global notes, including principal, premium, if any, and interest, be made by
wire transfer of immediately available funds to the accounts specified by the
holder of the global notes. With respect to notes in certificated form, we will
make all payments of principal, premium, if any, and interest on the notes at
our office or agency maintained for such purpose within the city and state of
New York, initially the office of the paying agent maintained for such purpose,
or, at our option, by check mailed to the holders thereof at their respective
addresses set forth in the register of holders of notes. However, we are
required to make all payments of principal, premium, if any, and interest on
notes in certificated form the holders of which have given us wire transfer
instructions, by wire transfer of immediately available funds to the accounts
specified by the holders thereof.
The notes represented by the global notes are expected to be eligible to
trade in The Depository Trust Company's Same-Day Funds Settlement System, and
any permitted secondary market trading activity in such notes will, therefore,
be required by The Depository Trust Company to be settled in immediately
available funds. We expect that secondary trading in any certificated notes will
also be settled in immediately available funds. Transfers between participants
in The Depository Trust Company will be effected in accordance with The
Depository Trust Company's procedures, and will be settled in same day funds,
and transfers between participants in Euroclear and Cedel will be effected in
the ordinary way in accordance with their respective rules and operating
procedures.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a global note from a direct or
indirect participant in The Depository Trust Company will be credited, and any
such crediting will be reported to the relevant Euroclear or Cedel participant,
during the securities settlement processing day, which must be a business day
for Euroclear and Cedel, immediately following the settlement date of The
Depository Trust Company. The Depository Trust Company has advised us that cash
received in Euroclear or Cedel as a result of sales of interests in a global
note by or through a Euroclear or Cedel participant to a participant in The
Depository Trust Company will be received with value on the settlement date of
The Depository Trust Company but will be available in the relevant Euroclear or
Cedel cash account only as of the business day for Euroclear or Cedel following
The Depository Trust Company's settlement date.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following discussion is a summary of United States federal income and
estate tax considerations that may be relevant to the exchange of initial notes
for exchange notes pursuant to the exchange offer and to the purchase, ownership
and disposition of the exchange notes. This summary does not purport to be a
complete analysis of all of the potential United States federal income and
estate tax considerations relating to the purchase, ownership and disposition of
the exchange notes and generally does not address any other taxes that might be
applicable to a holder of the exchange notes. In the opinion of Paul, Weiss,
Rifkind, Wharton & Garrison, special United States tax counsel to Metromedia
Fiber Network, the discussion accurately reflects the material United States
federal income tax consequences to U.S. and non-U.S. Holders of the consummation
of the exchange offer and the ownership and disposition of the exchange notes.
We cannot assure you that the United States Internal Revenue Service will take a
similar view of such consequences. Further, the discussion does not address all
aspects of taxation that may be relevant to particular holders of initial notes
or exchange notes 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 the initial notes or exchange 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
initial notes or exchange notes are held as capital assets within the meaning of
section 1221 of the Internal Revenue Code of 1986.
The discussion of the United States federal income and estate tax
considerations below is based on currently existing provisions of the Code, the
applicable Treasury regulations promulgated and proposed thereunder, judicial
decisions, and administrative interpretations, all of which are subject to
change, possibly on a retroactive basis. Because individual circumstances may
differ, 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 an
exchange note who or which is for United States federal income tax purposes (1)
a citizen or resident of the United States, (2) a corporation, partnership or
other entity created or organized in or under the laws of the United States or
of any political subdivision thereof, (3) an estate the income of which is
subject to United States federal income taxation regardless of its source or (4)
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.
The term also includes certain former citizens of the United States whose income
and gain on the exchange notes will be subject to United States taxation. As
used herein, the term non-U.S. holder means a beneficial owner of an exchange
note that is not a U.S. holder.
FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of initial notes for exchange notes pursuant to the exchange
offer will not be treated as an exchange or otherwise as a taxable event to
holders. Consequently, (1) no gain or loss will be realized by a holder upon
receipt of an exchange note, (2) the holding period of the exchange note will
include the holding period of the initial note exchanged therefor and (3) the
adjusted tax basis of the exchange note will be the same as the adjusted tax
basis of the initial note exchanged therefor immediately before the exchange.
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TAX CONSIDERATIONS FOR U.S. HOLDERS
PAYMENTS OF INTEREST
Interest on an exchange 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.
MARKET DISCOUNT AND BOND PREMIUM
If a U.S. holder purchases an exchange 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 exchange 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 exchange
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 exchange 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 exchange 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 Internal Revenue Service.
If a U.S. holder purchases an exchange note for an amount in excess of all
amounts payable on the exchange 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 exchange 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 Internal Revenue Service.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Upon the sale, exchange or retirement of a an exchange 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 exchange note. A U.S. holder's adjusted tax basis in an
exchange 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 exchange note received by such holder.
Subject to the discussion of market discount above, gain or loss realized on
the sale, exchange or retirement of an exchange note by a U.S. holder generally
will be capital gain or loss if the exchange 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.
TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
Generally, payments of principal or interest on the exchange notes by
Metromedia Fiber Network or any paying agent to a beneficial owner of an
exchange 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,
114
<PAGE>
(1) 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 Metromedia Fiber Network
entitled to vote, (2) such non-U.S. holder is not, for U.S. federal income tax
purposes, a controlled foreign corporation related to Metromedia Fiber Network
actually or constructively through stock ownership, (3) such non-U.S. holder is
not a bank receiving interest described in section 881(c)(3)(A) of the Code and
(4) either (a) the non-U.S. holder provides Metromedia Fiber Network or its
agent with an Internal Revenue Service 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 exchange note and provides a statement
to Metromedia Fiber Network or its agent signed under penalties of perjury in
which such organization, bank or financial institution certifies that such a
Form W-8 (or suitable substitute) 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 Metromedia Fiber Network 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 exchange notes. The non-U.S. holder must inform Metromedia Fiber Network or
its agent 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, 1999 provide alternative methods for satisfying the certification
requirements described in clause (4) above. These new regulations also will
require, in the case of exchange notes held by a foreign partnership, that (1)
the certification be provided by the partners rather than by the foreign
partnership and (2) the partnership provide certain information, including a
U.S. taxpayer identification number.
A non-U.S. holder of an exchange 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 exchange
note, unless (1) 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 (2) 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 an exchange note is
engaged in a trade or business in the United States and if interest on the
exchange note, or gain realized on the disposition of the exchange 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 Internal Revenue
Service Form 4224, or other form applicable under the new regulations, to the
payor.
An exchange note held by an individual non-U.S. holder who at the time of
death is not a United States citizen or resident of the United States, as
defined for United States federal estate tax purposes, will not be subject to
United States federal estate taxation as a result of such individual's death
unless (1) the individual owns, actually or constructively, 10% or more of the
combined voting power of all classes of stock of Metromedia Fiber Network
entitled to vote or (2) the interest on the exchange note is effectively
connected with the conduct by such individual of a trade or business in the
United States.
115
<PAGE>
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 exchange notes, unless the holder of the exchange note (1)
is a corporation or comes within certain other exempt categories and, when
required, demonstrates that fact or (2) 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 Metromedia Fiber Network or a paying agent on an exchange 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 an exchange
note to or through a non-United States office of a "broker" (as defined in
applicable Treasury regulations) that is (1) a United States person, (2) a
controlled foreign corporation for United States federal income tax purposes,
(3) 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 (4) after December 31, 1999, 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, 2000, backup withholding will not apply to any
payment of the proceeds from the sale of an exchange note made to or through a
foreign office of a broker. However, after December 31, 1999, backup withholding
might apply if the broker has actual knowledge that the payee is a U.S. holder.
Payments of the proceeds from the sale of an exchange 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 exchange 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 Internal Revenue Service.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX
ADVICE. ACCORDINGLY, YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR
TAX CONSEQUENCES TO YOU OF THE EXCHANGE OFFER AND OF PURCHASING, HOLDING AND
DISPOSING OF THE INITIAL NOTES OR THE EXCHANGE 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, 1999.
116
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives exchange notes for its own account pursuant
to the exchange offer in exchange for initial notes acquired by it as a result
of market making or other trading activities may be deemed to be an underwriter
within the meaning of the Securities Act and, therefore, must deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resales, offers to resell or other transfers of the exchange notes received by
it in the exchange offer. Accordingly, each such broker-dealer must acknowledge
that it will deliver a prospectus meeting the requirements of the Securities Act
in connection with any resale of these exchange notes. The letter of transmittal
states that by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
underwriter within the meaning of the Securities Act. This prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of exchange notes received in exchange for initial notes
where these initial notes were acquired as a result of market-making activities
or other trading activities. We have agreed that, starting on the consummation
of the exchange offer, and ending on the close of business 180 days after the
completion of the exchange offer, we will make this prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any
resale.
We will not receive any proceeds from any sale of exchange notes by
broker-dealers. Exchange notes received by broker-dealers for their own account
pursuant to the exchange offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the exchange notes or a combination of these methods
of resale, at market prices prevailing at the time of resale, at prices related
to these prevailing market prices or negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such exchange notes. Any
broker-dealer that resells exchange notes that were received by it for its own
account pursuant to the exchange offer and any broker or dealer that
participates in a distribution of these exchange notes may be deemed to be an
underwriter within the meaning of the Securities Act and any profit of any such
resale of exchange notes and any commissions or concessions received by any such
persons may be deemed to be underwriting compensation under the Securities Act.
The letter of transmittal states that by acknowledging that it will deliver and
by delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an underwriter within the meaning of the Securities Act.
For a period of 180 days after the completion of the exchange offer, we will
promptly send additional copies of this prospectus and any amendment or
supplement to this prospectus to any broker-dealer that requests these documents
in the letter of transmittal. We have agreed to pay all expenses incident to the
exchange offer, including the expenses of one counsel for the holders of the
notes, other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the notes, including any broker-dealers, against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, will pass upon
certain legal matters, including certain tax matters on our behalf, with respect
to the exchange notes.
117
<PAGE>
EXPERTS
The consolidated financial statements of Metromedia Fiber Network, Inc. at
December 31, 1997 and 1998 and for each of the three years in the period ended
December 31, 1998, appearing in this prospectus have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon appearing
elsewhere in this prospectus. Such financial statements are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
AVAILABLE INFORMATION
We have filed a registration statement on Form S-4 with the Securities and
Exchange Commission covering the exchange notes, and this prospectus is part of
our registration statement. For further information on Metromedia Fiber Network
and the exchange notes, you should refer to our registration statement and its
exhibits. This prospectus summarizes material provisions of contracts and other
documents that we refer you to. Since the prospectus may not contain all the
information that you may find important, you should review the full text of
these documents. We have included copies of these documents as exhibits to our
registration statement.
We are currently subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934. In addition, the indenture
requires that we file reports under the Securities Exchange Act of 1934 with the
Securities and Exchange Commission and provide those reports to the trustee and
holders of the notes. You can inspect and copy at prescribed rates the reports
and other information that we file with the Securities and Exchange Commission
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 also 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 exchange notes remain outstanding, we will furnish you as a holder of the
exchange notes and will, if permitted, file with the Securities and Exchange
Commission (1) 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 (2) 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. In addition, for so long as any of the
exchange notes remain outstanding, we have agreed to make available to any
prospective purchaser of the exchange notes or beneficial owner of the notes in
connection with any sale of these notes the information required by Rule 144
under the Securities Act.
118
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
The following documents and other materials, which we have filed with the
Securities and Exchange Commission, are incorporated in, and specifically made a
part of, this prospectus by this reference:
(1) Annual Report on Form 10-K for the fiscal year ended December 31, 1998; and
(2) The definitive Proxy Statement relating to our 1999 Annual Meeting of
Stockholders, which was filed on April 14, 1999.
In addition, all documents that we file with the Securities and Exchange
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934 after the date of this prospectus will be deemed to be
incorporated by reference into this prospectus and to be a part of this
prospectus from the date of filing of these documents with the Securities and
Exchange Commission. Any statement contained in this prospectus or in a document
incorporated or deemed to be incorporated by reference in this prospectus will
be deemed to be modified or superseded for purposes of this prospectus if a
statement contained in this prospectus 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 will not be deemed, except as so modified or superseded, to
constitute a part of this prospectus.
Statements contained in this prospectus or in any document incorporated by
reference in this prospectus as to the contents of any contract or other
document referred to herein or therein are complete in all material respects. In
each instance, where applicable, we refer you to the copy of the contract or
other document filed as an exhibit to the documents incorporated by reference,
each such statement being qualified in all respects by this reference.
This prospectus incorporates documents by reference that are not presented
in, or delivered with, this prospectus. Copies of these documents, other than
exhibits to documents that are not specifically incorporated by reference in
this prospectus, are available without charge to any person to whom this
prospectus 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.
119
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
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
for the years ended December 31, 1998, 1997 and 1996................................ F-6
Notes to Consolidated Financial Statements............................................ F-7
</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. 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.
/s/ Ernst & Young LLP
New York, New York
March 4, 1999
F-2
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
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; 180,000,000 shares authorized; 77,605,110 and
74,896,568 shares issued and outstanding, respectively................................ 776 749
Class B common stock, $.01 par value; 20,000,000 shares authorized; 16,884,636 shares
issued and outstanding................................................................ 169 169
Additional paid-in capital.............................................................. 198,806 191,845
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,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
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 $ (0.56) $ (0.29)
---------- ---------- ----------
---------- ---------- ----------
Net income per share, diluted................................................. $ 0.01 N/A N/A
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares outstanding, basic.......................... 93,495 47,447 35,858
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of shares outstanding, diluted........................ 109,762 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>
YEAR ENDED DECEMBER 31,
-----------------------------------
<S> <C> <C> <C>
1998 1997 1996
----------- ---------- ----------
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)
($000'S)
<TABLE>
<CAPTION>
SERIES A & B CLASS A
PREFERRED STOCK COMMON STOCK COMMON STOCK
-------------------- ---------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995............................ -- $ -- 24,960 $ 249 -- $ --
Issuance of common stock and Warrants for services
rendered.............................................. -- -- 10,652 106 -- --
Issuance of common stock and Warrants related to debt
Financing activities.................................. -- -- 3,435 34 -- --
Issuance of common stock in Connection with the exercise
of warrants........................................... -- -- 762 8 -- --
Sale of common stock and Warrants....................... -- -- 196 3 -- --
Sale of preferred stock with warrants................... 150 15 -- -- -- --
Net loss for the year................................... -- -- -- -- -- --
--------- --------- --------- ----------- ----------- ----------
Balance at December 31, 1996............................ 150 15 40,006 400 -- --
Issuance of common stock in Connection with the exercise
of warrants........................................... -- -- 608 6 -- --
Issuance of options to employees........................ -- -- -- -- -- --
Issuance of warrants in Connection with debt
extenstion............................................ -- -- -- -- -- --
Dividends on preferred stock............................ -- -- -- -- -- --
Repurchase and retirement of Series A preferred stock
and Warrants.......................................... (150) (15) -- -- -- --
Repurchase and retirement of Commons stock and
warrants.............................................. -- -- (2,354) (23) -- --
Sale of Series B preferred stock........................ 8 -- -- -- -- --
Net proceeds from Initial Public Offering............... -- -- -- -- 36,432 364
Conversion of Common Stock to Series A Common Stock..... -- -- (38,261) (383) 38,260 383
Conversion of Series B Preferred Stock to Series A & B
Common Stock.......................................... (8) -- -- -- 157 2
Sale of Series A Commons Stock for warrant.............. -- -- -- -- 48 --
Net loss for the year................................... -- -- -- -- -- --
--------- --------- --------- ----------- ----------- ----------
Balance at December 31, 1997............................ -- -- -- -- 74,897 748
Issuance of options to employees........................ -- -- -- -- -- --
Issuance of warrants in connection with settlement
agreement............................................. -- -- -- -- -- --
Issuance of common stock in connection with the exercise
of warrants........................................... -- -- -- -- 2,159 22
Issuance of common stock in connection with the exercise
of stock options...................................... -- -- -- -- 550 6
Net income for the year................................. -- -- -- -- -- --
Income tax benefit from exercises of employee stock
options............................................... -- -- -- -- -- --
--------- --------- --------- ----------- ----------- ----------
Balance at December 31, 1998............................ -- $ -- -- $ -- 77,606 $ 776
--------- --------- --------- ----------- ----------- ----------
--------- --------- --------- ----------- ----------- ----------
<CAPTION>
CLASS B
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- --------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995............................ -- $ -- $ (205) $ (5,381) (5,336)
Issuance of common stock and Warrants for services
rendered.............................................. -- -- 4,810 -- 4,916
Issuance of common stock and Warrants related to debt
Financing activities.................................. -- -- 1,738 -- 1,772
Issuance of common stock in Connection with the exercise
of warrants........................................... -- -- (8) -- --
Sale of common stock and Warrants....................... -- -- 121 -- 124
Sale of preferred stock with warrants................... -- -- 2,010 -- 2,025
Net loss for the year................................... -- -- -- (10,359) (10,359)
----------- --------- ------------- ------------ -------------
Balance at December 31, 1996............................ -- -- 8,467 (15,739) (6,857)
Issuance of common stock in Connection with the exercise
of warrants........................................... -- -- 4 -- 10
Issuance of options to employees........................ -- -- 19,218 -- 19,218
Issuance of warrants in Connection with debt
extenstion............................................ -- -- 220 -- 220
Dividends on preferred stock............................ -- -- -- (77) (77)
Repurchase and retirement of Series A preferred stock
and Warrants.......................................... -- -- (2,011) (13) (2,039)
Repurchase and retirement of Commons stock and
warrants.............................................. -- -- 18 (1,134) (1,139)
Sale of Series B preferred stock........................ -- -- 32,500 -- 32,500
Net proceeds from Initial Public Offering............... -- -- 133,514 -- 133,879
Conversion of Common Stock to Series A Common Stock..... -- -- -- -- --
Conversion of Series B Preferred Stock to Series A & B
Common Stock.......................................... 16,885 169 (171) -- --
Sale of Series A Commons Stock for warrant.............. -- -- 86 -- 86
Net loss for the year................................... -- -- -- (26,259) (26,259)
----------- --------- ------------- ------------ -------------
Balance at December 31, 1997............................ 16,885 169 191,845 (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........................................... -- -- 139 -- 161
Issuance of common stock in connection with the exercise
of stock options...................................... -- -- 867 -- 873
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............................ 16,885 $ 169 $ 198,806 $ (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)
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 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.
F-8
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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")
or enters into sales type leases for 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.
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 12,381,300 shares of the Company's common
F-9
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
NOTE 3: ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Trade accounts receivable.................................................. $ 560 $ 837
Costs and earnings in excess of billings................................... 30,134 --
Other...................................................................... 216 --
--------- ---------
$ 30,910 $ 837
--------- ---------
--------- ---------
</TABLE>
F-10
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
---------------------
<S> <C> <C>
1998 1997
---------- ---------
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,
--------------------
<S> <C> <C> <C>
1998 1997 USEFUL LIFE
--------- --------- -------------
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.
F-11
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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
207,883 shares of the Company's common stock at $0.006 per share through
February 1, 1999. In 1997 the Company repurchased and retired 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.
F-12
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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 36,432,000 shares of its Class A common stock, at an offering price of
$4 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 38,259,760 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 17,041,944 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 1,599,556 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 1,295,356 shares.
The Chairman thereafter assigned the option to the Company. On February 11,
1997, the Company exercised the option by payment of $500,000.
F-13
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 6,084,000 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
6,084,000 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.
In September 1996, the Company sold 43,736 shares of common stock to three
individuals for total proceeds of $23,500.
In August 1996, the Company issued 730,080 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 48,672 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 602,316 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 152,100 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 152,100 shares at $0.66 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
1,964,420 shares of its common stock. Management has estimated the value of the
1,964,420 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 33,613,300 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 17,041,944 shares of Class B common stock. Further,
on October 28,1997, a total of 157,308 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
F-14
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
($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 2,353,880 shares of the Company's common
stock and warrants to purchase 831,532 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.
STOCK WARRANTS
A. In 1996, the Company entered into an agreement with a customer for
exclusive usage rights for fibers on portions of 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 522,008 shares of common stock at $2.00 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 659,042 shares
of its common stock at $2.00 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, 782,016 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 377,208 shares of common stock at an exercise price
of $1.48. 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 237,436 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 2,676,668 shares of the
Company's common stock. In February 1997, this warrant was exchanged for a new
warrant to purchase 1,825,200 shares of the Company's common stock at $1.21 per
share. The new warrant expires on February 13, 2000. As of December 31, 1998,
none of the warrants have been exercised.
F-15
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
F. On December 13, 1996, the Company issued and sold to a private investor,
for an aggregate cash consideration of $2,025,000, (i) 600,000 shares of 10%
cumulative convertible preferred stock (the "Series A preferred stock") bearing
dividends at a rate of $.34 per share per annum, (ii) warrants to purchase
456,300 shares of Class A common stock at an exercise price of $1.24 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
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 456,300 to 912,600. 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 691,060 common shares for
all its warrants.
G. In June 1996, the Company granted 608,400 common stock purchase warrants
to the Company's legal counsel exercisable at $.02 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 2,228,050 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 12,380,944 shares of its Class A common stock. The
options have exercise prices between $0.49 and $1.91 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 4,000,000 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 2,450,000 shares of the Company's Class A
common stock were granted at an exercise price of $4.00 per share, the market
price at the date of grant. In 1998, options to purchase 1,700,000 shares of the
Company's Class A common stock were granted at exercise prices ranging from
$3.88 to $8.59 per share, the market price at the date of grant. Of these
grants, 557,500 were canceled and 117,500 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 10,000,000 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 3,459,000 shares of the Company's Class A common
stock were granted at exercise prices ranging from $7.28 to $26.50 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
F-16
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
The following table summarizes the stock option transactions for the two
years ended December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF OPTIONS EXERCISE PRICES
------------------ -------------------------------
<S> <C> <C> <C> <C>
Granted prior to December 31, 1997..................... 14,830,944 $ 0.49 to $ 4.00
------------------
Balance outstanding at December 31, 1997............... 14,830,944 0.49 to 4.00
------------------
Granted.............................................. 5,159,000 3.88 to 26.50
Excercised........................................... 550,024 0.49 to 7.47
Cancelled............................................ 567,500 0.49 to 8.59
------------------
Balance outstanding at December 31, 1998............... 18,872,420 0.49 to 26.50
------------------
------------------
Exercisable at:
December 31, 1997.................................... 12,241,172 0.49 to 1.91
------------------
------------------
December 31, 1998.................................... 12,440,920 0.49 to 4.00
------------------
------------------
</TABLE>
The following table summarizes information about stock option outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS GRANTED OPTIONS EXERCISABLE
----------------------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
YEAR OF RANGES OF OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
GRANT EXERCISE PRICES AT 12/31/98 LIFE (YEARS) PRICE AT 12/31/98 PRICE
- ----------- ------------------------------- ------------- ------------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997...... $ 0.49 to $ 4.00 13,798,420 8.40 $ 0.98 12,440,920 $ 0.65
1998...... 3.88 to 26.50 5,074,000 9.42 9.75 -- --
------------- --- ----- ------------ -----
18,872,420 8.67 $ 3.33 12,440,920 $ 0.65
------------- --- ----- ------------ -----
------------- --- ----- ------------ -----
</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,
----------------------
<S> <C> <C>
1998 1997
---------- ----------
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. 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
F-17
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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,
---------------------
<S> <C> <C>
1998 1997
--------- ----------
Pro forma net loss applicable to common stock............................ $ (864) $ (28,043)
Pro forma net loss per share applicable to common stock, basic........... $ (0.01) $ (0.59)
</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>
Total income tax expense (benefit) differed from the amounts computed by
applying the federal statutory income tax rate (34%) 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>
F-18
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 IRUs and sales type leases................. 5,599 573 --
Net operating loses......................................... -- 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 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.
F-19
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 15: RECONCILIATION OF EARNINGS PER SHARE (IN THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
<S> <C> <C> <C>
1998 1997 1996
---------- ---------- ----------
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....................................... 93,495 47,447 35,858
Net income (loss) per common share-basic.................. $ 0.01 $ (0.56) $ (0.29)
---------- ---------- ----------
---------- ---------- ----------
Weighted average number of common shares
outstanding--basic...................................... 93,495 47,447 35,858
Assuming conversion of warrants and options outstanding... 16,267 -- --
---------- ---------- ----------
Weighted average number of common shares
outstanding--diluted.................................... 109,762 47,447 35,858
---------- ---------- ----------
---------- ---------- ----------
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.
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.
F-20
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Approximate minimum payments under the aforementioned agreements are (in
thousands):
<TABLE>
<CAPTION>
FRANCHISE,
LICENSE AND
RIGHT-OF-WAY CAPITAL
AGREEMENTS LEASES OPERATING 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 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
F-21
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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) 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-22
<PAGE>
APPENDIX A
GLOSSARY
<TABLE>
<S> <C>
Asynchronous Transfer Mode...... An information transfer standard that is one of a general
class of packet technologies that relay traffic by way of
an address contained within the first five bytes of a
standard fifty-three-byte-long packet or cell. The
asynchronous transfer mode format can be used by many
different information systems, including local area
networks to deliver traffic at varying rates, permitting a
mix of voice, data and video (multimedia).
Fiber Optics.................... A technology in which light is used to transport
information from one point to another. Fiber optic cables
are thin filaments of glass through which light beams are
transmitted over long distances carrying enormous amounts
of data. Modulating light on thin strands of glass
produces major benefits in high-bandwidth, relatively low
cost, low power consumption, small space needs, total
insensitivity to electromagnetic interference and great
insensitivity to being bugged.
Frame Relay..................... A high-speed, data-packet switching service used to
transmit data between computers. Frame Relay supports data
units of variable lengths at access speeds ranging from 56
kilobits per second to 1.5 megabits per second. This
service is well-suited for connecting local area networks,
but is not presently well-suited for voice and video
applications due to the variable delays which can occur.
Frame Relay was designed to operate at high speeds on
modern fiber optic networks.
OC-3, OC-12, OC-48 and OC-192... OC, or Optical Carrier, is a measure of a synchronous
optical network transmission optical carrier level. The
number following the optical carrier designation is equal
to the corresponding number of DS-3s, e.g. OC-192 is equal
to 192 DS-3s.
Point of Presence............... The place where an IXC terminates an end user's long
distance lines just before those lines are connected to
the end-user's local phone company's lines or the
end-user's own direct hookup.
Synchronous Optical Network..... An electronics and network architecture for variable
bandwidth products which enables transmission of voice,
data and video multimedia at very high speeds. Synchronous
optical network ring architecture provides for virtually
instantaneous restoration of service in the event of a
fiber cut by automatically rerouting traffic in the
opposite direction around the ring.
</TABLE>
A-1
<PAGE>
METROMEDIA FIBER NETWORK, INC.
EXCHANGE OFFER FOR $650,000,000
OF ITS 10% SERIES A SENIOR NOTES DUE 2008
---------------------
PROSPECTUS
APRIL 23, 1999
---------------------
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, such 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 Metromedia Fiber Network since the date hereof or that the
information contained herein is correct as of any time subsequent to its date.
