<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 2000
REGISTRATION NO. 333- -
--------------------------------------------------------------------------------
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
METROMEDIA FIBER NETWORK, INC.
(Exact name of Registrant as specified in its charter)
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DELAWARE 4813 11-3168327
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
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360 HAMILTON AVENUE
WHITE PLAINS, NEW YORK 10601
914-421-6700
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
ARNOLD L. WADLER, ESQ.
EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
METROMEDIA FIBER NETWORK, INC.
C/O METROMEDIA COMPANY
ONE MEADOWLANDS PLAZA
EAST RUTHERFORD, NEW JERSEY 07073
201-531-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------------------
Copies to:
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DOUGLAS A. CIFU, ESQ. STEVEN J. TONSFELDT, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON JEFFREY Y. SUTO, ESQ.
1285 AVENUE OF THE AMERICAS VENTURE LAW GROUP
NEW YORK, NEW YORK 10019 2775 SAND HILL ROAD
212-373-3000 MENLO PARK, CALIFORNIA 94025
650-854-4488
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: As soon as
practicable after this Registration Statement becomes effective and all other
conditions to the merger, pursuant to the merger agreement described herein,
have been satisfied or waived.
--------------------------
If the securities being registered on this Form are being offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
CALCULATION OF REGISTRATION FEE
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<CAPTION>
TITLE OF EACH CLASS AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED (2) OFFERING PRICE PER SHARE AGGREGATE OFFERING PRICE (3) REGISTRATION FEE
<S> <C> <C> <C> <C>
Class A Common Stock, par
value $0.01 per share (1)... 62,500,000 N/A $19,270,562 $5,087.43
</TABLE>
(1) This Registration Statement relates to class A common stock, par value $0.01
per share, of the Registrant issuable to holders of capital stock of
SiteSmith, Inc. in connection with the merger described herein.
(2) Represents the maximum number of shares of class A common stock of the
Registrant, which may be issued to former stockholders of SiteSmith pursuant
to the merger.
(3) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended, and
calculated in accordance with Rule 457(f) under said Securities Act.
Pursuant to Rule 457(f)(2), the proposed maximum offering price of the
Registrant's class A common stock was calculated based on book value of the
shares of SiteSmith common stock as of September 30, 2000, the latest
practicable date prior to the date of filing this Registration Statement.
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
[LOGO]
METROMEDIA FIBER NETWORK, INC.
CLASS A COMMON STOCK, PAR VALUE $0.01 PER SHARE
[LOGO]
INFORMATION STATEMENT
SITESMITH, INC.
This information statement/prospectus is being furnished to holders of
shares of common stock, par value $0.0001 per share, and preferred stock, par
value $0.0001 per share, of SiteSmith, Inc. This information
statement/prospectus relates to the solicitation by the SiteSmith board of
directors of written consents.
In the written consents, you will be asked to approve and adopt a merger
agreement providing for a merger in which SiteSmith will become a wholly owned
subsidiary of Metromedia Fiber Network, Inc.
If the merger is completed, you will receive shares of Metromedia Fiber
class A common stock in exchange for your shares of SiteSmith common stock and
preferred stock. Metromedia Fiber class A common stock is quoted on the Nasdaq
National Market under the symbol "MFNX."
PLEASE PAY PARTICULAR ATTENTION TO THE "RISK FACTORS" SECTION BEGINNING ON
PAGE 11, WHICH DESCRIBES SOME OF THE RISKS THAT YOU SHOULD CONSIDER IN DECIDING
WHETHER TO VOTE IN FAVOR OF THE MERGER AGREEMENT AND THE MERGER.
NEITHER THE SEC NOR ANY STATE SECURITIES REGULATOR HAS APPROVED THE SHARES
OF METROMEDIA FIBER CLASS A COMMON STOCK TO BE ISSUED IN CONNECTION WITH THE
MERGER OR DETERMINED THAT THIS INFORMATION STATEMENT/PROSPECTUS IS ACCURATE OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This information statement/prospectus and the accompanying written consent
are first being mailed to SiteSmith stockholders on or about the date set forth
below.
Information Statement/Prospectus dated November , 2000
<PAGE>
[LOGO]
November , 2000
Dear SiteSmith Stockholder:
We are pleased to inform you of the proposed merger of SiteSmith, Inc. with
Aqueduct Acquisition Corp., a wholly-owned subsidiary of Metromedia Fiber
Network, Inc., with SiteSmith continuing as the surviving corporation. SiteSmith
will continue to operate after the merger as a subsidiary of Metromedia Fiber.
AFTER CAREFUL CONSIDERATION, SITESMITH'S BOARD OF DIRECTORS HAS DETERMINED THAT
THE MERGER IS FAIR TO AND IN THE BEST INTERESTS OF SITESMITH AND ITS
STOCKHOLDERS AND RECOMMENDS THAT YOU VOTE FOR THE ADOPTION OF THE MERGER
AGREEMENT.
In the merger, each share of SiteSmith's common stock and each share of
SiteSmith's series A, B and C preferred stock will be converted into the right
to receive a number of shares of Metromedia Fiber class A common stock based on
an exchange ratio that will depend on the average closing price of Metromedia
Fiber class A common stock during a twenty trading day period ending four
business days prior to the closing of the merger. You will not know the number
of shares that you will receive in the merger until three days before the
closing of the merger, which is expected to be in December 2000, but you can
call 408-987-6410 to receive that information at any time during that three day
period.
Metromedia Fiber's class A common stock is traded on the Nasdaq National
Market under the symbol "MFNX." As of November , 2000, the price of Metromedia
Fiber's class A common stock on the Nasdaq National Market was $ per share.
We are asking holders of SiteSmith capital stock to consent to the approval
and adoption of the merger agreement and related matters by executing the
enclosed written consent in lieu of a meeting. Prior to the mailing of this
information statement/prospectus, holders of more than a majority of the
outstanding shares of each of SiteSmith's common stock and series A, B and C
convertible preferred stock have agreed to execute written consents approving
the merger agreement. Therefore, adoption of the merger agreement is assured.
THIS INFORMATION STATEMENT/PROSPECTUS PROVIDES DETAILED INFORMATION ABOUT
METROMEDIA FIBER AND THE MERGER. PLEASE GIVE ALL THIS INFORMATION YOUR CAREFUL
ATTENTION. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE DISCUSSION IN THE
SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 11 OF THIS INFORMATION
STATEMENT/ PROSPECTUS.
Our board of directors is furnishing this document to you to provide you
with important information about the merger. You should read this information
statement/prospectus carefully prior to making any decision regarding the
adoption of the merger agreement or exercise of your appraisal rights. This
document is also a prospectus of Metromedia Fiber relating to the shares of
class A common stock to be issued in the merger.
Sincerely,
/S/ MARK F. SPAGNOLO
-----------------------------------------
Mark F. Spagnolo
PRESIDENT, CHIEF EXECUTIVE OFFICER
AND CHAIRMAN OF THE BOARD
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
QUESTIONS AND ANSWERS ABOUT THE PROPOSED MERGER............. 1
SUMMARY..................................................... 3
The Companies............................................. 3
The Merger................................................ 3
What You Will Receive in the Merger....................... 3
Ownership of Metromedia Fiber after the Merger............ 4
Metromedia Fiber's Reasons for the Merger................. 4
Recommendation of SiteSmith's Board of Directors;
SiteSmith's Reasons for the Merger...................... 4
Interests of Members of SiteSmith's Board of Directors and
Management in the Merger................................ 5
Security Ownership by SiteSmith's Management.............. 5
Stockholders' Consents.................................... 5
Written Consent........................................... 5
Dissenters' Rights of Appraisal........................... 5
Conditions to the Merger.................................. 6
Termination of the Merger Agreement....................... 6
Employment Agreements..................................... 6
Voting Agreement.......................................... 7
Escrow Agreement.......................................... 7
Income Tax Consequences of the Merger..................... 7
Regulatory Matters........................................ 7
COMPARATIVE PER SHARE INFORMATION........................... 8
COMPARATIVE PER SHARE MARKET PRICE INFORMATION.............. 9
Market Price Information for Metromedia Fiber............. 9
Market Price Information for SiteSmith.................... 10
DIVIDEND POLICY............................................. 10
RISK FACTORS................................................ 11
Risk Factors Related to the Merger........................ 11
Risk Factors Related to Metromedia Fiber's Business....... 13
Risks Related to the Construction of Metromedia Fiber's
Networks................................................ 17
Risks Related to Metromedia Fiber's Indebtedness.......... 18
Risks Related to the Regulation of the Telecommunications
Industry................................................ 19
Risks Related to Metromedia Fiber's Rights-of-Way......... 21
Risks Related to Metromedia Fiber's Corporate Structure... 21
Risk Related to Metromedia Fiber's Class A Common Stock... 22
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 23
THE MERGER.................................................. 25
What You Will Receive in the Merger....................... 25
Background of the Merger.................................. 25
Recommendation of SiteSmith Board of Directors;
SiteSmith's Reasons for the Merger...................... 27
Metromedia Fiber's Reasons for the Merger................. 28
Interests of SiteSmith's Officers and Directors in the
Merger.................................................. 28
Stock Exchange Listing.................................... 30
Appraisal Rights.......................................... 30
Federal Securities Laws Consequences...................... 31
Accounting Treatment...................................... 31
Regulatory Approvals...................................... 31
THE WRITTEN CONSENT OF SITESMITH STOCKHOLDERS............... 32
</TABLE>
i
<PAGE>
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PAGE
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THE MERGER AGREEMENT........................................ 34
Terms of the Merger....................................... 34
Exchange of Stock Certificates............................ 35
Representations and Warranties............................ 36
Covenants................................................. 38
No Solicitation of Transactions........................... 39
Indemnification........................................... 39
Conditions to the Merger.................................. 39
Termination............................................... 41
Termination Fees and Expenses............................. 41
Related Agreements........................................ 41
METROMEDIA FIBER SELECTED HISTORICAL FINANCIAL DATA......... 45
SITESMITH SELECTED HISTORICAL FINANCIAL INFORMATION......... 47
METROMEDIA FIBER UNAUDITED PRO FORMA CONDENSED COMBINING
FINANCIAL INFORMATION..................................... 48
BUSINESS OF METROMEDIA FIBER................................ 56
General................................................... 56
Build-Out of Networks..................................... 59
The Internet Service Exchange............................. 60
Internet Connectivity..................................... 60
Co-Location Services...................................... 60
Management Services and Tools............................. 61
Technology................................................ 61
Franchise, License and Related Agreements................. 62
Sales and Marketing....................................... 62
Competition............................................... 63
Regulation................................................ 64
Federal................................................... 64
State..................................................... 66
Local..................................................... 67
Federal Regulation of International Service............... 68
Regulation of International Operations.................... 68
The European Union........................................ 69
Austria................................................... 69
Belgium................................................... 70
France.................................................... 71
Germany................................................... 72
Italy..................................................... 73
The Netherlands........................................... 73
United Kingdom............................................ 74
Other Countries........................................... 75
Employees................................................. 75
Properties................................................ 75
Legal Proceedings......................................... 75
DESCRIPTION OF AQUEDUCT ACQUISITION CORP.................... 76
METROMEDIA FIBER MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS............. 77
General................................................... 77
Results of Operations..................................... 79
Liquidity and Capital Resources........................... 82
Quantitative and Qualitative Disclosures About Market
Risk.................................................... 84
</TABLE>
ii
<PAGE>
<TABLE>
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PAGE
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BUSINESS OF SITESMITH....................................... 85
Overview.................................................. 85
SiteSmith's Solution...................................... 85
SiteSmith's Services...................................... 86
Customers................................................. 88
Sales and Marketing....................................... 89
Alliances................................................. 89
Competition............................................... 90
Employees................................................. 90
Facilities................................................ 90
Intellectual Property Rights.............................. 90
Legal Proceedings......................................... 90
SITESMITH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 91
Liquidity and Capital Resources........................... 94
Recent Accounting Pronouncements.......................... 96
Quantitative and Qualitative Disclosures about Market
Risk.................................................... 96
INFORMATION ON OFFICERS AND DIRECTORS OF METROMEDIA FIBER... 97
Directors and Executive Officers.......................... 97
Directors of Metromedia Fiber............................. 97
Committees of the Board................................... 97
Compensation of Directors................................. 98
Directors of Metromedia Fiber............................. 99
Executive Officers of Metromedia Fiber.................... 100
Executive Compensation.................................... 101
Option/SAR Grants During the Year Ended December 31,
1999.................................................... 104
Aggregated Option Exercises in 1999 and Fiscal Year-End
Option and SAR Values................................... 104
Certain Relationships and Related Transactions............ 105
Certain Agreements Regarding Employment................... 106
Employment Agreements..................................... 106
1997 and 1998 Incentive Stock Plans....................... 109
Indemnification Agreements................................ 110
Compensation Committee Interlocks and Insider
Participation........................................... 111
Compensation Committee Report on Compensation............. 111
Base Salary............................................... 111
Annual Incentives......................................... 111
Long-Term Incentives...................................... 112
Chief Executive Officer Compensation...................... 112
Performance Graph......................................... 112
FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF SITESMITH
CAPITAL STOCK............................................. 113
General................................................... 113
Material Tax Consequences of the Merger................... 113
Backup Withholding........................................ 114
Reporting Requirements.................................... 114
DESCRIPTION OF METROMEDIA FIBER CAPITAL STOCK............... 115
Common Stock.............................................. 115
Preferred Stock........................................... 118
Certificate of Incorporation and By-laws.................. 118
Advance Notice Requirements for Stockholder Proposals and
Director Nominations.................................... 118
Dilution.................................................. 119
Section 203 of the Delaware General Corporation Law....... 119
</TABLE>
iii
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PAGE
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Limitations of Directors' Liability....................... 120
Transfer Agent............................................ 120
COMPARISON OF RIGHTS OF HOLDERS OF METROMEDIA FIBER CLASS A
COMMON STOCK AND SITESMITH STOCK.......................... 121
General................................................... 121
Comparison of Stockholders' Rights........................ 121
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF METROMEDIA
FIBER PRINCIPAL STOCKHOLDERS AND MANAGEMENT............... 125
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF SITESMITH
PRINCIPAL STOCKHOLDERS AND MANAGEMENT..................... 128
STOCKHOLDER PROPOSALS....................................... 130
LEGAL MATTERS............................................... 131
EXPERTS..................................................... 131
WHERE YOU CAN FIND MORE INFORMATION......................... 131
FINANCIAL STATEMENTS........................................ F-1
ANNEX INDEX
ANNEX A--Merger Agreement
ANNEX B--Escrow Agreement
ANNEX C--Voting Agreement
ANNEX D--Delaware General Corporation Law Section 262
</TABLE>
iv
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE PROPOSED MERGER
<TABLE>
<S> <C>
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: The companies are merging in order to combine SiteSmith's
comprehensive internet managed services with Metromedia
Fiber's worldwide fiber optic network and web hosting
facilities, to create a global end-to-end optical internet
infrastructure outsourcing solution, and to take advantage
of the resulting business synergies, including market
differentiation, cross-selling, enhanced brand equity,
greater combined resources and business diversification.
Q: HOW IS THIS TRANSACTION BEING STRUCTURED?
A: If all conditions to the merger are satisfied (or waived),
Aqueduct Acquisition Corp., a wholly owned subsidiary of
Metromedia Fiber, will be merged into SiteSmith. SiteSmith
will continue as the surviving corporation. Following the
merger, SiteSmith will be a wholly owned subsidiary of
Metromedia Fiber.
Q: WHAT CONSIDERATION HAS METROMEDIA FIBER AGREED TO PAY TO
SITESMITH STOCKHOLDERS?
A: Metromedia Fiber and SiteSmith have agreed that the
aggregate merger consideration will be paid in shares of
Metromedia Fiber class A common stock. The aggregate amount
of shares Metromedia Fiber class A common stock that
SiteSmith stockholders will be entitled to receive when the
merger becomes effective is based on the average closing
price of Metromedia Fiber class A common stock on the Nasdaq
National Market during the twenty trading day period ending
four business days prior to the closing of the merger:
- If the average closing price is greater than or equal
to $24.00 and less than or equal to $27.2727, then the
aggregate merger consideration will be the number of
shares obtained by dividing $1,500,000,000 by the
average closing price.
- If the average closing price is less than $24.00, then
the aggregate merger consideration will be 62,500,000
shares.
- If the average closing price is greater than $27.2727,
then the aggregate merger consideration will be
55,000,000 shares.
Q: WHAT WILL I RECEIVE IN EXCHANGE FOR MY SITESMITH STOCK?
A: When the merger becomes effective, each of your shares of
SiteSmith common stock will be converted into a number of
shares of Metromedia Fiber class A common stock equal to the
aggregate merger consideration divided by the total number
of shares of SiteSmith common stock on the date of
consummation of the merger on a diluted basis (i.e.,
assuming that all outstanding options, warrants, preferred
stock or other securities exercisable for or convertible
into SiteSmith common stock have been exercised or
converted). The holders of SiteSmith series A, B and C
preferred stock will receive the number of Metromedia Fiber
class A common stock that they would have received if those
holders had converted their preferred stock into SiteSmith
common stock immediately prior to the consummation of the
merger.
Q: WILL SITESMITH BE ABLE TO ISSUE ADDITIONAL CAPITAL STOCK
BEFORE THE MERGER BECOMES EFFECTIVE?
A: Yes. Under the merger agreement, SiteSmith may issue
additional shares of capital stock before the closing of the
merger to fund its working capital needs.
Q: WILL A PORTION OF THE METROMEDIA FIBER CLASS A COMMON STOCK
ISSUED IN THE MERGER BE HELD IN ESCROW?
A: Yes. 15% of the shares of Metromedia Fiber class A common
stock issued in the merger to the holders of SiteSmith
common stock and series A, B and C preferred stock will be
placed in escrow to indemnify Metromedia Fiber against any
breaches of the representations, warranties and covenants
contained in the merger agreement by SiteSmith. After
Metromedia Fiber files its Annual Report on Form 10-K for
the fiscal year ended December 31, 2000, one half of the
shares held in escrow will be released and distributed to
the former stockholders of SiteSmith and the balance of the
shares held in escrow will be released and distributed one
year after the closing of the merger.
Q: WILL THE SHARES OF METROMEDIA FIBER CLASS A COMMON STOCK
ISSUED IN THE MERGER BE LISTED ON THE NASDAQ NATIONAL
MARKET?
A: Yes. The shares of class A common stock of Metromedia Fiber
issued in the merger will be listed on the Nasdaq National
Market.
</TABLE>
1
<PAGE>
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Q: WILL I RECEIVE A DIVIDEND ON MY SHARES OF METROMEDIA FIBER
CLASS A COMMON STOCK AFTER THE MERGER?
A: Metromedia Fiber does not currently pay cash dividends on
its class A common stock and does not anticipate paying
dividends in the foreseeable future.
Q: WILL I RECOGNIZE GAIN OR LOSS IN CONNECTION WITH THE MERGER?
A: SiteSmith stockholders who exchange their shares of
SiteSmith capital stock solely for shares of Metromedia
Fiber class A common stock in the merger will not recognize
any gain or loss on the exchange for United States federal
income tax purposes, except with respect to the cash, if
any, received instead of fractional share interests of
Metromedia Fiber class A common stock. The merger will not
have any tax consequences for Metromedia Fiber stockholders.
To review the tax consequences to stockholders in greater
detail, see "Federal Income Tax Consequences to Holders of
SiteSmith Capital Stock."
Q: WHAT WILL MY TAX BASIS BE IN THE METROMEDIA FIBER CLASS A
COMMON STOCK I RECEIVE IN THE MERGER?
A: Your tax basis in your total shares of Metromedia Fiber
class A common stock you receive in the merger will equal
your current tax basis in your SiteSmith capital stock,
reduced by the amount of basis allocable to fractional
shares for which you will receive a cash payment.
Q: WILL I BE ABLE TO SELL THE SHARES OF METROMEDIA FIBER
CLASS A COMMON STOCK THAT I RECEIVE IN THE MERGER?
A: If you are an affiliate of SiteSmith, you will be subject to
the securities laws restrictions placed on the selling of
shares by affiliates and will be required to enter into an
agreement to ensure your compliance with the applicable
securities laws. Also, 15% of the shares of Metromedia Fiber
class A common stock issued in the merger will be placed
into escrow to satisfy indemnification claims that
Metromedia Fiber may have against SiteSmith. After
Metromedia Fiber files its Annual Report on Form 10-K for
the fiscal year ended December 31, 2000, one half of the
escrowed shares will be released to the former SiteSmith
stockholders and the balance of the escrowed shares are to
remain in escrow until one year after the closing of the
merger. Other than these restrictions, you will be able to
sell the shares of Metromedia Fiber class A common stock
that you receive in the merger.
Q: WHAT DO I NEED TO DO NOW?
A: We urge you to read this information statement/prospectus
carefully, including its annexes, and to consider how the
merger affects you. If you approve of the transactions
described in this information statement/prospectus, please
mail your signed written consent in the enclosed return
envelope as soon as possible to vote in favor of the merger
agreement and related matters.
Q: DO I HAVE APPRAISAL RIGHTS?
A: Yes. Under Delaware law, which governs the merger, you are
entitled to appraisal rights.
Q: WHAT DO I NEED TO DO TO GET MY METROMEDIA FIBER SHARES?
A: After the merger is completed, you will receive written
instructions for exchanging your SiteSmith stock
certificates for Metromedia Fiber stock certificates. You
should not send in your SiteSmith stock certificates now.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We are working toward completing the merger as quickly as
possible. We hope to complete the merger by December 2000.
Because the merger is subject to governmental approvals,
however, we cannot predict the exact timing of the closing.
Q: WHO CAN HELP ANSWER MY OTHER QUESTIONS?
A: If you have more questions about the merger or would like
additional copies, without charge, of this information
statement/prospectus, you should contact:
</TABLE>
<TABLE>
<S> <C> <C>
Kristin Wahl, Investor Relations
SiteSmith, Inc.
3283 Scott Blvd.
Santa Clara, California 95054
Tel: 408-987-6410
</TABLE>
2
<PAGE>
SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE
MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER, YOU SHOULD READ CAREFULLY THIS ENTIRE DOCUMENT, INCLUDING THE APPENDICES
AND THE OTHER DOCUMENTS REFERRED HERETO. SEE "WHERE YOU CAN FIND MORE
INFORMATION."
THE COMPANIES
- METROMEDIA FIBER NETWORK, INC.
360 Hamilton Avenue
White Plains, New York 10601
(914) 421-6700
Metromedia Fiber provides dedicated fiber optic infrastructure and high
performance internet connectivity for its communications intensive customers.
Metromedia Fiber is a facilities-based provider of end-to-end optical solutions
that offer virtually unlimited, unmetered bandwidth at a fixed cost to its
communications carrier, corporate and government customers in the United States
and Europe. Through its AboveNet Communications Inc. subsidiary, Metromedia
Fiber provides internet infrastructure to its customers. The combined company
facilitates the growth of e-commerce and advanced internet and communication
applications by delivering secure, reliable and scaleable optical networks and
IP services to internet content and service providers, communications carriers
and enterprise users worldwide. See "Business of Metromedia Fiber."
- SITESMITH, INC.
3283 Scott Blvd.
Santa Clara, California 95054
(408) 987-6400
SiteSmith is a provider of comprehensive, internet infrastructure management
services. Its services are designed to maximize the performance, reliability and
security of large-scale, complex internet sites. SiteSmith designs and
architects the infrastructure for its customers' internet operations, installs
the necessary hardware and software, recommends and establishes network
connectivity, and performs ongoing monitoring and security services. By relying
on SiteSmith to manage their internet operations, businesses can focus on their
core competencies.
SiteSmith offers its customers an outsourced internet infrastructure
management solution. SiteSmith's offerings consist of core services and premium
services. SiteSmith's core services include establishing and maintaining the
infrastructure for its customers' Internet operations. SiteSmith's premium
services currently include automated monitoring, security and network
redundancy.
SiteSmith's solution combines technical expertise with an emphasis on
maximizing the performance, reliability and security of its customers' internet
operations. SiteSmith has relationships with hardware, software, web hosting and
other internet infrastructure companies, including Cisco, Sun Microsystems,
StorageNetworks, Oracle and Metromedia Fiber's subsidiary, AboveNet
Communications Inc. See "Business of SiteSmith."
THE MERGER
WHAT YOU WILL RECEIVE IN THE MERGER
Each of your shares of SiteSmith common stock will be converted into a
number of shares of Metromedia Fiber class A common stock equal to the aggregate
merger consideration divided by the total number of shares of SiteSmith common
stock on the date of consummation of the merger on a diluted basis (i.e.,
assuming that all outstanding options, warrants, preferred stock or other
securities
3
<PAGE>
exercisable for or convertible into SiteSmith common stock have been exercised
or converted). The holders of SiteSmith series A, B and C preferred stock will
receive the number of Metromedia Fiber class A common stock that they would have
received if those holders had converted their preferred stock into SiteSmith
common stock immediately prior to the consummation of the merger.
The aggregate merger consideration will be based on the average closing
price of Metromedia Fiber class A common stock on the Nasdaq National Market
during the twenty trading day period ending four business days prior to the
closing of the merger, subject to the following conditions:
- If the average closing price is greater than or equal to $24.00 and less
than or equal to $27.2727, then the aggregate merger consideration will be
the number of shares obtained by dividing $1,500,000,000 by the average
closing price.
- If the average closing price is less than $24.00, then the aggregate
merger consideration will be 62,500,000 shares.
- If the average closing price is greater than $27.2727, then the aggregate
merger consideration will be 55,000,000 shares.
See "The Merger--What You Will Receive in the Merger." However, Metromedia
Fiber will not issue fractional shares of class A common stock. Instead, it will
give a cash payment. See "The Merger Agreement--Fractional Shares."
OWNERSHIP OF METROMEDIA FIBER AFTER THE MERGER
Once the merger is completed, the former SiteSmith stockholders will hold
approximately 10% to 11% of the Metromedia Fiber class A common stock. This
information is based on the number of outstanding shares of SiteSmith common and
preferred stock on October 9, 2000 and the number of outstanding shares of
Metromedia Fiber class A common stock on October 9, 2000, without taking into
account shares issuable upon exercise of stock options or warrants.
METROMEDIA FIBER'S REASONS FOR THE MERGER
Metromedia Fiber's board of directors determined that the merger fits
Metromedia Fiber's strategy of accelerating its internet services business.
Metromedia Fiber believes that the merger will enable the combined company to
have greater visibility and market penetration. See "The Merger--Metromedia
Fiber's Reasons for the Merger."
RECOMMENDATION OF SITESMITH'S BOARD OF DIRECTORS; SITESMITH'S REASONS FOR THE
MERGER
The SiteSmith board of directors has concluded that the proposal to adopt
the merger agreement is advisable and in the best interests of SiteSmith and its
stockholders and has approved and adopted the merger and the merger agreement.
Accordingly, the SiteSmith board of directors recommends that all SiteSmith
stockholders vote FOR adoption of the merger agreement, and the related matters,
by executing the written consent. In addition, the SiteSmith board of directors
recommends that (1) all SiteSmith preferred stockholders vote FOR the conversion
of the preferred stock into common stock, and (2) all SiteSmith preferred
stockholders, Marv Tseu, Robert Ryan and Dan Rasmussen vote FOR the termination
of SiteSmith's amended and restated investor rights agreement.
In the course of reaching its decision, SiteSmith's board of directors
considered various factors, including the strategic fit between Metromedia Fiber
and SiteSmith and the amount and form of consideration to be paid to SiteSmith
stockholders. See "The Merger--Recommendation of SiteSmith's Board of Directors;
SiteSmith's Reasons for the Merger."
4
<PAGE>
INTERESTS OF MEMBERS OF SITESMITH'S BOARD OF DIRECTORS AND MANAGEMENT IN THE
MERGER
Some SiteSmith directors and executive officers have interests in the merger
that may be different from, or in addition to, the interests of other SiteSmith
stockholders. These interests include employment agreements and stock options.
You should be aware of these interests because they may conflict with yours. See
"The Merger--Interests of Officers and Directors in the Merger."
SECURITY OWNERSHIP BY SITESMITH'S MANAGEMENT
As of November 3, 2000, the directors and executive officers of SiteSmith
and their affiliates beneficially owned an aggregate of 25,046,592 shares of
SiteSmith common stock, on an as converted basis. See "Security Ownership by
SiteSmith's Management."
STOCKHOLDERS' CONSENTS
Under applicable Delaware law and the charter documents of SiteSmith, the
adoption of the merger agreement requires the affirmative vote of a majority of
the SiteSmith common stock voting as a single class and a majority of the
SiteSmith common stock and SiteSmith preferred stock voting together as a single
class.
On October 9, 2000, the holders of a majority of the outstanding SiteSmith
common stock and a majority of the outstanding SiteSmith common stock and
SiteSmith preferred stock, taken as a whole, executed a voting agreement in
which they agreed to execute written consents approving the merger agreement.
Therefore, adoption of the merger agreement is assured. See "The Written Consent
of SiteSmith Stockholders--Voting Agreement."
However, your written consent approving the adoption of the merger agreement
and the escrow agreement, the appointment of Mark F. Spagnolo as escrow
representative and, in the case of SiteSmith preferred stockholders, the
conversion of the preferred stock into common stock and in the case of SiteSmith
preferred stockholders, Marv Tseu, Robert Ryan and Dan Rasmussen, the
termination of SiteSmith's amended and restated investor rights agreement,
remains important. See "The Written Consent of SiteSmith Stockholders--Purpose
of the Written Consent."
WRITTEN CONSENT
If you are a stockholder of SiteSmith as of , 2000 and if you
approve of the transactions described in this information statement/prospectus,
please fax to the indicated fax number, then mail your written consent in the
enclosed return envelope as soon as possible, and no later than December -,
2000. See "The Written Consent of SiteSmith Stockholders--Returning Written
Consents."
DISSENTERS' RIGHTS OF APPRAISAL
Under Delaware law, SiteSmith stockholders are entitled to appraisal rights,
subject to certain conditions discussed more fully elsewhere in this information
statement/prospectus. Appraisal rights entitle dissenting stockholders, under
certain conditions, to receive a valuation of their shares and a payment of that
value in cash. Failure to follow the steps required by law for perfecting
appraisal rights may lead to the loss of those rights, in which case the
dissenting stockholder will be treated in the same manner as other
non-dissenting stockholders. IN VIEW OF THE COMPLEXITY OF LAW RELATING TO
APPRAISAL RIGHTS, SITESMITH STOCKHOLDERS WHO ARE CONSIDERING OBJECTING TO THE
MERGER SHOULD CONSULT THEIR OWN LEGAL ADVISORS. See Annex D for a reproduction
of section 262 of the Delaware law relating to dissenters' rights. See "The
Merger--Appraisal Rights."
5
<PAGE>
CONDITIONS TO THE MERGER
The merger is subject to the satisfaction of various conditions, including:
- the adoption and approval of the merger agreement and the merger by the
SiteSmith stockholders;
- the authorization of the Nasdaq National Market listing of the shares of
Metromedia Fiber class A common stock to be issued in the merger;
- the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976 and obtaining of all
approvals and consents from governmental authorities that are necessary to
complete the merger;
- the registration statement on Form S-4 filed with the SEC, of which this
information statement/ prospectus is a part, being declared effective;
- no law, order, injunction or decree that prohibits, restrains or enjoins
consummation of the merger being enacted, issued, promulgated, enforced or
entered by, or be pending before, any court or governmental entity;
- Metromedia Fiber, the escrow representative and the escrow agent each
entering into the escrow agreement;
- the employment agreements entered into on October 9, 2000 with Mark F.
Spagnolo and Robert J. Ryan remaining in full force and effect; and
- stockholders holding no more than 5% of the outstanding capital stock of
SiteSmith having exercised or having given notice of their intent to
exercise dissenter's rights.
See "The Merger Agreement--Conditions to the Merger."
TERMINATION OF THE MERGER AGREEMENT
SiteSmith and Metromedia Fiber can agree to terminate the merger agreement
without completing the merger. Either SiteSmith or Metromedia Fiber can
terminate the merger agreement:
- if the merger is not completed before March 31, 2001 through no fault of
the party wishing to terminate the merger agreement;
- if a final, non appealable order, decree or injunction prevents the
consummation of the merger;
- if the SiteSmith stockholders fail to adopt and approve the merger
agreement; or
- if the other company has breached any of its material representations,
warranties, covenants or agreements and fails to cure that breach.
See "The Merger Agreement--Termination."
EMPLOYMENT AGREEMENTS
SPAGNOLO EMPLOYMENT AGREEMENT. Mark F. Spagnolo entered into an employment
agreement with Metromedia Fiber and SiteSmith on October 9, 2000, which will
become effective upon the closing of the merger. Under this employment
agreement, Mr. Spagnolo will serve as the Chief Executive Officer of SiteSmith
for an initial term ending September 30, 2003. Mr. Spagnolo's base salary will
be $350,000 per year. He will receive a bonus of $350,000 if he continues to be
employed by SiteSmith on June 30, 2001 and will be eligible for annual
discretionary bonuses equal to at least 100% of his base salary for subsequent
years. Mr. Spagnolo will be granted options to purchase 500,000 shares of
Metromedia Fiber class A common stock at the fair market value on the date of
the grant. Mr. Spagnolo has agreed
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<PAGE>
not to compete with Metromedia Fiber until termination of his employment, and if
he is terminated for cause or if he resigns without good reason, for one year
following termination of his employment.
RYAN EMPLOYMENT AGREEMENT. Robert J. Ryan entered into an employment
agreement with Metromedia Fiber and SiteSmith on October 9, 2000, which will
become effective upon consummation of the merger. Under this employment
agreement, Mr. Ryan will serve as the Senior Vice President of Operations of
SiteSmith for an initial term ending on September 30, 2002. Mr. Ryan's base
salary will be $225,000 per year. Also, beginning January 1, 2001, Mr. Ryan will
be eligible for annual discretionary bonuses equal to 40% of his base salary. He
will be granted options to purchase 200,000 shares of Metromedia Fiber class A
common stock at of the fair market value on the date of the grant. Mr. Ryan has
agreed not to compete with Metromedia Fiber until termination of his employment,
and if he is terminated for cause or if he resigns without good reason, for six
months following the termination of his employment agreement.
See "The Merger Agreement--Related Agreements."
VOTING AGREEMENT
On October 9, 2000, stockholders of SiteSmith holding more than a majority
of the outstanding voting power of SiteSmith's common stock and each class of
SiteSmith's preferred stock entered into a voting agreement under which they
agreed, among other things, to execute written consents or to vote in favor of
the merger agreement and the merger. See "The Merger Agreement--Related
Agreements."
ESCROW AGREEMENT
At the closing of the merger Metromedia Fiber and Mark F. Spagnolo, acting
on behalf of all SiteSmith stockholders will enter into an escrow agreement.
Under this agreement, the SiteSmith stockholders will agree to place in escrow
15% of the shares of class A common stock they will receive in the merger. The
escrowed shares will be released on the first anniversary of the closing date at
the latest. See "The Merger Agreement--Related Agreements."
INCOME TAX CONSEQUENCES OF THE MERGER
The merger is intended to be tax-free to holders of SiteSmith common stock
and preferred stock, except with respect to cash received instead of fractional
shares of Metromedia Fiber class A common stock. THE TAX CONSEQUENCES OF THE
MERGER TO YOU WILL DEPEND ON THE FACTS OF YOUR OWN SITUATION. YOU SHOULD CONSULT
YOUR TAX ADVISOR. See "Federal Income Tax Consequences to Holders of SiteSmith
Capital Stock."
REGULATORY MATTERS
Under the merger agreement, neither Metromedia Fiber nor SiteSmith is
required to complete the merger unless any antitrust law waiting period under
the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, has expired
or been terminated.
Under the Hart-Scott-Rodino Act of 1976, and the rules under that act, the
merger may not be completed unless the required 30-day waiting period has
expired or been terminated. On October 18, 2000, SiteSmith and Metromedia Fiber
filed premerger notifications and report forms under the HSR Act with the
Antitrust Division of the Department of Justice and the Federal Trade
Commission. The waiting period will expire on November 17, 2000, unless
extended. See "The Merger--Regulatory Approvals."
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<PAGE>
COMPARATIVE PER SHARE INFORMATION
You will find summarized below the per share information for SiteSmith and
Metromedia Fiber on a historical, pro forma and equivalent basis. The SiteSmith
equivalent pro forma share information assumes an exchange ratio of 1.2828
shares of Metromedia Fiber class A common stock for each share of SiteSmith
common stock.
You should read the data below in conjunction with Metromedia Fiber's
consolidated financial statements and notes and with SiteSmith's financial
statements and related notes included elsewhere in this prospectus.
The companies may have performed differently if they had actually been
combined during the periods presented. You should not rely on the pro forma
information as being indicative of either the historical results that the
combined entity would have had or the future results that it will experience
after the merger is completed.
<TABLE>
<CAPTION>
PERIOD FROM
YEAR ENDED SEPTEMBER 8, 1999
NINE MONTHS ENDED DECEMBER 31, (INCEPTION) THROUGH
SEPTEMBER 30, 2000 1999 DECEMBER 31, 1999
---------------------- ------------- -------------------
METROMEDIA SITESMITH METROMEDIA SITESMITH
---------- --------- ------------- -------------------
<S> <C> <C> <C> <C>
HISTORICAL PER SHARE DATA:
Income (loss per comon share)............... $(0.51) $(10.38) $(0.28) $(1.17)
Book value per common share at the end of
period.................................... $ 4.30 $ 1.16 $ 3.83 $ 0.26
</TABLE>
<TABLE>
<CAPTION>
METROMEDIA SITESMITH
PRO FORMA PRO FORMA
COMBINED EQUIVALENT
---------- ----------
<S> <C> <C>
PRO FORMA AND PRO FORMA EQUIVALENT PER SHARE DATA:
Loss per common share for the:
Year ended December 31, 1999.............................. $ (0.85) $(1.09)
Nine months ended September 30, 2000...................... $ (0.87) $(1.12)
Book value per common share at September 30, 2000........... $ 5.85 $ 7.50
</TABLE>
Neither Metromedia nor SiteSmith has paid any cash dividends in any of the
periods presented.
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<PAGE>
COMPARATIVE PER SHARE MARKET PRICE INFORMATION
MARKET PRICE INFORMATION FOR METROMEDIA FIBER
Metromedia Fiber class A common stock is traded on the Nasdaq National
Market under the symbol "MFNX." There is no established public market for
Metromedia Fiber class B common stock. Shares of Metromedia Fiber class B common
stock are not listed on any national exchange. The table below shows, for the
calendar quarters indicated, the high and low market prices for shares of
Metromedia Fiber class A common stock, all as reported on the Nasdaq National
Market. All the prices of Metromedia Fiber class A common stock set forth in the
table below have been adjusted to reflect the four two-for-one stock splits in
the form of a 100% stock dividend, completed on August 28, 1998, December 22,
1998, May 19, 1999 and April 17, 2000.
<TABLE>
<CAPTION>
METROMEDIA
FIBER CLASS A
COMMON STOCK
PRICE
----------------------------
YEAR HIGH LOW
---- ----------- -----------
<S> <C> <C>
1998
First quarter....... 2 5/8 1
Second quarter...... 2 15/16 1 5/8
Third quarter....... 4 7/16 2 5/8
Fourth quarter...... 8 11/16 3 1/8
1999
First quarter....... 14 8 3/8
Second quarter...... 23 3/4 13 11/16
Third quarter....... 20 1/8 11
Fourth quarter...... 24 9/16 12 1/8
2000
First quarter....... 50 9/16 22 13/32
Second quarter...... 42 1/16 24 1/2
Third quarter....... 43 22
Fourth quarter
(through
November 8)....... 23 7/8 15 5/16
</TABLE>
The following table shows the closing market price, as reported on the
Nasdaq National Market for shares of Metromedia Fiber class A common stock, and
the implied equivalent per share values for shares of SiteSmith common stock.
This information is provided as of October 9, 2000, the last trading day
before public announcement of the signing of the merger agreement, and as of
November 3, 2000, the latest practicable date prior to the printing of this
document. You should obtain current market quotations for Metromedia Fiber
class A common stock before deciding to exercise your appraisal.
<TABLE>
<CAPTION>
METROMEDIA SITESMITH
FIBER CLASS A COMMON
COMMON STOCK
STOCK EQUIVALENT
DATE PRICE VALUE
---- ------------- ----------
<S> <C> <C>
October 9, 2000......................................... 21 13/16 28
November 3, 2000........................................ 21 5/8 27 6/8
</TABLE>
As of November 3, 2000, there were approximately 568 holders of record of
Metromedia Fiber class A common stock and 5 holders of class B common stock.
Metromedia Fiber is aware that it has a substantial number of additional
stockholders who hold their shares through The Depositary Trust Company.
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<PAGE>
MARKET PRICE INFORMATION FOR SITESMITH
There is no established public trading market for the shares of SiteSmith's
capital stock. Shares of SiteSmith capital stock are not listed on any national
exchange.
As of November 3, 2000, SiteSmith had 16,675,563 shares of common stock,
7,200,000 shares of series A preferred stock, 8,610,861 shares of series B
preferred stock, and 4,717,372 shares of series C preferred stock outstanding.
As of November 3, 2000, there were approximately 153 holders of record of
SiteSmith common stock, 27 holders of record of Series A preferred stock, 52
holders of record of Series B preferred stock and 17 holders of record of
Series C preferred stock.
DIVIDEND POLICY
Neither Metromedia Fiber nor SiteSmith has ever declared or paid cash
dividends on its common stock. Each of Metromedia Fiber and SiteSmith expects to
retain its future earnings, if any, for use in the operation and expansion of
its business and does not anticipate paying any cash dividend in the foreseeable
future. Covenants in the indentures governing Metromedia Fiber's outstanding
debentures restrict the payment of cash dividends.
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<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION BELOW AS WELL AS ALL OTHER
INFORMATION PROVIDED TO YOU IN THIS DOCUMENT IN DECIDING WHETHER TO APPROVE THE
MERGER, INCLUDING INFORMATION IN THE SECTION OF THIS DOCUMENT ENTITLED "SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS."
RISK FACTORS RELATED TO THE MERGER
METROMEDIA FIBER MAY ENCOUNTER DIFFICULTIES IN THE INTEGRATION AND
DEVELOPMENT OF THE BUSINESS OF SITESMITH.
Metromedia Fiber may not be able to integrate and develop the businesses of
Metromedia Fiber and SiteSmith. For example, Metromedia Fiber may encounter
operational difficulties in the integration of the two companies. In addition,
commercial and technological advances resulting from the integration of
technologies of Metromedia Fiber and SiteSmith may not be achieved as
successfully or as rapidly as currently anticipated, if at all. The
consolidation of operations, technologies and marketing and distribution methods
and the technological integration of the SiteSmith and Metromedia Fiber networks
present significant managerial challenges. There can be no assurance that these
actions will be accomplished as successfully or as rapidly as currently
anticipated. Some of the factors contributing to the risks of integration faced
by Metromedia Fiber are:
- difficulties and expenses of integrating operations, technology and
personnel into Metromedia Fiber's operations while preserving the goodwill
of the SiteSmith businesses;
- the additional financial resources that may be needed to fund the
operations of SiteSmith;
- the potential disruption caused to the businesses of Metromedia Fiber and
SiteSmith by the need to dedicate management and other resources to
completing the merger transactions;
- the difficulty of creating and maintaining uniform standards, controls,
procedures and policies;
- Metromedia Fiber's inability to retain SiteSmith's customers;
- the ability of Metromedia Fiber's management to manage the substantial
expansion of Metromedia Fiber's employee base and the integration of teams
that have not previously worked together, while dealing with the potential
loss of key employees of SiteSmith;
- the impairment of relationships with employees and customers as a result
of changes in management; and
- the different geographic locations of the principal operations of
Metromedia Fiber and SiteSmith.
THE MARKET PRICE OF METROMEDIA FIBER CLASS A COMMON STOCK MAY DECLINE AS A
RESULT OF THE MERGER.
The market price of Metromedia Fiber's class A common stock may decline as a
result of the merger if:
- the integration of Metromedia Fiber and SiteSmith is unsuccessful;
- the perceived benefits of the merger are not achieved as rapidly or to the
extent anticipated by financial analysts or investors; or
- the effect of the merger on the combined entity's financial results is not
consistent with the expectations of financial analysts or investors.
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<PAGE>
THE INTERESTS OF MANAGEMENT MAY BE DIFFERENT FROM THOSE OF STOCKHOLDERS.
Some members of SiteSmith's management and board of directors, including
individuals who will be directors or executive officers of the surviving
corporation, have various interests in the merger that may be different from, or
in addition to, the interests of SiteSmith stockholders. In particular, Mark
Spagnolo and Robert Ryan have entered into post-merger employment agreements
with SiteSmith and Metromedia Fiber. See "The Merger--Interests of Members of
SiteSmith Board of Directors and Management in the Merger" for more information
concerning matters relating to the employment and compensation of the directors
and executive officers of SiteSmith.
IF THE MERGER FAILS TO QUALIFY AS A TAX-FREE REORGANIZATION YOU WILL
RECOGNIZE GAIN OR LOSS ON YOUR SITESMITH SHARES.
SiteSmith and Metromedia Fiber have structured the merger to qualify as a
tax-free reorganization under Section 368(a) of the Internal Revenue Code of
1986. Although the Internal Revenue Service has not provided a ruling on the
merger, SiteSmith and Metromedia Fiber will each obtain a legal opinion from
their respective counsel that the merger qualifies as a tax-free reorganization.
These opinions neither bind the IRS nor prevent the IRS from adopting a contrary
position. If the merger fails to qualify as a tax-free reorganization, you would
generally recognize gain or loss on each SiteSmith share surrendered in the
merger in the amount of the difference between your basis in such share and the
fair market value of the Metromedia Fiber common stock and other consideration
you receive in exchange for such SiteSmith share at the time of the merger.
A PORTION OF YOUR SHARES WILL BE HELD IN AN ESCROW ACCOUNT FOR A PERIOD OF
AT LEAST ONE YEAR.
Upon completion of the merger, 15% of the shares of Metromedia Fiber
class A common stock issued at the closing of the merger to the holders of
SiteSmith common stock and series A, B and C preferred stock will be delivered
to an escrow agent, on behalf of the holders of SiteSmith stock, as security for
breaches by SiteSmith of any of its representations, warranties, covenants or
agreements set forth in the merger agreement. One half of the escrowed shares
remaining in escrow after Metromedia Fiber files its Annual Report on Form 10-K
for the fiscal year ended December 31, 2000 will be released and distributed at
that time to former stockholders of SiteSmith and the balance of the escrowed
shares are to remain in an escrow account until one year after the closing of
the merger. If Metromedia Fiber successfully asserts a claim while the escrowed
shares remain in the escrow account, you may not receive all or part of these
escrowed shares.
THE ESCROW AGENT MAY NOT ACT IN THE MANNER YOU DESIRE.
The merger agreement provides that the escrow agent will act in certain
matters involving the shares of Metromedia Fiber class A common stock to be held
in escrow. The adoption and approval of the merger agreement and the merger by a
majority of the SiteSmith stockholders also effectively constitutes acceptance
by all SiteSmith stockholders of the escrow agent to act as such in accordance
with the merger agreement and the escrow agreement by which it is bound. The
escrow agent may not act in the manner you desire and any arbitration orders
required to be enforced by the escrow agent under the terms of the escrow
agreement could have the effect of reducing the consideration you ultimately
receive in the merger.
THE STOCKHOLDERS' ESCROW REPRESENTATIVE MAY NOT ACT IN THE MANNER YOU
DESIRE.
Mark Spagnolo will be appointed as the stockholders' escrow representative
to act in certain matters involving the shares of Metromedia Fiber class A
common stock to be held in escrow. As escrow representative, Mark Spagnolo will
have the right, among other things, to compromise and to settle claims made by
Metromedia Fiber against the escrowed shares. The escrow representative may
12
<PAGE>
not act in the manner you desire and decisions made by him could have the effect
of reducing the consideration you ultimately receive in the merger.
FAILURE TO COMPLETE THE MERGER WOULD NEGATIVELY IMPACT SITESMITH'S FUTURE
BUSINESS AND OPERATIONS.
If the merger is not completed for any reason, SiteSmith may be subject to a
number of material risks, including the following:
- if SiteSmith continues to incur substantial operating losses, it will need
to immediately and successfully establish new sources of financing, the
availability of which is uncertain;
- potential customers may defer purchases of SiteSmith's services; and
- employee turnover may increase.
The occurrence of any of these factors would likely result in serious harm
to SiteSmith's business, operating results and financial condition.
RISK FACTORS RELATED TO METROMEDIA FIBER'S BUSINESS
METROMEDIA FIBER MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT ITS BUSINESS
STRATEGY BECAUSE IT DEPENDS ON FACTORS BEYOND ITS CONTROL, WHICH COULD
ADVERSELY AFFECT ITS RESULTS OF OPERATIONS.
Metromedia Fiber's future largely depends on its ability to implement its
business strategy and proposed expansion in order to create new business and
revenue opportunities. Metromedia Fiber's results of operations will be
adversely affected if it cannot fully implement its business strategy.
Successful implementation depends on numerous factors beyond its 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.
METROMEDIA FIBER HAS A LIMITED HISTORY OF OPERATIONS.
You have limited historical financial information upon which to base your
evaluation of Metromedia Fiber's performance. Metromedia Fiber was formed in
April 1993 and has a limited operating history. Metromedia Fiber currently has a
limited number of customers and is still in the process of building many of its
networks. Accordingly, you must consider its prospects in light of the risks,
expenses and difficulties frequently encountered by companies in their early
stage of development.
METROMEDIA FIBER HAS INCURRED SIGNIFICANT NET LOSSES IN CONNECTION WITH THE
CONSTRUCTION OF ITS NETWORK AND THERE CAN BE NO ASSURANCE THAT METROMEDIA
FIBER WILL GENERATE NET INCOME OR THAT IT WILL SUSTAIN POSITIVE CASH FLOW IN
THE FUTURE.
Metromedia Fiber has incurred and expects to continue incurring losses while
it concentrates on the development and construction of its networks and until
its networks have established an adequate revenue-generating customer base. It
also expects to incur losses during the initial startup phases of any services
that it may provide. In addition, Metromedia Fiber cannot assure you that it
will succeed in establishing an adequate revenue base or that its services will
generate profitability.
As a result, Metromedia Fiber expects to continue experiencing net operating
losses for the foreseeable future. Continued losses may prevent Metromedia Fiber
from pursuing its strategies for growth and could cause it to be unable to meet
its debt service obligations, capital expenditure requirements or working
capital needs.
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<PAGE>
METROMEDIA FIBER CANNOT ASSURE YOU THAT A MARKET FOR ITS CURRENT OR FUTURE
SERVICES WILL DEVELOP.
The practice of leasing dark fiber, which is fiber optic cable without any
of the electronic or optronic equipment necessary to use the fiber for
transmission, is not widespread and Metromedia Fiber cannot assure you that the
market will develop or that it 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. Metromedia Fiber 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 it. If
Metromedia Fiber is unable to enter into contracts, comply with the terms of the
contracts or maintain relationships with these customers, its operations would
be materially and adversely affected. Metromedia Fiber 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. Metromedia Fiber will need to strengthen its
marketing efforts and increase its staff to handle future marketing and sales
requirements. If Metromedia Fiber fails to obtain significant, widespread
commercial and public acceptance of its networks and access to sufficient
buildings its visibility in the telecommunications market could be jeopardized.
Metromedia Fiber cannot assure you that it will be able to secure customers for
the commercial use of its proposed networks or access to sufficient buildings in
each market.
In addition, the market for Metromedia Fiber's co-location and internet
services is new and evolving. Metromedia Fiber cannot assure you that its
co-location and internet services will achieve widespread acceptance in this new
market. Further, the success of Metromedia Fiber's co-location and internet
services business depends in large part on growth in the use of the internet.
The growth of the internet is highly uncertain and depends on a variety of
factors.
Metromedia Fiber may expand the range of services that it offers. 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. Metromedia
Fiber cannot assure you that a market will develop for its new services, that
implementing these services will be technically or economically feasible, that
it can successfully develop or market them or that it can operate and maintain
its new services profitably.
SEVERAL OF METROMEDIA FIBER'S CUSTOMERS MAY TERMINATE THEIR AGREEMENTS WITH
IT OR INVOKE LIQUIDATED DAMAGES PROVISIONS IF METROMEDIA FIBER DOES NOT
PERFORM BY SPECIFIED TIMES.
Metromedia Fiber currently has some contracts to supply leased fiber
capacity which allow the lessee to terminate the contracts and/or provide for
liquidated damages if it does not supply the stated fiber capacity by a
specified time. Metromedia Fiber's ability to install and supply fiber at the
times required by its contracts is dependent on a number of factors, some of
which are beyond its control, including the ability of its subcontractors to
perform on time and state and local regulation. Termination of any of these
contracts or the invocation of liquidated damages provisions could adversely
affect Metromedia Fiber's operating results.
COMPETITORS OFFER SERVICES SIMILAR TO METROMEDIA FIBER'S IN ITS CURRENT OR
PLANNED MARKETS WHICH WOULD AFFECT ITS RESULTS OF OPERATIONS.
The telecommunications industry and the co-location and internet services
business are extremely competitive, particularly with respect to price and
service, which may adversely affect Metromedia Fiber's results of operations. A
significant increase in industry capacity or reduction in overall demand would
adversely affect Metromedia Fiber's ability to maintain or increase prices. In
the telecommunications industry, Metromedia Fiber competes against incumbent
local exchange carriers, which have historically provided local telephone
services and currently dominate their local
14
<PAGE>
telecommunications markets, and competing carriers in the local services market.
In addition to these carriers, several other potential competitors, such as
facilities-based communications service providers, cable television companies,
electric utilities, microwave carriers, satellite carriers, wireless telephone
system operators and large end-users with private networks, are capable of
offering, and in some cases offer, services similar to those offered by
Metromedia Fiber. Furthermore, several of these service providers, such as
wireless service providers, could build wireless networks more rapidly and at
lower cost than fiber optic networks. Additionally, the co-location and internet
services business is highly competitive due to a lack of barriers to entry and
high price sensitivity. Many of Metromedia Fiber's competitors have greater
financial, research and development and other resources than it does.
Some of Metromedia Fiber's principal competitors already own fiber optic
cables as part of their telecommunications networks. Accordingly, any of these
carriers, some of which already have franchise and other agreements with local
and state governments and substantially greater resources and more experience
than Metromedia Fiber, could directly compete with Metromedia Fiber 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. Metromedia Fiber's 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 Metromedia Fiber could enter into franchise and other agreements with local
and state governments and compete directly with it. Other companies may choose
to compete with Metromedia Fiber in its current or planned markets, including
Europe, by leasing fiber capacity, including dark fiber, to Metromedia Fiber's
targeted customers. This additional competition could materially and adversely
affect Metromedia Fiber's operations.
METROMEDIA FIBER DEPENDS ON A LIMITED NUMBER OF CUSTOMERS AND HAS A LONG
SALES CYCLE, AND AS A RESULT IS MORE VULNERABLE TO CHANGING ECONOMIC
CONDITIONS.
Metromedia Fiber is particularly dependent on a limited number of customers.
In addition, Metromedia Fiber's co-location and internet services business has a
long sales cycle. Metromedia Fiber is, therefore, more susceptible to the impact
of poor economic conditions than its competitors with a more balanced mix of
business.
METROMEDIA FIBER MAY EXPERIENCE RISKS AS A RESULT OF EXPANDING ITS NETWORKS
AND OPERATIONS INTO OTHER FOREIGN COUNTRIES, WHICH MAY ADVERSELY AFFECT ITS
RESULTS OF OPERATIONS.
Metromedia Fiber's strategy includes expanding its services to provide fiber
optic cable and developing regional internet service exchange facilities in
foreign countries. The following are risks Metromedia Fiber may experience as a
result of doing business in foreign countries in which it may expand its
networks:
- difficulties in staffing and managing its operations in foreign countries;
- longer payment cycles;
- problems in collecting accounts receivable;
- fluctuations in currency exchange rates;
- delays from customs brokers or government agencies encountered as a result
of exporting fiber from the United States to foreign countries in which
Metromedia Fiber may operate; and
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- potentially adverse consequences resulting from operating in multiple
countries, each with its own laws and regulations, including tax laws and
industry related regulations.
Metromedia Fiber cannot assure you that it will be successful in overcoming
these risks or any other problems arising because of expansion into foreign
countries.
METROMEDIA FIBER MAY NOT BE ABLE TO SUCCESSFULLY IDENTIFY, MANAGE AND
ASSIMILATE FUTURE ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES, WHICH
WOULD ADVERSELY AFFECT ITS RESULTS OF OPERATIONS.
Metromedia Fiber has in the past, and may in the future, acquire, make
investments in, or enter into strategic alliances, including joint ventures in
which it holds less than a majority interest, with companies that have customer
bases, switching capabilities, existing networks or other assets in Metromedia
Fiber's current markets or in areas into which it intends to expand its
networks. Any acquisitions, investments, strategic alliances or related efforts
will be accompanied by risks such as:
- the difficulty of identifying appropriate acquisition candidates;
- the difficulty of assimilating the operations of the respective entities;
- the potential disruption of Metromedia Fiber's pre-existing business;
- the potential inability to control joint ventures in which Metromedia
Fiber holds less than a majority interest;
- the inability of management to capitalize on the opportunities presented
by acquisitions, investments, strategic alliances or related efforts;
- the failure to successfully incorporate licensed or acquired technology
and rights into Metromedia Fiber's 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.
Metromedia Fiber cannot assure you that it will be successful in overcoming
these risks or any other problems encountered with such acquisitions,
investments, strategic alliances or related efforts.
IN THE TELECOMMUNICATIONS INDUSTRY, CONTINUED PRICING PRESSURES FROM
METROMEDIA FIBER'S COMPETITORS AND AN EXCESS OF NETWORK CAPACITY CONTINUE TO
CAUSE PRICES FOR ITS SERVICES TO DECLINE.
Metromedia Fiber anticipates that prices for its 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 Metromedia Fiber's networks;
- recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber; and
- strategic alliances or similar transactions, such as long distance
capacity purchasing alliances among regional Bell operating companies,
that increase the parties' purchasing power.
METROMEDIA FIBER'S BUSINESS DEPENDS ON A LIMITED NUMBER OF KEY PERSONNEL THE
LOSS OF WHOM COULD ADVERSELY AFFECT ITS BUSINESS.
Metromedia Fiber's business is managed by a small number of key management
and operating personnel. Metromedia Fiber believes that the success of its
business strategy and its ability to operate
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profitably depend on the continued employment of its senior management team led
by Stephen A. Garofalo, Chairman of the Board of Directors and Chief Executive
Officer. Metromedia Fiber's business and financial results could be materially
affected if Mr. Garofalo or other members of its senior management team became
unable or unwilling to continue in their present positions.
RISKS RELATED TO THE CONSTRUCTION OF METROMEDIA FIBER'S NETWORKS
METROMEDIA FIBER CANNOT ASSURE YOU THAT IT WILL SUCCESSFULLY COMPLETE THE
CONSTRUCTION OF ITS NETWORKS.
The construction of future networks and the addition of internet service
exchange facilities entail significant risks, including management's ability to
effectively control and manage these projects, shortages of materials or skilled
labor, unforeseen engineering, environmental or other regulatory or geological
problems, work stoppages, weather interference, floods and unanticipated cost
increases. The failure to obtain necessary licenses, permits and authorizations
could prevent or delay the completion of construction of all or part of
Metromedia Fiber's networks or increase completion costs. In addition,
Metromedia Fiber's establishment and maintenance of interconnections with other
network providers at various public and private points, often referred to as
"peering arrangements," is necessary for Metromedia Fiber to provide cost
efficient co-location and internet connectivity services. Metromedia Fiber
cannot assure you that the budgeted costs of its current and future projects
will not be exceeded or that these projects will commence operations within the
contemplated schedules, if at all.
METROMEDIA FIBER OBTAINS SOME OF THE KEY COMPONENTS USED IN ITS FIBER OPTIC
NETWORK FROM A SINGLE SOURCE OR A LIMITED GROUP OF SUPPLIERS, AND THE
PARTIAL OR COMPLETE LOSS OF ONE OF THESE SUPPLIERS COULD DISRUPT ITS
OPERATIONS AND RESULT IN A SUBSTANTIAL LOSS OF REVENUE.
Metromedia Fiber depends upon a small group of suppliers for some of the key
components and parts used in its network. In particular, Metromedia Fiber
purchases cable from Lucent, Lucent-Fitel and from Corning, and Metromedia Fiber
purchases fiber optic equipment from Nortel and Lucent. Any delay or extended
interruption in the supply of any of the key components, changes in the pricing
arrangements with its suppliers and manufacturers or delay in transitioning a
replacement supplier's product into its network could disrupt Metromedia Fiber's
operations.
METROMEDIA FIBER'S FIBER OPTIC NETWORK AND INTERNET SERVICE EXCHANGE
FACILITIES ARE VULNERABLE TO PHYSICAL DAMAGE, CATASTROPHIC OUTAGES, POWER
LOSS AND OTHER DISRUPTIONS BEYOND ITS CONTROL, AND THE OCCURRENCE OF ANY OF
THESE FAILURES COULD RESULT IN IMMEDIATE LOSS OF REVENUE, PAYMENT OF OUTAGE
CREDITS TO ITS CUSTOMERS AND, MORE IMPORTANTLY, THE LOSS OF ITS CUSTOMERS'
CONFIDENCE AND ITS BUSINESS REPUTATION.
Metromedia Fiber's success in marketing its services to its customers
requires that Metromedia Fiber provide high reliability, high bandwidth and a
secure network. Metromedia Fiber's network, facilities and the infrastructure
upon which it depends are subject to physical damage, power loss, capacity
limitations, software defects, breaches of security and other disruptions beyond
its control that may cause interruptions in service or reduced capacity for
customers. Its agreements with its customers typically provide for the payment
of outage related credits (a predetermined reduction or offset against its lease
rate when a customer's leased facility is non-operational and/or otherwise does
not meet certain operating parameters) or damages in the event of a disruption
in service. These credits or damages could be substantial and could
significantly decrease its net revenue. Significant or lengthy outages would
also undermine its customers' confidence in its fiber optic network and injure
Metromedia Fiber's business reputation.
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RISKS RELATED TO METROMEDIA FIBER'S INDEBTEDNESS
METROMEDIA FIBER HAS SUBSTANTIAL DEBT WHICH MAY LIMIT ITS ABILITY TO BORROW,
RESTRICT THE USE OF ITS CASH FLOWS AND CONSTRAIN ITS BUSINESS STRATEGY, AND
METROMEDIA FIBER MAY NOT BE ABLE TO MEET ITS DEBT OBLIGATIONS.
Metromedia Fiber has substantial debt and debt service requirements.
Metromedia Fiber currently has total debt of approximately $2.67 billion as of
September 30, 2000. Metromedia Fiber's substantial debt has important
consequences, including:
- its ability to borrow additional amounts for working capital, capital
expenditures or other purposes is limited;
- a substantial portion of its cash flow from operations is required to make
debt service payments; and
- its leverage could limit its ability to capitalize on significant business
opportunities and its flexibility to react to changes in general economic
conditions, competitive pressures and adverse changes in government
regulation.
Metromedia Fiber cannot assure you that its cash flow and capital resources
will be sufficient to repay its existing indebtedness and any indebtedness
incurred in the future, or that it will be successful in obtaining alternative
financing.
In the event that Metromedia Fiber is unable to repay its debts, it may be
forced to reduce or delay the completion or expansion of its networks, sell some
of its assets, obtain additional equity capital or refinance or restructure its
debt. If Metromedia Fiber is unable to meet its debt service obligations or
comply with its covenants, a default under its existing debt agreements would
result. To avoid a default, Metromedia Fiber may need waivers from third
parties, which might not be granted.
METROMEDIA FIBER MAY BE UNABLE TO RAISE THE ADDITIONAL FINANCING NECESSARY
TO COMPLETE THE CONSTRUCTION OF ITS NETWORKS, WHICH WOULD ADVERSELY AFFECT
ITS LONG-TERM BUSINESS STRATEGY.
Metromedia Fiber may need significant amounts of additional capital to
complete the build-out of its planned fiber optic communications networks, to
expand its network infrastructure, to build additional co-location facilities
and to meet its long-term business strategies, including expanding its networks
to additional cities and constructing its networks in Europe. If Metromedia
Fiber needs additional funds, its inability to raise them will have an adverse
effect on its operations. If Metromedia Fiber decides to raise additional funds
by incurring debt, it may become more leveraged and subject to additional or
more restrictive financial covenants and ratios. In addition, if Metromedia
Fiber issues equity securities or securities convertible or exchangeable into
its equity securities, current stockholders may face dilution.
Metromedia Fiber's ability to arrange financing and the cost of financing
depends upon many factors, including:
- general economic and capital markets conditions generally, and in
particular the non-investment grade debt market;
- conditions in the telecommunications and internet markets;
- regulatory developments;
- credit availability from banks or other lenders;
- investor confidence in the telecommunications and internet industries and
in Metromedia Fiber;
- the success of Metromedia Fiber's fiber optic communications network and
internet services; and
- provisions of tax and securities laws that are conducive to raising
capital.
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RISKS RELATED TO THE REGULATION OF THE TELECOMMUNICATIONS INDUSTRY
Existing and future government laws and regulations greatly influence how
Metromedia Fiber operates its business, its business strategy and ultimately its
viability. U.S. Federal and state telecommunications laws and the laws of
foreign countries in which Metromedia Fiber operates directly shape the
telecommunications market. Consequently, regulatory requirements and changes
could adversely affect Metromedia Fiber's operation and also influence the
market for the internet, web hosting and related services. However, Metromedia
Fiber cannot predict the future regulatory framework of its business.
U.S. LAWS MAY NEGATIVELY IMPACT OUR BUSINESS AND RESULTS OF OPERATIONS BY
REGULATING METROMEDIA FIBER'S OPERATIONS AND ITS CUSTOMERS' OPERATIONS.
U.S. Federal telecommunications law imposes legal requirements on common
carriers who engage in interstate or foreign communication by wire or radio, and
on telecommunications carriers. Should these regulations be applied to
Metromedia Fiber, they may have a material adverse impact on its business and
results of operation. If providing dark fiber facilities or related services
provided by Metromedia Fiber were deemed to be a telecommunications service,
then regulations, both Federal and state, applicable to telecommunications
carriers might apply to it. This could subject the revenues Metromedia Fiber
received from facility leases in interstate commerce to assessment by the
Federal Communications Commission Universal Service Fund and the offering of
those facilities or services would be subject to common carrier regulation. In
addition, several of Metromedia Fiber's customers and, in the case of Bell
Atlantic Corporation (doing business as Verizon Communications), one of its
shareholders, are local exchange carriers or long distance carriers, subject to
regulation by Federal Communications Commission. Metromedia Fiber's business may
be affected by regulations applicable to these telecommunications carriers. For
example, the Federal Communications Commission has recently taken steps, and may
take further steps, to reduce access charges, the fees paid by long distance
carriers to local exchange carriers for originating and terminating long
distance calls on the incumbent local exchange carriers' local networks, and to
give local exchange carriers greater flexibility in setting these charges. While
Metromedia Fiber cannot predict the precise effect reduction in access charge
will have on its operations, the reduction will likely make it more attractive
for long distance carriers to use local exchange carriers facilities, rather
than Metromedia Fiber's fiber optic telecommunications network. In addition, a
recent decision by the Federal Communications Commission to require unbundling
of incumbent local exchange carriers' dark fiber could decrease the demand for
Metromedia Fiber's dark fiber by allowing its potential customers to obtain dark
fiber from incumbent local exchange carriers at cost-based rates, and thereby
have an adverse effect on the results of its operations.
STATES' LEGISLATION AFFECTS METROMEDIA FIBER'S PRICING POLICIES AND ITS
COSTS.
Metromedia Fiber's offering of transmission services, which is different
from dark fiber capacity, may be subject to regulation in each state to the
extent that these services are offered for intrastate use, and this regulation
may have an adverse effect on the results of its operations. Metromedia Fiber
cannot assure you that these regulations, if any, as well as future regulatory,
judicial or legislative action will not have a material adverse effect on it. In
particular, state regulators have the authority to determine both the rates
Metromedia Fiber will pay to incumbent local exchange carriers for certain
interconnection arrangements such as physical co-location, and the prices that
incumbent local exchange carriers will be able to charge its potential customers
for services and facilities that compete with its services. Metromedia Fiber
will also incur costs in order to comply with regulatory requirements such as
the filing of tariffs, submission of periodic financial and operational reports
to regulators and payment of regulatory fees and assessments, including
contributions to state universal service funds. In some jurisdictions,
Metromedia Fiber's pricing flexibility for intrastate services may be limited
because of regulation, although Metromedia Fiber's direct competitors will be
subject to similar restrictions.
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LOCAL GOVERNMENTS' CONTROL OVER RIGHTS-OF-WAY CAN LIMIT THE DEVELOPMENT OF
METROMEDIA FIBER'S NETWORKS.
Local governments exercise legal authority that may have an adverse effect
on Metromedia Fiber's business because of its need to obtain rights-of-way for
its fiber network. While local governments may not prohibit persons from
providing telecommunications services nor treat telecommunication service
providers in a discriminatory manner, they can affect the timing and costs
associated with Metromedia Fiber's use of public rights-of-way.
THE REGULATORY FRAMEWORK FOR METROMEDIA FIBER'S INTERNATIONAL OPERATIONS IS
EXTENSIVE AND CONSTANTLY CHANGING, ADDING UNCERTAINTIES TO ITS PLANNED
EXPANSION INTO FOREIGN COUNTRIES.
Various regulatory requirements and limitations also will influence
Metromedia Fiber's business as it attempts to enter international markets.
Regulation of the international telecommunications industry is changing rapidly.
Metromedia Fiber is unable to predict how the Federal Communications Commission
and foreign regulatory bodies will resolve the various pending international
policy issues and the effect of such resolutions on it. Metromedia Fiber U.K. is
a U.S. international common carrier subject to U.S. regulation under Title II of
the Communications Act of 1934. Metromedia Fiber is also licensed as a U.S.
international common carrier subject to U.S. regulation under Title II of the
Communications Act of 1934. Metromedia Fiber's U.K. joint venture is, and
Metromedia Fiber itself also is, required, under Sections 214 and 203 of the
Communications Act of 1934, respectively, to obtain authorization and file an
international service tariff containing rates, terms and conditions before
initiating service. International carriers are also subject to certain annual
fees and filing requirements such as the requirement to file contracts with
other carriers, including foreign carrier agreements, and reports describing
international circuit, traffic and revenue data service. So long as Metromedia
Fiber U.K. and Metromedia Fiber itself operate as international common carriers,
they will also, be required to comply with the rules of the Federal
Communications Commission. The international services provided by Metromedia
Fiber U.K., and its international services are subject to regulation in the
United Kingdom and other European jurisdictions in which it may operate.
National regulations of relevant European and other foreign countries, as well
as policies and regulations of the European Union and other foreign governments,
impose separate licensing, service and other conditions on Metromedia Fiber's
foreign joint ventures and its international service operations, and these
requirements may have a material adverse impact on it.
METROMEDIA FIBER'S FRANCHISES, LICENSES OR PERMITS COULD BE CANCELED OR NOT
RENEWED, WHICH WOULD IMPAIR THE DEVELOPMENT OF MAJOR MARKETS FOR ITS
SERVICES.
Termination or non-renewal of Metromedia Fiber's franchise with the city of
New York or of other rights-of-way or franchises that it uses for its networks
could have a material adverse effect on its business, results of operations and
financial condition. Metromedia Fiber will also need to obtain additional
franchises, licenses and permits for its planned intracity networks, intercity
networks and international networks. Metromedia Fiber cannot assure you that it
will be able to maintain on acceptable terms its existing franchises, licenses
or permits or to obtain and maintain the other franchises, licenses or permits
needed to implement its strategy.
METROMEDIA FIBER MAY EXPERIENCE ADDITIONAL RISKS AS A RESULT OF ITS
CO-LOCATION AND INTERNET SERVICES.
The legal landscape that governs Metromedia Fiber's co-location and internet
services has yet to be interpreted or enforced. Regulatory issues for the
internet industry include property ownership, copyrights and other intellectual
property issues, taxation, libel, obscenity and personal privacy. Metromedia
Fiber's co-location and internet business may be adversely affected by the
adoption and interpretation of any future or currently existing laws and
regulations. Metromedia Fiber has no patented technology and relies on a
combination of copyright, trademark, service mark and trade secret
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laws and contractual restrictions to establish and protect certain proprietary
rights in its technology. Despite its design and implementation of a variety of
internet network security measures, unauthorized access, computer viruses,
accidental or intentional action and other disruptions could occur. In addition,
Metromedia Fiber may incur significant costs to prevent breaches in its internet
security or to alleviate problems caused by those breaches.
The law relating to the liability of online services companies and internet
access providers for information carried on or disseminated through their
networks is currently unsettled. It is possible that claims could be made
against online services companies, co-location companies and internet access
providers. Metromedia Fiber may need to implement measures to reduce its
exposure to this potential liability.
RISKS RELATED TO METROMEDIA FIBER'S RIGHTS-OF-WAY
METROMEDIA FIBER MAY NOT BE ABLE TO OBTAIN AND MAINTAIN THE RIGHTS-OF-WAY
AND OTHER PERMITS NECESSARY TO IMPLEMENT ITS BUSINESS STRATEGY.
Metromedia Fiber must obtain additional rights-of-way and other permits from
railroads, utilities, state highway authorities, local governments and transit
authorities to install conduit and fiber for the expansion of its intracity
networks, intercity networks and international networks. Metromedia Fiber cannot
assure you that it 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 Metromedia Fiber
cannot assure you that it 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 Metromedia Fiber were forced to remove
its fiber optic cable from under the streets or abandon its networks, the
termination could have a material adverse effect on its operations. In addition,
landowners have asserted that railroad companies and others to whom they granted
easements to their properties are not entitled as a result of these easements to
grant rights of way to telecommunications providers. If these disputes are
resolved in the landowners' favor, Metromedia Fiber could be obligated to make
substantial lease payments to these landowners for the lease of these rights of
way. More specifically, Metromedia Fiber's New York/New Jersey network relies
upon, and its planned expansions into Long Island and Westchester County will
rely upon, right-of-way agreements with Bell Atlantic Corporation and Empire
City Subway Company (Ltd.). The current agreements may be terminated at any time
without cause with three months notice. In case of termination, Metromedia Fiber
may be required to remove its fiber optic cable from the conduits or poles of
Bell Atlantic. This termination would have a material adverse effect on its
operations.
RAPID TECHNOLOGICAL CHANGES COULD AFFECT THE CONTINUED USE OF FIBER OPTIC
CABLE AND METROMEDIA FIBER'S RESULTS OF OPERATIONS.
The telecommunications industry is subject to rapid and significant changes
in technology that could materially affect the continued use of its services,
including Metromedia Fiber's fiber optic cable and internet connectivity
services. Metromedia Fiber cannot predict the effect of technological changes on
its business. Metromedia Fiber also cannot assure you that technological changes
in the communications industry and internet-related industry will not have a
material adverse effect on its operations.
RISKS RELATED TO METROMEDIA FIBER'S CORPORATE STRUCTURE
METROMEDIA COMPANY EFFECTIVELY CONTROLS METROMEDIA FIBER AND HAS THE POWER
TO CAUSE OR PREVENT A CHANGE OF CONTROL.
Metromedia Company and one of its general partners currently own 100% of
Metromedia Fiber's class B common stock, which represents more than a majority
of the total voting power of Metromedia Fiber's common stock and which is
entitled to elect 75% of the members of Metromedia Fiber's board of directors.
Accordingly, Metromedia Company is able to control the board of directors and
all
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stockholder decisions and, in general, to determine the outcome of any corporate
transaction or other matter submitted to the stockholders for approval,
including mergers, consolidations and the sale of all or substantially all of
Metromedia Fiber's assets, without the consent of Metromedia Fiber's other
stockholders. In addition, Metromedia Company has the power to prevent or cause
a change in control of Metromedia Fiber.
OFFICERS AND DIRECTORS OWN A SUBSTANTIAL PORTION OF METROMEDIA FIBER STOCK
AND MAY HAVE CONFLICTS OF INTEREST.
Metromedia Fiber's executive officers and directors have substantial equity
interests in Metromedia Fiber. As of October 9, 2000, all of Metromedia Fiber's
directors and executive officers as a group collectively beneficially owned
approximately 22% of its outstanding class A common stock and 100% of its
outstanding class B common stock, including shares beneficially owned by
Metromedia Company.
RISK RELATED TO METROMEDIA FIBER'S CLASS A COMMON STOCK
THE STOCK PRICE OF METROMEDIA FIBER'S CLASS A COMMON STOCK MAY BE VOLATILE.
The market price of Metromedia Fiber's class A common stock is subject to
fluctuations in response to various factors and events, including changes in
general market conditions, variations in Metromedia Fiber's quarterly operating
results, regulatory or other changes, both domestic and international, affecting
the telecommunications and internet-related industries generally or it
specifically, announcements of business developments by Metromedia Fiber or it
competitors, changes in operating results and the liquidity of the market for
the class A common stock.
SHARES OF METROMEDIA FIBER CLASS A COMMON STOCK ELIGIBLE FOR FUTURE SALE MAY
HAVE A POTENTIAL ADVERSE EFFECT ON METROMEDIA FIBER'S STOCK PRICE.
Sales of a substantial number of shares of Metromedia Fiber's class A common
stock in the public market, or the perception that sales may occur, could
adversely affect prevailing market prices for the class A common stock and
Metromedia Fiber's ability to raise capital in the future.
As of November 3, 2000, there were 483,358,400 shares of class A common
stock outstanding and 67,538,544 shares of class B common stock (which are
convertible into class A common stock on a one-for-one basis) outstanding.
Persons who are affiliates currently own all of the shares of class B common
stock. In addition, as of November 3, 2000, 75,742,912 shares of class A common
stock are issuable upon the exercise of outstanding options and warrants.
On March 6, 2000, under the terms of a securities purchase agreement,
Verizon Communications purchased 51.2 million newly issued shares of Metromedia
Fiber's class A common stock at a purchase price of $14.00 per share and a
convertible subordinated note in a principal amount of approximately
$975.3 million, which is convertible into shares of our class A common stock at
a conversion price of $17.00 per share.
Metromedia Fiber filed a universal shelf registration statement on Form S-3
which was declared effective in October 1999. Under that registration statement,
$489,925,000 aggregate principal amount of securities remain eligible to be sold
in primary offerings and 9,120,760 shares of class A common stock remain
eligible to be resold in secondary offerings.
No prediction can be made as to the effect, if any, that sales of shares of
class A common stock or the availability of those shares for sale will have on
the market prices prevailing from time to time. Nevertheless, the possibility
that substantial amounts of class A common stock, including those shares into
which the class B common stock is convertible, may be sold in the public market
may adversely affect prevailing market prices for the class A common stock and
impair Metromedia Fiber's ability to raise equity capital in the future.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The SEC encourages companies to disclose forward-looking information so that
investors can better understand a company's future prospects and make informed
investment decisions. This information statement/prospectus contains such
"forward-looking statements." These include statements regarding the period
following completion of the merger.
Words such as "anticipate," "estimate," "expects," projects," "intends,"
"plans," "believes" and words and terms of similar substance used in connection
with any discussion of future operating or financial performance, or the merger,
identify forward-looking statements. All forward-looking statements are based on
SiteSmith's or Metromedia Fiber's management's present expectations of future
events and are subject to a number of factors and uncertainties that could cause
actual results to differ materially from those described in the forward-looking
statements. In addition to the risks related to the business of Metromedia Fiber
and the factors relating to the merger discussed under "Risk Factors," factors
that could cause actual results to differ materially from those described in the
forward-looking statements made in this document include:
- the inability of SiteSmith and Metromedia Fiber to integrate their
operations;
- fluctuations in the value of Metromedia Fiber shares;
- the effect of the merger on Metromedia Fiber's business;
- general economic and business conditions;
- the existence or absence of adverse publicity;
- changes in, or failure to comply with, government regulations;
- changes in marketing and technology;
- changes in political, social and economic conditions, especially with
respect to our foreign operations;
- competition in the telecommunications industry and internet-related
industries;
- industry capacity;
- general risks of the telecommunications and internet-related industries;
- success of acquisitions and operating initiatives, including Metromedia
Fiber's ability to successfully integrate its acquisitions;
- changes in business strategy or development plans;
- management of growth;
- availability, terms and deployment of capital;
- construction schedules;
- costs and other effects of legal and administrative proceedings;
- dependence on senior management;
- business abilities and judgment of personnel;
- availability of qualified personnel; and
- labor and employee benefit costs.
Stockholders are cautioned not to place undue reliance on the
forward-looking statements, which speak only as of the date of this information
statement/prospectus. Neither SiteSmith nor Metromedia
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Fiber is under any obligation, and each expressly disclaims any obligation, to
update or alter any forward-looking statements, whether as a result of new
information, future events or otherwise. New factors emerge from time to time,
and it is not possible for Metromedia Fiber or SiteSmith to predict which will
arise. In addition, neither Metromedia Fiber nor SiteSmith can assess the impact
of each factor on its 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.
All forward-looking statements attributable to Metromedia Fiber or SiteSmith
or any person acting on behalf of either or both of them are expressly qualified
in their entirety by the cautionary statements contained or referred to in this
section.
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THE MERGER
WHAT YOU WILL RECEIVE IN THE MERGER
Once the merger between Aqueduct Acquisition Corp. and SiteSmith is
consummated, each of your shares of SiteSmith common stock will be converted
into a number of shares of Metromedia Fiber Class A common stock equal to the
aggregate merger consideration divided by the total number of shares of
SiteSmith common stock on the date of consummation of the merger on a diluted
basis (i.e., assuming that all outstanding options, warrants, preferred stock or
other securities exercisable for or convertible into SiteSmith common stock have
been exercised or converted). The holders of SiteSmith series A, B and C
preferred stock will receive the number of shares of Metromedia Fiber class A
common stock that they would have received if those holders had converted their
preferred stock into SiteSmith common stock immediately prior to consummation of
the merger.
The aggregate merger consideration will be based on the average closing
price of Metromedia Fiber class A common stock on the Nasdaq National Market
during the twenty trading day period ending four business days prior to the
closing of the merger, subject to the following conditions:
- If the average closing price is greater than or equal to $24.00 and less
than or equal to $27.2727, then the aggregate merger consideration will be
the number of shares obtained by dividing $1,500,000,000 by the average
trading price.
- If the average closing price is less than $24.00, then the aggregate
merger consideration will be 62,500,000 shares.
- If the average closing price is greater than $27.2727, then the aggregate
merger consideration will be 55,000,000 shares.
Metromedia Fiber will not issue any fractional shares of its class A common
stock in the merger. After completion of the merger, ChaseMellon Shareholder
Securities, LLC, the exchange agent, will determine the aggregate number of
fractional shares which would be distributed to all stockholders of SiteSmith.
ChaseMellon Shareholder Services will then sell a number of shares of Metromedia
Fiber class A common stock equal to such aggregate number of shares, and the
fractional shareholders will receive a cash payment in lieu of the fractional
shares. Instead of this procedure, however, Metromedia Fiber may satisfy payment
for the excess shares by delivering cash (without interest) to ChaseMellon
Shareholder Services in an amount equal to the aggregate amount of all these
fractional shares multiplied by the closing sales price of Metromedia Fiber
class A common stock on the Nasdaq National Market on the trading day
immediately following the date of completion of the merger.
BACKGROUND OF THE MERGER
Metromedia Fiber from time to time has evaluated entering into strategic
relationships with, and strategic acquisitions of companies with, complementary
business and technologies. SiteSmith has been growing its organization, customer
base and revenue.
In November 1999, SiteSmith and AboveNet Communications, a wholly owned
subsidiary of Metromedia Fiber, commenced discussions with respect to a
potential business transaction, which culminated in the execution of a
co-location agreement.
On numerous occasions from January through July 2000, representatives of
SiteSmith and AboveNet discussed how the parties could best work together in
serving mutual customers and enhancing the two companies' respective offerings.
In June and July 2000, officers of SiteSmith and Metromedia Fiber discussed the
possibility of Metromedia Fiber participating in an equity financing of
SiteSmith. However, these discussions did not result in any agreement between
the two companies.
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In late August 2000, senior officers of MetroMedia Fiber contacted senior
officers of SiteSmith to discuss the merits of an expanded strategic
relationship between the companies. On August 30, senior executives of
Metromedia Fiber and senior executives of SiteSmith held several meetings to
discuss their respective business strategies and various business transactions
that might be of mutual benefit.
On September 5, 2000, the SiteSmith board of directors held a meeting at the
offices of Weiss, Peck & Greer at which the SiteSmith board of directors
discussed the potential business combination. Following an extended discussion,
the SiteSmith board of directors authorized senior management to conduct due
diligence of Metromedia Fiber's business operations and prospects.
On September 8, 2000, senior executives of Metromedia Fiber spoke with
representatives of Credit Suisse First Boston, financial advisors to SiteSmith.
Tentative terms were discussed and CSFB committed to preparing a term sheet in
order to facilitate a discussion.
On September 10, 2000, senior executives of Metromedia Fiber again spoke
with representatives of CSFB. At that time, CSFB presented Metromedia Fiber with
a draft term sheet for a proposed a stock-for-stock merger between the two
companies. The Metromedia Fiber executives asked questions about the proposed
term sheet, but the parties did not negotiate the terms of a merger at this
meeting. In addition, the SiteSmith board of directors held a meeting that day
to discuss the proposed term sheet. Following an extended discussion, the
SiteSmith board of directors authorized senior management to negotiate the terms
of the proposed transaction.
Between September 11, 2000 and September 18, 2000 the parties held a series
of discussions concerning mutually acceptable merger terms. On September 18,
2000 senior executives of Metromedia Fiber and SiteSmith agreed on a non-binding
term sheet which set forth the terms of a stock-for-stock merger that would
result in Metromedia Fiber acquiring SiteSmith for $1.5 billion worth of
Metromedia Fiber class A common stock. As a result of this preliminary
understanding, the parties decided to commence due diligence reviews of each
other and negotiations of the terms of a merger agreement and other ancillary
agreements.
On September 20, 2000, the SiteSmith board of directors held a meeting at
which they reviewed the proposed terms of the merger as set forth in the term
sheet. Following an extended discussion, the SiteSmith board of directors
authorized senior management to proceed with further discussions regarding the
negotiation and preparation of a definitive merger agreement and the documents
related thereto, and to perform due diligence in connection with the potential
transaction.
Beginning September 21, 2000 and continuing through October 5, 2000,
SiteSmith and Metromedia Fiber conducted intensive mutual due diligence,
including a review of each other's business plans, budgets and capital
requirements. The parties and their legal counsel began negotiation of a merger
agreement and other ancillary agreements on September 20, 2000 and continued
their negotiations until shortly before the merger agreement was signed on
October 9, 2000.
On October 6, 2000, SiteSmith's board of directors held a special telephonic
meeting with senior management and SiteSmith's legal and financial advisers to
discuss the status of the negotiations with Metromedia Fiber and SiteSmith's due
diligence review of Metromedia Fiber. Management provided its view of the
proposed merger, describing the background of the discussion with Metromedia
Fiber, the terms of the merger and the merger agreement and outlining the
benefits and risks of the proposed transaction. Following the presentation by
senior management, the board of directors engaged in a full discussion of the
terms of the proposed merger, including the strategic benefits of the
combinations and the terms and conditions of the proposed merger. SiteSmith's
board of directors concluded that the merger agreement was fair to SiteSmith's
stockholders and that the proposed merger was in the best interests of SiteSmith
and its stockholders. Accordingly, the SiteSmith board of directors approved the
merger, declaring the merger agreement to be advisable and approved the related
documents and authorized management to proceed with the execution of the merger
documents.
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On October 6, 2000, the board of directors of Metromedia held a telephonic
meeting at which senior executives of Metromedia Fiber and its legal advisors
made a presentation of the business of SiteSmith and the principal terms of the
proposed agreements with SiteSmith. Each board member was provided with the most
current draft of the transaction documents and with information about SiteSmith.
After discussion, the board unanimously determined that the merger agreement,
the transactions contemplated by the merger agreements and the issuance of
shares of Metromedia Fiber class A common stock pursuant to the merger agreement
were advisable and in the best interests of Metromedia Fiber and its
stockholders, and the board approved the merger agreement and the issuance of
the shares of Metromedia class A common stock pursuant to the merger agreement,
subject to finalization of the merger documentation, due diligence and the
execution of new employment agreement by Messrs. Spagnolo and Ryan.
Following the Metromedia Fiber board meeting on October 6, 2000, extensive
negotiations took place between representatives of Metromedia Fiber and
representatives of Mark F. Spagnolo and Robert J. Ryan, concerning new
employment agreements with those executives to become effective upon closing of
the merger. These employment agreements were a condition to Metromedia Fiber's
willingness to enter into the merger agreement. See "The Merger
Agreement--Related Agreements." Following the conclusion of these negotiations
and finalization of the merger documentation, Metromedia Fiber and SiteSmith
executed the merger agreement on October 9, 2000.
In the evening of October 9, 2000, Metromedia Fiber and SiteSmith entered
into the merger agreement, and the SiteSmith stockholders identified on page 32
under the heading "The Written Consent of SiteSmith Stockholders--Voting
Agreement" entered into the voting agreement with Metromedia Fiber. On the
morning of October 10, 2000, Metromedia Fiber issued a press release announcing
the merger agreement.
RECOMMENDATION OF SITESMITH BOARD OF DIRECTORS; SITESMITH'S REASONS FOR THE
MERGER
At the telephonic meeting of the board of directors of SiteSmith on
October 6, 2000, the directors present at the meeting voted unanimously to enter
into the merger agreement and to recommend that SiteSmith's stockholders vote to
adopt the merger agreement.
In the course of reaching its decision to approve and adopt the merger and
the merger agreement, the board of directors of SiteSmith consulted with
SiteSmith's senior management, outside legal counsel and financial advisor,
reviewed a significant amount of information and considered a number of factors,
including the following material factors:
- the merger would give SiteSmith access to the optical internet
infrastructure developed by Metromedia Fiber and provide SiteSmith with a
reliable source of data center space and internet connectivity from
AboveNet Communications, a subsidiary of Metromedia Fiber;
- the strategic fit between Metromedia Fiber and SiteSmith, and the customer
offering created by the merger, which will be a global end-to-end optical
internet infrastructure outsourcing solution, combining comprehensive
managed services with unmetered, unshared fiber network connections in the
local loop, internet connectivity, co-location data centers and a globally
connected fiber backbone network;
- the belief that the combined company has the potential to enhance
stockholder value through share ownership in a larger, more diversified,
internet and telecommunications company;
- the amount and form of consideration to be received by SiteSmith's
stockholders in the merger and information on the historical trading range
of Metromedia Fiber's class A common stock;
- information concerning the business, earnings, competitive position and
prospects of SiteSmith and Metromedia Fiber both individually and on a
combined basis;
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- the strategic and financial alternatives available to SiteSmith in the
rapidly growing internet infrastructure management services industry;
- the possibility, as alternatives to the merger, of seeking to engage in
one or more joint ventures, seeking to engage in a combination with a
company other than Metromedia Fiber, or seeking to complete an initial
public offering of SiteSmith common stock;
- the likely impact of the merger on SiteSmith's employees and customers;
- the expected effect of the merger on SiteSmith's existing relationships
with third parties;
- the interests that certain executive officers and directors of SiteSmith
may have with respect to the merger in addition to their interests as
stockholders of SiteSmith generally as described in "Interests of Members
of SiteSmith Board of Directors and Management in the Merger;" and
- the qualification of the merger as a tax-free transaction for United
States federal income tax purposes (except for tax resulting from any cash
received for fractional shares by the holders of SiteSmith capital stock).
The SiteSmith board of directors has concluded that the proposal to adopt
the merger agreement is advisable and in the best interests of SiteSmith and its
stockholders and has approved and adopted the merger and the merger agreement.
Accordingly, the SiteSmith board of directors recommends that all SiteSmith
stockholders vote FOR adoption of the merger agreement, and the related matters,
by executing the written consent.
METROMEDIA FIBER'S REASONS FOR THE MERGER
Metromedia Fiber's board of directors approved the merger agreement and the
merger, as it believes that:
- the combined entity will be well positioned to meet the market's need for
an integrated internet infrastructure management solution, including a
worldwide fiber optic network, web hosting facilities and managed
services;
- the combined entity is expected to build brand equity, and gain
significant market share as it will be able to differentiate from its
competitors due to its ability to offer integrated end-to-end internet
solutions;
- the combination of the two companies' products and services is expected to
generate significant cross-selling and up-selling opportunities;
- SiteSmith's and Metromedia Fiber's resources and skills are complementary;
and
- SiteSmith and Metromedia Fiber have a strong cultural compatibility and
share the same marketing and business strategies.
INTERESTS OF SITESMITH'S OFFICERS AND DIRECTORS IN THE MERGER
In considering the recommendation of the SiteSmith board of directors with
respect to adopting the merger agreement, the SiteSmith stockholders should be
aware that certain members of the board of directors and management of SiteSmith
have interests in the merger that are in addition to the interests of the
SiteSmith stockholders generally. The SiteSmith board of directors was aware of
these interests and considered them, among other matters, in approving the
principal terms of the merger, the merger agreement and the transactions
contemplated thereby.
INDEMNIFICATION. The merger agreement provides for the survival after the
merger of all indemnification rights of the members of the board of directors
and officers of SiteSmith for acts and omissions occurring before the merger, as
their rights existed as of October 9, 2000, in the SiteSmith charter or bylaws,
in indemnification agreements with SiteSmith or as otherwise in effect on that
date. Metromedia Fiber will guaranty that the surviving company observes all of
these indemnification rights
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to the fullest extent permitted under Delaware law for a period of not less than
six years after the merger.
AUTOMATIC ACCELERATION OF STOCK OPTIONS; CHANGE IN CONTROL
PROVISIONS. Before initiation of discussions relating to the merger, SiteSmith
entered into agreements containing change in control provisions with Mark F.
Spagnolo, Chairman of the Board of SiteSmith and SiteSmith's Chief Executive
Officer and President, David C. Winn, SiteSmith's Managing Director, Europe,
Middle East and Africa, David S. Bauer, SiteSmith's Vice President, Operations,
Mary Cortani, SiteSmith's Vice President, Business Integration, Richard H. Dym,
SiteSmith's Vice President, Marketing, Peter E. Hilliard, SiteSmith's Vice
President, Human Resources, Dan M. Rasmussen, SiteSmith's Vice President, New
Market Development, Robert J. Ryan, IV, SiteSmith's Senior Vice President,
Operations, Michael E. Seifert, SiteSmith's Vice President and Chief Financial
Officer, Frank Slattery, SiteSmith's Vice President, Business Development and
General Counsel, Marvin Tseu, a director of SiteSmith and SiteSmith's former
President and Chief Executive Officer, Thomas Knight, SiteSmith's Assistant
Treasurer, David Moroney, SiteSmith's Director of Finance, Caren Durazzo,
SiteSmith's Corporate Controller, Lisa Geifer, SiteSmith's Director of Corporate
Marketing, Carolyn Aver, a director of SiteSmith and Edward Sanderson, a
director of SiteSmith. These arrangements provide for benefits if there is a
change in control of SiteSmith. The merger is a change in control for this
purpose.
Metromedia Fiber and some of the directors, officers and consultants of
SiteSmith may be subject to certain adverse tax consequences under Section 280G
of the Internal Revenue Code of 1986, as amended, due to certain change in
control benefits as described above. A portion of the change of control benefits
may not be deductible to Metromedia Fiber for tax purposes. Moreover, the
recipient of the change of control benefits may be subject to a 20% excise tax
in addition to regular income tax. These adverse tax consequences may be avoided
if SiteSmith stockholders holding shares possessing more than 75% of the voting
power of the outstanding SiteSmith shares computed as provided in Section 280G
of the Internal Revenue Code and the Treasury Regulations proposed thereunder,
approve the acceleration of vesting. Each person who may be subject to adverse
tax consequences has agreed to waive his or her right to the change of control
benefits in the event that such stockholder approval is not obtained. Messrs.
Spagnolo and Ryan have agreed to waive their rights to their change of control
benefits regardless of stockholder approval.
SiteSmith is in the process of soliciting stockholder approval by written
consent for change of control benefits so that Metromedia Fiber and none of the
directors or officers receiving change of control benefits suffer adverse tax
consequences under Section 280G of the Internal Revenue Code.
TERMINATION FOR REDUNDANCY; ACCELERATION OF STOCK OPTIONS. The merger
agreement provides that if, within two years following the closing of the
merger, (a) an employee of SiteSmith as of the effective time of the merger is
terminated due to redundancy in position or (b) an employee of SiteSmith as of
the closing of the merger resigns his or her position for good reason, then all
unvested portions of each option to purchase SiteSmith common stock held by that
employee at the closing of the merger will fully accelerate and become
immediately exercisable.
EMPLOYMENT AGREEMENTS. Mark F. Spagnolo has entered into an employment
agreement with Metromedia Fiber and SiteSmith regarding employment with
SiteSmith after the merger. Mr. Spagnolo will be appointed the Chief Executive
Officer for SiteSmith. Robert J. Ryan has entered into an employment agreement
with Metromedia Fiber and SiteSmith regarding employment with SiteSmith after
the merger. Mr. Ryan will be appointed the Senior Vice President of Operations
for SiteSmith. In connection with the execution of the employment agreements,
Messrs. Spagnolo and Ryan have agreed that only 25% of their unvested shares of
SiteSmith common stock will vest as a result of the merger, and that such newly
vested shares will be subject to a lock-up for a period of six months following
the closing of the merger. See the section entitled "The Merger
Agreement--Related Agreements."
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As a result of these arrangements, the directors and executive officers of
SiteSmith could be more likely to vote in favor of recommending adoption of the
merger agreement than if they did not hold these interests.
STOCK EXCHANGE LISTING
The Metromedia Fiber class A common stock to be issued to you in the merger
will be listed on the Nasdaq National Market, subject to official notice of
issuance.
APPRAISAL RIGHTS
Under the Delaware General Corporation Law, notwithstanding the approval of
the merger by the holders of the requisite number of shares of SiteSmith common
stock and preferred stock, you are entitled to refuse the merger consideration
to which you would otherwise be entitled under the merger agreement and exercise
appraisal rights and obtain payment of the "fair value" for your shares under
the terms of the Delaware General Corporation Law. In order to effectively
exercise your appraisal rights you must satisfy each of the following primary
requirements:
- you must hold shares in SiteSmith as of the date you make your demand for
appraisal rights and continue to hold shares in SiteSmith through the
closing of the merger;
- you must deliver to SiteSmith a written notice of your demand of payment
of the fair value for your shares within 20 days of being notified by
SiteSmith that the merger and the merger agreement have been approved by
written consent; and
- you must not have consented to the merger and the merger agreement.
If you fail to comply with any of the above conditions or otherwise fail to
comply with the requirements of Section 262 of the Delaware General Corporation
Law, you will have no appraisal rights with respect to your shares.
The determination of fair value takes into account all relevant factors, but
excludes any appreciation or depreciation in anticipation of the applicable
merger. The costs of the appraisal proceeding may be determined by the Delaware
Court of Chancery and allocated among the parties as the Delaware Court of
Chancery deems equitable under the circumstances. Upon your application for
appraisal, the Delaware Court of Chancery may order all or a portion of the
expenses incurred by you in connection with the appraisal proceeding, including,
without limitation, reasonable attorney's fees and the fees and expenses of
experts, to be charged pro rata against the value of all shares entitled to
appraisal. In the absence of a determination or assessment, you will bear your
own expenses.
All written notices should be addressed to: SiteSmith, Inc., 3283 Scott
Blvd., Santa Clara, California 95054, Telephone: (408) 987-6400. All written
notices must be executed by, or with the consent of, the holder of record. The
notice must identify you and indicate your intention to demand payment of the
fair value for your shares. In the notice, your name should be stated as it
appears on your stock certificate(s). If your shares are owned of record in a
fiduciary capacity, such as by a trustee, guardian or custodian, your demand
must be executed by or for the fiduciary. If you own the shares with another
person, such as in a joint tenancy or tenancy in common, your demand must be
executed by or for all joint owners. An authorized agent, including an agent for
two or more joint owners, may execute your demand for appraisal. However, the
agent must identify you and any other owners of the shares and expressly
disclose the fact that, in exercising the demand, he or she is acting as agent
for you and any other owners.
IF YOU ARE CONTEMPLATING THE EXERCISE OF THE RIGHTS SUMMARIZED ABOVE IN
CONNECTION WITH THE MERGER, YOU ARE URGED TO CONSULT WITH YOUR OWN LEGAL
COUNSEL. THE DESCRIPTION OF SECTION 262 CONTAINED IN THIS DOCUMENT IS ONLY A
SUMMARY OF THE FULL TEXT DESCRIBED IN ANNEX D ATTACHED TO THIS INFORMATION
STATEMENT/PROSPECTUS AND THE DELAWARE GENERAL CORPORATION LAW. FAILURE TO FOLLOW
PRECISELY ALL OF THE STEPS REQUIRED BY SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW WILL RESULT IN THE LOSS OF YOUR APPRAISAL RIGHTS. ANY DEMANDS,
NOTICES, CERTIFICATES OR OTHER DOCUMENTS REQUIRED TO BE DELIVERED IN
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CONNECTION WITH YOUR EXERCISE OF APPRAISAL RIGHTS SHOULD BE SENT TO TARGET AT
THE ADDRESS INDICATED ABOVE.
FEDERAL SECURITIES LAWS CONSEQUENCES
All shares of Metromedia Fiber class A common stock received by SiteSmith
stockholders in the merger will be freely transferable under the Federal
securities laws, except for shares received by persons who are deemed to be
"affiliates" of SiteSmith prior to the closing of the merger. The shares
received by persons deemed "affiliates" of SiteSmith may be resold by them only
in transactions permitted by the resale provisions of Rule 145 under the
Securities Act of 1933 (or Rule 144 in the case of persons who become affiliates
of Metromedia Fiber) or as otherwise permitted under the Securities Act of 1933.
Persons who may be deemed to be affiliates of Metromedia Fiber or SiteSmith
generally include individuals or entities that control, are controlled by, or
are under common control with those parties and individuals who serve as
officers or directors of Metromedia Fiber or SiteSmith.
ACCOUNTING TREATMENT
The merger is expected to be accounted for under the purchase method of
accounting. This means that after the merger, Metromedia Fiber will be required
to record as intangible assets the excess of the consideration paid over the
estimated fair value of net assets acquired and will subsequently amortize this
cost against earnings.
REGULATORY APPROVALS
Under the merger agreement, neither Metromedia Fiber nor SiteSmith is
required to complete the merger unless any antitrust law waiting period under
the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, has expired
or been terminated.
Under the Hart-Scott-Rodino Act of 1976, and the rules under that act, the
merger may not be completed unless the required 30-day waiting period has
expired or been terminated. On October 18, 2000, SiteSmith and Metromedia Fiber
filed premerger notifications and report forms under the HSR Act with the
Antitrust Division of the Department of Justice and the Federal Trade
Commission. The waiting period will expire on November 17, 2000, unless
extended.
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THE WRITTEN CONSENT OF SITESMITH STOCKHOLDERS
PURPOSES OF THE WRITTEN CONSENT
The purposes of the written consent are:
- to adopt the merger agreement;
- to adopt the escrow agreement;
- appoint Mark F. Spagnolo as escrow representative;
- with respect to the SiteSmith preferred stockholders, to convert the
series A preferred stock, series B preferred stock and series C preferred
stock, respectively, into shares of SiteSmith common stock in accordance
with the terms of SiteSmith's certificate of incorporation; and
- with respect to SiteSmith preferred stockholders, Marv Tseu, Robert Ryan
and Dan Rasmussen, to terminate the amended and restated investor rights
agreement, dated July 20, 2000, by and among SiteSmith and certain holders
of SiteSmith series A preferred stock, series B preferred stock and
series C preferred stock, which termination shall be effective immediately
prior to the consummation of the merger.
RECOMMENDATION OF SITESMITH'S BOARD OF DIRECTORS
THE SITESMITH BOARD OF DIRECTORS HAS CONCLUDED THAT THE PROPOSAL TO ADOPT
THE MERGER AGREEMENT IS ADVISABLE AND IN THE BEST INTERESTS OF SITESMITH AND ITS
STOCKHOLDERS AND HAS APPROVED AND ADOPTED THE MERGER AND THE MERGER AGREEMENT.
ACCORDINGLY, THE SITESMITH BOARD OF DIRECTORS RECOMMENDS THAT ALL SITESMITH
STOCKHOLDERS VOTE FOR ADOPTION OF THE MERGER AGREEMENT BY EXECUTING THE WRITTEN
CONSENT.
IN ADDITION, THE SITESMITH BOARD OF DIRECTORS RECOMMENDS THAT (1) ALL
SITESMITH PREFERRED STOCKHOLDERS VOTE FOR THE CONVERSION OF THE PREFERRED STOCK
INTO COMMON STOCK AND (2) ALL SITESMITH PREFERRED STOCKHOLDERS, MARV TSEU,
ROBERT RYAN AND DAN RASMUSSEN VOTE FOR THE TERMINATION OF SITESMITH'S AMENDED
AND RESTATED INVESTOR RIGHTS AGREEMENT.
RECORD DATE; SHARES OUTSTANDING AND ENTITLED TO VOTE
The board of directors of SiteSmith has fixed , 2000 as the record
date for the consent solicitation. Accordingly, only holders of shares of
SiteSmith common and preferred stock at the close of business on , 2000,
are entitled to notice of and to vote at the special meeting. As of the record
date, there were shares of SiteSmith common stock, shares of
SiteSmith series A preferred stock, shares of SiteSmith series B
preferred stock and shares of SiteSmith series C preferred stock.
Each share of SiteSmith common stock and series A, B and C preferred stock
entitles its holder to one vote on each matter submitted for stockholder
approval in the written consent.
REQUIRED VOTE
Under applicable Delaware law and the charter documents of SiteSmith, the
adoption of the merger agreement, the adoption of the escrow agreement and the
appointment of Mark F. Spagnolo requires the affirmative vote of a majority of
the SiteSmith common stock, voting as a single class, and a majority of the
SiteSmith common stock and preferred stock, voting together as a single class.
Under the charter documents of SiteSmith, the conversion of the preferred
stock into common stock requires the affirmative vote of each holder of
SiteSmith preferred stock.
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Under the amended and restated investor rights agreement, the termination of
the amended and restated investor rights agreement requires the affirmative vote
of (1) a majority of the SiteSmith preferred stock voting as a single class,
(2) a majority of the SiteSmith common stock held by Marv Tseu, Robert Ryan and
Dan Rasmussen, and (3) 66 2/3 percent of the outstanding SiteSmith Series C
preferred stock.
VOTING AGREEMENT
At the time of the signing of the merger agreement, the following
individuals and entities who owned approximately 25,912,355 shares of common
stock and series A, B and C preferred stock of SiteSmith, representing a
majority of the common stock and a majority of each series of the preferred
stock, executed a voting agreement under which they have agreed to vote all of
their shares of SiteSmith stock to approve and adopt the merger agreement:
Robert J. Ryan, Mark F. Spagnolo, Spagnolo 2000 Trust, Spagnolo Extended Family
Trust, Marv Tseu, Communications Ventures III, L.P., Communications
Ventures III CEO & Entrepreneur's Fund, L.P., ComVentures IV CEO Fund, L.P.,
ComVentures IV, L.P., ComVentures IV Entrepreneurs Fund, L.P., Bedrock Capital
Partners I, L.P., Credit Suisse First Boston Bedrock Fund, L.P., VBW Employee
Bedrock Fund, L.P., Weiss, Peck & Greer Venture Associates V Cayman, L.P., WPG
Information Sciences Entrepreneur Fund II, L.L.C., WPG Information Sciences
Entrepreneur Fund II-A, L.L.C., Weiss, Peck & Greer Venture Associates V-A,
L.L.C., and Weiss, Peck & Greer Venture Associates V, L.L.C.
Approximately 8,849,525 shares of common stock, 6,000,000 shares of
series A preferred stock, 8,403,361 shares of series B preferred stock and
2,659,469 shares of series C preferred stock, which represent 53.1%, 83.3%, 97.6
% and 56.4% of such class and series of capital stock of SiteSmith,
respectively, are subject to the voting agreement. Therefore, approval and
adoption of the merger agreement is assured. However, your vote in favor of
adoption of the merger agreement, adoption of the escrow agreement and
appointment of the escrow representative remains important. See "The Merger
Agreement--The Voting Agreement."
EFFECT OF ABSTAINING
You may abstain from voting on the proposal to adopt the merger agreement,
the proposal to convert the preferred stock into common stock and/or the
proposal to terminate the amended and restated investor rights agreement. If you
mark your written consent "ABSTAIN" with respect to a proposal, you will be in
effect voting against that proposal. In addition, if you fail to send in your
written consent, this, too, will have the same negative effect.
RETURNING WRITTEN CONSENTS
BY TELECOPY. Because Delaware, the state in which SiteSmith is incorporated,
permits electronic submission of written consents by telecopy, stockholders are
asked to fill in, sign, date and fax their written consents to the attention of
Elizabeth Holmes, at Venture Law Group, a Professional Corporation, at:
(650) 233-8386.
BY MAIL. Stockholders are encouraged to return the written consent they
faxed in the enclosed, prepaid envelope marked "Written Consent" to: Elizabeth
Holmes, Venture Law Group, a Professional Corporation, 2800 Sand Hill Road,
Menlo Park, CA 94025, prior to December , 2000.
WRITTEN CONSENT SOLICITATION
SiteSmith will bear the cost of the solicitation of written consents from
its stockholders and will share the cost of printing and mailing this
information statement/prospectus.
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THE MERGER AGREEMENT
The following is a brief summary of the material provisions of the merger
agreement. A copy of the merger agreement is attached as Annex A to this
document and is incorporated in this document by reference. YOU SHOULD READ THE
MERGER AGREEMENT CAREFULLY AND IN ITS ENTIRETY.
TERMS OF THE MERGER
GENERAL
The merger agreement contemplates the merger of a Metromedia Fiber
subsidiary, Aqueduct Acquisition Corp., with and into SiteSmith. The merger will
be completed once Metromedia Fiber files the Certificate of Merger with the
Delaware Secretary of State. This filing will occur as soon as is practicable
after the closing under the merger agreement. Unless Metromedia Fiber and
SiteSmith agree otherwise, the closing will occur at 10:00 a.m. on the business
day after the day on which the last of the conditions set forth in the merger
agreement is satisfied or waived.
CONVERSION OF SECURITIES
Once Metromedia Fiber completes the merger, each of your shares of SiteSmith
common stock will be converted into a number of shares of Metromedia Fiber
class A common stock equal to the aggregate merger consideration divided by the
total number of shares of SiteSmith common stock on the date of consummation of
the merger on a diluted basis (i.e., assuming that all outstanding options,
warrants, preferred stock or other securities exercisable for or convertible
into SiteSmith common stock have been exercised or converted). The holders of
SiteSmith series A, B and C preferred stock will receive the number of shares of
Metromedia Fiber class A common stock that those holders would have received,
had they converted their SiteSmith preferred stock into common stock immediately
prior to consummation of the merger.
The aggregate merger consideration will be based on the average closing
price of Metromedia Fiber class A common stock on the Nasdaq National Market
during the twenty trading day period ending four business days prior to the
closing of the merger, subject to the following conditions:
- If the average closing price is greater than or equal to $24.00 and less
than or equal to $27.2727, then the aggregate merger consideration will be
the number of shares obtained by dividing $1,500,000,000 by the average
closing price.
- If the average closing price is less than $24.00, then the aggregate
merger consideration will be 62,500,000 shares.
- If the average closing price is greater than $27.2727, then the aggregate
merger consideration will be 55,000,000 shares.
If there is a change in the number of shares, or securities or other
instruments convertible or exchangeable into, or exercisable for, or common
stock of SiteSmith or Metromedia Fiber class A common stock prior to the
completion of the merger, the exchange ratio will be adjusted to eliminate the
effects of that event.
FRACTIONAL SHARES
Metromedia Fiber will not issue any fractional shares of its stock in the
merger. As promptly as practicable after Metromedia Fiber completes the merger,
ChaseMellon Shareholder Services, as Metromedia Fiber's exchange agent in the
merger, will determine the aggregate number of fractional shares which would be
distributed to all of Metromedia Fiber's stockholders. ChaseMellon Shareholder
Services will then sell a number of shares of Metromedia Fiber class A common
stock equal to such aggregate number of fractional shares, and fractional
stockholders will receive a cash payment in lieu of
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the fractional shares. Until the net proceeds of those sales have been
distributed to Metromedia Fiber's stockholders, ChaseMellon Shareholder Services
will hold those proceeds in trust for the benefit of those holders. SiteSmith
will pay the costs of the sale of the excess shares. ChaseMellon Shareholder
Services will determine the portion of the proceeds to which each holder of
fractional shares will be entitled, if any, by multiplying the amounts of the
aggregate net proceeds from the sale by the holder's proportionate interest in
the proceeds, which will depend on the holder's fractional share ownership.
Instead of the procedure described above, however, Metromedia Fiber may
satisfy payment for the excess shares by delivering cash (without interest) to
ChaseMellon Shareholder Services in an amount equal to the aggregate amount of
all of these excess shares multiplied by the closing sales price of Metromedia
Fiber class A common stock on the Nasdaq Stock Market on the trading day
immediately following the date Metromedia Fiber completes the merger.
STOCK OPTIONS AND OTHER STOCK RIGHTS
Once Metromedia Fiber completes the merger, each option or warrant to
purchase shares of SiteSmith common stock will be assumed by Metromedia Fiber.
This means that each SiteSmith stock option or warrant will be converted into an
option or warrant to acquire shares of Metromedia Fiber class A common stock.
The number of shares of Metromedia Fiber class A common stock to be subject to
the option or warrant will be equal to the product of (a) the number of shares
of SiteSmith common stock subject to the original option or warrant and (b) the
exchange ratio by which the shares of SiteSmith common stock were exchanged into
Metromedia Fiber class A common stock, rounded, in the case of any warrant or
option other than an incentive stock option, up, and in the case of any
incentive stock option, down, to the nearest whole share. The exercise price for
each SiteSmith option and warrant will also be adjusted and will be equal to the
quotient of (a) the exercise price of the original SiteSmith option and warrant
divided by (b) the number of shares of Metromedia Fiber class A common stock for
which the SiteSmith option or warrant shall be exercisable, rounded to the
nearest cent in the case of any warrant or option other than an incentive stock
option and, in the case of an incentive stock option, rounded up to the nearest
cent.
EXCHANGE OF STOCK CERTIFICATES
EXCHANGE PROCEDURES
Once Metromedia Fiber completes the merger, ChaseMellon Shareholder Services
will mail to each SiteSmith stockholder (a) a letter of transmittal,
(b) instructions for use in surrendering its SiteSmith shares in exchange for
certificate(s) representing shares of Metromedia Fiber class A common stock, and
(c) stock transfer powers. Upon surrender of a SiteSmith stock certificate to
ChaseMellon Shareholder Services along with an executed letter of transmittal
and any other required documents, each SiteSmith stockholder will be entitled to
receive a certificate representing that number of whole shares of Metromedia
class A common stock and cash instead of any fractional share of Metromedia
class A common stock, plus any dividends, which that stockholder has a right to
receive in the merger. Surrendered SiteSmith stock certificates will then be
canceled.
DIVIDENDS AND DISTRIBUTIONS
NO DIVIDENDS OR OTHER DISTRIBUTIONS DECLARED OR MADE AFTER THE MERGER WITH
RESPECT TO METROMEDIA FIBER CLASS A COMMON STOCK WITH A RECORD DATE AFTER THE
DATE OF THE CLOSING OF THE MERGER WILL BE PAID TO SITESMITH STOCKHOLDERS UNTIL A
SITESMITH STOCKHOLDER SURRENDERS ITS SITESMITH STOCK CERTIFICATE(S).
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Following surrender to ChaseMellon Shareholder Services of any such
certificate(s), as a record holder of certificates representing whole shares of
Metromedia Fiber class A common stock, each SiteSmith stockholder will be paid,
without interest:
- the amount of any cash payable instead of a fractional share of Metromedia
Fiber class A common stock to which it is entitled;
- the amount of dividends or other distributions with a record date after
the date of the closing of the merger and a payment date on or prior to
the date of issuance of those whole shares of Metromedia Fiber class A
common stock; and
- at the appropriate payment date, the amount of dividends or other
distributions payable with respect to those whole shares of Metromedia
Fiber class A common stock with a record date after the date of the
closing of the merger but with a payment date subsequent to surrender.
TRANSFERS
Immediately after the closing of the merger, the stock transfer books of
SiteSmith will be closed, and there will be no further registration of transfers
of SiteSmith common stock.
TERMINATION OF EXCHANGE FUND
Metromedia Fiber will receive any portion of Metromedia Fiber class A common
stock or the proceeds from the sale of any excess Metromedia Fiber shares (or
cash deposited by Metromedia Fiber representing fractional shares) which remains
undistributed to SiteSmith stockholders twelve months after the date of the
closing of the merger. Any SiteSmith stockholder who has not previously complied
with the exchange procedures may then look only to Metromedia Fiber for payment.
NO LIABILITY
Metromedia Fiber, SiteSmith and ChaseMellon Shareholders Services will not
be liable to any stockholder for any undistributed Metromedia Fiber class A
common stock or cash from the proceeds of the sale of any excess Metromedia
Fiber shares (or cash deposited by Metromedia Fiber representing fractional
shares) which is properly delivered to a public official pursuant to any
applicable abandoned property or similar laws.
NO INTEREST
No interest will be paid or accrued on cash paid to SiteSmith stockholders
instead of fractional shares. In addition, no interest will be paid or accrued
on unpaid dividends and distributions, if any, which may be payable upon
surrender of SiteSmith stock certificates.
REPRESENTATIONS AND WARRANTIES
The merger agreement contains various representations and warranties of
SiteSmith relating to, among other things:
- its organization and qualification and that of its subsidiary;
- its certificate of incorporation and by-laws;
- its capitalization;
- its authority relative to the merger agreement and the merger;
- no conflicts or violations of laws or other agreements in connection with
the merger agreement and the merger;
- consents, approvals and filings required by it for the merger;
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- its possession of permits and other approvals required for operation of
its business and compliance with laws;
- its filings with the SEC and its financial statements;
- absence of certain changes or events;
- its employee benefit plans;
- tax matters;
- its material contracts and absence of defaults under them;
- absence of litigation;
- environmental matters;
- its intellectual property;
- non-competition agreements;
- absence of agreements that would alter or increase certain of its
obligations;
- its real property interests;
- labor matters;
- its customers;
- the lack of any requirement to be registered under the Investment Company
Act of 1940;
- brokers;
- no impact of anti-takeover statutes;
- vote necessary to approve the merger; and
- the accuracy of information supplied by it for inclusion in this document.
The merger agreement also contains customary representations and warranties
made by Metromedia Fiber and its merger subsidiary as to, among other things:
- its organization and qualification and its subsidiaries;
- its certificate of incorporation and by-laws;
- its capitalization;
- its authority relative to the merger agreement and the merger;
- no conflicts or violations of laws or other agreements in connection with
the merger agreement and the merger;
- consents, approvals and filings required by it for the merger;
- its possession of permits and other approvals required for operation of
its businesses and compliance with laws;
- filings with the SEC and its financial statements;
- absence of certain changes or events;
- tax matters;
- absence of litigation;
- environmental matters;
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- absence of brokers;
- no impact of anti-takeover statutes;
- interim operations of its merger subsidiary; and
- the accuracy of information supplied for inclusion in this document.
COVENANTS
SiteSmith has agreed between the date of the merger agreement and the
closing of the merger, except for scheduled exceptions or with the consent of
Metromedia Fiber, that it will:
- conduct its business in the ordinary course of business and consistent
with past practice;
- not amend its organizational documents;
- not issue any shares of its capital stock, other than issuances of
additional shares of common stock or preferred stock necessary to fund its
working capital needs;
- not declare or pay any dividends on its capital stock;
- not split, combine, subdivide, reclassify or redeem, retire, purchase or
acquire any shares of its capital stock or any of its securities;
- except for pay or benefits increases made in accordance with past practice
to officers and employees of SiteSmith or in connection with new hires,
and bonuses paid in accordance with past practice, not change the terms of
its existing pay or benefits arrangements with management or its employees
or otherwise enter into new employment or severance agreements with any of
those persons;
- except for activities in the ordinary course of business, not acquire,
sell, lease, license, encumber or dispose of any material properties or
assets or enter into any material commitment or transaction;
- except for borrowings made in the ordinary course of business, not incur
or prepay any debt, guarantee any obligations of another person or make
any loans or capital contributions to any other person;
- not terminate, cancel or make any significant change in any contract or
agreement material to it;
- not enter into any joint venture agreement, partnership agreement or
similar agreement;
- not make or authorize any capital expenditures in excess of those provided
for its budget;
- not adopt a plan of liquidation, dissolution, merger, consolidation, or
other reorganization, other than the merger with Metromedia Fiber;
- not create or acquire any subsidiary;
- not take any action with respect to accounting policies or procedures,
other than in the ordinary course of business and consistent with past
practice or as required by law or by generally accepted accounting
principles;
- not waive, release, assign, settle or compromise any material rights,
claims or litigation;
- not enter into any arrangement or agreement that would materially limit or
otherwise materially restrict it and its subsidiary from engaging or
competing in Metromedia Fiber's or SiteSmith's line of business or in any
geographic area;
- not make any tax election or settle any material income tax liability; and
- not authorize or enter into any agreement or make any commitment to do any
of the foregoing.
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Each of Metromedia Fiber and SiteSmith has also agreed, among other things,
to:
- not voluntarily take any action that would, or that could reasonably be
expected to, result in any of the conditions to the merger not being
satisfied;
- use reasonable best efforts to cause the merger to qualify as a plan of
reorganization and not knowingly take any actions or cause any actions to
be taken which would prevent the merger from qualifying as a plan of
reorganization;
- use reasonable best efforts to do all things necessary to ensure that the
conditions to the merger are satisfied and to consummate and make
effective the merger, and to take any further actions necessary to carry
out the purpose of the merger agreement; and
- except as required under any confidentiality agreement or similar
agreement, provide to each other such information concerning the business,
properties, contracts, assets, liabilities, personnel and other aspects as
the other party may reasonably request.
Metromedia Fiber has agreed to:
- offer employee benefits to SiteSmith's employees for a period of two years
following consummation of the merger substantially equivalent to those
offered prior to the merger;
- no later than three business days after the effectiveness of the merger,
file with the SEC a registration statement on an appropriate form or a
post-effective amendment to a previously filed registration statement with
respect to the Metromedia Fiber class A common stock issuable in respect
of the SiteSmith stock options and warrants; and
- grant stock options to purchase 1,000,000 shares of Metromedia Fiber
class A common stock to the employees of SiteSmith as an incentive for
such employees to remain employed by SiteSmith following the closing of
the merger.
NO SOLICITATION OF TRANSACTIONS
SiteSmith has agreed not to, and not to permit any of its officers,
directors, employees or representatives, to:
- solicit, initiate or encourage any competing acquisition proposal; or
- participate in any discussions or negotiations regarding, furnish
information to anyone else about, or knowingly facilitate any competing
acquisition proposal.
INDEMNIFICATION
After the merger is completed, Metromedia Fiber will preserve all rights to
indemnification existing as of the date of the merger agreement, in favor of any
director, officer, agent or employee of SiteSmith and its subsidiaries for a
period of at least six years following the effectiveness of the merger.
Metromedia Fiber will also indemnify directors, officers, agents and employees
of SiteSmith and its subsidiaries against liabilities or claims arising before
the merger is completed and as a result of their positions at SiteSmith or any
of its subsidiaries. Finally, Metromedia Fiber will those persons legal and
other expenses in connection with any proceeding arising out of any matter
occurring until the merger is completed.
CONDITIONS TO THE MERGER
Metromedia Fiber's and SiteSmith's respective obligations to complete the
merger are subject to the satisfaction or waiver of each of the following
conditions:
- the adoption and approval of the merger agreement by the SiteSmith
stockholders;
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- the authorization of the Nasdaq National Market listing of the shares of
Metromedia Fiber class A common stock to be issued in the merger;
- the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvement Act of 1976 and obtaining of all
approvals and consents from governmental authorities that are necessary to
complete the merger;
- the registration statement on Form S-4 filed with the SEC being declared
effective;
- no law, order, injunction or decree that prohibits, restrains or enjoins
consummation of the merger being enacted, issued, promulgated, enforced or
entered by, or be pending before, any court or governmental entity; and
- Metromedia Fiber, the escrow representative and the escrow agent each
entering into the escrow agreement.
Metromedia Fiber's obligation to complete the merger agreement also depends
on the satisfaction or waiver of each of the following conditions:
- SiteSmith's representations and warranties being true and correct in all
material respects when made and as of the closing date;
- SiteSmith's having performed in all material respects all obligations to
be performed by it under the merger agreement at or prior to the closing
date;
- SiteSmith's having obtained the consent, approval or waiver of each person
that is not a governmental entity whose consent, approval or waiver is
required to consummate the merger, except those for which the failure so
to do could not reasonably be expected to result, either individually or
in the aggregate, in a material adverse effect on SiteSmith;
- the employment agreements entered into on the date of execution of the
merger agreement with Mark F. Spagnolo and Robert J. Ryan, remaining in
full force and effect;
- stockholders holding no more than 5% of the outstanding capital stock of
SiteSmith having exercised or having given notice of their intent to
exercise dissenter's rights;
- the Investor Rights Agreement dated as of July 20, 2000 among SiteSmith
and holders of SiteSmith's preferred stock being terminated;
- agreements between Metromedia Fiber and each of Mark F. Spagnolo and
Robert J. Ryan, IV providing for the waiver of the acceleration of vesting
of their SiteSmith stock options as a result of the merger being in full
force and effect; and
- Metromedia Fiber having received an opinion from Paul, Weiss, Rifkind,
Wharton & Garrison, dated as of the closing date, to the effect that the
merger will be treated for federal income tax purposes as a reorganization
within the meaning of section 368(a) of the Internal Revenue Code and that
each party to the merger agreement will be treated as a "party to the
reorganization" within the meaning of section 368(b) of the Internal
Revenue Code.
SiteSmith's obligation to complete the merger agreement also depends on the
satisfaction or waiver of each of the following conditions:
- Metromedia Fiber's representations and warranties being true and correct
in all material respects when made and as of the closing date;
- Metromedia Fiber having performed in all material respects with all
obligations to be performed by it under this agreement at or prior to the
closing date; and
- SiteSmith having received the opinion of Venture Law Group, a Professional
Corporation, dated as of the closing date, to the effect that the merger
will be treated as a reorganization within the meaning of section 368(a)
of the Internal Revenue Code and that each party to the merger
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agreement will be treated as a "party to the reorganization" within the
meaning of section 368(b) of the Internal Revenue Code.
TERMINATION
The merger agreement may be terminated and the merger may be abandoned, at
any time before Metromedia Fiber completes the merger and before or after any
stockholder approval, in the following circumstances:
- by Metromedia Fiber's and SiteSmith's mutual written consent;
- by Metromedia Fiber or SiteSmith, if the merger is not completed before
March 31, 2001 through no fault of the party wishing to terminate the
merger agreement;
- by Metromedia Fiber or SiteSmith, if a final non-appealable order, decree
or injunction prevents the completion of the merger;
- by Metromedia Fiber or SiteSmith if the SiteSmith stockholders fail to
adopt and approve the merger agreement and the merger;
- by Metromedia Fiber, if SiteSmith breaches any of its material
representations, warranties, covenants or agreements and fails to cure
that breach; and
- by SiteSmith, if Metromedia Fiber breaches any of its material
representations, warranties, covenants or agreements and fails to cure
that breach.
TERMINATION FEES AND EXPENSES
Except as otherwise stated in the merger agreement, all expenses incurred in
the merger will be paid by the party incurring the expenses.
RELATED AGREEMENTS
ESCROW AGREEMENT
At the closing of the merger, Metromedia Fiber, Mark F. Spagnolo, acting on
behalf of all the SiteSmith stockholders, as escrow agent will enter into an
escrow agreement, the form of which is attached as Annex B to this information
statement/prospectus and is incorporated in this document by reference.
Under this escrow agreement, the SiteSmith stockholders, represented by
Mr. Spagnolo, will agree to place in escrow 15% of the shares of Metromedia
Fiber class A common stock they will receive in the merger. The shares placed in
escrow will be used to guarantee SiteSmith's stockholders' obligations under the
merger agreement to indemnify Metromedia Fiber for losses suffered as a result
of SiteSmith's breach of any representation, warranty or covenant contained in
the merger agreement.
Each SiteSmith stockholder will have the right to receive any taxable
dividends distributed on the Metromedia Fiber class A common stock that he, she
or it has placed in escrow and to exercise any voting rights associated to that
stock.
One half of the shares placed in escrow and remaining in escrow on the date
on which Metromedia Fiber files its annual report on Form 10-K for the year
ended December 31, 2000 will be released and distributed at that time to the
former SiteSmith stockholders. The remainder of the shares held in escrow will
be released on the first anniversary of the closing date, unless an
indemnification claim remains outstanding, in which case the escrow will
continue, but with respect only to that claim and will terminate upon its
resolution.
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VOTING AGREEMENT
As a condition to Metromedia Fiber's willingness to enter into the merger
agreement, on October 9, 2000, eighteen stockholders of SiteSmith, who together
hold shares of SiteSmith's capital stock representing more than a majority of
the outstanding voting power of SiteSmith's common stock and each class of
SiteSmith's preferred stock, entered into a voting agreement with Metromedia
Fiber. A copy of the voting agreement is attached as Annex C to this information
statement/prospectus and is incorporated in this document by reference. These
stockholders have agreed to execute written consents or to vote in favor of the
merger agreement and the merger. They have also agreed to vote against any
proposal for any extraordinary corporate transaction between SiteSmith and any
person (other than Metromedia Fiber or its subsidiaries) or any other action or
agreement, in each case that is intended or could reasonably be expected to:
- result in a breach of any covenant, representation, warranty or agreement
of SiteSmith under the merger agreement;
- result in any of the conditions to SiteSmith's obligations under the
merger agreement not being fulfilled; or
- impede, interfere with, delay, postpone or materially adversely affect the
merger and the transactions contemplated by the merger agreement.
These stockholders have also agreed not to transfer or assign any of their
shares of SiteSmith capital stock prior to the closing date or termination of
the merger agreement, unless the person to whom the shares are transferred
agrees to be bound by this voting agreement.
EMPLOYMENT AGREEMENTS
SPAGNOLO EMPLOYMENT AGREEMENT
As a condition to Metromedia Fiber's willingness to enter into the merger
agreement, on October 9, 2000, Metromedia Fiber, SiteSmith and Mark F. Spagnolo
entered into an employment agreement which will become effective upon closing of
the merger. Under this employment agreement, Mr. Spagnolo will serve as the
chief executive officer of SiteSmith and carry out the duties consistent with
that position.
TERM AND TERMINATION. The employment agreement with Mr. Spagnolo provides
for his employment until September 30, 2003. After this initial term,
Mr. Spagnolo's employment will be "at will," meaning that any party may
terminate the employment agreement at any time and for any reason.
During the initial term ending September 30, 2003, if SiteSmith terminates
Mr. Spagnolo's employment agreement because of his disability, Mr. Spagnolo will
receive his base salary for a period of one year from termination. If SiteSmith
terminates Mr. Spagnolo's employment for cause (as defined in his employment
agreement), Mr. Spagnolo will have no right to receive any compensation or
benefit from SiteSmith. If SiteSmith terminates the employment agreement without
cause (as defined in his employment agreement), or if Mr. Spagnolo terminates
his employment for good reason (as defined in the Employment Agreement),
Mr. Spagnolo will be entitled to the following for a period ending on the later
of (a) one year after the termination or (b) September 30, 2003:
- his then-current annual base salary;
- his then current target bonus;
- reimbursement for expenses incurred in continuing his medical coverage
from the date of termination;
- accelerated vesting of his options to purchase shares of Metromedia Fiber
class A common stock granted by Metromedia Fiber pursuant to his
employment agreement; and
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- full and accelerated vesting of his options to purchase SiteSmith common
stock granted by SiteSmith prior to the merger.
The definition of good reason in Mr. Spagnolo's employment agreement
includes:
- a material reduction in the nature or scope of Mr. Spagnolo's title,
authority, powers, stature, duties or responsibilities;
- a reduction in Mr. Spagnolo's base salary and/or target bonus;
- a reduction in Mr. Spagnolo's benefits;
- a change in the method or formula for determining the annual discretionary
bonus which results in a decrease in the potential amount of the bonus
payable to Mr. Spagnolo;
- a material change in Mr. Spagnolo's reporting relationships;
- a requirement that Mr. Spagnolo relocate his principal place of employment
by more than 35 miles from Dallas, Texas; and
- a material breach by SiteSmith of its affirmative or negative covenants or
undertakings in the employment agreement and a failure to remedy that
breach within 15 days.
COMPENSATION. Mr. Spagnolo's employment agreement provides for a base
salary of at least $350,000 per year. His base salary will be reviewed at least
annually by SiteSmith's board of directors and, if appropriate, will be
increased. In addition, Mr. Spagnolo will receive a bonus of $350,000 if he
continues to be employed by SiteSmith on June 30, 2001 and will be eligible for
annual discretionary bonuses equal to at least 100% of his base salary based on
the achievement of objectives to be identified by the board of directors.
OPTIONS. Concurrently with or as soon as reasonably practicable after
closing of the merger, Mr. Spagnolo will be granted options to purchase 500,000
shares of Metromedia Fiber class A common stock at the fair market value on the
date of the grant. 25% of these options will vest and become exercisable on each
of the first four anniversaries of the consummation of the merger. However, if
there is a change-in-control of Metromedia Fiber or SiteSmith, all of
Mr. Spagnolo's options to purchase shares of Metromedia Fiber class A common
stock (including his options to purchase SiteSmith common stock granted by
SiteSmith prior to the merger) will fully vest and become immediately
exercisable. Mr. Spagnolo has agreed that only 25% of his unvested shares of
SiteSmith common stock will vest as a result of the merger and that such newly
vested shares will be subject to a lock-up for a period of six months following
the closing of the merger.
NON-COMPETE. Mr. Spagnolo has agreed not to compete with Metromedia Fiber
and SiteSmith until termination of his employment, and if he is terminated for
cause or if he resigns without good reason, for one year following termination
of his employment. In addition, Mr. Spagnolo has agreed not to solicit any
employees of SiteSmith during that period.
RYAN EMPLOYMENT AGREEMENT
As a condition to Metromedia Fiber's willingness to enter into the merger
agreement, on October 9, 2000, Metromedia Fiber, SiteSmith and Robert J. Ryan
entered into an employment agreement which will become effective upon closing of
the merger. Under this employment agreement, Mr. Ryan will serve as the Senior
Vice President of Operations of SiteSmith and carry out the duties consistent
with that position.
TERM AND TERMINATION. The employment agreement with Mr. Ryan provides for
his employment until September 30, 2002. After this initial term, Mr. Ryan's
employment with SiteSmith will be "at will," meaning that any party may
terminate the employment agreement at any time and for any reason.
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If SiteSmith terminates Mr. Ryan's employment for cause (as defined in the
merger agreement), Mr. Ryan will have no right to receive any compensation or
benefit from SiteSmith. During the initial term ending September 30, 2002, if
SiteSmith terminates the employment agreement without cause, or if Mr. Ryan
terminates his employment for good reason, Mr. Ryan will be entitled to the
following for a period of six months after the termination or until
September 30, 2002, whichever period is greater:
- his then-current annual base salary;
- his then-current target bonus;
- reimbursement for expenses incurred in continuing his medical coverage
from the date of termination;
- accelerated vesting of his options to purchase shares of Metromedia Fiber
class A common stock granted by Metromedia Fiber pursuant to his
employment agreement; and
- full and accelerated vesting of his options to purchase SiteSmith common
stock granted by SiteSmith prior to the merger.
The definition of good reason in Mr. Ryan's employment agreement includes:
- a material reduction in the nature or scope of Mr. Ryan's title,
authority, powers, stature, duties or responsibilities;
- a reduction of greater than 5% in Mr. Ryan's base salary, target bonus,
benefits and/or incentive payments;
- a material change in Mr. Ryan's reporting relationship;
- a requirement that Mr. Ryan relocate his principal place of employment by
more than 50 miles from Santa Clara, California; and
- a material breach by SiteSmith of its affirmative or negative covenants or
undertakings in the employment agreement and a failure to remedy that
breach within 15 days.
COMPENSATION. Mr. Ryan's employment agreement provides for a base salary of
at least $225,000 per year. His base salary will be reviewed at least annually
by SiteSmith's chief executive officer and board of directors and, if
appropriate, will be increased. In addition, beginning January 1, 2001,
Mr. Ryan will be eligible for annual discretionary bonuses equal to at least 40%
of his base salary based on the achievement of objectives to be identified by
SiteSmith's chief executive officer.
OPTIONS. Concurrently with or as soon as reasonably practicable after
closing of the merger, Mr. Ryan will be granted options to purchase 200,000
shares of Metromedia Fiber class A common stock at the fair market value on the
date of the grant. 25% of these options will vest and become exercisable on each
of the first four anniversaries of the consummation of the merger. However, if
there is a change-in-control of Metromedia Fiber or SiteSmith, 50% of
Mr. Ryan's unvested options to purchase shares of Metromedia Fiber class A
common stock will fully vest and become immediately exercisable and all options
to purchase SiteSmith common stock granted by SiteSmith prior to the merger will
fully vest and become immediately exercisable. Mr. Ryan has agreed that only 25%
of his unvested shares of SiteSmith common stock will vest as a result of the
merger and that such newly vested shares will be subject to a lock-up period of
six months following the closing of the merger.
NON-COMPETE. Mr. Ryan has agreed not to compete with Metromedia Fiber and
SiteSmith until termination of his employment, and if he is terminated for cause
or if he resigns without good reason, for six months following termination of
his employment. In addition, Mr. Ryan has agreed not to solicit any employees of
SiteSmith during that period.
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METROMEDIA FIBER SELECTED HISTORICAL FINANCIAL DATA
THE SELECTED FINANCIAL DATA SET FORTH BELOW FOR METROMEDIA FIBER FOR THE
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 AND AS OF DECEMBER 31, 1999 AND
1998, IS DERIVED FROM, AND QUALIFIED BY REFERENCE TO, THE AUDITED CONSOLIDATED
FINANCIAL STATEMENTS INCLUDED ELSEWHERE IN THIS INFORMATION STATEMENT/
PROSPECTUS.
The selected financial data set forth below for Metromedia Fiber for the
years ended December 31, 1996 and 1995 and as of December 31, 1997, 1996 and
1995 are derived from Metromedia Fiber's audited consolidated financial
statements not included elsewhere in this information statement/prospectus.
The statements of operations data for the nine months ended September 30,
2000 and 1999 and the balance sheet data as of September 30, 2000 and 1999 have
been derived from Metromedia Fiber's unaudited financial statements that have
been prepared on the same basis as the audited financial statements and, in the
opinion of Metromedia Fiber's management, include all adjustments, consisting
only of normal recurring accruals, necessary for a fair presentation of the
financial data for the periods presented. The financial data for the interim
periods are not necessarily indicative of results that may be expected for any
other interim period or for the year as a whole.
Metromedia Fiber is providing the following selected historical financial
information to aid you in your analysis of the financial aspects of the merger.
The information is only a summary. You should carefully review Metromedia
Fiber's consolidated financial statements included elsewhere in this information
statement/prospectus and the information provided in "Metromedia Fiber Unaudited
Pro Forma Condensed Combining Financial Information," "Metromedia Fiber Selected
Consolidated Financial Data" and "Metromedia Fiber Management's Discussion and
Analysis of Financial Condition and Results of Operations."
45
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ -----------------------
1999(C) 1998 1997 1996 1995 2000 1999
---------- -------- -------- -------- -------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue........................................ $ 75,247 $ 36,436 $ 2,524 $ 236 $ 56 $ 127,118 $ 49,397
Expenses:
Cost of sales................................ 49,019 13,937 3,572 699 -- 133,466 24,414
Selling, general and administrative.......... 51,010 14,712 6,303 2,070 3,886 94,363 27,369
Consulting and employment incentives (a)..... 397 248 19,218 3,652 -- 919 --
Settlement agreement......................... 1,932 3,400 -- -- -- -- --
Depreciation and amortization................ 45,965 1,532 757 613 162 118,567 15,645
---------- -------- -------- -------- -------- ---------- ----------
Income (loss) from operations.................. (73,076) 2,607 (27,326) (6,798) (3,992) (220,197) (18,031)
Interest income (expense), net................. (40,256) 1,927 1,067 (3,561) (327) (49,551) (25,784)
(Loss) from joint venture...................... (1,606) (146) -- -- -- (2,739) (475)
Income taxes................................... -- 3,402 -- -- -- -- --
---------- -------- -------- -------- -------- ---------- ----------
Net income (loss).............................. $ (114,938) $ 986 $(26,259) $(10,359) $ (4,319) $ (272,487) $ (44,290)
========== ======== ======== ======== ======== ========== ==========
Net income (loss) applicable to common
stockholders per share-basic................. $ (0.28) $ 0.00 $ (0.14) $ (0.07) $ (0.04) $ (0.51) $ (0.23)
Net income applicable to common stockholders
per share-diluted............................ N/A $ 0.00 N/A N/A N/A N/A N/A
Number of shares of common stock assumed
outstanding-basic (b)........................ 407,192 373,980 189,788 143,432 99,316 538,811 190,639
Number of shares of common stock assumed
outstanding-diluted (b)...................... N/A 439,048 N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------------ -----------------------
1999 1998 1997 1996 1995 2000 1999
---------- -------- -------- -------- -------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA:
Current assets................................. $1,377,465 $665,823 $140,557 $ 645 $ 254 $1,800,486 $ 558,637
Working capital (deficiency)................... 1,127,945 553,050 133,030 (12,887) (11,542) 1,422,485 392,536
Fiber optic transmission network and related
equipment, net............................... 796,684 244,276 24,934 6,369 5,885 2,049,166 557,662
Property and equipment, net.................... 9,215 2,716 759 525 468 32,613 7,136
Total assets................................... 3,959,985 974,417 167,378 7,977 7,077 5,659,839 2,918,401
Long-term debt................................. 1,699,314 672,675 -- -- -- 2,670,570 689,036
Total liabilities.............................. 2,125,309 816,903 17,838 14,835 12,413 3,291,294 938,408
Stockholders' equity (deficiency).............. 1,834,676 157,514 149,540 (6,858) (5,336) 2,368,545 1,979,993
</TABLE>
------------------------------
(a) Represents value of class A common stock, warrants and options issued to
consultants and officers to provide services to Metromedia Fiber.
(b) Based upon the weighted average shares outstanding after giving retroactive
effect to stock splits; see Note 1 to Notes to Consolidated Financial
Statements.
(c) Includes the impact of adopting FASB Interpretation No. 43.
46
<PAGE>
SITESMITH SELECTED HISTORICAL FINANCIAL INFORMATION
THE FOLLOWING SELECTED FINANCIAL DATA SHOULD BE READ IN CONJUNCTION WITH
SITESMITH'S FINANCIAL STATEMENTS AND THE NOTES TO THOSE STATEMENTS AND
"SITESMITH MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" INCLUDED ELSEWHERE IN THIS INFORMATION
STATEMENT/PROSPECTUS.
The statements of operations data for the period from September 8, 1999
(inception) through December 31, 1999 and for the nine months ended
September 30, 2000 and the balance sheet data at December 31,1999 and
September 30, 2000, are derived from SiteSmith's financial statements included
elsewhere in this information statement/prospectus. You should note that
historical results are not necessarily indicative of the results to be expected
in the future, and results of interim periods are not necessarily indicative of
results for the entire year.
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS
SEPTEMBER 8, 1999 ENDED
(INCEPTION) SEPTEMBER 30,
THROUGH DECEMBER 31, 1999 2000
------------------------- -----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<S> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Service revenue......................................... $ 98 $ 9,296
Equipment revenue....................................... -- 4,860
------- --------
Total revenue............................................... 98 14,156
Costs and expenses:
Cost of service revenue................................. 484 16,559
Cost of equipment revenue............................... -- 4,341
Research and development................................ 67 594
Sales and marketing..................................... 147 10,074
General and administrative.............................. 861 17,494
Stock-based compensation................................ 663 11,900
------- --------
Total costs and expenses.................................... 2,222 60,962
Loss from operations........................................ (2,124) (46,806)
Interest income, net........................................ 21 518
------- --------
Net loss.................................................... (2,103) (46,288)
Accretion of redemption premium on mandatorily redeemable
convertible preferred stock............................... (60) (2,276)
------- --------
Net loss attributable to common stockholders................ $(2,163) $(48,564)
======= ========
<CAPTION>
AS OF
AS OF SEPTEMBER 30,
DECEMBER 31, 1999 2000
------------------------- -----------------
(IN THOUSANDS)
BALANCE SHEET DATA:
<S> <C> <C>
Cash and cash equivalents................................... $ 1,416 $ 5,099
Working capital............................................. 1,140 3,080
Total assets................................................ 2,793 30,810
Current liabilities......................................... 613 11,539
Mandatorily redeemable convertible preferred stock.......... 3,625 52,971
Total stockholders' deficit................................. (1,445) (33,701)
</TABLE>
47
<PAGE>
METROMEDIA FIBER UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
THE FOLLOWING UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
ILLUSTRATES THE EFFECT OF THE MERGER OF SITESMITH WITH AQUEDUCT ACQUISITION
CORP., METROMEDIA FIBER'S WHOLLY-OWNED SUBSIDIARY, UNDER THE TERMS OF THE MERGER
AGREEMENT DATED OCTOBER 9, 2000.
BASIS FOR THE CONVERSION RATIO
Each share of SiteSmith common stock will be converted into a number of
shares of Metromedia Fiber class A common stock equal to the aggregate merger
consideration divided by the total number of shares of SiteSmith common stock on
the date of consummation of the merger on a diluted basis (i.e., assuming that
all outstanding options, warrants, preferred stock or other securities
exercisable for or convertible into SiteSmith common stock have been exercised
or converted). The holders of SiteSmith series A, B and C preferred stock will
receive the number of shares of Metromedia class A common stock that they would
have received if those holders had converted their preferred stock into
SiteSmith common stock immediately prior to consummation of the merger.
The aggregate merger consideration will be based on the average closing
price of Metromedia Fiber class A common stock on the Nasdaq National Market
during the twenty trading day period ending four business days prior to the
closing of the merger, subject to the following conditions:
- If the average closing price is greater than or equal to $24.00 and less
than or equal to $27.2727, then the aggregate merger consideration will be
the number of shares obtained by dividing $1,500,000,000 by the average
closing price.
- If the average closing price is less than $24.00, then the aggregate
merger consideration will be 62,500,000 shares.
- If the average closing price is greater than $27.2727, then the aggregate
merger consideration will be 55,000,000 shares.
Metromedia Fiber has prepared these unaudited pro forma condensed combining
financial statements assuming an average closing price of $25.6364 (the midpoint
of the range between $24.00 and $27.27), a total number of shares of SiteSmith
common stock on a diluted basis equal to 45,610,776 and, therefore, an exchange
ratio of 1.2828. The actual exchange ratio will be determined on the date of
determination in accordance with the formulas set forth in the merger agreement.
See "The Merger Agreement."
The unaudited pro forma condensed combining statements of operations for the
nine months ended September 30, 2000 and for the period ended December 31, 1999
give effect to the above transactions as if they had been consummated on January
1, 1999. The unaudited condensed combining balance sheets give effect to the
above transaction as if it had occurred on September 30, 2000.
ACCOUNTING TREATMENT
Metromedia Fiber plans to record the acquisition of SiteSmith using the
purchase method of accounting. Accordingly, the assets acquired and liabilities
assumed will be recorded at their estimated fair values, which are subject to
further adjustment based upon appraisals and other analyses.
The pro forma adjustments are based upon available information and
assumptions that Metromedia Fiber believes are reasonable at the time made. The
unaudited pro forma condensed combining financial statements do not purport to
present Metromedia Fiber's financial position or results of operations had the
acquisition occurred on the dates specified, nor are they necessarily indicative
of the financial position or results of operations that may be achieved in the
future. The unaudited pro forma condensed combining statements of operations do
not reflect any adjustments for synergies that Metromedia Fiber expects to
realize following consummation of the acquisitions. No assurances can be made as
to the amount of cost savings or revenues enhancements, if any, that may be
realized.
The unaudited pro forma condensed combining financial statements should be
read in conjunction with the consolidated financial statements and notes of
Metromedia Fiber and of SiteSmith, included elsewhere in this information
statement/prospectus.
48
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SITESMITH METROMEDIA
HISTORICAL HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- ---------- -------------- ---------
<S> <C> <C> <C> <C>
Revenue...................................... $ 14,156 $ 127,118 $ (578)(2) $ 140,696
Expenses:
Cost of sales.............................. 20,900 133,466 (578)(2) 153,788
Selling, general and administrative........ 26,991 94,363 121,354
Deferred compensation...................... 11,900 919 104,980 (3) 117,799
Depreciation and amortization.............. 1,171 118,567 80,014 (4) 199,752
-------- --------- --------- ---------
Loss from operations......................... (46,806) (220,197) (184,994) (451,997)
Interest income.............................. 518 93,194 -- 93,712
Interest expense (including financing
costs)..................................... -- (142,745) -- (142,745)
Income (loss) from joint ventures............ -- (2,739) -- (2,739)
-------- --------- --------- ---------
Net loss..................................... (46,288) (272,487) (184,994) (503,769)
Accretion of redemption premium on
mandatorily redeemable convertible
preferred stock............................ (2,276) -- 2,276 (5) --
-------- --------- --------- ---------
Net loss available for common stockholders... $(48,564) $(272,487) $(182,718) $(503,769)
======== ========= ========= =========
Net loss per share........................... $ (0.51) $ (0.87)
========= =========
Weighted average number of shares outstanding
(6)........................................ 538,811 578,605
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL
STATEMENTS.
49
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
METROMEDIA
SITESMITH FIBER
HISTORICAL PRO FORMA ADJUSTMENTS (1) PRO FORMA
---------- ---------- --------------- ---------
<S> <C> <C> <C> <C>
Revenue...................................... $ 98 $ 96,491 $ (18)(2) $ 96,571
Expenses:
Cost of sales.............................. 484 74,958 (18)(2) 75,424
Selling, general and administrative........ 1,050 70,252 -- 71,302
Consulting and employment incentives....... -- 1,051 -- 1,051
Settlement agreement....................... -- 1,932 -- 1,932
Deferred compensation...................... 663 -- 139,973 (3) 140,636
Depreciation and amortization.............. 25 107,791 106,685 (4) 214,501
------- --------- --------- ---------
Loss from operations......................... (2,124) (159,493) (246,659) (408,276)
Interest income.............................. 21 36,785 -- 36,806
Interest expense (including financing
costs)..................................... -- (74,142) -- (74,142)
Income (loss) from joint ventures............ -- (2,003) -- (2,003)
------- --------- --------- ---------
Net loss..................................... (2,103) (198,853) (246,659) (447,615)
Accretion of redemption premium on
mandatorily redeemable convertible
preferred stock............................ (60) -- 60 (5) --
------- --------- --------- ---------
Net loss available for common stockholders... $(2,163) $(198,853) $(246,599) $(447,615)
======= ========= ========= =========
Net loss per share........................... $ (0.41) $ (0.85)
========= =========
Weighted average number of shares
outstanding (6)............................ 488,474 528,268
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL
STATEMENTS.
50
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
PRO FORMA CONDENSED COMBINING BALANCE SHEETS
(UNAUDITED)
SEPTEMBER 30, 2000
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SITESMITH METROMEDIA
HISTORICAL HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- ---------- -------------- ----------
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................. $ 5,099 $1,492,513 $ (3,121)(1) $1,494,491
Restricted cash, current.................. 482 -- 482
Marketable securities..................... -- 188,433 188,433
Accounts receivable....................... 6,981 86,249 93,230
Prepaid expenses and other current
assets.................................. 2,058 33,291 35,349
-------- ---------- ---------- ----------
Total current assets.................... 14,620 1,800,486 (3,121) 1,811,985
Fiber optic transmission network and related
equipment, net............................ -- 2,049,166 2,049,166
Property and equipment,net.................. 11,907 32,613 44,520
Restricted cash............................. 3,030 52,605 55,635
Investment in/advance to joint venture...... -- 23,068 23,068
Other assets................................ 1,253 97,642 98,895
Goodwill, net............................... -- 1,604,259 1,066,854 (1) 2,671,113
-------- ---------- ---------- ----------
Total assets............................ $ 30,810 $5,659,839 $1,063,733 $6,754,382
======== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................... 7,250 91,242 98,492
Accrued expenses.......................... 4,290 257,674 261,964
Deferred revenue, current................. -- 21,048 21,048
Capital lease obligations and notes
payable, current........................ -- 8,037 8,037
-------- ---------- ---------- ----------
Total current liabilities............... 11,540 378,001 -- 389,541
Mandatorily redeemable convertible preferred
stock..................................... 52,971 (52,971)(1) --
Senior notes payable........................ -- 1,660,900 1,660,900
Convertible subordinated notes payable...... -- 975,281 975,281
Capital lease obligations and notes
payable................................... -- 34,389 34,389
Deferred revenue............................ -- 226,278 226,278
Other long term liabilities................. -- 16,445 16,445
Total stockholders' (deficit) equity.... (33,701) 2,368,545 1,116,704 (1) 3,451,548
-------- ---------- ---------- ----------
Total liabilities and stockholders'
equity................................ $ 30,810 $5,659,839 $1,063,733 $6,754,382
======== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
51
<PAGE>
METROMEDIA FIBER NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(1) Reflects the acquisition by Metromedia Fiber of SiteSmith at September 30,
2000 for the balance sheet and January 1, 1999 for the statement of
operations as follows:
(a) September 30, 2000 information for SiteSmith has been adjusted to
reflect the issuance of 559,566 stock options from October 1 to
October 24, 2000, and 698,974 common stock warrants, at exercise prices
ranging from $1.75 to $5.65 per warrant. Series C manditorily redeemable
convertible preferred stock and common stock warrants are assumed to
convert to Metromedia Fiber Class A common stock based on the exchange
ratio.
(b) The issuance of 48,494,612 shares of Metromedia Fiber class A common
stock in exchange for shares of SiteSmith common stock, including the
conversion of SiteSmith's Series A, Series B and Series C mandatorily
redeemable convertible preferred stock, and the exercise of warrants to
purchase common stock, at a ratio of 1.2828, assuming that the price of
Metromedia Fiber's class A common stock is at the midpoint of the price
range of $24.00 to $27.2727.
(c) Issuance of shares of Metromedia Fiber class A common stock
<TABLE>
<S> <C> <C>
Number of shares issued to acquire SiteSmith (including
shares subject to repurchase)......................... 48,494,612
Per share price of stock................................ $ 25.6364
-----------
Value of shares issued.................................. $1,243,227,000
Value of Metromedia Fiber options issued in exchange for
SiteSmith's options................................... 259,697,000
Less value of restricted shares and unvested options
accounted for as deferred compensation................ (419,920,000)
Transaction costs....................................... 5,000,000
--------------
Total acquisition costs................................. 1,088,004,000
Fair value of SiteSmith's net tangible assets
acquired.............................................. (21,150,000)
--------------
Excess of cost over net tangible assets acquired........ $1,066,854,000
==============
</TABLE>
Metromedia Fiber has made a preliminary allocation to intangible assets of
excess cost over fair value of net tangible assets acquired as SiteSmith's
tangible assets and liabilities are estimated to approximate fair value.
However, there can be no assurance that the actual allocation will not
differ significantly from the pro forma allocation.
(2) Reflects elimination of intercompany sales.
(3) Reflects amortization of deferred compensation over the remaining vesting
period which is estimated to be three years.
(4) Reflects additional amortization of the excess of cost over tangible assets
acquired in the merger by use of the straight-line method over ten years.
(5) Reflects conversion of mandatorily redeemable preferred stock to common
stock.
(6) The average common shares outstanding used in calculating pro forma loss per
common share are calculated assuming that the number of shares of Metromedia
Fiber's class A common stock issued in the merger were outstanding from the
beginning of the periods presented. Further, 8,701,000 shares of class A
common stock subject to repurchase were deducted from shares outstanding.
52
<PAGE>
METROMEDIA FIBER'S ACQUISITION OF ABOVENET
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
The following unaudited pro forma condensed combining financial information
illustrates the effect of the merger of AboveNet on September 8, 1999 with
Metromedia Fiber's wholly-owned subsidiary for the year ended December 31, 1999.
Under the terms of the merger agreement, the holders of AboveNet common stock
received 1.175 shares of Metromedia Fiber's class A common stock for each share
of AboveNet common stock. The share price used to determine the acquisition cost
was derived from taking the average of the closing price of Metromedia Fiber's
class A common stock for the two days prior to and subsequent to the
announcement of the merger, which was June 23, 1999.
On June 21, 1999, AboveNet acquired the assets and assumed obligations
related to the Palo Alto Internet Exchange, known as PAIX, from Compaq Computer
Corporation ("Compaq") for approximately $76.5 million, consisting of
$70 million in cash, an obligation to provide various services to Compaq with a
value estimated to be approximately $5 million and expenses of approximately
$1.5 million.
The unaudited pro forma condensed combining statements of operation for the
year ended December 31, 1999 presented herein gives effect to Metromedia Fiber's
acquisition of AboveNet and AboveNet's acquisition of PAIX as if they had been
consummated on January 1, 1999. The unaudited pro forma condensed combining
financial information is based on the historical financial statements of
Metromedia, AboveNet and PAIX.
The pro forma adjustments are based upon available information and
assumptions that Metromedia Fiber believes are reasonable at the time made. The
unaudited pro forma condensed combined financial statements do not purport to
present Metromedia Fiber's financial position or results of operations had the
transaction occurred on the dates specified, nor are they necessarily indicative
of the financial position or results of operations that may be achieved in the
future. The unaudited pro forma condensed combined statements of operations do
not reflect any adjustments for synergies that Metromedia Fiber expects to
realize following consummation of the transactions. No assurances can be made as
to the amount of cost savings or revenue enhancements, if any, that may be
realized.
The unaudited pro forma condensed combining financial information should be
read in conjunction with the consolidated financial statements and notes of our
company, AboveNet and PAIX included elsewhere in this information
statement/prospectus.
53
<PAGE>
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
METROMEDIA METROMEDIA
ABOVENET(1) PAIX(2) PRO FORMA FIBER FIBER
HISTORICAL HISTORICAL ADJUSTMENTS ABOVENET HISTORICAL ADJUSTMENTS PRO FORMA
----------- ---------- ----------- --------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue $ 18,073 $3,171 $ -- $ 21,244 $ 75,247 $ -- $ 96,491
Expenses:
Cost of sales...... 24,132 2,013 (206)(3) 25,939 49,019 74,958
Selling, general
and
administrative... 21,810 301 -- 22,111 51,010 (2,869)(4) 70,252
Consulting and
employment
incentives....... 654 -- -- 654 397 1,051
Settlement
agreement........ 1,932 1,932
Depreciation and 5,228 (5) (5,228)(6)
amortization..... 5,006 1,696 (1,490)(3),(5) 10,440 45,965 56,614 (7) 107,791
-------- ------ ------- -------- --------- -------- ---------
Loss from
operations......... (33,529) (839) (3,532) (37,900) (73,076) (48,517) (159,493)
Interest income...... 4,679 -- -- 4,679 32,106 36,785
Interest expense
(including
financing costs)... (1,780) -- -- (1,780) (72,362) (74,142)
Loss in joint
ventures........... (397) -- -- (397) (1,606) (2,003)
-------- ------ ------- -------- --------- -------- ---------
Net loss............. $(31,027) $ (839) $(3,532) $(35,398) $(114,938) $(48,517) $(198,853)
Net loss per share... $ (0.28) $ (0.41)
========= =========
Weighted average
number of shares
outstanding(8) 407,192 488,474
========= =========
</TABLE>
SEE ACCOMPANYING NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL
STATEMENTS.
54
<PAGE>
METROMEDIA FIBER NETWORK, INC.
ACQUISITION OF ABOVENET
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
(1) AboveNet historical amounts are for the period through the acquisition by us
on September 8, 1999.
(2) PAIX historical amounts are for the period through the acquisition by
AboveNet on June 21, 1999.
(3) Reflects adjustments to conform to Metromedia Fiber's presentation.
(4) Reflects the elimination of merger related expenses.
(5) Reflects adjustments related to the acquisition by AboveNet of PAIX at
January 1, 1999 as follows:
(i) The elimination of PAIX historical intangible asset amortization; and
(ii) The addition of amortization for the excess of cost over net tangible
assets acquired of PAIX ($69.7 million) over 10 years.
(6) Reflects the elimination of AboveNet's historical intangible asset
amortization.
(7) Reflects additional amortization of the excess of cost over net tangible
assets acquired in the merger by use of the straight-line method over 20
years.
(8) The average common shares outstanding used in calculating pro forma loss per
common share are calculated assuming that the number of shares of Metromedia
Fiber's class A common stock issued in the merger were outstanding from
January 1, 1999.
55
<PAGE>
BUSINESS OF METROMEDIA FIBER
GENERAL
Metromedia Fiber provides dedicated fiber optic infrastructure and high
performance internet connectivity for its communications intensive customers.
Metromedia Fiber is a facilities-based provider of end-to-end optical solutions
that offer virtually unlimited, unmetered bandwidth at a fixed cost to its
communications carrier, corporate and government customers in the United States
and Europe. Through its AboveNet Communications Inc. subsidiary, Metromedia
Fiber provides internet infrastructure to its customers. The combined company
facilitates the growth of e-commerce and advanced internet and communications
applications by delivering secure, reliable and scaleable optical networks and
IP services to internet content and service providers, communications carriers
and enterprise users worldwide.
Metromedia Fiber was founded in 1993 and is a Delaware corporation and its
executive offices are located at 360 Hamilton Avenue, White Plains, New York
10601.
Metromedia Fiber is expanding its presence to approximately 50 markets in
the United States and 17 major international markets. To date, Metromedia Fiber
has 10 cities operational, 24 cities under construction, and the balance in the
engineering phase.
THE INTRA-CITY NETWORKS. Metromedia Fiber's existing intra-city networks
consist of approximately 924,000 fiber miles covering in excess of 1,600 route
miles in the United States. Metromedia Fiber is currently expanding its existing
local intra-city networks in metropolitan areas and constructing additional
intra-city networks in other Tier I and Tier II markets in the United States.
THE INTER-CITY NETWORKS. Metromedia Fiber's inter-city network currently
consists of approximately 225,000 fiber miles primarily covering the 255
route-mile network that it has built between New York City and Washington, D.C.
Metromedia Fiber has also built or contracted to acquire a nationwide dark fiber
network linking its intra-city networks.
THE INTERNATIONAL NETWORKS. In addition to Metromedia Fiber's domestic
networks, Metromedia Fiber is expanding its international presence to include
approximately 17 major markets. In February 1999, Metromedia Fiber entered into
an agreement with Viatel, Inc. and Carrier 1 Holdings, Ltd. to jointly build a
dark fiber inter-city network between selected cities throughout Germany. Once
completed, Metromedia Fiber's German network will consist of approximately
320,000 fiber miles covering in excess of 1,450 route miles connecting 14 major
cities. Metromedia Fiber has also acquired fiber on the Circe network, which
connects a number of European markets. In addition to its inter-city networks,
Metromedia Fiber is constructing 16 intra-city networks throughout Europe.
Separately, Metromedia Fiber has also entered into a contract to acquire rights
to dark fiber network facilities in Toronto, Canada.
INTERNET CONNECTIVITY AND EXCHANGE. Through its acquisition of AboveNet,
Metromedia Fiber is a leading provider of high performance internet connectivity
services to a wide range of internet service providers, internet content
providers and web hosting companies and facilities-based, managed co-location
services. Its internet exchange server facilities provide high performance,
reliable and scalable solutions for electronic commerce and other business
critical applications. AboveNet developed a network architecture based upon
strategically located, fault-tolerant internet exchange servers. Metromedia
Fiber currently operates four internet service exchange campuses, two of which
are located near two of the major internet access points, metropolitan area
exchange west and metropolitan area exchange east, using Metromedia Fiber's
suite of sophisticated network management and remote monitoring tools.
Metromedia Fiber believes that its centralized network architecture provides
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enhanced connectivity while eliminating the need to build numerous
geographically dispersed data centers. AboveNet's internet service exchange
model offers customers the benefits of combining direct internet service
providers access with co-location services for internet content providers. As of
September 30, 2000, AboveNet had more than 457 direct public and private data
exchange agreements, known as peering arrangements, including relationships with
most major network providers. The convergence of content providers and internet
service providers at Metromedia Fiber's internet service exchanges enables
internet service provider customers to provide their users with "one hop"
connectivity, through Metromedia Fiber's local area network, to the Web sites of
the internet content providers that are co-located at the same site. This direct
connectivity minimizes the risk of delays and data loss often encountered in the
transmission of data over the public internet infrastructure.
AboveNet's wholly-owned subsidiary PAIX.net, Inc., known as PAIX, began
operations in 1996 as Digital Equipment Corporation's PAIX. Having proven itself
as a vital part of the internet infrastructure, PAIX serves as a packet
switching center for internet service providers. PAIX also offers secure,
fault-tolerant co-location services to internet service providers. PAIX is the
only major commercial internet exchange or IX that is not owned by a
telecommunications carrier, which enables internet service providers at PAIX to
form public and private peering relationships with each other and choose from
multiple telecommunications carriers for circuits, all within the same facility.
CUSTOMERS. Metromedia Fiber is focused on providing its broadband
communications infrastructure and internet connectivity services to two main
customer groups located in Tier I and Tier II markets: communications carriers
and corporate/government customers.
Metromedia Fiber's targeted customers include a broad range of companies
such as:
- incumbent local exchange carriers or ILECs;
- competitive local exchange carriers or CLECs;
- long distance companies/IXCs;
- paging, cellular and PCS companies;
- cable companies;
- Fortune 500 and major financial institutions;
- internet service providers; and
- Web hosting and e-commerce companies.
Metromedia Fiber's dark fiber customers typically lease Metromedia Fiber's
fiber optic capacity with which they develop their own communications networks.
Leasing Metromedia Fiber's fiber optic capacity is a low-cost alternative to
building their own infrastructure or purchasing metered services from ILECs or
CLECs. Metromedia Fiber's internet connectivity and co-location customers
typically lease bandwidth and co-location space which allows them to provide
their internet related services on a reliable and cost-effective basis.
Metromedia Fiber believes that it is well-positioned to penetrate its target
customer base since it plans to continue to install most of its dark fiber
networks and internet service exchanges in major markets where these customers
are concentrated. Metromedia Fiber believes its target customers for its dark
fiber and internet connectivity are complementary and will provide significant
cross selling opportunities.
NETWORK INFRASTRUCTURE. Metromedia Fiber has designed its networks to
provide high levels of reliability, security and flexibility by virtue of a
self-healing SONET architecture that prevents interruption in service to its
clients by instantaneously rerouting traffic in the event of a fiber cut.
Metromedia Fiber's advanced network architecture is also capable of supporting
state-of-the-art technologies, including DWDM (dense wave division
multiplexing), which significantly increases the
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transmission capacity of a strand of fiber optic cable. Because DWDM can boost
transmission capacity significantly, it has greater relevance on Metromedia
Fiber's inter-city routes where Metromedia Fiber has, on average, fewer strands
of fiber installed than in Metromedia Fiber's intra-city markets. Where
practicable, Metromedia Fiber installs additional unused conduits to cost
effectively accommodate future network expansion and eliminate the need for
future construction.
MARKET OPPORTUNITY. Metromedia Fiber believes that the market for its dark
fiber services is characterized by significant and growing demand for, and
limited supply of, fiber optic capacity. To meet its customers' demand,
Metromedia Fiber tailors the amount of fiber capacity leased to the needs of its
customers. Generally, customers lease fiber optic capacity from Metromedia Fiber
and connect their own transmission equipment to the leased fiber, thereby
obtaining a high-bandwidth, fixed-cost, secure communications alternative to the
metered communications services offered by traditional providers. In addition,
Metromedia Fiber believes that it has installation, operating and maintenance
cost advantages per fiber mile relative to its competitors because Metromedia
Fiber generally install 432 fibers, and has begun installing as many as 864
fibers, per route mile, as compared to the generally lower number of fibers per
mile in existing competitive networks.
Metromedia Fiber believes the market for its internet service exchanges is
characterized by significant and growing demand for, and limited access to,
highly reliable internet connectivity and co-location services. To meet
Metromedia Fiber's customers' demands, it provides scalable connectivity and
co-location services that drive its customers' electronic commerce and other
mission critical internet applications. Metromedia Fiber's customers lease
bandwidth and co-location space from it to gain highly reliable, secure and cost
effective internet connectivity. Through its existing and planned networks,
Metromedia Fiber believes it has the low cost position relative to those
competitors who lease rather than own their networks.
MANAGEMENT EXPERTISE. Metromedia Fiber benefits from the support of its
controlling stockholder, Metromedia Company. On April 30, 1997, Metromedia
Company and certain of its affiliates made a substantial equity investment in
Metromedia Fiber (the "Metromedia Investment"). As a result, Metromedia Company
and its partners own all of Metromedia Fiber's outstanding shares of class B
common stock, par value $.01 per share. Metromedia Fiber's class B common stock
is entitled to 10 votes per share and to vote separately to elect at least 75%
of the members of the Board of Directors. As of the date of this information
statement/prospectus, Metromedia Company and its partners own and control more
than a majority of the outstanding voting power of Metromedia Fiber.
VERIZON COMMUNICATIONS INVESTMENT. Metromedia Fiber also anticipates
benefits from the March 6, 2000 investment in it by Verizon Communications. On
October 7, 1999, Metromedia Fiber entered into a securities purchase agreement
with Verizon Communications, under which Verizon Communications would purchase
up to approximately 51.2 million newly issued shares of Metromedia Fiber's
class A common stock at a purchase price of $14.00 per share and a convertible
subordinated note of approximately $975.3 million, which is convertible into
shares of Metromedia Fiber's class A common stock at a conversion price of
$17.00 per share. This transaction closed on March 6, 2000. After the issuance
of the 51.2 million shares of class A common stock and assuming conversion of
the convertible subordinated note, this investment would represent 18.2% of
Metromedia Fiber's outstanding shares. Verizon Communications has also agreed to
pay Metromedia Fiber $550 million over the next three years in exchange for
delivery of fiber optic facilities over the next five years. The proceeds from
these two transactions will be used to fund the expansion of Metromedia Fiber's
network.
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BUILD-OUT OF NETWORKS
Metromedia Fiber has concentrated on developing and constructing its
networks. It has either obtained or is currently pursuing the acquisition of
necessary licenses, franchises and rights-of-way to construct these networks. On
May 22, 2000, Metromedia Fiber awarded Bechtel Corporation a contract to provide
program and construction management, and construction services, for Metromedia
Fiber's currently planned build of optical networks in metropolitan areas
throughout North America and Europe. The agreement allows Metromedia Fiber to
streamline engineering processes, control network quality and maintain its
low-cost position by using a single point-of-contact for its infrastructure
projects. Metromedia Fiber utilizes only advanced commercially available fiber.
It has ordered a substantial portion of its fiber optic cable from Lucent
Technologies, Inc. However, Metromedia Fiber believes that it could obtain
advanced fiber from other suppliers on acceptable terms.
Metromedia Fiber's existing intra-city networks currently consist of
approximately 924,000 fiber miles covering in excess of 1,600 route miles in the
United States. Metromedia Fiber's inter-city network consists of approximately
225,000 fiber miles primarily covering Metromedia Fiber's 255 route-mile network
that it has built between New York City and Washington D.C. It has also built
or, contracted to acquire a nationwide dark fiber network linking its intra-city
networks.
Metromedia Fiber has also entered into an agreement with Carrier 1
Holdings, Ltd. and Viatel, Inc., to jointly build a dark fiber intercity network
between selected cities throughout Germany. Once completed, Metromedia Fiber's
German inter-city network will consist of approximately 320,000 fiber miles
covering in excess of 1,450 route miles that will connect 14 of Germany's
largest cities such as Hamburg, Berlin, Munich, Frankfurt and Dusseldorf.
Metromedia Fiber has also acquired fiber on the Circe networks, which connects a
number of European markets. In addition to its inter-city networks, Metromedia
Fiber is constructing 16 intra-city networks throughout Europe. Separately, it
has also entered into a contract to acquire rights to dark fiber network
facilities in Toronto, Canada. Metromedia Fiber's networks will be high-capacity
broadband networks capable of supporting high-quality voice, video, internet
protocol and data traffic and built using a self-healing SONET architecture.
In addition, Metromedia Fiber has acquired from Pacific Gateway Exchange,
Inc. up to 137 STM-1s of capacity on the Japan-U.S. Cable Network and up to 168
STM-1s of capacity on the TAT-14 cable network, which will connect the United
States and Europe. The amount of capacity available to Metromedia Fiber on each
cable system will depend on the amount of capacity that each system ultimately
places in service. Metromedia Fiber expects the initial tranches of capacity on
both systems to be available by the end of the second quarter of 2001.
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THE INTERNET SERVICE EXCHANGE
Metromedia Fiber's internet service exchanges ("ISXs") provide co-location
services, internet connectivity services, network management services and tools.
Its ISXs provide Metromedia Fiber's customers with the most advanced, fail-safe
data center environment available, as well as superior internet connectivity.
The unique combination of intelligent connectivity and massive bandwidth
availability enables content and service providers to deliver an ever-advancing
class of new, data-rich applications. Metromedia Fiber's network employs
intelligent network routing and peering technology, thereby ensuring the highest
level of data integrity of any network. By co-locating network equipment and
servers in ISXs, enterprise customers, content providers and internet service
providers can combine the advanced internet connectivity solutions with
virtually unlimited data throughput capacity via dark fiber connections running
into each center. Metromedia Fiber's management services and tools enable
Metromedia Fiber and its customers to continuously manage their internet
operations jointly, proactively and remotely.
INTERNET CONNECTIVITY
Metromedia Fiber's internet connectivity services are designed to meet the
requirements of high bandwidth, business critical internet operations by
providing highly reliable, scalable, non-stop and uncongested operations. As of
September 30, 2000, AboveNet had peering relationships with more than 420
network providers. Any failure by AboveNet to maintain and increase peering
relationships would have a material adverse effect on Metromedia Fiber's
business, results of operations and financial condition.
Metromedia Fiber's network is designed to minimize the likelihood of service
interruptions. Each ISX has multiple physical fiber paths into the facility.
Metromedia Fiber maintains multiple network links from multiple vendors and
regularly check that its network traffic traverses physically separated paths.
This network architecture enhances the availability of a customer's site, even
in the event of a link failure. In addition, since Metromedia Fiber's customers'
internet operations often experience network traffic spikes due to promotions or
events, Metromedia Fiber has a policy of maintaining significant excess
capacity. Metromedia Fiber might not be able to expand or adapt its
telecommunications infrastructure to meet additional demand or its customers'
changing requirements on a timely basis and at a commercially reasonable cost,
or at all.
Metromedia Fiber's internet connectivity services are also designed to
reduce latency and to enhance network performance. Its engineering personnel
continuously monitor traffic patterns and congestion points throughout the
internet and dynamically reroute traffic flows to improve end-user response
times. Metromedia Fiber also enhances network performance by maintaining what
Metromedia Fiber believes is among the largest number of direct public and
private network peering interconnections in the industry. For customers seeking
a direct communications link to the site of another customer that is located at
the same ISX, Metromedia Fiber offers highly secure, fast and efficient
cross-connections.
CO-LOCATION SERVICES
Metromedia Fiber provides co-location services designed to meet the demands
of sophisticated, multi-vendor business critical internet operations. Metromedia
Fiber supports most leading internet hardware and software system vendor
platforms, including those from Ascend Communications, Inc., Nortel Networks,
Cisco Systems, Inc., Compaq Computer Corporation, Dell Computer Corporation, EMC
Corporation, Hewlett-Packard Company, International Business Machines
Corporation, Lucent Technologies Inc., Microsoft Corporation, Apple
Computer, Inc., Network Appliance, Inc., Silicon Graphics Inc., Sun
Microsystems Inc. and 3Com Corporation. This multi-vendor compatibility enables
Metromedia Fiber's customers to retain control over their choice of technical
solution and to integrate
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their internet operations into Metromedia Fiber's existing information
technology architecture. Because business critical internet operations are
dynamic and often require timely hardware and software upgrades to maintain
targeted service levels, customers have twenty-four hours a day, seven days a
week physical and remote access to the ISX facilities. Additional space and
electrical power can be added as needed in order to provide Metromedia Fiber's
customers with access to additional server co-location services. Customers
install and manage their own hardware and software at Metromedia Fiber's
facilities. Metromedia Fiber does not provide any Web hosting services.
MANAGEMENT SERVICES AND TOOLS
Metromedia Fiber's management services and tools support business critical
internet operations by providing the customer with detailed monitoring,
reporting and management tools to control their hardware, network, software and
application environments. Through Metromedia Fiber's network management services
and tools, customers are able to remotely manage their business critical
internet operations housed at its ISX facilities. Metromedia Fiber believes that
this provides an important advantage to enterprises that seek to outsource a
portion of their internet operations and to link the management of the
outsourced operations with in-house operations. Metromedia Fiber's proactive
management services and tools enable it to identify and resolve hardware,
software, network and application problems, often before the customer is aware
that a problem exists.
TECHNOLOGY
Metromedia Fiber's networks consist of fiber optic communications networks
which allow for high speed, high quality transmission of voice, data and video.
Fiber optic systems use laser-generated light to transmit voice, data and video
in digital formats through ultra-thin strands of glass. Fiber optic systems are
generally characterized by large circuit capacity, good sound quality,
resistance to external signal interference and direct interface to digital
switching equipment or digital microwave systems. Metromedia Fiber plans to
install backbone fiber optic cables containing up to 864 fiber optic strands,
which have significantly greater bandwidth than traditional analog copper
cables. Using current electronic transmitting devices, a single pair of glass
fibers used by Metromedia Fiber's network can transmit up to 8.6 gigabits of
data per second or the equivalent of approximately 129,000 simultaneous voice
conversations, which is substantially more than traditional analog copper cable
installed in many current communications networks. Metromedia Fiber believes
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.
Metromedia Fiber's network is capable of using the highest commercially
available capacity transmission (OC-192) and thereby can handle advanced,
capacity-intensive data applications such as voice over internet Protocol, video
teleconferencing, Frame Relay, ATM, multimedia and internet-related
applications. In its intra-city networks, Metromedia Fiber offers end-to-end
fiber optic capacity, capable of utilizing SONET capable ring architecture,
which has the ability to route customer traffic in either direction around its
ring design thereby assuring that fiber cuts do not interrupt service to
customers on its networks. Metromedia Fiber's networks are also capable of
supporting DWDM. Currently, a state-of-the-art network operating system
continuously monitors and maintains quality control of networks on a 24-hour
basis, alerts Metromedia Fiber of any degradation or loss of fiber capacity and
pinpoints the location of such degradation. This network operating system also
enables Metromedia Fiber 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 Metromedia Fiber to
ensure that its customers obtain continuous service.
Metromedia Fiber's connectivity services utilize its internally developed
ASAP network monitoring and routing technology to enhance internet connectivity
by monitoring all of Metromedia Fiber's direct and indirect network connections
for congestion. ASAP automatically monitors all of Metromedia
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Fiber's major providers' and peers' direct and indirect connections on a
real-time 24-hour basis to identify congestion. If packet loss and congestion is
detected on any of the links that directly affect customers' performance,
Metromedia Fiber's network engineers are able to dynamically reroute traffic
temporarily away from the problem link. This functionality is particularly
important for emerging applications such as audio and video streaming and voice
over the internet.
FRANCHISE, LICENSE AND RELATED AGREEMENTS
When Metromedia Fiber decides to build a fiber optic communications network,
its corporate development staff seeks to obtain the necessary rights-of-way and
governmental authorizations. In some jurisdictions, a construction permit is all
that is required. In other jurisdictions, a license agreement, permit or
franchise is also required. Such licenses, permits and franchises are generally
for a term of limited duration. Where possible, rights-of-way are leased under
multi-year agreements with renewal options and are generally non-exclusive.
Metromedia Fiber leases underground conduit and pole space and other
rights-of-way from entities such as ILECs, utilities, railroads, IXCs, state
highway authorities, local governments and transit authorities. Metromedia Fiber
strives to obtain rights-of-way that afford it the opportunity to expand its
communications networks as business develops.
SALES AND MARKETING
Metromedia Fiber's sales and marketing strategy includes:
- positioning Metromedia Fiber as the preferred facilities based provider of
broadband communications infrastructure and internet connectivity
services;
- focusing on high dollar volume corporate and government customers;
- emphasizing the cost advantages that will allow Metromedia Fiber to lease
its fiber optic infrastructure at fixed prices which represent potentially
significant savings for its large volume carrier and corporate customers
relative to their present build or buy alternatives;
- achieve broad market penetration and increase brand recognition for its
internet connectivity services among internet service providers, internet
content providers and Web hosting companies; and
- Identify opportunities to cross-sell its internet connectivity services to
its complementary infrastructure customer base.
Metromedia Fiber also believes that communications carrier and corporate and
government customers will be attracted to its dark fiber product and its
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, but which will carry a signal generated by the customer.
Metromedia Fiber intends initially to centralize its sales and marketing efforts
on carrier customers through a national sales team and it is currently in the
process of hiring additional sales professionals to focus on these customers. As
Metromedia Fiber has constructed fiber optic networks in new cities, it has
hired sales forces in these areas to target regional corporate, government and
to a lesser extent carrier customers. Metromedia Fiber plans to continue this
strategy.
For Metromedia Fiber's internet connectivity services, it has developed a
two-tiered sales strategy to target leading internet service providers, internet
content providers and Web hosting companies through direct sales and channel
relationships. Metromedia Fiber maintains a direct sales force of highly trained
individuals in San Jose, California, New York, New York and Vienna, Virginia.
Metromedia Fiber's sales force is supported by its sales engineers and, in many
circumstances, by its senior management. Metromedia Fiber is also seeking to
develop relationships with potential channel
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partners including hardware vendors, value added resellers, system integrators,
application hosting and Web hosting companies in order to leverage their sales
organizations.
COMPETITION
Fiber optic systems are currently under construction both locally and
nationally. In New York City, for example, several franchisees have been granted
the right to install and operate a telecommunications network within the city.
Development of fiber optic networks is also continuing on a national scale. The
construction of these networks enables their owners to lease access to their
networks to other communications carriers or large corporate or government
customers seeking high bandwidth capacity, without these customers having to
incur costly expenditures associated with building networks of their own.
Alternatively, some network owners may choose to use their infrastructure to
provide switched voice and data services, competing directly with ILECs and
IXCs. Currently, Metromedia Fiber does not provide such services or plan to
provide such services.
In the cities where it plans to deploy fiber optic communications networks,
it faces significant competition from the ILECs, which currently dominate their
local communications markets. Metromedia Fiber also faces competition from CLECs
and other potential competitors in these markets and will face competition in
the cities in which it plans to build its networks. Many of Metromedia Fiber's
competitors have financial, management and other resources substantially greater
than that of Metromedia Fiber, as well as other competitive advantages over
Metromedia Fiber, 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 Metromedia Fiber in the market for leasing fiber
capacity. In addition, although CLECs generally provide a wider array of
services to their customers than Metromedia Fiber presently provides to its
customers, CLECs nevertheless represent an alternative means by which Metromedia
Fiber's potential customer could obtain direct access to an IXC POP or other
site of the customer's choosing. Thus, CLECs could compete with Metromedia
Fiber. In November 1999, the Federal Communications Commission ordered ILECs to
provide nondiscriminatory access to their dark fiber to other telecommunications
services providers. This will increase the competitive nature of Metromedia
Fiber's business.
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.
Metromedia Fiber believes 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. Metromedia Fiber
believes that the CLECs, IXCs, internet service providers, wireless carriers and
corporate and government customers on which it focuses will have distinct
requirements, including maximum reliability, consistent high quality
transmissions, capacity for high-speed data transmissions, diverse routing and
responsive customer service. Metromedia Fiber believes that it will be able to
satisfy the needs of such customers.
Metromedia Fiber's internet connectivity services business is intensely
competitive. There are few substantial barriers to entering the co-location
service business, and Metromedia Fiber expects that it will face additional
competition from existing competitors and new market entrants in the future.
Metromedia Fiber believes that participants in this market must grow rapidly and
achieve a significant presence in the market in order to compete effectively.
Metromedia Fiber believes that the principal
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competitive factors in this market are uncongested connectivity, quality of
facilities, level of customer service, price, the financial stability and
credibility of the provider, brand name and the availability of network
management tools. AboveNet might not have the resources or expertise to compete
successfully in the future. Metromedia Fiber's current and potential competitors
in this market include:
- providers of co-location services, such as Exodus Communications, Inc.,
Frontier Corporation, which was acquired by Global Crossing Ltd., Hiway
Technologies, Inc., which was acquired by Verio Inc., and Globix
Corporation;
- national and regional internet service providers, such as Concentric
Network Corporation, PSINet, Inc., MCI WorldCom and certain subsidiaries
of GTE Corporation;
- global, regional and local telecommunications companies, such as Sprint,
MCI WorldCom and Regional Bell Operating Companies, some of whom supply
capacity to AboveNet; and
- large information technology outsourcing firms, such as International
Business Machines Corporation and Electronic Data Systems.
REGULATION
As a provider of communications facilities, Metromedia Fiber is subject to
varying degrees of regulation in each of the jurisdictions in which it operates.
In the United States, some aspects of its services are regulated by the FCC and
various state regulatory bodies. In some local jurisdictions, Metromedia Fiber
must obtain approval to operate or construct its networks. In other countries
where Metromedia Fiber operates it 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 Metromedia Fiber competes. Metromedia Fiber offers two types of
services--the leasing of dark fiber and the provision of telecommunications
transmission services--that are subject to varying degrees of regulation by the
FCC pursuant to the provisions of the Communications Act of 1934, as amended, by
the Telecommunications Act of 1996 (the "Communications Act"), and by FCC
regulations implementing and interpreting the Communications Act.
The Communications Act imposes legal requirements on "common carriers" who
engage in "interstate or foreign communication by wire or radio" and on
"telecommunications carriers." Telecommunications carriers, or common carriers,
are providers of telecommunications services, which is defined by the
Communications Act as the offering of telecommunications for a fee "directly to
the public" or to all potential users of an indiscriminate basis subject to
standardized rates, terms, and conditions.
DARK FIBER LEASING. Metromedia Fiber believes that it is not a
"telecommunications carrier" or "common carrier" with respect to its leasing of
dark fiber facilities, and therefore that Metromedia Fiber's dark fiber
activities are not subject to special legal requirements applicable to such
carriers. First, the FCC has said that leasing dark fiber is not a
"telecommunications service" that is subject to FCC regulation. The FCC
considers dark fiber a "network element". The FCC generally regulates
"communication by wire or radio" or the "transmission" of "information of the
users' choosing," neither of which describes the leasing of dark fiber
facilities. Second, Metromedia Fiber does not offer dark fiber facilities as a
common carrier, i.e., to all potential users on an indiscriminate basis.
Instead, Metromedia Fiber enters into individualized negotiations on a selective
basis with prospective lessees of its dark fiber facilities to determine whether
and on what terms to serve each potential lessee. Metromedia Fiber's dark fiber
offerings should therefore not be subject to the common carrier jurisdiction of
the FCC or to the common carrier provisions of the Communications Act.
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If Metromedia Fiber's offering of dark fiber facilities were deemed to
constitute "telecommunications," then Metromedia Fiber's revenues from such
leases to end users (but not to other telecommunication carriers), whether or
not provided on a common carrier basis, would become subject to assessment for
the FCC's Universal Service Fund to assist in ensuring the universal
availability of basic telecommunications services at affordable prices, and
other FCC assessments. The FCC announced that the rate of assessment will be
approximately 5.88% of gross interstate end-user revenues for the first quarter
of 2000. On July 30, 1999, the U.S. Court of Appeals for the Fifth Circuit
upheld in part the FCC's order but determined that assessments must be limited
to interstate revenues. Metromedia Fiber cannot predict the effect of this
ruling on the rate of assessment, or what rates of assessment will apply in
future years. Metromedia Fiber may also be liable for assessments by state
commissions for state universal service programs.
TRANSMISSION SERVICES. With respect to Metromedia Fiber's offering of
telecommunications services, however, Metromedia Fiber will likely operate as a
common carrier, offering such transmission services to all potential users
indiscriminately, and therefore will be subject to the regulatory requirements
applicable to common carriers and to telecommunications carriers. For example,
Metromedia Fiber will be required, with respect to its transmission services, to
(1) provide such services indiscriminately upon any reasonable request;
(2) charge rates and adopt practices, classifications and regulations that are
just and reasonable; and (3) avoid unreasonable discrimination in charges,
practices, regulations, facilities and services. Metromedia Fiber may also be
required to file tariffs setting forth the rates for its services. Under current
FCC policies, these regulatory requirements should not impose any substantial
burdens on Metromedia Fiber. The FCC has recently determined, for example, that
providers of "access" services (intracity transmission services used to
originate and/or terminate interstate and foreign communications) need not file
tariffs and may offer such services to customers on a private, contractual
basis. Metromedia Fiber's revenues from transmission services will also be
subject to FCC Universal Service Fund assessments as discussed above, to the
extent that these services are purchased by end users. Since the revenues of
Metromedia Fiber's competitors will be subject to comparable assessments, this
should not reduce Metromedia Fiber's competitiveness. Also, being regulated as a
"telecommunications carrier" will give Metromedia Fiber's certain legal
benefits. In particular, Metromedia Fiber will be entitled, like other
competitive local exchange carriers to insist upon access to the existing
telecommunications infrastructure by interconnecting its fiber-optic networks
with incumbent local exchange carriers central offices and other facilities.
Under the 1996 Telecom Act, ILECs must, among other things: (1) allow
interconnection 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.
ILECs must also provide "physical co-location" for other telecommunications
carriers. Physical co-location is an offering by an ILEC that enables another
telecommunications carrier to enter the ILEC's premises to install, maintain and
repair its own equipment that is necessary for interconnection or access to the
ILEC's network elements. An ILEC is required to allocate reasonable amounts of
space to carriers on a first-come first-served basis. If space limitations or
practical or technical reasons prohibit physical co-location, an ILEC must offer
"virtual co-location," by which the other carrier may specify ILEC equipment to
be dedicated to its use and electronically monitor and control communications
terminating in such equipment. Metromedia Fiber intends, in some instances, to
co-locate portions of its network on the premises of certain ILECs. Metromedia
Fiber's ability to do this on a cost-effective basis will depend on the rates,
terms and conditions established for co-location, which will be established by
state regulators in arbitration proceedings and therefore may vary from one
state to the next.
The FCC has responsibility under the 1996 Telecom Act's interconnection
provisions to determine what elements of an ILEC's network must be provided to
competitors on an unbundled basis. The FCC declared dark fiber an unbundled
network element under these provisions. The FCC's requirements for
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unbundling were overturned by the Supreme Court, which ordered the FCC to
re-evaluate the standard it uses to determine which network elements need to be
unbundled. In response, the FCC recently issued an order affirming all but one
of the network elements and also stating for the first time that ILECs must
provide access to dark fiber as a separate element. In addition, federal
district courts in a number of jurisdictions have interpreted the 1996 Telecom
Act to include dark fiber as a network element, which must be unbundled. The FCC
decision to treat dark fiber as an unbundled element, as well as these court
rulings, could decrease the demand for dark fiber provided by Metromedia Fiber
because its potential customers will be able to obtain dark fiber from ILECs at
cost-based rates. In addition, the FCC has announced that state commissions may
decide to add network elements to the FCC's list of elements that are required
to be unbundled by carriers.
ILECs, CLECs and inter-exchange carriers are subject to other requirements
under the Communications Act, the FCC regulations and additional federal
telecommunications laws. These requirements may affect Metromedia Fiber's
business by virtue of the inter-relationships that exist among Metromedia Fiber
and many of these regulated telecommunications carriers. For example, the FCC
recently issued an order requiring, among other things, that access charges
(fees charged by ILECs to IXCs for use of local telephone facilities for the
origination and termination of long-distance calls) shift in part from being
usage driven to a fixed flat cost-based structure. The FCC recently issued an
order granting ILECs greater pricing flexibility for their access services (both
switched and non-switched), which may permit the ILECs to compete more
effectively against some of Metromedia Fiber's service offerings. While it is
not possible to predict the precise effect the access charge changes will have
on Metromedia Fiber's business or financial condition, the reforms will reduce
access charges paid by IXCs, likely making the use of ILEC facilities by IXCs
more attractive, which could have a material adverse effect on the use of
Metromedia Fiber's fiber optic telecommunications networks by IXCs. Bell
Atlantic's proposed investment could subject Metromedia Fiber to additional
regulation by the FCC. Bell Atlantic is an ILEC and pursuant to the
Communications Act may not provide long distance service within its geographic
region until certain conditions are met. Companies in which an ILEC owns greater
than a ten percent ownership interest are subject to the same prohibitions. If
such prohibitions applied to Metromedia Fiber it would have a material adverse
effect on Metromedia Fiber's business. For that reason, Metromedia Fiber's
agreement with Bell Atlantic prohibits Bell Atlantic from owning more than ten
percent of Metromedia Fiber until the long-distance prohibitions no longer apply
to Bell Atlantic and its affiliates.
STATE
The 1996 Telecom Act prohibits state and local governments from enforcing
any law, rule or legal requirement that prohibits, or has the effect of
prohibiting, any person from providing any interstate or intrastate
telecommunications service. Nonetheless, this provision of the 1996 Telecom Act
should enable Metromedia Fiber and its customers to provide telecommunications
services in states that previously prohibited competitive entry.
However, states retain jurisdiction, on a competitively neutral basis, under
the 1996 Telecom Act, to adopt regulations necessary to preserve universal
service, protect public safety and welfare, manage public rights of way, ensure
the continued quality of communications services and safeguard the rights of
consumers.
States continue to determine the rates that ILECs can charge for most of
their intrastate services. They are also responsible for mediating and
arbitrating ILEC interconnection arrangements with other carriers if voluntary
agreements are not reached. Accordingly, state involvement in local
telecommunications services is substantial.
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Each state (and the District of Columbia, which is treated as a state for
the purpose of regulation of telecommunications services) has its own statutory
scheme for regulating providers of telecommunications services of they are
"common carriers" or "public utilities". As with the federal regulatory scheme,
Metromedia Fiber believes that the offering of dark fiber facilities does not
make Metromedia Fiber a common carrier or public utility so Metromedia Fiber
would not be subject to this type of regulation in most jurisdictions in which
it currently has or plans to construct facilities. Metromedia Fiber's offering
of transmission services (as distinct from dark fiber capacity), however, will
likely be subject to regulation in each of these jurisdictions to the extent
that these services are offered for intra-state use. Even though its facilities
will be physically located in individual states, Metromedia Fiber anticipates
that most customers will use Metromedia Fiber's facilities and services for the
purpose of originating and/or terminating interstate and foreign communications.
Under current FCC policies, any dedicated transmission service or facility that
is used more than 10% of the time for the purpose of inter-state or foreign
communication is subject to FCC jurisdiction to the exclusion of any state
regulation.
State regulation of the telecommunications industry is changing rapidly, and
the regulatory environment varies substantially from state to state. Metromedia
Fiber's subsidiaries are currently authorized to provide intrastate
telecommunications services in California, Colorado, Connecticut, Delaware,
District of Columbia, Florida, Georgia, Illinois, Kansas, Maryland,
Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New York, Ohio,
Oregon, Pennsylvania, Rhode Island, Texas, Virginia, Washington and have
applications pending in Arizona, Louisiana and North Carolina. At present,
Metromedia Fiber does not anticipate that the regulatory requirements to which
Metromedia Fiber will be subject in the states in which it currently intends to
operate will have any material adverse effect on its operations. These
regulations may require, among other things, that Metromedia Fiber obtain
certification to operate, and that Metromedia Fiber provide notification of, or
obtain authorization for, certain corporate transactions, such as the
transaction with Bell Atlantic. In any event, Metromedia Fiber 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,
Metromedia Fiber's pricing flexibility for intra-state services may be limited
because of regulation, although its direct competitors will be subject to
similar restrictions. However, Metromedia Fiber makes no assurances that future
regulatory, judicial, or legislative action will not materially adversely affect
it.
Verizon Communications was recently approved by the FCC to provide long
distance service in New York on the grounds that it provides nondiscriminatory
access and interconnection to its network facilities for the network facilities
of one or more unaffiliated competing providers of telecommunications services.
In conjunction with the March 6, 2000 investment in Metromedia Fiber, Verizon
Communications became a significant customer of Metromedia Fiber.
LOCAL
In addition to federal and state laws, local governments exercise legal
authority that affects Metromedia Fiber's business. For example, local
governments, such as the City of New York, typically retain the ability to
manage public rights-of-way, subject to the limitation that local governments
may not prohibit persons from providing telecommunications services and local
governments may not treat telecommunication service providers in a
discriminatory manner. Because of the need to obtain approvals, local
authorities affect the timing and costs associated with Metromedia Fiber's use
of public rights-of-way. In addition, some local authorities must approve or be
notified of certain corporate transactions, such as the Verizon Communications
transaction. These regulations may have an adverse effect on Metromedia Fiber's
business.
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FEDERAL REGULATION OF INTERNATIONAL SERVICE
Various regulatory requirements and limitations also will influence
Metromedia Fiber's business as it enters the market for international
telecommunications service. It has entered into a 50/50 joint venture, ION, with
a subsidiary of Racal that contemplates jointly acquiring and selling
international, facilities-based telecommunications capacity between the U.S. and
the United Kingdom and possibly between the U.S. and other markets. ION is a
U.S. international common carrier subject to U.S. regulation under Title II of
the Communications Act, and, Metromedia Fiber is also a U.S. international
common carrier subject to the same regulations. Under current FCC rules,
international carriers that do not exercise market power and that are not
affiliated with dominant foreign carriers (carriers possessing market power in
their local markets) are subject to relatively relaxed U.S. regulation as
nondominant international carriers. As a non-dominant common carrier, ION and
Metromedia Fiber are subject to, among other policies, the common carrier
obligation of nondiscrimination. In addition, FCC rules prohibit U.S. carriers
from bargaining for special concessions from certain foreign partners. ION and
Metromedia Fiber are required, under Sections 214 and 203 of the Communications
Act to obtain authorization and file an international service tariff containing
rates, terms and conditions prior to initiating service. As a nondominant
carrier, ION and Metromedia Fiber are eligible to seek "global" authorization
under Section 214 to operate as facilities-based and/or resale carrier.
International carriers are also subject to certain annual fees and filing
requirements, such as the requirement to file contracts with other carriers,
including foreign carrier agreements, and reports setting forth international
circuit, traffic and revenue data. Failure to obtain an appropriate U.S. license
for international service or the revocation of a license could materially
adversely affect Metromedia Fiber's future operations. Until recently,
international common carriers were also required to comply with the FCC's
International Settlements Policy which defines the permissible boundaries for
U.S. carriers and their foreign correspondents to settle the cost of terminating
each other's traffic over their respective networks. The FCC, however, recently
decided that it is no longer necessary to apply the International Settlement
Policy rules to U.S. carrier arrangements with non-dominant foreign carriers and
with arrangements with all foreign carriers in competitive foreign markets.
Since the U.S.-UK route has been declared competitive by the FCC, ION and
Metromedia Fiber will not have to comply with the International Settlement
Policy.
The FCC has also made significant changes to other aspects of its
international regulatory regime that facilitate Metromedia Fiber's international
operations. For example, it has approved the provisions of switched services
over private lines ("ISR") interconnected with the public switched network
between the United States and 22 other countries, including the UK and Germany.
Recently, the FCC took steps to streamline the application process for authority
to provide international services, relaxing further the rules for almost all
international services to almost all countries (with China, Taiwan, Russia,
Saudi Arabia, the notable exceptions). The FCC continues to refine its
international service rules to promote competition, reflect and encourage
liberalization in foreign countries, and reduce accounting rates toward cost.
Metromedia Fiber is unable to predict how the FCC will resolve the various
pending international policy issues and the effect of such resolutions on
Metromedia Fiber.
REGULATION OF INTERNATIONAL OPERATIONS
Metromedia Fiber's international services are also subject to regulation in
other countries where Metromedia Fiber operates. Such regulation, as well as
policies and regulations on the European Union level, may impose separate
licensing, service and other conditions on Metromedia Fiber's international
service operations, and these requirements may have a material adverse effect on
Metromedia Fiber's ability to operate. In addition to its joint venture, ION,
Metromedia Fiber has entered into a joint venture with Carrier 1 and Viatel to
develop a fiber network linking Germany's main cities. Metromedia Fiber also has
an agreement with Viatel to use Viatel's network in France, Germany, the UK and
the Netherlands. The following discussion is intended to provide a general
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outline of certain regulations and current regulatory posture in certain foreign
jurisdictions in which Metromedia Fiber currently operates or intends 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. 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 EU
telecommunications market. This basic framework has been advanced by a series of
harmonization directives, which include the so-called Open Network Provision
directives and the Licensing Directive of April 1997 and the Interconnection
Directive of June 1997, which address the procedures for granting license
authorizations and conditions applicable to such licenses and the
interconnection of networks and the interoperability of services as well as the
achievement of universal service. The Licensing Directive sets out framework
rules for the procedures associated with the granting of national authorizations
for the provision of telecommunications services and for the establishment or
operation of any infrastructure for the provision of telecommunications
services. It distinguishes between "general authorizations," which should
normally be easier to obtain since they do not require an explicit decision by
the national regulatory authority, and "individual licenses." EU member states
may impose individual license requirements for the establishment and operation
of public telecommunications networks and for the provision of voice telephony,
among other things. Consequently, Metromedia Fiber's operations in those EU
member states comprising its European Network and its proposed operations in
general, require Metromedia Fiber's local operating subsidiaries to obtain
individual licenses rather than operate under a general authorization. EU law
permits member states to establish universal service funds and seek
contributions from licensed operators. Each of the EU member states in which
Metromedia Fiber currently conducts its business have different regulatory
regimes and such differences are expected to continue. Licensing requirements
and requirements to obtain necessary approvals vary considerably from country to
country.
On November 10, 1999, the European Commission published a consultation paper
called "Towards a new framework for Electronic Communications infrastructure and
associated services". This communication advocates simplification of the
existing package of European telecommunications legislation, greater reliance on
competition rules and devolving more interpretation and enforcement functions to
national regulatory authorities. It also recommends a move away from individual
licenses to general authorizations. The communication is part of the European
Commission's ongoing 1999 review of telecommunications European legislation. The
proposals, if implemented, may make it easier for Metromedia Fiber to operate
under general authorizations rather than obtaining individual licenses in each
of the EU member states comprising Metromedia Fiber's European Network.
In a number of European jurisdictions, the standard licenses authorizing the
operation of telecommunications networks and the provision of services over such
networks assume that the licensee is a vertically integrated operator, running
its own infrastructure and providing services to subscribers over such
infrastructure. The impact of such licenses on operators that provide
infrastructure alone is unclear in a number of European jurisdictions.
AUSTRIA
The Telecommunications Act (Telekommunikationsgesetz) which came into force
on August 1, 1997 establishes the basic regulatory framework for the
telecommunications sector. It was enacted to
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prepare the market for the abolition of the voice telephony monopoly and to
fulfil Austria's obligations under the relevant EU liberalization and
harmonization directives.
The Telecommunications Act itself only sets out the basic regulatory
provisions and leaves it to the competent telecommunications authorities to
issue ordinances containing more detailed and specific provisions. So far, the
Federal Minister of Science and Transport has issued several ordinances.
The Telecommunications Act provides for two regulatory authorities: the
Telekom Control GmbH and the Telekom Control Kommission. The Telekom Control
GmbH is responsible for the implementation of basic provisions, such as
regulatory tasks and adjudicating complaints regarding fee disputes or quality
of service. The Telekom Control Kommission is an independent three-member
committee responsible for decisions about matters concerning civil rights. These
matters include the issuance, withdrawal, revocation and amendment of licenses,
the approval of general business conditions and tariffs of dominant operators,
the definition of financial compensation to be paid from and to the universal
service fund, the conditions for interconnection in the event of a dispute and
decisions regarding failure to comply with the ban on cross-subsidization.
An individual license issued by the Telekom Control Kommission is required
for the public offer of leased lines by means of an owner-operated fixed
network. Metromedia Fiber Network Services GmbH ("MFN Austria") will shortly be
filing an application for a license for the provision of leased lines. According
to the Telecommunications Act, such required license shall be granted if the
applicant has the necessary technical competence and there is no reason to
assume that it will not provide the relevant service in accordance with the
license. Further, the financial strength of the applicant, its experience in the
telecommunications sector and its expertise shall be taken into consideration.
Operators of public telecommunications networks have the right to negotiate
interconnection with other operators. The framework for this interconnection is
set out in the Telecommunications Act and two ordinances, the
"Zusammenschaltungsverordnung" (interconnection ordinance) and the
"Numerierungsverordnung" (numbering ordinance). Additional principles for
interconnection have been set out by the Kommission in several decisions.
BELGIUM
The Belgian Telecommunications Act of March 21, 1991, as amended, provides
for the licensing and regulatory framework for telecommunications activities in
Belgium. Under the Belgian Act, voice telephony was liberalized as of
January 1, 1998. The Belgian Act is implemented by a number of Royal Decrees.
These cover, among other things, licensing procedure, license fees,
interconnection, universal service, number portability, mobile telecommunication
services and mediation of conflicts between operators.
Licenses in Belgium are granted by the Minister for Telecommunications, upon
the recommendation of the national regulator, the Belgian Institute for Post and
Telecommunications. Under the Belgian regulatory schemes, there are two basic
types of licenses: a voice telephony license (service license) and an
infrastructure license (public network license). Other licenses are specific to
mobile terrestrial services, mobile satellite services and so forth. Other
services, such as the leasing of leased lines, are subject to a prior
notification obligation to the national regulator.
A services license allows the licensee to offer voice telephony services to
the public, independent of the infrastructure used. An infrastructure license
allows the licensee to build and operate a network and allow the use of that
network for public voice telephony services (a "public" network). Only an
infrastructure license provides the licensee with certain rights of way over
public property. The provision of dark fiber (owned but not-self-operated
infrastructure) does not require an infrastructure license.
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Metromedia Fiber's Belgian subsidiary, Metromedia Fiber Network Belgium
BVBA/SPRL, will apply for an infrastructure license in the near future.
A licensed operator of a public network will have the right, but also the
obligation, to negotiate interconnection with other operators. For its
interconnection with Belgacom, the Belgian incumbent operator, the
interconnection rates are fixed in the BRIO 2000 (the Belgacom Reference
Interconnect Offer for the year 2000). A BRIO is negotiated each year among
Belgacom, the industry and the national regulator and is subject to regulatory
approval. Interconnection rates with other operators are subject to commercial
agreement.
Licensed operators are under an obligation to present their standard terms
and conditions with regard to the provision of telecommunication services to the
public to the regulator, who may not accept these or suggest modifications.
Licensed operators are also subject to certain universal service financing
obligations.
FRANCE
In July 1996, France enacted legislation providing for the liberalization of
all telecommunications activities by January 1, 1998. The establishment and
operation of public telecommunications networks and the provision of voice
telephony services to the public are subject to individual licenses granted by
the Minister in charge of telecommunications upon recommendation of France's
independent regulatory authority, the Autorite de Regulation des
Telecommunications.
The regulation of telecommunication services is set out in article L34-1 of
the French Post and Telecommunications Code, which requires a license to be
issued for "the commercial provision to the public of a service consisting of
the conveyance of direct, real-time voice telephony between public switched
telephone networks for mobile and fixed users."
In order to own and control transmission infrastructure in France, and
benefit from rights of ways, a carrier must obtain a network license under
article L33-1 of the French Post and Telecommunication Code. On October 7, 1999,
Metromedia Fiber Network France SAS was granted an L 33-1 license to be a public
telecommunications network operator. This license enables Metromedia France to
build a telecommunications network in the following French regions: Alsace,
Champagne-Ardenne, Ile de France, Lorraine, Nord--Pas de Calais and Picardie.
The license is granted for 15 years and may not be freely assigned.
Metromedia France is subject to the requirements in the operation of its
public telecommunications network, as set forth in the schedule of conditions
attached to the license.
Local authorities are under the obligation to grant authorizations for
public occupancy to licensed telecommunication operators. Metromedia France is
therefore entitled by law to obtain rights of way on public properties to build
its network. However, such authorizations may contain restrictions relating to,
among other things, the location, the coordination of works and operations in
consideration of public traffic and maintenance of the roads. In consideration
for the right to use the public property, Metromedia France will be required to
pay annual fees to such local authorities. The right to occupy the public domain
is precarious and is granted to telecommunication operators in consideration of
the person or entity to which the telecommunication license is granted.
Metromedia France will also benefit from statutory easements on private
properties.
Metromedia France is entitled to interconnection with France Telecom. France
differentiates between interconnection for public telecommunications network
operators, holding a L33.1 license, and voice telephony service providers,
holding a L34.1 license. The 2000 interconnection tariffs of France Telecom,
which have been officially approved by ART, provide different interconnection
rates for public telecommunications network operators and for voice telephony
service providers.
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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. 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 three
infrastructure license classes: mobile telecommunications (license class 1);
satellite (license class 2); and telecommunications services for the general
public (license class 3). The provision of dark fiber does not require a
license. Beside the infrastructure licenses, an additional license is required
for provision of voice telephony services on the basis of self-operated
telecommunications networks (license class 4). A class 4 license does not
include the right to operate transmission lines. Metromedia Fiber Network GmbH
obtained a class 3 license for the whole territory of Germany on October 20,
1999.
According to the License Fees Ordinance, a nationwide class 4 license costs
a one-time fee of DM 3,000,000 (approximately $1.5 million at June 30, 2000). A
nationwide territorial class 3 license costs DM 10,600,000 (approximately
$5.2 million at June 30, 2000). The Administrative Court of Cologne held in a
preliminary ruling that there is a high probability that the license fees are
excessive and that therefore the Ordinance might be void. The Upper
Administrative Court of Northrhine-Westfalia, however, did not agree with these
doubts when it received a complaint from the Regulierungsbehorde fur
Telekommunikation und Post (the "RegTP"). Metromedia Fiber Network GmbH has
received license fee orders in the total amount of DM 10,600,000. Metromedia
Fiber Network GmbH has challenged these license fee orders before the
Administrative Court. The legal proceedings are currently at an early stage and
Metromedia Fiber does not know when the courts will reach a decision. Since the
action does not suspend the obligation to pay the fees, Metromedia Fiber Network
GmbH must pay the fees. If the administrative court action is successful, the
sum paid or a portion thereof will be refunded.
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. Metromedia Fiber Network GmbH has concluded framework
agreements with the cities of Frankfurt, Stuttgart, Cologne and Munich on the
conditions and procedures for obtaining the necessary planning agreements with
the city authorities.
The German Telecommunications Act provides that the operators of public
telecommunications networks are under the obligation to interconnect and have a
right to request interconnection from other operators. This right and the
obligation only apply to operators of public telecommunications networks.
According to the Regulatory Authority, a public telecommunications network
consists of at least one switch and three transmission lines and is the basis
for the provision of telecommunications services to the public. Since Metromedia
Fiber Network GmbH does not operate any switching equipment in Germany and does
not intend to do so, the right and the obligation do not apply to Metromedia
Fiber Network GmbH.
Licensed operators are under an obligation to present their standard terms
and conditions (with regard to the provision of telecommunications services for
the public) to the RegTP. The RegTP may, based upon specified criteria, decide
not to accept these terms and conditions. Metromedia Fiber Network GmbH may
become subject to universal service financing obligations. Currently, it is
unlikely that the universal service financing system will be implemented in
Germany in the foreseeable future. These obligations do not apply as far as the
provision of mere dark fiber is concerned.
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ITALY
Under Presidential Decree No. 318 of September 19, 1997 on the Regulation
for the implementation of European Directives in the telecommunications field
and Ministerial Decree of November 25, 1997 on individual licenses, an
individual license is required, inter alia, for (1) the provision of voice
telephony services, (2) the establishment and provision of public
telecommunications networks, and (3) the establishment of a public network in
order to provide voice telephony services on such a network (so-called
"combined" license). The combined license is intended to expedite the
administrative licensing process for any facility-based operator, but it does
not allow the provision (e.g., the lease to third parties) of the operator's
network.
On January 21, 2000, Metromedia Fiber Network Italia S.r.l. filed with the
Italian Telecommunications Regulatory Authority (the "Italian regulatory
authority") an individual license for the establishment and provision of public
telecommunications networks in the Milan area. Once granted, the Network License
will entitle Metromedia Italy to establish and provide its network in the Milan
area.
In addition, in order to dig and build on public land, network licensees
must previously obtain ad hoc rights of way from the relevant municipal
authorities. Such rights of way are generally granted in the form of
concessions. In this respect, the Italian Telecommunications Act provides that
the public authorities in charge of public property management may not
discriminate among telecommunications operators in connection with the granting
of rights of way for the installation of public telecommunications networks. The
ad hoc concession is not required for the installation of "backbones", as these
will be defined by the Italian regulatory authority.
Telecommunications operators belonging to defined categories have the right
to negotiate interconnection with any telecommunications operator within the
same categories. Accordingly, once Metromedia Italy obtains the Network License,
it will be entitled to negotiate interconnection with other operators (including
the incumbent operator, Telecom Italia S.p.A.)
Under Ministerial Decree of April 23, 1998 on interconnection and network
access, the telecommunications operators mentioned above must enter into
interconnection agreements within 45 days from the beginning of the relevant
negotiations. If there is no agreement between the parties by such deadline, the
telecommunications operators involved must transmit to the Italian regulatory
authority the scheme of the agreement, highlighting those parts on which they
were unable to find a mutually acceptable solution. The Italian regulatory
authority must resolve interconnection disputes within 90 days from notification
of the dispute and, in the meantime, it may also issue temporary restraining
orders.
The telecommunications operators mentioned above and notified by the Italian
regulatory authority as having significant market power with respect to the
interconnection (i.e., currently Telecom Italia S.p.A., Telecom Italia Mobile
S.p.A. and Omnitel Pronto Italia S.p.A.) must apply non-discriminatory,
objective, transparent and cost-oriented interconnection prices.
THE NETHERLANDS
The Telecommunications Act of 1998 (the "Dutch law") provides a licensing
and regulatory framework for telecommunications activities in the Netherlands.
The Secretary of State at the Ministry of Transport, Public Works and Water
Management (the "Secretary of Transport") is responsible for granting individual
licenses for use of frequencies under the Dutch law, for enforcing the terms of
such licenses and for overseeing telecommunications policy, aided principally by
the Directorate General of Telecommunications and Post and the Radio
Communications Agency. The Independent Authority for Post and Telecommunications
is responsible, among other things, for performing registrations, issuing
numbers, regulating interconnection rights and obligations, adjudicating
interconnection disputes, and
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generally enforcing the obligations under the Dutch law in respect of registered
parties. Both Metromedia Fiber Network B.V. and Metromedia Fiber Network ICN
B.V. have been registered with Dutch regulatory authority as providers of public
telecommunications networks as of July 1999. Under these registrations,
Metromedia's Dutch subsidiaries and Metromedia's Dutch subsidiaries are
authorized to construct and publicly offer telecommunications networks, which
include dark fiber. As registered parties, both Metromedia's Dutch subsidiaries
and Metromedia's Dutch subsidiaries are granted statutory rights of way over
public land.
Any provider of a public telecommunications network or of public
telecommunications services has the right to negotiate interconnection as well
as a corresponding obligation to negotiate interconnection with any other such
provider. The terms, conditions and charges to be applied to interconnection
between operators who do not have significant market power are not specifically
regulated and are therefore subject to commercial agreement. All the
aforementioned providers are eligible to benefit from the terms and conditions
and charges which fixed-line operators with significant market power are obliged
to offer by an interconnection directive. In the Netherlands, KPN Telecom has
significant market power for the provision of fixed networks and services and
leased lines.
UNITED KINGDOM
The 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. Act 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. Both ION and Metromedia Fiber
Network UK Limited have been granted Public Telecommunication Operator licenses.
The regulatory license authorizes the operation of and provision of services
over the operator's own international facilities as well as an authorization to
provide telecommunications services in the United Kingdom.
Metromedia U.K. will be used as the operating company in the United Kingdom
and has been granted code powers, which gives it statutory rights of way over
land, which override private rights.
Any operator who appears on the Annex II list on the office of
telecommunications web-site (www.oftel.gov.uk) has the right to negotiate
interconnection as well as a corresponding obligation to negotiate
interconnection with any other operator in Annex II. The terms, conditions and
charges to be applied to interconnection between operators who do not have
significant market power are not specifically regulated and are therefore
subject to commercial agreement. All Annex II operators are eligible to benefit
from the terms and conditions and charges which fixed-line operators with
significant market power are obliged to offer by the Interconnection Directive.
In the United Kingdom, British Telecommunications and Kingston Communications
have significant market power for the provision of fixed networks and services
and leased lines. ION is included in the Annex II list of operators on office of
telecommunications's web-site and therefore has a right coupled with a
corresponding obligation to negotiate interconnection with any other operator on
the Annex II list. Metromedia U.K. is not currently included in the Annex II
list but may apply to office of telecommunications to be included in the list.
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OTHER COUNTRIES
In addition to its operations in the above countries, Metromedia Fiber is
also in the process of incorporating or has incorporated local subsidiaries and
is applying for licenses in The Czech Republic, Denmark, Hungary, Ireland,
Israel, Japan, Spain and Switzerland.
EMPLOYEES
As of September 30, 2000, Metromedia Fiber employed 1,351 people, including
858 in engineering and construction, 272 in sales and marketing and 221 in
administration. Metromedia Fiber's employees are not represented by any labor
union. Metromedia Fiber considers its relationship with employees to be good.
PROPERTIES
Metromedia Fiber's principal properties currently are the fiber optic cable
in place and its component assets. Metromedia Fiber owns substantially all of
the communications equipment required for its business. Metromedia Fiber
installed fiber optic cable is laid under the various rights-of-way held by it.
Metromedia Fiber's other fixed assets are located at various leased locations in
the geographic areas that it serves. Metromedia Fiber's executive and
administrative offices are located at its principal office at 360 Hamilton
Avenue, White Plains, New York. Metromedia Fiber leases this space (currently
approximately 80,000 square feet) under an agreement that expires in June 2010.
Metromedia Fiber leases additional office or operation space in many of the
markets Metromedia Fiber is building out its network. Such additional space
ranges from 1,000 to 10,000 square feet under agreements that expire within the
next three to ten years.
AboveNet's executive and administrative offices are located at 50 West San
Fernando Street, San Jose, California. Metromedia Fiber leases this space
(approximately 19,850 square feet) under an agreement that expires in
February 2008. Palo Alto Internet Exchange's executive and administrative
offices are located at 285 Hamilton Avenue, Palo Alto, California (approximately
5,130 square feet) under an agreement that expires in January 2007. In addition,
AboveNet and Palo Alto Internet Exchange lease various co-location facilities in
California, Virginia and New York that range from 10,000 to 29,000 square feet
under agreements that expire within the next 10 to 20 years.
LEGAL PROCEEDINGS
On or about June 12, 1998, Claudio E. Contardi commenced an action against
Peter Sahagen, Sahagen Consulting Group of Florida and the Company in the United
States District Court for the Southern District of New York (No. 98 CIV 4140)
(the Contardi Litigation). 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 which Metromedia Fiber cannot currently ascertain but believes
to be approximately 225,000 shares (calculated as of the date on which the
complaint was filed without taking into account subsequent stock splits) or
damages in an amount which Metromedia Fiber cannot currently ascertain but
believes 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. Metromedia Fiber has filed an answer to the complaint and has raised
affirmative defenses. Metromedia Fiber moved for summary judgment on the
complaint. On or about June 5, 2000, the court denied the summary judgment
motion. On or about July 20, 2000, the court entered a stipulation and order
dismissing this action without prejudice on the grounds that the court lacks
subject matter jurisdiction.
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In January 2000, Herman Goldsmith and Arnold S. Schickler commenced an
action against Metromedia Fiber, F. Garofalo Electric Co., Inc. and Stephen A.
Garofalo in the Supreme Court of the State of New York, County of New York
(No. 600163/00) (the "Goldsmith Litigation"). The complaint alleges a cause of
action for breach of contract in connection with an alleged "finders agreement"
entered into in 1993 between Messrs. Goldsmith and Schickler, on the one hand,
and F. Garofalo Electric Co., Inc. and Stephen A. Garofalo, on the other.
Plaintiffs seek damages of $860,627,590.99, plus interest from September 7,
1999, in addition to their costs, expenses and reasonable attorneys' fees. On
April 7, 2000 Metromedia Fiber filed a motion to dismiss the complaint.
Metromedia Fiber intends to vigorously defend both the Goldsmith Litigation
and the Contardi Litigation (if plaintiff pursues the action) actions because
Metromedia Fiber believes that it acted appropriately in connection with the
matters at issue in these two cases. However, Metromedia Fiber can make no
assurances that it will not determine that the advantages of entering into a
settlement outweigh the risk and expense of protracted litigation or that
ultimately Metromedia Fiber will be successful in defending against these
allegations. If Metromedia Fiber is unsuccessful in defending against these
allegations, an award of the magnitude being sought in the Contardi Litigation
and the Goldsmith Litigation would have a material adverse effect on Metromedia
Fiber's financial condition or results of operations.
On June 29, 1999, an alleged stockholder of AboveNet filed a lawsuit,
captioned Kaufman v. Tuan, et al, Del. Ch. C.A. No. 17259NC, in the Court of
Chancery of the State of Delaware in and for the New Castle County. The
plaintiff, who purports to represent a class of all AboveNet stockholders,
challenges the terms of the proposed merger between Metromedia Fiber and
AboveNet. The complaint names, as defendants, AboveNet, the directors of
AboveNet and Metromedia Fiber (as an aider and abettor). The complaint alleges
generally that AboveNet's directors breached their fiduciary duty to
stockholders of AboveNet, and seeks an injunction against the merger, or, in the
alternative, rescission and the recovery of unspecified damages, fees and
expenses. AboveNet, Metromedia Fiber and the individual defendants believe the
lawsuit is without merit and intend to defend themselves vigorously. AboveNet
and the individual director defendants' responses were filed on July 22, 1999.
In connection with these responses, a motion to dismiss the complaint in its
entirety and a motion to stay discovery pending the outcome of the motion to
dismiss were filed by the AboveNet and the individual directors of AboveNet on
July 22, 1999. Similar motions to dismiss the complaint and stay discovery were
filed by Metromedia Fiber on July 26, 1999. Upon stipulation of the parties,
this action was dismissed without prejudice in December 1999.
Four other complaints, which are virtually identical to the complaint in
Kaufman v. Tuan, have also been filed in the Delaware Court of the Chancery.
None of these four complaints have been served. The four actions are captioned
Brosious v. Tuan, et al, Del. Ch. C.A. No. 17271NC, Chong v. Tuan, et al, Del.
Ch. C.A. No. 17281NC, Ehlert v. Tuan et al, Del. Ch. C.A. No. 17284NC, Horn v.
Tuan, et al, Del. Ch. C.A. No. 17300NC.
In addition, Metromedia Fiber is subject to various claims and proceedings
in the ordinary course of business. Based on information currently available,
Metromedia Fiber believes that none of such current claims, or proceedings,
individually or in the aggregate, including the Contardi litigation and the
Goldsmith litigation, will seriously harm Metromedia Fiber's financial condition
or results of operations, although Metromedia Fiber can make no assurances in
this regard.
DESCRIPTION OF AQUEDUCT ACQUISITION CORP.
Aqueduct Acquisition Corp. is a wholly owned subsidiary of Metromedia Fiber
organized under the laws of the State of Delaware. It was incorporated in
September 2000 solely for use in the merger, and is engaged in no other
business. Its executive offices are located at One Meadowlands Plaza, East
Rutherford, New Jersey 07073.
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METROMEDIA FIBER MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THIS INFORMATION TOGETHER WITH METROMEDIA FIBER'S
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES AND OTHER FINANCIAL
INFORMATION INCLUDED IN THIS DOCUMENT. THIS DOCUMENT CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. METROMEDIA FIBER'S ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING
STATEMENTS. PLEASE SEE THE "SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS"
ELSEWHERE IN THIS DOCUMENT.
GENERAL
Metromedia Fiber provides dedicated fiber optic infrastructure and
high-bandwidth internet connectivity for its communications intensive customers.
Metromedia Fiber is a facilities-based provider of end-to-end optical solutions
that offer virtually unlimited, unmetered bandwidth at a fixed cost to its
communications carrier, corporate and government customers in the United States
and Europe. Through its AboveNet Communications, Inc. subsidiary, Metromedia
Fiber provides internet infrastructure to its customers. The combined company
facilitates the growth of e-commerce and advanced internet and communications
applications by delivering secure, reliable and scaleable optical networks and
IP services to internet content and service providers, communications carriers
and enterprise users worldwide.
Metromedia Fiber is expanding its presence to approximately 50 markets in
the United States and 17 major international markets. To date, Metromedia Fiber
has 10 cities operational, 24 cities currently under construction, and the
balance in the engineering phase.
Metromedia Fiber's existing intra-city networks consist of approximately
924,000 fiber miles covering in excess of 1,600 route miles in the United
States. Metromedia Fiber's inter-city network consists of approximately 225,000
fiber miles primarily covering the 255 route-mile network that it has built
between New York City and Washington, D.C. Metromedia Fiber has also built or
contracted to acquire, a nationwide dark fiber network linking its intra-city
networks.
In February 1999, Metromedia Fiber entered into an agreement with
Viatel, Inc. and Carrier 1 Holdings, Ltd. to jointly build a dark fiber
inter-city network between selected cities throughout Germany. Once completed,
Metromedia Fiber's German network will consist of approximately 320,000 fiber
miles covering in excess of 1,450 route miles connecting 14 major cities.
Metromedia Fiber has also acquired fiber on the Circe network, which connects a
number of European markets. In addition to its inter-city networks, Metromedia
Fiber is constructing 16 intra-city networks throughout Europe. Separately,
Metromedia Fiber also entered into a contract to acquire rights to dark fiber
network facilities in Toronto, Canada.
On September 8, 1999, Metromedia Fiber completed the acquisition of
AboveNet. The holders of AboveNet common stock received 2.35 shares of
Metromedia Fiber's class A common stock for each share of AboveNet common stock.
AboveNet is a leading provider of facilities-based, managed services for
customer-owned Web servers and related equipment, known as co-location, and high
performance internet connectivity solutions for electronic commerce and other
business critical internet operations. Palo Alto Internet Exchange, AboveNet's
wholly owned subsidiary, serves as a packet switching center for internet
service providers. Palo Alto Internet Exchange also offers secure,
fault-tolerant co-location services to internet service providers. The
acquisition has been recorded under the purchase method of accounting and
AboveNet's results will be included in the results of operations subsequent to
the acquisition date. On October 7, 1999, Metromedia Fiber entered into a
securities purchase agreement with Verizon Communications, under which Verizon
Communications agreed to purchase up to approximately 51.1 million newly issued
shares of Metromedia Fiber's class A common stock at a purchase price of $14.00
per share and a convertible subordinated note of approximately $975.3 million,
which is convertible into shares of Metromedia Fiber's class A common stock at a
conversion price of
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$17.00 per share. This transaction closed on March 6, 2000. Assuming the
issuance of the 51.1 million shares of Metromedia Fiber's class A common stock
and conversion of the convertible subordinated note, this investment would
represent 18.2% of Metromedia Fiber's outstanding shares. Verizon Communications
has also agreed to pay Metromedia Fiber $550 million over the next three years
in exchange for delivery of fiber optic facilities over the next five years. The
proceeds from these two transactions will be used to fund the expansion of
Metromedia Fiber's network.
Most of Metromedia Fiber's contracts for the provision of dark fiber are
accounted for as operating leases under which it recognizes recurring monthly
revenues. For certain other contracts Metromedia Fiber recognizes revenue under
the percentage of completion method for the provision of dark fiber. Effective
June 30, 1999, the Financial Accounting Standards Board issued FASB
Interpretation No. 43, "Real Estate Sales" ("FIN 43"), which requires that sales
or leases of integral equipment subsequent to June 30, 1999, be accounted for in
accordance with real estate accounting rules. Metromedia Fiber believes that the
staff of the Securities and Exchange Commission requires the classification of
dark fiber cables in the ground as integral equipment as defined in FIN 43.
Accounting for dark fiber leases as defined by FIN 43 does not change any of the
economics of the contracts. It requires Metromedia Fiber, however, to recognize
the revenue from certain leases as operating leases over the term of the
contract as opposed to the prior method of recognizing revenue during the period
over which Metromedia delivers the fiber. As a result, this change in accounting
treatment reduces the revenue and income that Metromedia Fiber recognizes in the
earlier years of the contract and spreads it out over the life of the contract
regardless of when the cash was received or the delivery of the fiber took
place.
By way of example, if Metromedia Fiber entered into an agreement for a
25 year lease for dark fiber with a customer who pays $100.0 million in cash
when the contract is signed, Metromedia Fiber previously recorded average
revenues of $20.0 million over the 5 years during which it delivered the dark
fiber. By contrast, the real estate accounting rules of FIN 43 would require
Metromedia Fiber to recognize revenue of $4.0 million per year over the 25 year
term of the contract, even though Metromedia Fiber would receive a cash payment
of $100.0 million when the contract is signed.
Metromedia Fiber implemented this method of accounting for its contracts
entered into after June 30, 1999, for which the method is required. Although
there was no change to the economics of the contracts or the timing of the cash
to be received by Metromedia Fiber, the impact of the change in accounting
resulted in Metromedia Fiber recording substantially less revenue between the
dates of July 1, 1999 and December 31, 1999 than would have been recorded if
this change had not been imposed.
Total revenue for the quarter ended September 30, 2000 was $51.9 million. Of
the $13.0 million of optical infrastructure revenue, 96% came from recurring
domestic revenue, with pricing in line with Metromedia Fiber's expectations.
Approximately 85% of the optical infrastructure revenue is from carrier
customers. Internet infrastructure revenue rose 19% over the previous quarter to
$38.9 million.
STOCK SPLITS. On August 28, 1998, December 22, 1998, May 19, 1999, and
April 17, 2000, Metromedia Fiber completed two-for-one stock splits of
Metromedia Fiber's class A and class B common stock in the form of 100 percent
stock dividends to all stockholders of record as of certain specified dates.
All share and per share amounts presented herein give retroactive effect to
the four stock splits effected in 1998, 1999 and on April 17, 2000. As of
October 9, 2000, adjusted for the effect of the stock dividends, Metromedia
Fiber had 483,058,711 class A common shares outstanding and 67,538,544 class B
common shares outstanding.
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RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES. Revenues for the nine months ended September 30, 2000 were $127.1
million, or 157% greater than revenues of $49.4 million for the same period in
1999. The increase for the nine months ended September 30, 2000, compared with
the nine months ended September 30, 1999, reflected higher revenues associated
with commencement of service to an increased total number of customers, and the
inclusion of AboveNet's revenue in 2000. Revenue recognized for the nine months
ended September 30, 2000 using the percentage of completion method was $325,000
compared to $37.7 million for the nine months ended September 30, 1999,
respectively. If not for the impact of the aforementioned accounting change,
effective June 30, 1999, the increase in revenues for the nine month period
would have been greater.
COST OF SALES. Cost of sales for the nine months ended September 30, 2000
was $133.5 million, or 447% greater than cost of sales of $24.4 million for the
same period in 1999. The increase for the nine months ended September 30, 2000,
compared with the nine months ended September 30, 1999, is primarily due to the
inclusion of AboveNet and costs associated with an increased amount of customers
and higher fixed costs associated with the operation of our network in service.
Cost of sales as percentages of revenue for the nine months ended September 30,
2000 and 1999 was 105% and 49%, respectively, increasing in 2000 as a result of
the higher fixed costs related to the operation and maintenance of Metromedia
Fiber's network, as well as the higher fixed costs of the internet connectivity
services related to AboveNet's operations. Cost of sales in the nine months
ended September 30, 2000 related to the percentage of completion method was
$49,000, compared to $10.3 million for the nine months ended September 30, 1999.
Costs of sales were also impacted as a direct result of the aforementioned
accounting change, effective June 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, for the nine month period ended September 30, 2000
versus the nine month period ended September 30, 1999, increased 245% to $94.4
million from $27.4 million. The increase in selling, general and administrative
expenses in the nine month period ended September 30, 2000 as compared to the
same period in 1999 resulted primarily from the acquisition of AboveNet and the
increased headcount and other overhead to support our network expansion. As a
percentage of revenue, selling, general and administrative expenses were 74.2%
for the nine months ended September 30, 2000, compared to 55.4% for the
comparable period in 1999.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA). EBITDA consists of earnings (loss) before income taxes plus all net
interest expense and all depreciation and amortization expense and losses from
joint ventures. Metromedia Fiber has included EBITDA because it is a widely used
financial measure of the potential capacity of a company to incur and service
debt. Metromedia Fiber's reported EBITDA may not be comparable to similarly
titled measures used by other companies.
For the nine months ended September 30, 2000, Metromedia Fiber recognized an
EBITDA loss of $101.6 million compared with an EBITDA loss for the nine months
ended September 30, 1999 of $2.4 million. The change in EBITDA is primarily due
to the acquisition of AboveNet and the aforementioned accounting change.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense was
$118.6 million for the nine months ended September 30, 2000, versus $15.7
million for the nine months ended September 30, 1999. This represents an
increase of $102.9 million for the nine months ended September 30, 2000 as
compared to the same period in 1999. The increases in depreciation and
amortization expense resulted primarily from amortization of the goodwill
relating to the acquisition of AboveNet and increased investment in Metromedia
Fiber's completed fiber optic network and additional property and equipment
acquired.
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LOSS FROM OPERATIONS. For the nine months ended September 30, 2000
Metromedia Fiber recognized losses from operations of $220.2 million. This
represents an increased loss of $202.2 million for the nine months ended
September 30, 2000 from the $18.0 million loss from operations recognized at
September 30, 1999. The increased loss from operations was attributable to the
acquisition of AboveNet and the related goodwill and the aforementioned
accounting change.
INTEREST INCOME. Interest income was $93.2 million during the nine months
ended September 30, 2000, as compared to $19.1 million during the comparable
1999 period, an increase of $74.1 million, or 388%. Interest income increased in
2000 as a result of the investment of Metromedia Fiber's excess cash received as
proceeds from the issuance and sale of our 10% senior notes in October 1999, as
well as from the convertible subordinated notes issued in March 2000.
INTEREST EXPENSE. Interest expense increased in the nine months ended
September 30, 2000 to $142.8 million versus $44.9 million for the nine months
ended September 30, 1999, respectively. The increase in interest expense
reflects the cost of additional debt acquired related to the issuance and sale
of 10% senior notes in October 1999, as well as the convertible subordinated
notes issued in March 2000.
NET LOSS. Metromedia Fiber had net losses of $272.5 million for the nine
months ended September 30, 2000 versus a net loss of $44.3 million for the
comparable periods of 1999. For the nine months ended September 30, 2000, basic
net loss per share was $0.51 versus basic net loss per share of $0.23 for the
nine months ended September 30, 1999.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Revenues for 1999 were $75.2 million or 107% greater than
revenues of $36.4 million for the same period in 1998. The increase reflected
higher revenues associated with commencement of service to an increased total
number of customers, as well as revenue recognized related to sales-type leases
of portions of Metromedia Fiber's network for contracts entered into before
June 30, 1999, and the inclusion of AboveNet's revenue for the period of
September 9, 1999 (acquisition date) through December 31, 1999. Revenue
recognized in 1999 using the percentage of completion method was $40.3 million,
compared to $32.8 million in 1998. If not for the impact of the aforementioned
accounting change, effective June 30, 1999, the increase in revenues would have
been greater.
COST OF SALES. Cost of sales was $49.0 million for 1999, a 253% increase
over cost of sales of $13.9 million for 1998. Cost of sales increased for 1999
compared with the same period in 1998 due to costs related to the inclusion of
AboveNet's operations since the acquisition date, costs associated with the
greater number of customers, as well as higher fixed costs associated with the
operation and maintenance of Metromedia Fiber's networks. Costs of sales as
percentages of revenue for 1999 and 1998 were 65% and 38% respectively,
increasing as a result of the higher fixed costs related to the operation and
maintenance of Metromedia Fiber's fiber optic network, as well as the higher
fixed costs related to Metromedia Fiber's internet connectivity services. Cost
of sales in 1999 related to the percentage of completion method was
$10.7 million, compared to $11.2 million in 1998. Cost of sales was also
impacted as a direct result of the aforementioned accounting change, effective
June 30, 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $51.0 million during 1999 from
$14.7 million during 1998, an increase of $36.3 million, or 247%. The increase
in selling, general and administrative expenses resulted primarily from
increased overhead to accommodate Metromedia Fiber's network expansion and the
acquisition of AboveNet. As a percentage of revenue, selling, general and
administrative expenses increased to 68% of revenue for 1999, from 40% for the
comparable period in 1998. Selling, general and administrative expenses as a
percentage of revenue were also impacted as a direct result of the
aforementioned accounting change, effective June 30, 1999.
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SETTLEMENT AGREEMENT. Metromedia Fiber recorded $1.9 million and
$3.4 million for settlement agreements in 1999 and 1998, respectively.
EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION AND AMORTIZATION
(EBITDA). For the year ended December 31, 1999 Metromedia Fiber recognized a
loss before interest, taxes, depreciation and amortization of $27.1 million
compared with income before interest, taxes, depreciation and amortization for
the year ended December 31, 1998 of $4.1 million. The change in EBITDA is
primarily due to the acquisition of AboveNet and the aforementioned accounting
change.
DEPRECIATION AND AMORTIZATION. Metromedia Fiber recorded depreciation and
amortization of $46.0 million during 1999 versus $1.5 million during 1998, an
increase of $44.5 million. The increase in depreciation and amortization expense
resulted primarily from amortization of the goodwill relating to the acquisition
of AboveNet and increased investment in Metromedia Fiber's completed fiber optic
network and additional property and equipment acquired.
INCOME (LOSS) FROM OPERATIONS. For the year ended December 31, 1999, loss
from operations was $73.1 million, a $75.7 million change over the $2.6 million
income for the comparable period in 1998. The loss was greater as a result of
the acquisition of AboveNet and the aforementioned accounting change, effective
June 30, 1999.
INTEREST INCOME. Interest income was $32.1 million during 1999 compared
with $8.8 million during the comparable 1998 period, an increase of
$23.3 million or 265%. Interest income increased as a result of the investment
of certain of the proceeds from the issuance and sale of Metromedia Fiber's 10%
senior notes due in 2008 and 2009.
INTEREST EXPENSE (NET). Interest expense increased for 1999 to
$72.4 million compared with $6.9 million during the same period of 1998. The
increase in interest expense reflects the issuance and sale of Metromedia
Fiber's 10% senior notes due in 2008 and 2009, issued in November 1998 and
October 1999, respectively.
INCOME (LOSS) FROM JOINT VENTURES. For the year ended December 31, 1999
Metromedia Fiber recorded a $1.6 million loss from joint ventures compared with
a $146,000 loss for the year ended December 31, 1998. The increase is
attributable to the losses incurred by AboveNet's joint venture investees.
NET LOSS. Metromedia Fiber had net loss of $114.9 million for 1999, versus
net income of $986,000 for the comparable period of 1998. For the year ended
December 31, 1999, the basic net loss per share was $0.28 versus a basic net
income per share of $0.00 for the same period in 1998. The net losses were
primarily attributable to the amortization of goodwill related to the AboveNet
acquisition, the results of operations of AboveNet since the date of
acquisition, the increase in net interest expense related to the issuance and
sale of Metromedia Fiber's 10% senior notes due in 2008 and 2009, issued in
November 1998 and October 1999, respectively, and the aforementioned accounting
change.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES. Revenues for 1998 were $36.4 million or 1,356% greater than
revenues of $2.5 million for 1997. The increase in revenue for 1998 versus 1997
reflected higher revenues associated with commencement of service to an
increased total number of customers, as well as revenue recognized related to
grants of indefeasible rights of use to portions of Metromedia Fiber's network
and sales of dark fiber classified as sales type leases. Revenue recognized in
1998 using the percentage of completion method was $32.8 million. No revenue was
recognized in 1997 using the percentage of completion method.
COST OF SALES. Cost of sales was $13.9 million in 1998, a 286% increase
over cost of sales of $3.6 million in 1997. Cost of sales increased for 1998 as
compared to 1997 due to costs associated with the commencement of service to
customers, higher fixed costs associated with the operation of
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Metromedia Fiber's network in service and the allocated costs of the network
related to revenue recognized for grants of indefeasible rights of use to
portions of Metromedia Fiber's network and sales type leases of portions of
Metromedia Fiber's dark fiber classified as capital leases. Costs of sales, as
percentages of revenue for 1998 and 1997 were 38% and 142%, respectively,
declining as a result of the significant increase in the number of customers and
revenues. Cost of sales in 1998 related to the percentage of completion method
was $11.2 million. No cost of sales was incurred in 1997 relating to the
percentage of completion method.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses for 1998 were $14.7 million or 133% greater than
selling, general and administrative expenses of $6.3 million during 1997. The
increase in selling, general and administrative expenses for 1998 as compared to
1997 resulted primarily from increased overhead to accommodate Metromedia
Fiber's 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. Metromedia Fiber recorded $3.4 million for a
settlement agreement in 1998. The amount was recorded in the first quarter of
1998 for the expense associated with the issuance of stock options and payment
of cash related to a settlement agreement.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense for 1998 was $1.5 million or 88% greater than depreciation and
amortization expense of $800,000 during 1997. The increases in depreciation and
amortization expense resulted from increased investment in Metromedia Fiber's
completed fiber optic network and property and equipment.
INTEREST INCOME (EXPENSE). Interest income for 1998 was $8.8 million or
389% greater than interest income of $1.8 million during 1997. Interest income
during 1998 was derived from investment of Metromedia Factor's excess cash
received as proceeds from its initial public offering in October 1997 and the
additional cash received in November 1998 from the proceeds of Metromedia
Factor's $650 million note issuance. Interest expense increased in 1998 to
$6.9 million as compared to $0.7 million for 1997. The increase in interest
expense reflects interest accrued for the senior notes issued in November 1998.
INCOME (LOSS) FROM JOINT VENTURE. Metromedia Fiber recorded a $100,000 loss
from its 50% share of the ION joint venture's loss for 1998. The loss primarily
represents startup costs and operating activities for the joint venture.
INCOME TAXES. Metromedia Fiber recorded a provision for income taxes for
1998 in the amount of $3.4 million. This represents an estimated effective tax
rate, for federal and state taxes, of 77.5%.
NET INCOME (LOSS). Net income was $1.0 million for 1998, as compared to a
net loss of $26.3 million for 1997. For 1998, basic net income per share was
$0.00 as compared to a basic net loss per share of $0.14 for 1997. On a diluted
basis, net income per share for 1998 was $0.00.
The improvements in results for 1998 were primarily attributable to the
growth of revenues and the improvements in gross margins, as noted above, as
well as the increase in net interest income related to the investment made by
Metromedia Company and the funds raised through Metromedia Fiber's initial
public offering as compared to net interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Metromedia Fiber's initial public offering, on October 28, 1997, of
145,728,000 shares of class A common stock generated net proceeds of
$133.9 million, after deducting the underwriter's commission
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and expenses relating to such initial public offering. In addition, on
November 25, 1998, Metromedia Fiber issued and sold 10% Senior Notes due 2008
which generated net proceeds of $630.0 million. Also, on October 25, 1999,
Metromedia Fiber issued and sold 10% Senior Notes due 2009 which generated net
proceeds of $974.2 million. On October 7, 1999, Metromedia Fiber entered into a
securities purchase agreement with Verizon Communications, under which Verizon
Communications would purchase shares of Metromedia Fiber's class A common stock
and a convertible subordinated note. The agreement closed on March 6, 2000 and
generated net proceeds of approximately $1.7 billion. In addition, Verizon
Communications has agreed to purchase a minimum of $550 million of fiber optic
facilities payable over the next three years.
Cash used in operating activities was $24.5 million for the nine months
ended September 30, 2000, compared with $6.3 million provided by operations
during the comparable period in 1999. For the nine months ended September 30,
2000 Metromedia Fiber used $1.5 billion of cash for investing activities as
compared to $211.3 million for the same period in 1999. This increase was due
primarily to investments in the expansion of Metromedia Fiber's networks and
related construction in progress. For the nine months ended September 30, 2000,
$1.8 billion was provided by financing activities, primarily through the Verizon
Communications investment, compared to the $11.5 million cash outflow in the
nine months ended September 30, 1999.
For the year ended December 31, 1999, Metromedia Fiber's operating
activities generated $59.7 million of cash, compared with $18.0 million during
the comparable period in 1998. The increase in cash provided by operations was
primarily due to the increase in advance payments received from customers. For
the year ended December 31, 1999, Metromedia Fiber used $344.8 million of cash
for net investing activities compared with $126.0 million for 1998. This
increase was due primarily to investments in the expansion of its networks and
related construction in progress, and the acquisition of dark fiber
infrastructure in certain markets in Texas. Offsetting these items was the cash
acquired through the AboveNet acquisition. For the year ended December 31, 1999,
Metromedia Fiber had net proceeds of $986.9 million of cash from financing
activities, compared with $538.6 million in 1998. These amounts are primarily
due to the issuance noted above of 10% senior notes in October, 1999 and
November, 1998.
On May 9, 2000, Metromedia Fiber finalized an agreement with Pacific Gateway
Exchange ("PGE") to purchase PGE's ownership position in two transoceanic
fiber-optic consortia. One of the transactions closed in June 2000 and the other
closed in August 2000. Under the terms of the sale, Metromedia Fiber has paid
approximately $52.0 million in net cash proceeds to PGE, primarily to reimburse
it for payment to the consortia to date. Metromedia Fiber has assumed PGE's
future payment obligations to the cable consortia.
Metromedia Fiber anticipates that it will continue to incur net operating
losses as it expands and completes its existing networks, constructs additional
networks and markets its services to an expanding customer base and incurs
operating expenses related to the business of SiteSmith. Metromedia Fiber
anticipates spending approximately $3.4 billion through the year ending
December 31, 2001 on the build-out of its fiber optic networks and internet
service exchanges in 50 major markets in the United States and in 17 major
international markets. Metromedia Fiber believes that the net proceeds from the
investment by Verizon Communications, the net proceeds from the senior notes,
cash on hand, certain vendor financing and cash generated by operations
(including advance customer payments), will enable it to fully fund the planned
build-out of its networks and its other working capital needs through the year
ended December 31, 2001.
The indentures governing Metromedia Fiber's debt obligations permit it to
incur additional indebtedness to finance the engineering, construction,
installation, acquisition, lease, development or improvement of
telecommunications assets. As a result, Metromedia Fiber may also consider from
time to time private or public sales of additional equity or debt securities,
and entering into other credit facilities and financings, depending upon market
conditions, in order to finance the continued build-out of its network.
Metromedia Fiber previously filed a universal shelf registration statement on
Form S-3
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which was declared effective in October 1999. Under that registration statement,
$489,925,000 aggregate principal amount of securities remain eligible to be sold
in primary offerings and 9,120,760 shares of class A common stock remain
eligible to be resold in secondary offerings. Metromedia Fiber may issue and
sell shares of its class A common stock or its debt or other securities, or
facilitate the sale of shares of class A common stock by some of its existing
stockholders. Some or all of the securities covered by the two registration
statements may be issued or sold prior to or after the closing of the merger.
Metromedia Fiber expects to continue to experience negative cash flows for
the foreseeable future. In addition, as part of its acquisition of AboveNet,
Metromedia Fiber recorded approximately $1.6 billion in goodwill and other
intangible assets, which it is amortizing over periods up to twenty years. As
part of its acquisition of SiteSmith, Metromedia Fiber will record approximately
$1.1 billion in goodwill and other intangible assets, which it will amortize
over periods up to ten years. Accordingly, Metromedia Fiber expects to report
further net operating losses for the foreseeable future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of Metromedia Fiber
is routinely subjected to a variety of risks. In addition to the market risk
associated with interest movements on Metromedia Fiber's outstanding debt,
Metromedia Fiber is subject to other types of risk such as the collectibility of
its accounts receivables. Metromedia Fiber's principal long term obligation are
its $650 million 10% senior notes due 2008 and $1 billion 10% senior notes due
2009, and the convertible subordinated note of approximately $975.3 million
issued to Verizon Communications in March 2000. The fair value of the long-term
debt at September 30, 2000 was $2.67 billion. A 10% decrease and a 10% increase
in the level of interest rates would result in an increase in the fair value of
Metromedia Fiber's long term obligation by $73 million and a decrease in the
fair value of Metromedia Fiber's long term obligation by $33 million
respectively.
Metromedia Fiber has also purchased a portfolio of U.S. government
securities, which mature at dates sufficient to provide for payment, in full, of
interest on Metromedia Fiber's $650 million 10% senior notes due 2008 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 its carrying value.
Metromedia Fiber had approximately $1.5 billion in cash and cash and
equivalents at September 30, 2000. To the extent Metromedia Fiber's cash and
cash equivalents exceed its short-term funding requirements Metromedia Fiber may
invest its excess cash and cash equivalents in longer-term high-quality
financial instruments. Such investments when made will be subject to changes in
interest rates.
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BUSINESS OF SITESMITH
OVERVIEW
SiteSmith is a provider of comprehensive, internet infrastructure management
services to internet companies and traditional businesses seeking to maximize
the performance, reliability and security of large-scale, complex internet
sites. By relying on SiteSmith to manage their internet operations, its
customers can focus on their strategic initiatives and core competencies.
SiteSmith's core services include establishing and maintaining the
infrastructure for its customers' internet operations, and its premium services
currently include automated monitoring, security and network redundancy.
SiteSmith's technical personnel focus exclusively on analyzing,
recommending, implementing and supporting its customers' internet
infrastructure. SiteSmith has relationships with hardware, software, web hosting
and other internet infrastructure companies, including Cisco, Sun Microsystems,
Storage Networks, Oracle and Metromedia Fiber's subsidiary, AboveNet. To date,
SiteSmith has worked with over 100 customers, including About.com, Critical
Path, Electronic Arts, Microsoft HotMail, and Ogilvy & Mather.
SITESMITH'S SOLUTION
SiteSmith provides comprehensive internet infrastructure management services
that maximize the performance, reliability and security of large-scale, complex
internet sites for SiteSmith's customers. Key elements of SiteSmith's solution
include:
COMPREHENSIVE SERVICE OFFERINGS. SiteSmith handles all aspects of internet
infrastructure management. To create or upgrade an internet site quickly,
SiteSmith designs and architects the infrastructure, installs the appropriate
hardware and software and establishes reliable network connectivity. SiteSmith
is an expert in "clustering," which involves the linking together of multiple
computer systems in order to handle variable workloads or to provide continued
operations in the event one system fails, and in "load balancing," which
involves distributing data and processing across the systems within a cluster.
Once an internet site is up and running, SiteSmith performs site monitoring and
fault resolution, as well as security audits, load balancing, site mirroring and
data replication.
EXPERIENCE WITH LARGE-SCALE, COMPLEX INTERNET SITES. SiteSmith's founders
have extensive experience in internet infrastructure management, and its
technical personnel focus exclusively on analyzing, recommending and
implementing internet infrastructure management solutions for SiteSmith's
customers worldwide. SiteSmith's technical personnel have experience in many
technical disciplines, including infrastructure design and architecture,
database interface development, site security, site availability and content
distribution. To date, SiteSmith has worked with over 100 large-scale and
complex internet sites. SiteSmith also is implementing a sophisticated web-based
knowledge management system SiteSmith called Knowledge Network to share
technology developments, best practices, and experiences from prior customer
engagements.
SOLUTIONS TAILORED TO CUSTOMER REQUIREMENTS. Each of SiteSmith's customers
has unique business requirements, which can be met by a variety of technology
solutions. SiteSmith understands and employs a wide range of operating systems,
hardware, software and services. SiteSmith's relationships with internet
infrastructure providers including Cisco, Sun Microsystems, StorageNetworks,
Oracle and AboveNet give it access to a wide range of internet infrastructure
management solutions and service solutions enabling it to select from a variety
of options to tailor solutions to meet its customers' specific needs.
AROUND-THE-CLOCK HANDS-ON MANAGEMENT. SiteSmith's Internet Customer Care
Center, or IC3, monitors its customers' internet operations 24 hours a day,
365 days a year. The IC3 is the first line of
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attack for problems with customers' internet operations. The IC3 serves as a
filtering mechanism for minor problems, with more serious problems being
escalated to SiteSmith's internet site management team. This process gives
SiteSmith's customers a single point of contact for all internet infrastructure
management related issues. While SiteSmith provides some services remotely,
SiteSmith believes that timely installation, quick fault resolution, and
efficient maintenance of its customers' internet operations require active
on-site management. SiteSmith achieves this by maintaining a permanent presence
near major data centers where its customers' hardware resides. SiteSmith
currently has offices in Silicon Valley, Los Angeles, New York City, Newark,
Herndon, Chicago and London.
SITESMITH'S SERVICES
SiteSmith offers a comprehensive solution for the management of its
customers' internet infrastructure. SiteSmith's core services cover the range of
activities involved in establishing the infrastructure of an internet site and
managing its ongoing operation. These offerings rely on the technical skills of
SiteSmith's personnel to help its customers design, build and maintain internet
infrastructures that are reliable and high-performing. SiteSmith also offers
premium services designed to maximize the performance of an internet site,
including such areas as monitoring, network redundancy and security.
CORE SERVICES
SiteSmith's core services can be classified into three areas:
INFRASTRUCTURE DESIGN AND ARCHITECTURE. SiteSmith's first step consists of
analyzing its customer's online business objectives and existing applications,
and recommending the configuration of hardware, software and network components
that best serves its current and anticipated future requirements. SiteSmith's
technical personnel select an infrastructure design that ensures that its
customer's internet operations:
- have no single point of failure;
- are scalable and allow for easy, low-cost expansion;
- have sufficient redundancy; and
- enjoy optimal performance with minimal system bottlenecks.
SiteSmith's experience with leading technology providers allows SiteSmith to
consider a wide range of solutions for its customers. Examples of technologies
that SiteSmith works with include:
- Clustering: VERITAS Cluster Server, MS Cluster Server
- Databases: Oracle, MS SQL, Sybase
- Hardware: Sun Microsystems, Compaq, Cisco, Dell, Hewlett-Packard
- Load Balancing: Cisco, Foundry, Alteon, F5, Hydraweb, Radware
- Networking: Cisco, Nortel, Foundry, Alteon
- OS Support: Solaris, NT, Linux
- Security: Nokia, Check Point, Netscreen, Cisco
- Software: Apache, iPlanet Web Server, MS IIS
- Storage: StorageNetworks, EMC, Sun Microsystems, Compaq, StorageTek,
StorageWay
IMPLEMENTATION. After finalizing the infrastructure design, SiteSmith
performs the services necessary to begin operation of its customers' new or
upgraded internet site. These services consist of:
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- configuring components of SiteSmith's customers' internet infrastructure;
- provisioning, installing and testing equipment; and
- arranging for web hosting.
Configuring internet infrastructure components requires knowledge of stable
release levels, security complications, component interaction trade-offs and
business integration requirements. SiteSmith's technical personnel work closely
with each customer to ensure that their systems are configured correctly for
their business application environment. For example, SiteSmith ensures that all
required security updates are applied correctly and that security policies are
applied consistently across its customers' internet infrastructure.
Provisioning is the management of purchasing, tracking, and taking delivery
of internet infrastructure components. As part of this service, SiteSmith also
arranges support for purchased equipment, including coordination of vendor
service agreements. SiteSmith then helps its customers install and test these
components.
Arranging for web hosting consists of working with multiple hosting
providers in order to provide a tailored package for each customer. SiteSmith's
relationships with multiple hosting providers allow its customers to spread
their internet operation across multiple data centers, maximizing internet site
availability.
ONGOING MANAGEMENT. Ongoing management of internet operations involves:
- day-to-day maintenance;
- performance optimization; and
- site fault resolution.
In order to keep its customers' internet operations running efficiently and
problem-free, SiteSmith performs regular maintenance including installation of
software patches and updates in response to vendor recommendations or security
alerts and system backups.
SiteSmith also works closely with customers to refine and improve
performance of their internet operations by recommending and implementing
modifications and upgrades to both hardware and software. As a customer's
business grows, SiteSmith helps them develop a solution to scale their business.
In addition, SiteSmith keeps a record of all revisions made to a customer's
internet infrastructure, which eliminates inconsistent revisions to hardware and
software.
SiteSmith's technical personnel are on-call around-the-clock to resolve
problems quickly and minimize disruption to SiteSmith's customers' internet
operations. SiteSmith has offices close to data centers so it can respond
quickly in person when a remote resolution is not possible or would be
sub-optimal.
PREMIUM SERVICES. The key benefits of SiteSmith's premium services are to
improve internet site availability, security and content distribution.
Availability of internet sites can be improved by network redundancy, load
balancing, monitoring, clustering, and back-up and restore services. Security
can be improved by access control, intrusion detection systems, system
hardening, and network filtering. Content distribution services include
distributed caching and geographic site replication, as well as load balancing,
all of which can also improve availability.
SiteSmith's premium services currently consist of:
MONITORING. SiteSmith's monitoring service is designed to identify problems
as they occur. SiteSmith offers two levels of internet site monitoring to its
customers. SiteSmith's basic monitoring service includes external monitoring of
customer URLs, mailboxes and servers, typically by verifying the
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viability of each component at five-minute intervals. SiteSmith generates
reports for customers that include exception details, as well as internet site
statistics such as total downtime and average bandwidth use. SiteSmith's premium
monitoring service supplements these functions with customized internal
monitoring of hardware, databases and applications. Subscribers to this service
receive enhanced reports that discuss trends and analyze internet site
performance from the user's perspective, allowing customers to plan expansion of
bandwidth or data storage capabilities.
SECURITY SERVICES. SiteSmith's managed security services help provide a
secure environment for its customers' internet operations. To take advantage of
public infrastructure, the networks of many systems are built within public
networks. These networks can be configured so as to operate as if they were
private, and are then referred to as "virtual private networks". One method for
keeping a network secure is the use of "firewalls," which control access across
network segments, such as to separate a company's public Web server from its
internal network. SiteSmith's security services offerings include managed
firewalls, virtual private network, and intrusion detection systems. SiteSmith's
managed firewall services help protect internet sites against unwanted
intrusions and can be installed without major modification to the customer's
existing site infrastructure. SiteSmith's virtual private network services
provide secure connections to its customers' internet sites for content
maintenance and administration tasks.
NETWORK REDUNDANCY. SiteSmith's network redundancy service connects
customers to multiple independent web hosting and bandwidth providers, reducing
their exposure to network failures. By using multiple network providers, online
businesses can avoid network degradations or outages caused by the failure of a
specific data center's network connection. Building connections to multiple
networks, referred to here as a metropolitan area network, is a complex and
expensive undertaking for even the most sophisticated online business.
SiteSmith's network redundancy service gives customers the benefits of a
metropolitan area network without the attendant costs.
CUSTOMERS
As of September 30, 2000, SiteSmith has worked with over 150 customers.
SiteSmith's customers range from Fortune 500 companies, application service
providers, internet content companies to internet start-up companies. The
following are customers from which SiteSmith has derived in excess of $100,000
of revenue as of September 30, 2000:
3iNetworks
About.com
AdOne
Alloy
Astaga
AudioBasket.com
Carabunga
Click2Send.com
CoolBoard.com
Critical Path
The Daily Deal
Electronic Arts
ESCENE
Fasturn
File America.com
Financialprinter.com
FreeSamples.com
funBug.com
GroupTrade.com
Handspring
Healinx
iGroove
Microsoft-Hotmail
Namezero.com
Nano.com
Novell
Ogilvy & Mather
Pentech Financial
RedCart Technologies
Rocketlinks
Scale8
Shine
Sigaba
SmoothSale
Sonera
Swan Systems
Trepp
UBUBU
Urban Box Office
UUNET
Walmart
Website Pros
wine.com
World Wrestling Federation
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For the nine months ended September 30, 2000, no customer accounted for more
than 10% of total revenues.
SALES AND MARKETING
SALES
SiteSmith sells its services through an internal direct sales organization,
which establishes and maintains direct relationships with key accounts and
strategic customers. In addition, SiteSmith maintains field offices in five
major metropolitan areas in the United States and one in London, England.
SiteSmith derives sales leads from both its internal direct sales
organization and its channel partners. SiteSmith's sales team generates its
leads from its marketing activities, including SiteSmith's internet site,
advertising, direct marketing and trade show participation, as well as from
telemarketing based on purchased prospect lists. Companies with whom SiteSmith
has alliances generate leads through team selling and co-marketing arrangements,
which provide SiteSmith with access to their customer base.
MARKETING
SiteSmith's marketing strategy is to build its brand in order to solidify
its competitive position in the market for internet infrastructure management
services. SiteSmith's marketing activities include:
- establishing relationships with key trade analyst groups,
- advertising in trade and general business print media, regional radio, and
outdoor venues,
- employing direct marketing programs,
- participating in trade shows,
- speaking at industry and technology conferences, and
- hosting and participating in technical seminars.
We also plan to establish regional campaigns for the various metropolitan
areas that SiteSmith serves, both domestically and internationally.
ALLIANCES
SiteSmith has relationships with many leading hardware, software, storage,
hosting and value-added reseller companies. SiteSmith uses these relationships
to enhance its service offerings, as well as to generate qualified sales leads.
These arrangements also can include co-marketing and cross-training activities.
Set forth below is a representative list of companies with which SiteSmith has
alliances:
<TABLE>
<CAPTION>
HARDWARE SOFTWARE STORAGE HOSTING VARS
-------- -------- ------- ------- ----
<S> <C> <C> <C> <C>
Cisco Argus Systems EMC AboveNet Comstor
Compaq Check Point StorageNetworks Colo.com IngramMicro
Dell Microsoft StorageTek Equinix Merisel
Foundry Networks Oracle StorageWay GlobalCenter
Nokia Peakstone Globix
RADWARE Red Hat QwestCommunications
Sun Microsystems VERITAS UUNET
VA Linux Systems Vignette
</TABLE>
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COMPETITION
SiteSmith competes in the rapidly evolving and increasingly competitive
internet infrastructure management services market. SiteSmith competes against
web hosting companies, companies selling internet site design services, and the
development efforts of companies seeking to maintain and improve their internet
infrastructures in-house. SiteSmith expects competition to intensify even
further as this market evolves.
SiteSmith believes that the key competitive factors are:
- experience in internet infrastructure management services,
- technological independence,
- focus on new and emerging technologies,
- global presence, and
- broad and deep relationships with customers.
SiteSmith believes it competes favorably on these criteria and distinguishes
itself from its competitors based on the breadth of its expertise, which enables
SiteSmith to tailor a solution for customers from a variety of leading
technologies.
EMPLOYEES
As of November 3, 2000, SiteSmith had approximately 439 full-time employees.
SiteSmith has never experienced a work stoppage or labor dispute that has
interfered with its operations. SiteSmith considers its relations with its
employees to be satisfactory.
FACILITIES
SiteSmith's principal executive offices are located at 3283 Scott Boulevard,
Santa Clara, California. SiteSmith's lease on these premises covers
approximately 11,200 square feet and expires in October 2004. SiteSmith also has
leases on an adjoining building at 3281 Scott Boulevard, Santa Clara, California
that covers approximately 24,000 square feet and expires in February 2005, and a
lease covering approximately 48,275 square feet at 3250 Olcott Street, Santa
Clara, California that expires in June 2010. SiteSmith also leases facilities in
Chicago, Herndon (Virginia), Los Angeles, New York City, Newark, and London.
SiteSmith anticipates additional space will be required as its business expands
and believe that SiteSmith will be able to obtain suitable space as needed.
INTELLECTUAL PROPERTY RIGHTS
SiteSmith relies on a combination of copyright, trademark and trade secret
laws and restrictions on disclosure to protect its intellectual property rights.
Despite SiteSmith's efforts to protect its proprietary rights, unauthorized
parties may attempt to copy or otherwise obtain and use its technology.
Monitoring unauthorized use of SiteSmith's intellectual property rights is
difficult and costly, and SiteSmith cannot be certain that the steps it has
taken will prevent misappropriations of its technology, particularly in
countries where the laws may not protect its proprietary rights as fully as in
the United States.
LEGAL PROCEEDINGS
SiteSmith is not currently subject to any material legal proceedings.
SiteSmith may from time to time become a party to various legal proceedings
arising in the ordinary course of business.
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SITESMITH MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS OF SITESMITH'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH SITESMITH'S FINANCIAL
STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS PROSPECTUS. THE
INFORMATION BELOW CONTAINS SOME FORWARD-LOOKING STATEMENTS AND YOU SHOULD
SPECIFICALLY CONSIDER THE SECTION OF THIS DOCUMENT ENTITLED "SPECIAL NOTE
REGARDING FORWARD-LOOKING STATEMENTS" IN EVALUATING THESE RESULTS.
SiteSmith, Inc. was incorporated as SiteBrigade in Delaware on September 8,
1999 and began offering commercial access to its marketplace in October 1999. On
November 15, 1999, SiteSmith changed its name to SiteSmith, Inc. SiteSmith's
principal executive offices are located at 3283 Scott Blvd., Santa Clara,
California 95054. Its telephone number at that location is (408) 987-6400. Its
web site address is www.sitesmith.com.
REVENUE. SiteSmith derives its revenue primarily from providing internet
infrastructure management services to its customers. SiteSmith also derives
revenue by purchasing equipment on behalf of its customers and reselling it to
them.
SiteSmith sells its services under contracts that typically have terms of
one year. Customers pay monthly fees for the services utilized and one-time fees
for projects and purchases of equipment. Monthly fees for SiteSmith's services
are generally recognized as they are performed. Generally, the pricing of
SiteSmith's one-year service contracts is based on the complexity of the
engagement and the resources required. SiteSmith bills its customers a monthly
rate based on the contract, plus out-of-pocket expenses. If the services
required in any given month exceed the services SiteSmith is contracted to
perform, SiteSmith bills its customers for any incremental service. SiteSmith
reports revenue inclusive of reimbursable expenses. Any advanced billings are
classified as deferred revenue. To date, SiteSmith has worked with over 150
customers. For the nine months ended September 30, 2000, no customer accounted
for more than 10% of total revenue.
Revenue from equipment resales is not related to contracts for services.
Over time, SiteSmith expects the percentage of revenue that it derives from
equipment resales to decrease substantially as SiteSmith focuses on revenues
from services. In the future, SiteSmith plans to include the provisioning of
hardware in its basic offering, and to outsource any other equipment sales.
COST OF SERVICE AND EQUIPMENT REVENUE. SiteSmith's cost of service revenue
consists of salaries and benefits for technical personnel, rent, depreciation,
space in internet data centers, network and local telecommunications circuits
and interconnections to other networks, plus other costs that are not reimbursed
directly by the customer. SiteSmith expects to continue to incur significant
costs to hire personnel and to obtain data center space and bandwidth in
anticipation of future revenue. In addition, SiteSmith expects that salaries for
its technical personnel will increase over time due to the intense competition
in SiteSmith's industry for qualified personnel. SiteSmith's cost of service
revenue, as a percentage of service revenue, is affected by the efficiency with
which SiteSmith uses its technical resources, including personnel, and its
ability to incorporate increased costs in the fees SiteSmith charges its
customers. SiteSmith's cost of service revenue as a percentage of service
revenue could decline as customers increasingly use its premium services.
SiteSmith's cost of equipment revenue presently consists of the costs of
third party computer equipment resold to its customers. SiteSmith expects this
cost to increase as SiteSmith includes the provisioning of hardware in its basic
offering, offset in part by the outsourcing of other equipment sales. This cost
as a percentage of total revenue will fluctuate depending on the product mix
selected by customers.
RESEARCH AND DEVELOPMENT EXPENSES. SiteSmith's research and development
expenses consist primarily of personnel costs. SiteSmith's efforts in research
and development are primarily directed
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towards evaluating software and hardware technologies for potential use by its
customers, and performing benchmark analyses on various products that might be
employed by SiteSmith for the benefit of its customers.
SALES AND MARKETING EXPENSES. SiteSmith's sales and marketing expenses
consist primarily of personnel costs, sales commissions, advertising costs and
public relations expenses. Most of SiteSmith's marketing costs are directed
towards programs designed to build brand name recognition and attract new
customers. SiteSmith expects sales and marketing expenses as a percentage of
revenue to decline in the future.
GENERAL AND ADMINISTRATIVE EXPENSES. SiteSmith's general and administrative
expenses consist primarily of salaries and benefits for its administrative and
management information systems personnel, recruiting, related costs for general
corporate functions, fees for legal and other professional services and
facilities costs. SiteSmith expects general and administrative expenses as a
percentage of revenue to decline in the future.
STOCK-BASED COMPENSATION EXPENSE. SiteSmith recorded unearned stock-based
compensation in connection with the granting of options to purchase its common
stock with purchase or exercise prices that were subsequently determined to be
less than the deemed fair market value at the grant date. Options granted are
typically subject to a four-year vesting period. Stock-based compensation
related to the issuance of these options is being amortized on an accelerated
basis over their respective vesting periods in accordance with FASB
Interpretation No. 28. As a result of the cumulative effect of stock-based
compensation charges related to stock option grants. SiteSmith expects
stock-based compensation expense, which is primarily attributable to
amortization of unearned stock-based compensation charges, to affect its
reported results through December 31, 2004.
INTEREST INCOME, NET. Interest income, net consists primarily of interest
earned on cash and cash equivalents SiteSmith generated from private placements
of convertible preferred stock.
LOSS FROM OPERATIONS. Since SiteSmith began operations in October 1999,
SiteSmith has experienced significant operating losses and negative cash flows
from operations in each quarterly period. As of September 30, 2000, SiteSmith
had an accumulated deficit of $48.4 million. SiteSmith also expects to continue
to incur increasing sales and marketing, infrastructure development and general
and administrative expenses as the number of its employees increase. As a
result, SiteSmith will need to generate significant revenues to achieve
profitability. If SiteSmith does achieve profitability, SiteSmith may not be
able to sustain or increase profitability on a quarterly or annual basis in the
future. Although SiteSmith's revenue has grown since its inception, SiteSmith
does not believe that it can sustain its historical growth rates. Accordingly,
SiteSmith's historical growth rates may not be indicative of its future revenue
growth.
RECENT DEVELOPMENTS. On October 9, 2000, SiteSmith entered into a definitive
agreement with Metromedia Fiber to exchange all outstanding shares of its common
and preferred stock for the right to receive between 55 million and
62.5 million shares of Metromedia Fiber class A common stock. The exchange ratio
will depend on the average closing price of Metromedia Fiber class A common
stock during the 20 trading day period ending on the fourth business day prior
to the effective time of merger. This transaction is expected to close during
the fourth quarter of fiscal 2000, subject to various closing conditions.
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RESULTS OF OPERATIONS. The following table sets forth selected items from
SiteSmith's audited statement of operations for the periods indicated:
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8, 1999
(INCEPTION) NINE MONTHS ENDED
THROUGH SEPTEMBER 30,
DECEMBER 31, 1999 2000
------------------ -----------------
(IN THOUSANDS)
<S> <C> <C>
Revenue:
Service revenue............................................. $ 98 $ 9,296
Equipment revenue........................................... -- 4,860
------- --------
Total revenue............................................... 98 14,156
Costs and expenses:
Cost of service revenue..................................... 484 16,559
Cost of equipment revenue................................... -- 4,341
Research and development.................................... 67 594
Sales and marketing......................................... 147 10,074
General and administrative.................................. 861 17,494
Stock-based compensation.................................... 663 11,900
------- --------
Total costs and expenses.................................... 2,222 60,962
------- --------
Loss from operations........................................ (2,124) (46,806)
Interest income, net........................................ 21 518
------- --------
Net loss.................................................... $(2,103) $(46,288)
======= ========
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000
REVENUE. SiteSmith's service revenue increased to $9.3 million for the nine
months ended September 30, 2000, from $98,000 for the period from inception
through December 31, 1999. The increase in service revenue was due to the
addition of customers and increased revenue per customer, as SiteSmith enhanced
its sales and marketing efforts. Equipment revenue was $4.9 million for the nine
months ended September 30, 2000. There was no equipment revenue for the period
from inception through December 31, 1999. Equipment revenue was related to the
sale of equipment in connection with some of SiteSmith's service engagements.
COST OF SERVICE AND EQUIPMENT REVENUE. SiteSmith's cost of service revenue
increased to $16.6 million for the nine months ended September 30, 2000, from
$484,000 for the period from inception through December 31, 1999. The increase
in cost of service revenue was primarily due to the hiring of additional
technical personnel. Cost of equipment revenue was $4.3 million for the nine
months ended September 30, 2000.
RESEARCH AND DEVELOPMENT EXPENSES. SiteSmith's research and development
expenses increased to $594,000 for the nine months ended September 30, 2000,
from $67,000 for the period from inception through December 31, 1999.
SALES AND MARKETING EXPENSES. SiteSmith's sales and marketing expenses
increased to $10.1 million for the nine months ended September 30, 2000, from
$147,000 for the period from inception through December 31, 1999. The increase
in sales and marketing expenses was primarily due to an increase in the number
of sales and marketing personnel and related recruiting costs and costs incurred
in connection with advertising and public relations.
GENERAL AND ADMINISTRATIVE EXPENSES. SiteSmith's general and administration
expenses increased to $17.5 million for the nine months ended September 30,
2000, from $861,000 for the period from inception through December 31, 1999. The
increase was primarily due to an increase in the number of general and
administrative personnel, facilities costs, recruiting costs, and professional
service fees.
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STOCK-BASED COMPENSATION EXPENSE. SiteSmith's stock-based compensation
expense increased to $11.9 million for the nine months ended September 30, 2000,
from $663,000 for the period from inception through December 31, 1999.
INTEREST INCOME, NET. SiteSmith's interest income, net, increased to
$518,000 for the nine months ended September 30, 2000, from $21,000 for the
period from inception through December 31, 1999. The increase in interest
income, net, was primarily due to the increase in cash and cash equivalents.
NET LOSS. SiteSmith's net loss increased to $46.3 million for the nine
months ended September 30, 2000, from $2.1 million for the period from inception
through December 31, 1999, as a result of the above factors.
PERIOD FROM SEPTEMBER 8, 1999 (INCEPTION) THROUGH DECEMBER 31, 1999
REVENUE. SiteSmith began providing its services in October 1999. For the
period from its inception to December 31, 1999, service revenue was $98,000 and
SiteSmith derived no equipment revenue.
COST OF SERVICE AND EQUIPMENT REVENUE. For the period from SiteSmith's
inception to December 31, 1999, cost of services revenue was $484,000. Cost of
revenue exceeded revenue due to the hiring of technical personnel in
anticipation of future customer contracts, as well as acquisition of facilities.
There was no cost of equipment revenue for the period from inception through
December 31, 1999.
RESEARCH AND DEVELOPMENT EXPENSES. For the period from SiteSmith's
inception to December 31, 1999, its research and development expenses were
$67,000.
SALES AND MARKETING EXPENSES. For the period from SiteSmith's inception to
December 31, 1999, sales and marketing expenses were $147,000, resulting mainly
from the establishment of its sales and marketing department.
GENERAL AND ADMINISTRATIVE EXPENSES. For the period from SiteSmith's
inception to December 31, 1999, its general and administrative expenses were
$861,000, consisting mainly of general and administrative personnel salaries,
facilities costs, and professional service fees.
STOCK-BASED COMPENSATION EXPENSES. For the period from SiteSmith's
inception to December 31, 1999, stock-based compensation expense was $663,000.
INTEREST INCOME, NET. For the period from SiteSmith's inception to
December 31, 1999, interest income, net, was $21,000.
NET LOSS. For the period from SiteSmith's inception to December 31, 1999,
its net loss was $2.1 million as a result of the above factors.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception through September 30, 2000, SiteSmith has financed its
operations by raising approximately $51.4 million primarily through the private
placement of equity securities. In addition, on September 29, 2000, the Company
entered into a Master Lease Agreement with Comdisco ("Comdisco") that provides
the Company the ability to lease up to $4.0 million in equipment, software and
improvements. No borrowings were outstanding under this agreement at
September 30th. On October 9, 2000, the Company entered into a $3.0 million Loan
and Security Agreement with Comdisco for general working capital purposes. In
connection with these agreements, Comdisco received an option to purchase up to
168,141 shares of the Company's Series C mandatorily redeemable preferred stock
at $5.65 per share which, if exercised, would provide the Company an additional
$950,000 in funding. At December 31, 1999, SiteSmith had $1.4 million in cash
and cash
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equivalents and at September 30, 2000, SiteSmith had $5.1 million in cash and
cash equivalents as well as $3.5 million of restricted cash. SiteSmith had
significant negative cash flows from operating activities for the period from
inception to December 31, 1999 and for the nine months ended September 30, 2000.
Net cash used in SiteSmith's operating activities was $1.3 million for the
period from inception to December 31, 1999 and $28.6 million for the nine months
ended September 30, 2000. Cash used in operating activities consisted primarily
of net operating losses and increases in accounts receivable and prepaid
expenses, which were partially offset by increases in accrued expenses and
accounts payable. As SiteSmith continues to grow, any increases in its accounts
receivable balance will adversely affect its ability to generate positive cash
flows from SiteSmith's operating activities.
Net cash used in SiteSmith's investing activities was $876,000 for the
period from inception to December 31, 1999 and $15.7 million for the nine months
ended September 30, 2000. Net cash used in investing activities in these periods
consisted primarily of capital expenditures for computer equipment, purchased
software, office equipment, and leasehold improvements.
Net cash provided by SiteSmith's financing activities was $3.6 million for
the period from inception to December 31, 1999, and $48.0 million for the nine
months ended September 30, 2000. Net cash provided by financing activities was
principally attributable to the private sale of 7,200,000 shares of Series A
mandatorily redeemable convertible preferred stock, 8,610,861 shares of
Series B mandatorily redeemable convertible preferred stock and 4,717,372 shares
of Series C mandatorily redeemable convertible preferred stock. The preferred
stock is voting stock with a dividend and liquidation preference over the common
stock, and is redeemable after January 13, 2005 at cost plus 10% per year
outstanding prior to redemption.
As of September 30, 2000, SiteSmith's principal commitments consisted of
obligations outstanding under a number of facility and equipment leases.
SiteSmith has entered into facility lease agreements for its corporate
headquarters in Santa Clara, California, as well as for office space in
Illinois, New York, New Jersey, Virginia, a number of locations in southern
California, and London, with expiration dates through the year 2010. In
addition, SiteSmith leases equipment under noncancellable lease agreements
through 2002. In July 2000, SiteSmith entered into an operating lease agreement
for a new facility in Santa Clara, California. The agreement is for a minimum of
ten years with annual rent payments increasing from $2.8 million to $3.9 million
over the lease term. Concurrent with the execution of the lease, SiteSmith
posted a letter of credit in the amount of $2.9 million, which expires on
October 1, 2001. In March 2000, SiteSmith entered into a two-year equipment
rental agreement, which provides for a line of credit up to $2.0 million secured
by the assets that SiteSmith acquires during that time and by restricted cash
balances equal to six months of lease payments. As of September 30, 2000,
SiteSmith had utilized $1.5 million under this agreement. Lease terms are 24
months, and may be extended by agreement of the parties.
SiteSmith believes that the cash resources available from Metromedia Fiber
following the merger, together with its current cash and cash equivalents, will
be sufficient to meet SiteSmith's working capital requirements, including its
planned increases in its expenditures on sales and marketing, research and
development and international expansion, for at least the twelve months
following the merger. If SiteSmith is not acquired in this transaction,
SiteSmith will need to raise additional funds within the next twelve months.
Management believes that there is sufficient cash on hand and borrowings
available to continue operations until early 2001. However, after that date,
SiteSmith will need additional financing. If SiteSmith needs to raise additional
funds, it will likely do so through the issuance and sale of equity securities.
If this were to occur, the percentage of ownership of SiteSmith's stockholders
could be reduced, its stockholders may experience additional dilution and these
securities may have rights, preferences or privileges senior to those of its
stockholders. SiteSmith cannot assure you that additional financing will be
available on terms favorable to it, if at all. If adequate funds are not
available or are not available on acceptable terms, SiteSmith's ability to
continue its expansion, take
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advantage of unanticipated opportunities, develop or enhance services or
products or otherwise respond to competitive pressures would be significantly
limited. SiteSmith's business, results of operations and financial condition
could be materially affected by these limitations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. The Company
does not currently hold any derivative instruments and does not engage in
hedging activities. The Company expects the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flow. The Company will be required to adopt SFAS No. 133 for the year ending
December 31, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin, or SAB 101,
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The adoption of SAB 101 did not have a material effect on
the financial position or results of operations of the Company.
In March 2000, the FASB issued Interpretation, or FIN No. 44, Accounting for
Certain Transactions Involving Stock Compensation--an Interpretation of APB 25.
This Interpretation clarifies (a) the definition of an employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequences of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. The adoption of the conclusions of
FIN 44 did not have a material impact on the Company's financial position and
results of operations.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
SiteSmith has limited exposure to financial market risks, including changes
in interest rates. An increase or decrease in interest rates would not
significantly increase or decrease interest expense on debt or lease obligations
due to the fixed nature of the obligation.
SiteSmith's interest income is sensitive to changes in the general level of
U.S. interest rates, particularly since the majority of its investments are in
short-term financial instruments. Due to the short-term nature of its
investments, SiteSmith believes that it is not subject to any material market
risk exposure. SiteSmith has limited foreign operations and so it believes that
SiteSmith is not materially exposed to foreign currency fluctuations. SiteSmith
anticipates that as it expands internationally the proportion of its revenues
paid in foreign currencies will increase. Accordingly, SiteSmith may be subject
to exposure from adverse movements in foreign currency exchange rates in
relation to those revenues.
During the third quarter of the fiscal year 2000, SiteSmith established a
United Kingdom subsidiary and as a result may be exposed to market risk from
fluctuations in foreign currency exchange rates, which could affect its
financial position, results of operations and cash flows. SiteSmith plans to
manage its exposure to market risk through its regular operating and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments. SiteSmith plans to use derivative financial instruments as risk
management tools and not for trading or speculative purposes, and does not plan
to maintain such instruments that may expose SiteSmith to significant market
risk.
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INFORMATION ON OFFICERS AND DIRECTORS OF METROMEDIA FIBER
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information regarding the directors
and executive officers of Metromedia Fiber:
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
---- -------- -----------------------------------------------------------
<S> <C> <C>
Stephen A. Garofalo 49 Chairman of the Board and Chief Executive Officer
Nicholas M. Tanzi 41 President and Chief Operating Officer
Gerard Benedetto 43 Senior Vice President and Chief Financial Officer
David Rand 37 Executive Vice President and Director
Sherman Tuan 46 Chief Executive Officer of AboveNet Communications, Inc.
and Director
Silvia Kessel 50 Executive Vice President and Director
Arnold L. Wadler 57 Executive Vice President, General Counsel, Secretary and
Director
John W. Kluge 86 Director
David Rockefeller 85 Director
Stuart Subotnick 58 Director
Leonard White 61 Director
</TABLE>
DIRECTORS OF METROMEDIA FIBER
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. Metromedia Fiber's charter
provides that the number of directors shall be fixed at twelve. The board of
directors of Metromedia Fiber presently consists of ten members, Howard M.
Finkelstein and Vincent A. Galluccio having resigned from the board of directors
during 2000, Mr. Finkelstein has been replaced by Nicholas M. Tanzi. Currently
eight of the ten directors are nominees of the holders of class B common stock
and two of the ten directors are nominees of the holders of class A common stock
and as a result holders of the class A common stock and the holders of class B
common stock are entitled to fill one vacancy on the board of directors. Members
of each class of directors will hold office until their successors are elected
and qualified. The directors elected by the holders of the class A common stock
are elected by a plurality vote of all votes cast by such holders at each annual
meeting of stockholders of Metromedia Fiber entitled to vote for such directors.
The directors hold office for a one-year term. The class A directors are
Nicholas M. Tanzi and Stephen A. Garofalo and the class B directors are Silvia
Kessel, John W. Kluge, David Rockefeller, Stuart Subotnick, Arnold L. Wadler,
Sherman Tuan, David Rand and Leonard White.
COMMITTEES OF THE BOARD
The board of directors has delegated certain functions to the following
standing committees:
THE EXECUTIVE COMMITTEE. The executive committee was created on
December 3, 1997 and is authorized to exercise, to the extent permitted by law,
all of the powers of the board of directors in the management or corporate
matters including, without limitation, the power and authority to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger in connection with Metromedia Fiber's merger or the merger
of any of Metromedia Fiber's subsidiaries.
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The members of the executive committee are Messrs. Stuart Subotnick, Stephen A.
Garofalo,
Nicholas M. Tanzi and Ms. Silvia Kessel.
THE AUDIT COMMITTEE. The audit committee is responsible for (a) reviewing
the professional services and independence of Metromedia Fiber's independent
auditors and the scope of the annual external audit recommended by the
independent auditors, (b) ensuring that the scope of the annual external audit
is sufficiently comprehensive, (c) reviewing, in consultation with Metromedia
Fiber's independent auditors and Metromedia Fiber's internal auditors, the plan
and results of the annual external audit, the adequacy of Metromedia Fiber's
internal control systems and the results of Metromedia Fiber's internal audit
and (d) reviewing with management and Metromedia Fiber's independent auditors
Metromedia Fiber's annual financial statements, financial reporting practices
and the results of such external audit. The current members of the audit
committee are Ms. Silvia Kessel and Messrs. David Rockefeller and Leonard White.
THE COMPENSATION COMMITTEE. The compensation committee's functions are to
review, approve, recommend and report to the board of directors on matters
specifically relating to the compensation of Metromedia Fiber's executive
officers and other key personnel and to administer Metromedia Fiber's stock
option plans. The current members of the compensation committee are
Messrs. Rockefeller and White.
THE NOMINATING COMMITTEE. The nominating committee's principal function is
to identify candidates and recommend to the board of directors nominees for
membership on the board of directors. The nominating committee expects normally
to be able to identify from its own resources the names of qualified nominees,
but it will accept from stockholders recommendations of individuals to be
considered as nominees, provided Metromedia Fiber's stockholders follow
procedures specified in Metromedia Fiber's by-laws. These procedures provide
that, in order to nominate an individual to the board of directors, a
stockholder must provide timely notice of such nomination in writing to the
secretary of Metromedia Fiber and a written statement by the candidate of his or
her willingness to serve. The notice must include the information required to be
disclosed in solicitations for proxies for election of directors pursuant to
Regulation 14A under the Exchange Act, along with the name, record address,
class and number of shares of common stock beneficially owned by the stockholder
giving such notice. To be timely, notice must be received by Metromedia Fiber
not less than 60 days nor more than 90 days prior to the scheduled date of the
annual meeting; provided, however, that if less than 70 days' notice or prior
public disclosure of the date of the annual meeting is given, such notice must
be received within 10 days following the earlier of (i) public disclosure by us
of the date of the annual or special meeting at which directors are to be
elected or (ii) the day on which such notice of the date of the meeting was
mailed. For purposes of this notice requirement, disclosure will be deemed to be
first made when disclosure of such date of the annual or special meeting of
stockholders is first made in a press release reported by the Dow Jones News
Service, Associated Press or other comparable national news services, or in a
document which has been publicly filed by us with the Securities and Exchange
Commission pursuant to Sections 13, 14 or 15(d) of the Exchange Act. Any such
nominations should be submitted in writing to Metromedia Fiber Network, Inc.,
One Meadowlands Plaza, East Rutherford, New Jersey, 07073, Attention: Secretary.
The nominating committee recommends individuals to serve as directors and
includes members who have been elected by the class B stockholders. The current
members of the nominating committee are Arnold L. Wadler and Silvia Kessel.
COMPENSATION OF DIRECTORS
During 1999, each director of Metromedia Fiber who was not an officer,
employee or affiliate of Metromedia Fiber 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 in person or $500 for each meeting of the board of
directors in which the non-employee director participated by conference
telephone call.
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Members of committees of the board of directors are paid $500 for each meeting
attended. In addition, Metromedia Fiber's 1998 and 1997 Incentive Stock Plans
entitle any non-employee director who meets the criteria for "outside director"
under Section 162(m) of the Internal Revenue Code ("Independent Directors") and
who first serves on the board of directors after the adoption of the Incentive
Stock Plans to receive awards under such plans of 80,000 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 will not exceed 80,000
shares of class A common stock.
In addition, on September 16, 1999, Metromedia Fiber granted to each of
Mr. Tuan and Mr. Rand options to purchase 1,000,000 shares of class A common
stock at an exercise price of $13.1875 per share in connection with their
respective employment agreements with Metromedia Fiber's wholly-owned subsidiary
AboveNet Communications Inc.
DIRECTORS OF METROMEDIA FIBER
NICHOLAS M. TANZI has been Metromedia Fiber's President and Chief Operating
Officer since January 2000 and a Director since April 2000. He served as Senior
Vice President from August 1999 to January 2000 and as Senior Vice
President--Sales from August 1997 to July 1999. Prior to joining Metromedia
Fiber, Mr. Tanzi served as Vice President--Enterprise Networks Division at
Fujitsu Business Communications Systems from March 1995 until July 1997 and
prior to that Mr. Tanzi served as Director of Sales, Eastern Region, Asante
Technologies Inc. from April 1993 until February 1995.
STEPHEN A. GAROFALO founded Metromedia Fiber in April 1993, and has been
serving as Chairman of the Board since Metromedia Fiber's inception and as Chief
Executive Officer since October 1996 and served as President from 1993 to 1996
and as Secretary from 1993 to 1997. From 1979 to 1993, Mr. Garofalo served as
President and Chief Executive Officer of F. Garofalo Electric Co., Inc., an
electrical contractor.
SILVIA KESSEL has served as a Director of the Company since July 1997 and as
Executive Vice President since October 1997. Ms. Kessel is a Director of
Metromedia International Group, Inc. and has served as Chief Financial Officer
and Treasurer since 1995 and Executive Vice President 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 and Senior Vice President and Director from June 1991 to
November 1992. Ms. Kessel has been Senior Vice President of Metromedia Company
since 1994 and President of Kluge & Company since January 1994 and Managing
Director from April 1990 to January 1994. Ms. Kessel is a Director and Executive
Vice President of Big City Radio, Inc., an American Stock Exchange listed
company that operates radio stations in New York, Los Angeles, Chicago and
Phoenix. Ms. Kessel is also a Director of Liquid Audio, Inc.
JOHN W. KLUGE has been a Director of the Company since July 1997. Mr. Kluge
has been the President and Chairman of Metromedia Company and its
predecessor-in-interest, Metromedia, Inc. for over five years. Mr. Kluge has
been the Chairman of the Board of Metromedia International Group, Inc. since
1995. In addition, Mr. Kluge was Chairman of the Board and a Director of Orion
from 1992 until July 1997. He also serves as a Director of Conair Corporation
and Occidental Petroleum Corporation.
STUART SUBOTNICK has been a Director of the Company since July 1997.
Mr. Subotnick has been the Vice Chairman of the Board of Metromedia
International Group, Inc. since 1995 and President and Chief Executive Officer
since December 1996. In addition, Mr. Subotnick served as Vice Chairman of the
Board of Orion, Inc. 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
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years. Mr. Subotnick is also a director of Carnival Cruise Lines, Inc. and
Chairman of the Board of Big City Radio, Inc.
DAVID RAND has served as a Director of the Company since September 1999 and
as AboveNet's Chief Technology Officer from March 1996, initially as a
consultant, and from May 1998 as an employee to July 2000. Mr. Rand is currently
Executive Vice President of Metromedia Fiber and also served as its Chief
Technology Officer until July 2000. Mr. Rand has served as a member of the
Internet Engineering Task Force for the past seven years. Mr. Rand authored rfc
1962 and rfc 1663, developed the EtherValve technology, ASAP and APS, as well as
co-developed MRTG. From September 1995 to May 1998, Mr. Rand was an engineer at
Cisco Systems, Inc., a router manufacturer. From February 1994 to August 1995,
Mr. Rand was an engineer at Innovative Systems and Technologies, a video
compression company. From October 1993 to February 1994, Mr. Rand was a software
engineer at Novell, Inc., a network server company.
DAVID ROCKEFELLER has served as a Director of the Company since
October 1997. He currently serves as a member of The Chase Manhattan Bank's
International Advisory Committee, as Chairman of Rockefeller Center
Properties, Inc. (since 1995) and as a Director of Rockefeller & Co., Inc.
(since 1994), a privately owned investment management firm, and its parent
corporation, Rockefeller Financial Services, Inc. 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.
SHERMAN TUAN has served as a Director of the Company since September 1999.
Mr. Tuan, the founder of AboveNet Communications, Inc., has served as Chief
Executive Officer and a Director of AboveNet Communications, Inc. since
March 1996 and President until January 1998. Mr. Tuan was President of InterNex
Information Services, Inc., an internet infrastructure provider, from
November 1994 to October 1995 and from February 1994 to November 1995 was
President of Tiara Computer, Inc., a network equipment manufacturer, which
merged with InterNex Information Services, Inc. in November 1994. From
January 1992 to June 1993, Mr. Tuan was Vice President of Worldwide Sales and
Marketing of Primus Technologies, Inc., a provider of problem resolution and
knowledge management software, and President of Celerite Graphics, Inc., a
manufacturer of video chips. Mr. Tuan received an Electrical Engineering degree
from Feng-Chia University in Taiwan.
ARNOLD L. WADLER has served as a Director, Executive Vice President, General
Counsel and Secretary of the Company since October 1997. Mr. Wadler has served
as a Director, Executive Vice President, General Counsel and Secretary of
Metromedia International Group, Inc. since August 29, 1996 and, from
November 1, 1995 until August 1996 as Senior Vice President, General Counsel and
Secretary. Mr. Wadler has been a Director, Executive Vice President, General
Counsel and Secretary of Big City Radio, Inc. since December 1997. Mr. Wadler
served as a Director of Orion, Inc. from 1991 until July 1997 and has been
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 the Company since October 1997.
Mr. White has served as President and Chief Executive Officer of Rigel
Enterprises since July 1997. Mr. White served as President and Chief Executive
Officer of Orion, Inc. 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 and Big City
Radio, Inc.
EXECUTIVE OFFICERS OF METROMEDIA FIBER
Set forth below is the background of each of Metromedia Fiber's executive
officers other than those who are also directors.
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GERARD BENEDETTO has been Senior Vice President--Chief Financial Officer
since May 1999 and was Vice President-Chief Financial Officer from
February 1998 until May 1999. 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 Senior 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.
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information on
compensation awarded to, earned by or paid to the chief executive officer and
Metromedia Fiber's four other most highly compensated executive officers whose
individual compensation exceeded $100,000 during the years ended December 31,
1999, December 31, 1998 and December 31, 1997 for services rendered in all
capacities to us and Metromedia Fiber's subsidiaries. The persons listed in the
table below are referred to as the "named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
---------------------- -------------------------
NUMBER OF
SHARES
OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND COMPENSATION STOCK COMPENSATION
POSITION PRINCIPAL YEAR SALARY ($) BONUS ($) ($)(1) OPTIONS(2) ($)
------------------ -------- ---------- --------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
1999 368,231 100,000 24,149 -- --
Stephen A. Garofalo .......... 1998 328,385 100,000 23,301 -- --
Chief Executive Officer 1997 295,000 50,000 14,157 6,084,000 (3) --
1999 361,923 100,000 24,149 -- --
Howard M. Finkelstein ........ 1998 321,462 100,000 24,074 -- --
Former Vice Chairman(4) 1997 196,756 50,000 11,769 24,336,000 (5) --
Nicholas M. Tanzi ............ 1999 209,616 92,000 5,585 1,150,000 (7) --
President and Chief 1998 158,000 65,000 2,819 600,000 (8) --
Operating Officer(6) 1997 -- -- -- 1,443,360 (9) --
Vincent A. Galluccio ......... 1999 201,000 36,680 6,448 -- --
Former Senior Vice 1998 183,400 15,000 1,673 600,000 (11) --
President(10) 1997 181,522 -- -- 4,963,680 (12) --
Gerard Benedetto ............. 1999 222,500 36,285 5,661 150,000 (14) --
Senior Vice President--Chief 1998 181,423 -- 3,355 2,200,000 (15) --
Financial Officer(13) 1997 -- -- -- -- --
David Rand ................... 1999 82,109 -- -- 1,305,500 (17) --
Executive Vice President-- 1998 -- -- -- 511,124 (18) --
Chief Technology Officer(16) 1997 -- -- -- 117,500 (19) --
Sherman Tuan ................. 1999 82,916 37,840 8,000 1,070,500 (21) --
Chief Executive Officer-- 1998 -- -- -- 665,050 (22) --
AboveNet Communications(20) 1997 -- -- -- 293,750 (23) --
</TABLE>
------------------------
(1) Includes amounts paid as automobile allowance, insurance premiums and
401(k) matching funds.
(2) This information gives effect to Metromedia Fiber's 1998, 1999 and
April 17, 2000 stock splits.
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(3) Includes presently exercisable options to purchase 6,084,000 shares of
class A common stock at an exercise price of $0.123 per share of which
5,764,000 are held by the Stephen A. Garofalo 1999 Annuity Trust No. 1 and
320,000 are held by the Stephen A. Garofalo 1999 Annuity Trust No. 2.
Mr. Garofalo is the trustee of both trusts. Also includes 813,378 shares of
class A common stock owned by the Garofalo Foundation, Inc.
(4) Mr. Finkelstein served as Metromedia Fiber's President and Chief Operating
Officer during 1999 and became Vice Chairman in January 2000.
Mr. Finkelstein's employment agreement expired on April 30, 2000 at which
time Mr. Finkelstein's employment terminated and Mr. Finkelstein resigned
from Metromedia Fiber's board of directors.
(5) Includes presently exercisable options to purchase 18,816,000 shares of
class A common stock at an exercise price of $.123 per share and the options
to purchase 5,520,000 shares of class A common stock which the officer
exercised during 1999.
(6) Mr. Tanzi was hired by Metromedia Fiber during 1998 thus preceding years'
compensation is not applicable. Mr. Tanzi served as the company's Senior
Vice President--Sales during 1999 until his promotion to Chief Operating
Officer and President in January 2000.
(7) Represents options to purchase 150,000 shares of class A common stock at an
exercise price of $13.1875 per share of which 37,500 are presently
exercisable, the remainder becoming exercisable ratably over a three year
period commencing September 16, 2001 and 1,000,000 shares of class A common
stock at an exercise price of $19.875 per share which become exercisable
ratably over a four year period commencing December 14, 2000.
(8) Includes presently exercisable options to purchase 273,360 shares of
class A common stock at an exercise price of $2.625 per share and options to
purchase 300,000 shares of class A common stock at an exercise price of
$2.625 per share which become exercisable ratably over a two year period
commencing August 31, 2001.
(9) Includes presently exercisable options to purchase 390,000 shares of
class A common stock at an exercise price of $1.00 per share, and options to
purchase 300,000 shares of class A common stock at an exercise price of
$1.00 per share which become exercisable ratably over a one year period
commencing October 28, 2001.
(10) Mr. Galluccio served as Metromedia Fiber's Senior Vice President during
1999 and 2000, until recently resigning as Senior Vice President and a
Director.
(11) Includes presently exercisable options to purchase 300,000 shares of
class A common stock at $2.625 per share and options to purchase 300,000
shares of class A common stock at an exercise price of $2.625 per share that
become exercisable ratably over a two year period commencing August 31,
2001.
(12) Includes presently exercisable options to purchase 1,663,680 and 700,000
shares of class A common stock at an exercise price of $.123 and $1.00 per
share, respectively and options to purchase shares of class A common stock
which the officer exercised in 1998 and 1999 at an exercise price of $.123
per share and shares of class A common stock which the officer exercised in
1999 at an exercise price of $1.00 per share. Also, includes options to
purchase 300,000 shares of class A common stock at an exercise price of
$1.00 per share that will become exercisable ratably over a one year period
commencing October 28, 2001.
(13) Mr. Benedetto was hired by Metromedia Fiber during 1998, thus preceding
years' compensation is not applicable.
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(14) Represents options to purchase shares of class A common stock at an
exercise price of $13.1875 per share of which 37,500 shares are presently
exercisable and the remainder will become exercisable ratably over a three
year period commencing September 16, 2001.
(15) Includes presently exercisable options to purchase 250,000 and 150,000
shares of class A common stock at an exercise price of $.9685 and $2.625 per
share, respectively and options to purchase shares of class A common stock
which the officer exercised in 1999. Also includes options to purchase
800,000 shares of class A common at an exercise price of $.9685 per share
that will become exercisable ratably over a two year period commencing
January 6, 2001 and options to purchase 300,000 shares of class A common
stock at an exercise price of $2.625 per share that will become exercisable
ratably over a two year period commencing August 31, 2001.
(16) Mr. Rand was hired by Metromedia Fiber during 1999 and thus preceding
years' compensation is not applicable. However, Metromedia Fiber has
included option grants made to Mr. Rand during those years which, in
connection with the merger of AboveNet Communications into Metromedia Fiber,
became exercisable for shares of class A common stock of Metromedia Fiber.
(17) Includes presently exercisable options to purchase 235,000, 70,5000 and
243,250 shares of class A common stock at an exercise price of $11.104,
$16,596, $13.1875 per share, respectively.
(18) Includes presently exercisable options to purchase 287,394 shares of
class A common stock at an exercise price of $2.128 per share and 1,750
shares of class A common stock at an exercise price of $2.58 per share.
(19) These options were exercised at $0.0855 per share.
(20) Mr. Tuan was hired by Metromedia Fiber during 1999 and thus preceding
years' compensation is not applicable. However, Metromedia Fiber has
included option grants made to Mr. Tuan during those years which, in
connection with the merger of AboveNet Communications into Metromedia Fiber,
became exercisable for shares of class A common stock of Metromedia Fiber.
(21) Includes presently exercisable options to purchase 70,500 and 333,334
shares of class A common stock at an exercise price of $16.596 and $13.1875
per share, respectively.
(22) Includes presently exercisable options to purchase 23,500, 228,050 and
11,750 shares of class A common stock at an exercise price of $0.2555,
$2.128 and $2.58 per share, respectively, 16.596 and $13.1875 per share,
respectively.
(23) Includes presently exercisable options to purchase 293,750 shares of
class A common stock at an exercise price of $0.0855.
During 1999, Mr. Wadler and Ms. Kessel, each of whom serves as an executive
officer of Metromedia Fiber, were employed and paid by Metromedia Company
pursuant to a management agreement with Metromedia Company dated as of
January 2, 1998, as amended. Metromedia Fiber did not pay any other amounts to
the named executive officers during 1999, 1998 or 1997.
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OPTION/SAR GRANTS DURING THE YEAR ENDED DECEMBER 31, 1999
The following table sets forth individual grants of stock options by us
pursuant to Metromedia Fiber's 1997 and 1998 incentive stock plans or otherwise
to the named executive officers during the fiscal year ended December 31, 1999.
<TABLE>
<CAPTION>
% OF TOTAL
SECURITIES
NUMBER OF GRANTED
SECURITIES TO
UNDERLYING EMPLOYEES EXERCISE
OPTIONS IN FISCAL PRICE EXPIRATION GRANT DATE
NAME GRANTED (#) YEAR ($/SH) DATE VALUATION ($)(1)
---- ------------ ---------- -------- ---------- -----------------
<S> <C> <C> <C> <C> <C>
Stephen A. Garofalo................. -- -- -- -- --
Howard M. Finkelstein............... -- -- -- -- --
Nicholas M. Tanzi................... 150,000 1% $13.1875 9/16/09 $ 1,411,500
1,000,000 6% $19.875 12/14/09 $14,270,000
Vincent A. Galluccio................ -- -- -- -- --
Gerard Benedetto.................... 150,000 1% $13.1875 9/16/09 $ 1,411,500
David Rand.......................... 235,000 1.3% $11.104 3/19/09 $ 2,201,950
1,000,000 6% $13.1875 9/16/09 $ 9,410,000
Sherman Tuan........................ 70,500 0.4% $16.596 5/6/09 $ 969,375
1,000,000 1% $13.1875 9/16/09 $ 9,410,000
</TABLE>
------------------------
(1) The modified Black-Scholes method of option valuation has been used to
determine grant date present value. The assumptions used in the
Black-Scholes option valuation calculations are (i) an estimated future
annual stock price volatility of 86.7%; (ii) a ten-year strip rate of
5.89%-6.46%; (iii) a future dividend yield of 0%; and (iv) an expected life
of five years.
AGGREGATED OPTION EXERCISES IN 1999 AND FISCAL YEAR-END OPTION AND SAR VALUES
The following table sets forth information concerning the exercise of
options by the named executive officers during the 1999 fiscal year and the
number of unexercised options and SARs beneficially held by such officers as of
the end of the 1999 fiscal year.
<TABLE>
<CAPTION>
VALUE OF
NUMBER OF UNEXERCISED
UNEXERCISED IN THE MONEY
OPTIONS AND SARS OPTIONS/SARS
AT FISCAL YEAR-END AT FISCAL YEAR-END($)
SHARES ACQUIRED VALUE REALIZED (#) EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE ($) UNEXERCISABLE UNEXERCISABLE(1)
---- --------------- -------------- ------------------- -------------------------
<S> <C> <C> <C> <C>
Stephen A. Garofalo... -- $ -- 6,084000/0 $ --
Howard M.
Finkelstein......... 5,520,000 103,807,050 18,816,000/0 448,683,984/0
Nicholas M. Tanzi..... 270,000 3,847,746 723,360/1,050,000 16,368,027/23,386,200
Vincent A.
Galluccio........... 400,000 4,296,495 2,913,680/1,050,000 68,944,246/24,567,450
Gerard Benedetto...... 550,000 8,769,422 400,000/1,400,000 8,537,600/28,297,225
Sherman Tuan.......... 458,000 8,758,359 970,800/1,000,000 16,483,672/10,781,500
David Rand............ 475,000 7,543,591 975,164/1,000,000 17,447,328/10,781,500
</TABLE>
------------------------
(1) Calculated based on a closing price for the class A common stock of $23.969
per share reported by the Nasdaq National Market on December 31, 1999.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRADEMARK LICENSE AGREEMENT. Metromedia Fiber is a party to a license
agreement with Metromedia Company, pursuant to which Metromedia Company has
granted Metromedia Fiber 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 affiliates own less than 20% of the common
stock;
(2) a change in control of Metromedia Fiber occurs; or
(3) any of the stock or all or substantially all of the assets of any of
Metromedia Fiber's 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 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 Metromedia
Fiber's stock;
- a change in the composition of Metromedia Fiber's board of directors
whereby a majority of the members are not directors serving on the board
of directors at the time of the license agreement with Metromedia Company
or any person succeeding such director who was recommended or elected by
such directors;
- a reorganization, merger or consolidation where following consummation
thereof, Metromedia Company would hold less than 20% of the combined
voting power of all classes of Metromedia Fiber's stock;
- a sale or other disposition of all or substantially all of Metromedia
Fiber's assets; or
- any transaction the result of which would be that the common stock would
not be required to be registered under the Securities Exchange Act of 1934
and the holders of common stock would not receive common stock of the
survivor to the transaction which is required to be registered under the
Securities Exchange Act of 1934.
In addition, Metromedia Company has reserved the right to terminate this
trademark license agreement in its entirety immediately upon written notice to
us if, in Metromedia Company's sole judgment, Metromedia Fiber's continued use
of Metromedia as a trade name would jeopardize or be detrimental to the good
will and reputation of Metromedia Company.
Metromedia Fiber has 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. Metromedia Fiber is a party to the management
agreement under which Metromedia Company provides us with consultation and
advisory services relating to legal matters, insurance, personnel and other
corporate policies, cash management, internal audit and finance, taxes, benefit
plans and other services as Metromedia Fiber may reasonably request. The
management agreement terminates on December 31 of each year, and is
automatically renewed for successive one year terms unless either party
terminates upon 60 days prior written notice. Metromedia Fiber is also
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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, Metromedia Fiber has 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, 1999,
Metromedia Fiber incurred $1,000,000 to Metromedia Company under this agreement.
CERTAIN AGREEMENTS REGARDING EMPLOYMENT
EMPLOYMENT AGREEMENTS
Metromedia Fiber has 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 6,084,000
shares of class A common stock at an exercise price of $.123 per share. These
options are immediately exercisable and expire 10 years from their grant.
Metromedia Fiber registered the shares of class A common stock underlying the
options under the Securities Act upon the consummation of Metromedia Fiber's
initial public offering.
Except in the case of disability, Metromedia Fiber 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, Metromedia Fiber 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 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 or a merger or consolidation of Metromedia Fiber with any
other corporation;
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- a change in control of Metromedia Fiber, 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 Metromedia Fiber's
securities representing 50% or more of the combined voting power of
Metromedia Fiber's then outstanding securities; or
- a change in control of Metromedia Fiber, 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 Metromedia Fiber's
securities representing 50% or more of the combined voting power of
Metromedia Fiber's then outstanding securities; or
- a material breach by us of Metromedia Fiber's 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 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.
TANZI EMPLOYMENT AGREEMENT. Metromedia Fiber and Mr. Tanzi have agreed in
principle on the terms of a new employment agreement under which Mr. Tanzi would
continue to serve as Metromedia Fiber's President and Chief Operating Officer
through September 30, 2002. Under this new employment agreement, Mr. Tanzi will
receive a base salary of $500,000 for each year and will be entitled to bonuses
to be agreed upon. The new employment agreement will contain other customary
terms and conditions, has not been finalized by the parties and remains subject
to final documentation and approval by the Metromedia Fiber compensation
committee. Mr. Tanzi's former employment agreement, dated as of August 31, 1998,
had a two year term. It provided Mr. Tanzi with a minimum base salary of
$175,000 for each year. Mr. Tanzi was also entitled to receive an annual
incentive bonus, which was dependent upon Metromedia Fiber's performance, as
determined by the compensation committee of the board of directors. If approved
by the compensation committee, the incentive bonus had a target of 40% of
Mr. Tanzi's base salary. Mr. Tanzi's former employment agreement also provided
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
600,000 shares of class A common stock at an exercise price of $2.625 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, Metromedia Fiber 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
Metromedia Fiber. 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 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 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 Metromedia Fiber and Metromedia Fiber's 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.
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, which is
dependent upon Metromedia Fiber's performance, to be determined by the
compensation committee of the board of directors. If approved by the
compensation committee, the incentive bonus
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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 600,000 shares of class A common
stock at an exercise price of $2.625 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, Metromedia Fiber
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
Metromedia Fiber. 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 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 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 Metromedia Fiber and Metromedia Fiber's 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 or any affiliated
company for a period of two years following termination of his employment
agreement.
TUAN EMPLOYMENT AGREEMENT. Mr. Tuan is employed as chief executive officer
of AboveNet and is a member of Metromedia Fiber's board of directors.
Mr. Tuan's employment agreement has an initial term of three years and expires
in October 2002. After this initial term of employment, the employment agreement
will be automatically renewed for successive one-year periods unless terminated
by either party upon written notice given not less than three months prior to
the expiration of the then-current term. The employment agreement provides for
an initial base salary of $250,000 for each year of the term or at such higher
rate as the board of Metromedia Fiber determines in its sole discretion. The
base salary will be increased by at least 10% in each year of the term. The
employment agreement also provides for an annual bonus of $150,000 based upon
performance targets established by the board of Metromedia Fiber at the
beginning of each employment year.
Mr. Tuan has received first incentive stock options, up to the extent
legally permissible, and then nonqualified stock options to purchase 1,000,000
shares of Metromedia Fiber's class A common stock at an exercise price equal to
the fair market value on the date of grant. Mr. Tuan will be vested as to
one-third of the option shares on each of the first three anniversaries of the
effective date of the employment agreement.
The employment agreement may be terminated in the event of Mr. Tuan's death
or disability, for cause or as a result of a material breach by Metromedia
Fiber. If Mr. Tuan's employment agreement is terminated for cause, he will be
entitled to receive only his base salary through the date of termination and any
previously accrued and unpaid benefits. If the employment agreement is
terminated for death or disability, Mr. Tuan will be entitled to base salary
through the date of termination and any additional compensation to which he is
entitled, prorated to the date of termination. If the employment agreement is
terminated without cause by Metromedia Fiber or upon a material breach of the
agreement by Metromedia Fiber, Mr. Tuan is entitled to base salary through the
date of termination, any additional compensation to which he is entitled
prorated to the date of termination, continuing payments of base salary for 18
months following termination, coverage for Mr. Tuan and his dependents for two
years under certain insurance plans sponsored by Metromedia Fiber or AboveNet,
and immediate vesting of all options. Metromedia Fiber and AboveNet pay all
current insurance policies covering Mr. Tuan.
The employment agreement subjects Mr. Tuan during, and for 18 months after
the termination of his employment, to a restriction on, among other things,
directly or indirectly competing with AboveNet
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by serving as an officer, director or employee of, or consultant to, any
competitor of Metromedia Fiber or AboveNet that sells or offers to sell any
products or services which compete with those offered or sold by Metromedia
Fiber or AboveNet. He is also restricted in his dealings with customers of
Metromedia and AboveNet.
RAND EMPLOYMENT AGREEMENT. Mr. Rand is employed as chief technology officer
of AboveNet and is a member of the Metromedia Fiber's board of directors.
Mr. Rand's employment agreement has an initial term of five years and expires in
October 2004. After this initial term of employment, the letter agreement will
be automatically extended for additional periods of one year unless terminated
by either party upon written notice given not less than three months prior to
the expiration of the then-current term. The letter agreement with Mr. Rand
provides for an initial base salary of $250,000 for each year of the term or at
such higher rate as the board of Metromedia shall determine in its sole
discretion. The letter agreement also provides for an annual bonus of $125,000
based upon performance targets established by the board of Metromedia Fiber at
the beginning of each employment year.
Mr. Rand has received stock options to purchase 1,000,000 shares of
Metromedia Fiber's class A common stock at an exercise price equal to the fair
market value on the date of grant. Mr. Rand will be vested in 25% of the option
shares on the first anniversary of the effective date of the employment
agreement and 25% of the options on each anniversary for the next three years.
The letter agreement with Mr. Rand may be terminated in the event of his
death or disability, for cause or as a result of a material breach by Metromedia
Fiber. If the letter agreement is terminated for cause, Mr. Rand will be
entitled to no further compensation. It the letter agreement is terminated for
disability, he will be entitled to compensation and reimbursement amounts
provided in the letter agreement prorated to the date of termination. If the
letter agreement is terminated because of a material breach by Metromedia Fiber,
Mr. Rand will be entitled to his unpaid salary through the date of termination,
all previously earned and accrued entitlement and benefits from Metromedia Fiber
and its employee benefit plans, an amount equal to the product of Mr. Rand's
base salary as determined in accordance with the letter agreement multiplied by
two, continued coverage for Mr. Rand and any covered dependents for two years
under all health, life and disability insurance plans sponsored by Metromedia
Fiber or AboveNet at premium rates in effect at the time of the termination, and
immediate vesting of all options held by Mr. Rand.
The employment agreement subjects Mr. Rand during and 24 months after the
termination of his employment to a restriction on, among other things, directly
or indirectly competing with AboveNet by serving as an officer, director or
employee of, or consultant to, any competitor of Metromedia Fiber or AboveNet
that sells or offers to sell any products or services which compete with those
offered or sold by Metromedia Fiber or AboveNet. He is also restricted in his
dealings with customers of Metromedia Fiber and AboveNet. Mr. Rand has also
entered into a proprietary information and inventions agreement with AboveNet
whereby he has agreed, among other things, to license or assign specified
intellectual property to AboveNet and to hold certain information concerning
AboveNet and Metromedia Fiber confidential.
1997 AND 1998 INCENTIVE STOCK PLANS
Metromedia Fiber has adopted the 1997 and the 1998 Incentive Stock Plans
pursuant to which key employees, officers and directors (including independent
directors and members of the compensation committee) of Metromedia Fiber and its
subsidiaries who have substantial responsibility in the direction of Metromedia
Fiber and its subsidiaries, and others whom the option committee determines
provide substantial and important services to the company may be granted
(i) incentive stock options ("ISOs") and/or (ii) non-qualified stock options
("NQSOs" and together with ISOs, "Stock Options"). The aggregate number of
shares of the class A common stock that may be the subject of Stock Options
under the Incentive Stock Plans is 56,000,000 (16,000,000 under the 1997
Incentive Stock Plan and
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40,000,000 under the 1998 Incentive Stock Plan) and the maximum number of shares
of class A common stock available with respect to Stock Options granted to any
one grantee is 4,000,000 (1,600,000 under the 1997 Incentive Stock Plan and
2,400,000 under the 1998 Incentive Stock Plan) shares.
The exercise price of all ISOs is the fair market value of the class A
common stock on the date of grant (or 110% of such fair market value with
respect to ISOs granted to persons who own stock possessing more than 10% of the
voting rights of Metromedia Fiber "s capital stock) and the exercise price of
all NQSOs is determined by the compensation committee, although the initial
awards will be made at fair market value of the class A common stock on the date
of grant. Stock Options vest and become exercisable over a period of years, as
determined by the compensation committee, and have a term not to exceed ten
years.
If a grantee's employment with Metromedia Fiber is terminated because of the
grantee's death, or the grantee's retirement on or after attaining the age which
the company may from time to time establish as the retirement age for any class
of its employees or the age specified in the employment agreement with such
grantee prior to the date when the stock option is by its terms exercisable, the
stock option will be immediately exercisable as of the date of the termination
of the grantee's employment, subject to the other terms of the Incentive Stock
Plans. Upon a "change in control" of Metromedia Fiber (as defined in the
Incentive Stock Plans) each holder of a stock option granted under the 1997
Incentive Stock Plan will have the right to exercise the stock option in full
without regard to any waiting period, installment period or other limitation or
restriction thereon and the right, exercisable by written notice within 60 days
after the change in control, to receive in exchange for the surrender of an
option an amount of cash equal to the difference between the fair market value
of the class A common stock on the date of exercise and the exercise price of
the stock option. For options granted under the 1998 Incentive Stock Plan on or
after November 13, 1998, in the event of a change in control, the board of
directors may in its sole discretion determine (i) that each holder of such a
stock option will have the right to exercise the stock option in full without
regard to any waiting period, installment period or other limitation or
restriction thereon, and/or (ii) each holder of such a stock option will have
the right, exercisable by written notice within 60 days after the change of
control, to receive in exchange for the surrender of a stock option an amount of
cash equal to the difference between the fair market value of the Class A Common
Stock on the date of exercise and the exercise price of the stock option.
Alternatively, the board of directors may in its sole discretion determine to
take neither action. Upon a grantee's termination of employment from Metromedia
Fiber or a subsidiary on account of disability, the grantee or the legal
representative of the grantee will have the right for a period of one year
following the date of such termination to exercise a stock option to the extent
such award is exercisable and to the extent such stock option has not yet
expired. In the event the grantee's employment with Metromedia Fiber is
terminated for any reason other than disability, death or retirement, the
grantee may exercise a stock option within three months after his or her
termination of employment.
On March 13, 2000, Metromedia Fiber's board of directors voted to amend
Metromedia Fiber's 1998 incentive stock plan to increase the number of shares
available for the grant of options under the plan from 40,000,000 to 60,000,000,
subject to adjustment in the event of stock splits, stock dividends,
recapitalizations and the like.
INDEMNIFICATION AGREEMENTS
Metromedia Fiber has entered into indemnification agreements with certain
officers and directors. The indemnification agreements provide for
indemnification of such directors and officers to the fullest extent authorized
or permitted by law. The indemnification agreements also provide that:
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- Metromedia Fiber will advance all expenses incurred by the director or
officer in defending certain litigation;
- Metromedia Fiber will appoint in specified circumstances an independent
legal counsel to determine whether the director or officer is entitled to
indemnification; and
- Metromedia Fiber will continue to maintain directors' and officers'
liability insurance, which currently consists of $25.0 million of primary
coverage.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee consists of Messrs. Rockefeller and White.
Neither member of the compensation committee served as an officer or employee of
Metromedia Fiber or any of its subsidiaries during 1999. There were no material
transactions between us and any of the members of the compensation committee
during 1999.
COMPENSATION COMMITTEE REPORT ON COMPENSATION
The compensation committee of the board of directors is comprised entirely
of independent directors and is responsible for developing and making
recommendations to the board with respect to Metromedia Fiber's executive
compensation policies.
The following report of the compensation committee discusses Metromedia
Fiber's executive compensation policies and the basis of the compensation paid
to Metromedia Fiber's executive officers in 1999:
In general, the compensation committee seeks to link the compensation paid
to each executive officer to the performance of such executive officer. Within
these parameters, the executive compensation program attempts to provide an
overall level of executive compensation that is competitive with companies of
comparable size and with similar market and operating characteristics.
There are three elements in Metromedia Fiber's executive total compensation
program, all determined by individual and corporate performance as specified in
the various employment agreements:
- Base salary;
- Annual incentive; and
- Long-term incentive.
BASE SALARY
The summary compensation table shows amounts earned during 1999 by
Metromedia Fiber's executive officers. The base compensation of such executive
officers is set by the terms of the employment agreement entered into with each
such executive officer. Metromedia Fiber established base salaries prior to its
initial public offering in 1997 for Mr. Garofalo's executive employment
agreement. The company established the base salaries for the other executive
employment agreements in August 1998.
ANNUAL INCENTIVES
Each executive officer is entitled to an annual incentive bonus as
determined by the compensation committee based on such executive officer's
performance during the previous calendar year. The cash bonuses awarded to
Metromedia Fiber's chief executive officer and president in 1999 were determined
based on provisions of their respective employment agreements. The cash bonuses
awarded to the
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company's senior vice presidents were determined by management and approved by
the compensation committee.
LONG-TERM INCENTIVES
Metromedia Fiber grants long-term incentive awards periodically to align a
significant portion of the executive compensation program with shareholder
interests. Executives are eligible to participate in the 1997 and 1998 incentive
stock plans. On September 16, 1999, the compensation committee approved, and
Metromedia Fiber granted to, Mr. Tanzi, currently the president and chief
operating officer, and Mr. Benedetto, senior vice president and chief financial
officer, stock options to purchase 150,000 shares of class A common stock at an
exercise price of $26.375 per share, which was the fair market value of such
shares on the date of grant. On December 14, 1999, Metromedia Fiber granted
options to purchase 1,000,000 shares of class A common stock to Mr. Tanzi at an
exercise price of $19.875 per share, which was the fair market value of such
shares on the date of grant.
CHIEF EXECUTIVE OFFICER COMPENSATION
The summary compensation table shows amounts earned during 1999 by
Metromedia Fiber's chairman and chief executive officer, Stephen A. Garofalo.
Mr. Garofalo's employment agreement sets his base compensation. During 1999,
Mr. Garofalo was paid a bonus of $100,000 in accordance with the terms of his
employment agreement. No additional stock option grants were awarded to
Mr. Garofalo during 1999.
PERFORMANCE GRAPH
The following graph sets forth the total stockholder return on Metromedia
Fiber class A common stock as compared to the Nasdaq Stock Market Composite
Index, a broad based capitalization-weighted index of all Nasdaq National Market
and Smallcap Stocks, and the Nasdaq Telecommunications Stock Index, a
capitalization-weighted index designed to measure the performance of all Nasdaq
stocks in the telecommunications sector, for the period commencing on
October 29, 1997, the date of our initial public offering, and ending
December 31, 1999. The total stockholder return assumes $100 invested on
October 29, 1997 in Metromedia Fiber Network's class A common stock, the Nasdaq
Stock Market Composite Index and the Nasdaq Telecommunications Stock Index and
reinvestment of dividends paid.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
METROMEDIA FIBER NETWORK, INC., NASDAQ STOCK MARKET COMPOSITE INDEX
AND NASDAQ TELECOMMUNICATIONS STOCK INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
METROMEDIA FIBER NASDAQ NASDAQ
<S> <C> <C> <C>
Network, Inc. Composite Index Telecom Index
10/29/1997 $100 $100 $100
12/31/1997 $104 $98 $104
12/31/1998 $838 $137 $170
12/31/1999 $2,397 $256 $346
</TABLE>
<TABLE>
<CAPTION>
10/29/1997 12/31/97 12/31/98 12/31/99
---------- -------- -------- --------
<S> <C> <C> <C> <C>
Metromedia Fiber Network, Inc............................. 100 104 838 2,397
Nasdaq Stock Market Composite Index....................... 100 98 137 256
Nasdaq Telecommunications Stock Index..................... 100 104 170 346
</TABLE>
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FEDERAL INCOME TAX CONSEQUENCES TO HOLDERS OF SITESMITH CAPITAL STOCK
GENERAL
The following describes the material federal income tax consequences of the
merger to SiteSmith stockholders. This discussion is based on the Internal
Revenue Code, U.S. Treasury regulations, judicial decisions and administrative
rulings as of the date hereof, all of which are subject to change, including
changes with retroactive effect. This discussion assumes that SiteSmith
stockholders hold their stock as capital assets. The tax treatment of a
stockholder may vary depending upon the stockholder's particular situation, and
some stockholders may be subject to special treatment under the federal income
tax laws, such as insurance companies, tax-exempt organizations, financial
institutions, broker-dealers, foreign corporations, foreign partnerships or
foreign estates or trusts and persons who are not citizens or residents of the
United States. This discussion does not address any state, local or foreign tax
consequences of the merger. This discussion may not be applicable to holders who
acquired SiteSmith capital stock pursuant to the exercise of options or warrants
or otherwise as compensation. WE URGE YOU TO CONSULT YOUR OWN TAX ADVISOR AS TO
THE SPECIFIC TAX CONSEQUENCES OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL,
STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO YOU OF THE MERGER.
MATERIAL TAX CONSEQUENCES OF THE MERGER
The material United States federal income tax consequences of the merger
will be as follows:
- The merger will constitute a reorganization within the meaning of
section 368(a) of the Internal Revenue Code for United States federal
income tax purposes, and Metromedia Fiber, Aqueduct Acquisition Corp. and
SiteSmith will each be a party to the reorganization within the meaning of
section 368(b) of the Internal Revenue Code;
- No gain or loss will be recognized by you upon your receipt of Metromedia
Fiber class A common stock in exchange for your SiteSmith capital stock,
except with respect to cash received instead of fractional shares of
Metromedia Fiber class A capital stock;
- The aggregate tax basis of the shares of Metromedia Fiber class A common
stock received in the merger, including any fractional share interest for
which cash is received, will be the same as the aggregate tax basis of
your SiteSmith capital stock exchanged therefor;
- The holding period for Metromedia Fiber class A common stock received in
the merger will include the period during which the SiteSmith common stock
exchanged therefor was held; and
- If you receive cash instead of a fractional share of Metromedia Fiber
class A common stock, you will recognize gain or loss equal to the
difference, if any, between your tax basis in the fractional share and the
amount of cash received.
- If you exercise dissenters' rights with respect to your shares of
SiteSmith capital stock, you will generally recognize gain or loss for
federal income tax purposes measured by the difference between your tax
basis in those shares and the amount of cash received. However, if the
payment of that cash is essentially equivalent to a dividend within the
meaning of section 302 of the Internal Revenue Code and SiteSmith has
current or accumulated earnings and profits for United States federal
income tax purposes, you will recognize ordinary income to the extent of
your pro rata share of those earnings and profits (but not greater than
the amount of cash received). To the extent that the cash received exceeds
your pro rata share of those earnings and profits and your tax basis in
your shares of SiteSmith capital stock, you will recognize gain equal to
the amount of that excess.
Metromedia Fiber's obligation to complete the merger is conditioned upon,
among other things, its receipt of an opinion from Paul, Weiss, Rifkind,
Wharton & Garrison that the merger will be treated as a reorganization within
the meaning of section 368(a) of the Internal Revenue Code and that
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Metromedia Fiber, Aqueduct Acquisition Corp. and SiteSmith will each be a party
to the reorganization within the meaning of section 368(b) of the Internal
Revenue Code. SiteSmith's obligation to complete the merger is conditioned upon,
among other things, its receipt of an opinion from Venture Law Group, a
Professional Corporation, that the merger will be treated as a reorganization
within the meaning of section 368(a) of the Internal Revenue Code and that
Metromedia Fiber, Aqueduct Acquisition Corp. and SiteSmith will each be a party
to the reorganization within the meaning of section 368(b) of the Internal
Revenue Code. These opinions of counsel will be based in part upon
representations, made as of the effective time of the merger, by Metromedia
Fiber, Aqueduct Acquisition Corp. and SiteSmith, which each counsel will assume
to be true, correct and complete. If the representations are inaccurate, the
opinions of counsel could be adversely affected. No ruling has been sought (or
will be sought) from the Internal Revenue Service as to the United States
federal income tax consequences of the merger, and the opinion of counsel will
not be binding upon the Internal Revenue Service or any court.
A successful Internal Revenue Service challenge to the "reorganization"
status of the merger would result in all SiteSmith stockholders being treated as
if they sold their SiteSmith capital stock in a fully taxable transaction. In
such event, you would recognize gain or loss with respect to each share of
SiteSmith capital stock surrendered by you equal to the difference between your
adjusted tax basis in such share and the fair market value, as of the effective
time of the merger, of the Metromedia Fiber class A common stock received in
exchange therefor (and any cash received in lieu of fractional shares). In such
event, your aggregate tax basis in your Metromedia Fiber class A common stock so
received would equal its fair market value as of the effective time of the
merger and your holding period for such Metromedia Fiber class A common stock
would begin the day after the merger.
BACKUP WITHHOLDING
Noncorporate holders of SiteSmith common stock may be subject to backup
withholding at a rate of 31% of cash payments received instead of a fractional
share interest in Metromedia Fiber class A common stock. Backup withholding will
not apply, however, to a stockholder who:
- furnishes a taxpayer identification number and certifies, under penalties
of perjury, that the taxpayer identification number is correct and that he
or she is not subject to backup withholding for specified reasons, and
otherwise complies with applicable requirements of the backup withholding
rules; or
- is a corporation or otherwise exempt from backup withholding and, when
required, demonstrates this fact.
Any amount withheld under these rules will be credited against the
stockholder's federal income tax liability.
REPORTING REQUIREMENTS
You will be required to attach a statement to your tax returns for the
taxable year in which the merger is completed that contains the information set
forth in Section 1.368-3(b) of the Department of Treasury regulations. The
statement must include your tax basis in the SiteSmith capital stock surrendered
and a description of the Metromedia Fiber class A common stock and cash, if any,
received in the merger.
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DESCRIPTION OF METROMEDIA FIBER CAPITAL STOCK
Metromedia Fiber's authorized capital stock consists of 2,404,031,240 shares
of class A common stock, par value $.01 per share, 522,254,782 shares of
class B common stock, par value $.01 per share, and 20,000,000 shares of
preferred stock, par value $.01 per share. As of November 3, 2000 there were
483,358,400 shares of class A common stock outstanding, 67,538,544 shares of
class B common stock outstanding and no shares of preferred stock outstanding.
COMMON STOCK
The shares of class A common stock and class B common stock are identical in
all respects, except for different voting rights described below and conversion
rights and restrictions on transfer applicable only to the class B common stock
that is described below.
VOTING RIGHTS. The holders of class A common stock are entitled to one vote
per share. Holders of class B common stock are entitled to ten votes per share.
Holders of all classes of common stock are entitled to vote together as a single
class on all matters presented to Metromedia Fiber's stockholders for their vote
or approval except for the election and the removal of directors and as
otherwise required by applicable law. With respect to the election of directors,
Metromedia Fiber's amended and restated certificate of incorporation provides
that holders of class B common stock vote as a separate class to elect at least
75% of the members of Metromedia Fiber's board.
Directors may be removed, with or without cause, only by the holders of the
class of common stock or series of preferred stock that, as of the date such
removal is effected, would be entitled to elect such director at the next annual
meeting of stockholders. Vacancies in a directorship may be filled only by:
- the remaining directors elected by holders of each class of common stock
or series of preferred stock that elected such director and as of the date
such vacancy is filled, would be entitled to elect such director at the
next annual meeting of the stockholders; or
- if there are no such remaining directors, then by the vote of the holders
of the class or classes of common stock or series of preferred stock,
that, as of the date such vacancy is filled, would be entitled to elect
such director at the next annual meeting of stockholders, voting as a
separate class at a meeting, special or otherwise, of the holders of
common stock of such class or series of preferred stock.
DIVIDENDS. Holders of class A common stock and the class B common stock are
entitled to receive dividends at the same rate if, as and when such dividends
are declared by Metromedia Fiber's board out of assets legally available
therefor after payment of dividends required to be paid on shares of outstanding
preferred stock. Metromedia Fiber may not make any dividend or distribution to
any holder of any class of common stock unless simultaneously with such dividend
or distribution Metromedia Fiber makes the same dividend or distribution with
respect to each outstanding share of common stock regardless of class. In the
case of a dividend or other distribution payable in shares of class of common
stock, including distributions pursuant to stock splits or divisions of common
stock, only shares of class A common stock may be distributed with respect to
class A common stock and only shares of class B common stock may be distributed
with respect to class B common stock. Whenever a dividend or distribution,
including distributions pursuant to stock splits or divisions of the common
stock, is payable in shares of a class of common stock, the number of shares of
each class of common stock payable per share of such class of common stock will
be equal in number. In the case of dividends or other distributions consisting
of Metromedia Fiber's other voting securities or of voting securities of any
corporation which is Metromedia Fiber's wholly-owned subsidiary, Metromedia
Fiber
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will declare and pay such dividends in two separate classes of such voting
securities, identical in all respects except that:
- the voting rights of each security issued to the holders of class A common
stock will be one-tenth of the voting rights of each security issued to
holders of class B common stock;
- such security issued to holders of class B common stock will convert into
the security issued to the holders of class A common stock into class A
common stock and will have the same restrictions on transfer and ownership
applicable to the transfer and ownership of the class B common stock; and
- with respect only to dividends or other distributions of voting securities
of any corporation which is Metromedia Fiber's wholly owned subsidiary,
the respective voting rights of each such security issued to holders of
the class A common stock and class B common stock with respect to election
of directors shall otherwise be as comparable as is practicable to those
of the class A common stock and class B common stock.
In the case of dividends or other distributions consisting of securities
convertible into, or exchangeable for, Metromedia Fiber's voting securities or
of voting securities of any corporation which is Metromedia Fiber's wholly owned
subsidiary, Metromedia Fiber will provide that such convertible or exchangeable
securities and the underlying securities be identical in all respects
(including, without limitation, the conversion or exchange rate) except that the
underlying securities may have the same difference as they would have if
Metromedia Fiber issued voting securities of Metromedia Fiber's wholly owned
subsidiary rather than issuing securities convertible into or exchangeable for,
such securities. Metromedia Fiber does not anticipate paying cash dividends in
the foreseeable future.
RESTRICTIONS ON ADDITIONAL ISSUANCES AND TRANSFER. Metromedia Fiber may not
issue or sell any shares of class B common stock or any securities (including,
without limitation, any rights, options, warrants or other securities)
convertible into, or exchangeable or exercisable for, shares of class B common
stock to any person or entity other than to Metromedia Company, John W. Kluge
and Stuart Subotnick, their affiliates, relatives and other permitted holders
that are controlled by these persons. Additionally, shares of class B common
stock may not be transferred, whether by sale, assignment, gift, bequest,
appointment or otherwise, to a person other than to a permitted holder.
Notwithstanding the foregoing:
- any permitted holder may pledge his, her or its shares of class B common
stock to a financial institution pursuant to a bona fide pledge of such
shares as collateral security for indebtedness due to the pledgee as long
as such shares remain subject to the transfer restrictions and that, in
the event of foreclosure or other similar action by the pledgee, such
pledged shares of class B common stock may only be transferred to a
permitted holder or converted into shares of class A common stock, as the
pledgee may elect; and
- the foregoing transfer restrictions do not apply in the case of a merger,
consolidation or business combination of Metromedia Fiber with or into
another corporation in which all of the outstanding shares of common stock
and preferred stock regardless of class are purchased by the acquiror.
CONVERSION. Class A common stock has no conversion rights. Shares of
class B common stock are convertible into class A common stock, in whole or in
part, at any time and from time to time at the option of the holders, on the
basis of one share of class A common stock for each share of class B common
stock converted. Additionally, at such time as a person ceased to be a permitted
holder, any
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share of class B common stock held by such person at such time shall convert
into a share of class A common stock. Metromedia Fiber agrees that:
- Metromedia Fiber will at all times reserve and keep available out of
Metromedia Fiber's authorized but unissued shares of class A common stock,
such number of shares of class A common stock issuable upon the conversion
of all outstanding shares of class B common stock;
- Metromedia Fiber will cause any shares of class A common stock issuable
upon conversion of a share of class B common stock that require
registration with or approval of any governmental authority under federal
or state law before such shares may be issued upon conversion to be so
registered or approved; and
- Metromedia Fiber will use Metromedia Fiber's best efforts to list the
shares of class A common stock required to be delivered upon conversion
prior to such delivery upon such national securities exchange upon which
the outstanding class A common stock is listed at the time of such
delivery.
RECLASSIFICATION AND MERGER. In the event of a reclassification or other
similar transaction as a result of which the shares of class A common stock are
converted into another security, then a holder of class B common stock will be
entitled to receive upon conversion the amount of such other securities that the
holder would have received if the conversion occurred immediately prior to the
record date of such reclassification or other similar transaction. No
adjustments in respect of dividends will be made upon the conversion of any
share of class B common stock. If a share is converted subsequent to the record
date for the payment of a dividend or other distribution on shares of class B
common stock but prior to such payment, then the registered holder of such share
at the close of business on such record date will be entitled to receive the
dividend or other distribution payable on such date regardless of the conversion
thereof or Metromedia Fiber's default in payment of the dividend due on such
date.
In the event Metromedia Fiber enters into any consolidation, merger,
combination or other transaction in which shares of common stock are exchanged
for or changed into other stock or securities, cash and/or any other property,
then, and in such event, the shares of each class of common stock will be
exchanged for or changed into either:
- the same amount of stock, securities, cash and/or any other property, as
the case may be, into which or for which each share of any other class of
common stock is exchanged for or changed into shares of capital stock,
such shares so exchanged for or changed into may differ only to the extent
that the class A common stock and the class B common stock differ as
provided in Metromedia Fiber's amended and restated certificate of
incorporation; or
- if holders of each class of common stock are to receive different
distributions of stock, securities, cash and/or any other property, an
amount of stock, securities, cash and/or property per share having a value
as determined by an independent investment banking firm of national
reputation selected by the board of directors, equal to the value per
share into which or for which each share of any other class of common
stock is exchanged or changed.
LIQUIDATION. In the event of Metromedia Fiber's liquidation, after payment
of Metromedia Fiber's debts and other liabilities and after making provision for
the holders of preferred stock, if any, Metromedia Fiber's remaining assets will
be distributed ratably among the holders of the class A common stock and
class B common stock treated as a single class.
OTHER PROVISIONS. Except as described below, the holders of the class A
common stock and class B common stock are not entitled to preemptive rights.
None of the class A common stock or class B common stock may be subdivided or
combined in any manner unless the other classes are subdivided or combined in
the same proportion. Metromedia Fiber may not make any offering of
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options, rights or warrants to subscribe for shares of class B common stock. If
Metromedia Fiber makes an offering of options, rights or warrants to subscribe
for shares of any other class or classes of capital stock (other than class B
common stock) to all holders of a class of common stock, then Metromedia Fiber
is required to simultaneously make an identical offering to all holders of the
other classes of common stock other than to any class the holders of which,
voting as a separate class, agrees that such offerings need not be made to such
class. All such options, rights or warrants offerings will offer the respective
holders of class A common stock and class B common stock the right to subscribe
at the same rate per share. All outstanding shares of common stock are, and all
shares of common stock offered hereby when issued will be upon payment therefor,
validly issued, fully paid and nonassessable.
PREFERRED STOCK
The board has the authority, without any further action by Metromedia
Fiber's stockholders to issue from time to time shares of preferred stock in one
or more series and to fix the designations, preferences, rights, qualifications,
limitations and restrictions thereof, including voting rights, dividend rights,
dividend rates, conversion rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series. The
issuance of preferred stock with voting rights could have an adverse effect on
the voting power of holders of common stock by increasing the number of
outstanding shares having voting rights. In addition, if the board authorizes
preferred stock with conversion rights, the number of shares of common stock
outstanding could potentially be increased up to the authorized amount. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock. Any such issuance could
also have the effect of delaying, deterring or preventing a change in control of
the company and may adversely affect the rights of holders of common stock.
CERTIFICATE OF INCORPORATION AND BY-LAWS
Stockholders' rights and related matters are governed by the Delaware
General Corporation Law and Metromedia Fiber's certificate of incorporation and
the by-laws. Certain provisions of Metromedia Fiber's certificate of
incorporation and by-laws, which are summarized below, may have the effect,
either alone or in combination with each other, of discouraging or making more
difficult a tender offer or takeover attempt that is opposed by Metromedia
Fiber's board of directors but that a stockholder might consider to be in its
best interest. Such provisions may also adversely affect prevailing market
prices for the common stock. Metromedia Fiber believes that such provisions are
necessary to enable Metromedia Fiber to develop Metromedia Fiber's business in a
manner that will foster Metromedia Fiber's long-term growth without disruption
caused by the threat of a takeover not deemed by Metromedia Fiber's board of
directors to be in Metromedia Fiber's best interests and those of Metromedia
Fiber's stockholders.
ADVANCE NOTICE REQUIREMENTS FOR STOCKHOLDER PROPOSALS AND DIRECTOR NOMINATIONS
Metromedia Fiber's by-laws establish advance notice procedures for
stockholder proposals and the nomination, other than by or at the direction of
the board of directors, of candidates for election as directors. These
procedures provide that the notice of stockholder proposals and stockholder
nominations for the election of directors at an annual meeting must be in
writing and received by Metromedia Fiber's secretary at least 60 days but not
more than 90 days prior to the scheduled date of the annual meeting. However, if
public disclosure of Metromedia Fiber's annual meeting date is made less than
70 days before the annual meeting, notice by a stockholder will be considered
timely if it is delivered not later than the 10th day following the earlier of
(i) the day on which public disclosure of the date of the annual meeting was
made or (ii) the day on which such notice of the date of the meeting was mailed.
The notice of nominations for the election of directors must set forth certain
information concerning the stockholder giving the notice and each nominee.
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By requiring advance notice of nominations by stockholders, these procedures
will afford Metromedia Fiber's board of directors an opportunity to consider the
qualifications of the proposed nominees and, to the extent deemed necessary or
desirable by the board of directors, to inform stockholders about these
qualifications. By requiring advance notice of other proposed business, these
procedures will provide Metromedia Fiber's board of directors with an
opportunity to inform stockholders of any business proposed to be conducted at a
meeting, together with any recommendations as to the board of directors'
position on action to be taken on such business. This should allow stockholders
to better decide whether to attend a meeting or to grant a proxy for the
disposition of any such business.
DILUTION
Metromedia Fiber's certificate of incorporation provides that Metromedia
Fiber's board of directors is authorized to create and issue, whether or not in
connection with the issuance and sale of any of its stock or other securities or
property, rights entitling the holders to purchase from Metromedia Fiber shares
of stock or other securities of Metromedia Fiber or of any other corporation.
Metromedia Fiber's board of directors is authorized to issue these rights even
though the creation and issuance of these rights could have the effect of
discouraging third parties from seeking, or impairing their right to seek, to:
- acquire a significant portion of Metromedia Fiber's outstanding
securities;
- engage in any transaction which might result in a change of control of the
corporation; or
- enter into any agreement, arrangement or understanding with another party
to accomplish these transactions or for the purpose of acquiring, holding,
voting or disposing of any of Metromedia Fiber's securities.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Section 203 of the Delaware General Corporation Law prohibits certain
transactions between a Delaware corporation and an "interested stockholder",
which is defined as a person who, together with any affiliates and/or associates
of such person, beneficially owns, directly or indirectly, 15% or more of the
outstanding voting shares of a Delaware corporation. This provision prohibits
certain business combinations between an interested stockholder and a
corporation for a period of three years after the date the interested
stockholder acquired its stock, unless:
- the business combination is approved by the corporation's board of
directors prior to the date the interested stockholder acquired shares;
- the interested stockholder acquired at least 85% of the voting stock of
the corporation in the transaction in which it became an interested
stockholder; or
- the business combination is approved by a majority of the board of
directors and by the affirmative vote of two-thirds of the outstanding
voting stock owned by disinterested stockholders at an annual or special
meeting.
A business combination is defined broadly to include mergers,
consolidations, sales or other dispositions of assets having an aggregate value
of 10% or more of the consolidated assets of the corporation and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation. A Delaware corporation, under a provision in
its certificate of incorporation or by-laws, may elect not to be governed by
Section 203 of the Delaware General Corporation Law. Metromedia Fiber is subject
to the restrictions imposed by Section 203.
Under certain circumstances, Section 203 makes it more difficult for a
person who could be an "interested stockholder" to effect various business
combinations with a corporation for a three-year
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period, although the stockholders may elect to exclude a corporation from the
restrictions imposed thereunder. Metromedia Fiber's certificate of incorporation
does not exclude Metromedia Fiber from the restrictions imposed under
Section 203 of the Delaware General Corporation Law. It is anticipated that the
provisions of Section 203 of the Delaware General Corporation Law may encourage
companies interested in acquiring Metromedia Fiber to negotiate in advance with
the board of directors, since the stockholder approval requirement would be
avoided if a majority of the directors then in office approves, prior to the
date on which a stockholder becomes an interested stockholder, either the
business combination or the transaction which results in the stockholder
becoming an interested stockholder. Mr. Stephen Garafalo and Metromedia Company
are interested stockholders under the Delaware General Corporation Law. However
since their acquisition of Metromedia Fiber's securities was approved in advance
by Metromedia Fiber's board, they would not be prohibited from engaging in a
business transaction with Metromedia Fiber.
LIMITATIONS OF DIRECTORS' LIABILITY
Metromedia Fiber's certificate of incorporation provides that none of
Metromedia Fiber's directors will be personally liable to Metromedia Fiber or
Metromedia Fiber's stockholders for monetary damages for breach of fiduciary
duty as a director except for liability:
- for any breach of the director's duty of loyalty to Metromedia Fiber or
Metromedia Fiber's stockholders;
- for acts of omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
- under Section 174 of the Delaware General Corporation Law; or
- for any transaction from which the director derived an improper personal
benefit.
The effect of these provisions will be to eliminate Metromedia Fiber's
rights and Metromedia Fiber's stockholders (through stockholders' derivatives
suits on behalf of Metromedia Fiber) to recover monetary damages against a
director for breach of fiduciary duty as a director (including breaches
resulting from grossly negligent behavior), except in the situations described
above. These provisions will not limit the liability of directors under federal
securities laws and will not affect the availability of equitable remedies such
as an injunction or rescission based upon a director's breach of his duty of
care.
TRANSFER AGENT
The Transfer Agent and Registrar for Metromedia Fiber's class A common stock
is ChaseMellon Shareholder Services, L.L.C.
120
<PAGE>
COMPARISON OF RIGHTS OF HOLDERS OF METROMEDIA FIBER
CLASS A COMMON STOCK AND SITESMITH STOCK
GENERAL
Metromedia Fiber is incorporated under the laws of Delaware and accordingly,
the rights of the Metromedia Fiber stockholders are governed by the certificate
of incorporation of Metromedia Fiber, the by-laws of Metromedia Fiber and the
laws of the state of Delaware. SiteSmith is also incorporated under the laws of
Delaware and, accordingly, the rights of the SiteSmith stockholders are governed
by the certificate of incorporation of SiteSmith, the by-laws of SiteSmith and
the laws of the state of Delaware.
COMPARISON OF STOCKHOLDERS' RIGHTS
Set forth on the following pages is a summary comparison of material
differences among the rights of a Metromedia Fiber stockholder under the current
Metromedia Fiber charter and by-laws (left column), and the rights of a
SiteSmith stockholder under the current SiteSmith charter and by-laws (right
column).
The summary set forth below highlights the material distinctions among the
governing documents of Metromedia Fiber, SiteSmith and the combined company and
is not intended to provide a comprehensive summary of each of those companies'
governing documents. Copies of the SiteSmith charter and by-laws, the Metromedia
Fiber charter and by-laws and Aqueduct Acquisition Corp. charter and by-laws,
will be sent to stockholders upon request. See "Where you can find more
information."
<TABLE>
<CAPTION>
CURRENT METROMEDIA FIBER CURRENT SITESMITH
--------------------------------------------- ---------------------------------------------
<S> <C>
AUTHORIZED CAPITAL STOCK
2,404,031,240 shares of class A common stock, 50,000,000 shares of common stock, par value
par value $.01 per share, entitled to one $0.0001 per share, entitled to one vote per
vote per share on all matters and to vote as share on all matters and to vote as a class
a class to elect 25% of the members of the to elect 2 of the members of the board of
board of directors of Metromedia Fiber. directors of SiteSmith, Inc.
522,254,782 shares of class B common stock, 7,200,000 shares of series A convertible
par value $.01 per share, entitled to ten preferred stock, par value $0.0001, entitled
votes per share on all matters and to vote as to one vote per share on all matters and to
a class to elect 75% of the members of vote as a class to elect 2 of the members of
Metromedia Fiber's board of directors. the board of directors of SiteSmith, Inc.
20,000,000 shares of preferred stock, par 8,610,861 shares of series B convertible
value $.01 per share. preferred stock, par value $0.0001, entitled
to one vote per share on all matters and to
vote as a class to elect one of the members
of the board of directors of SiteSmith, Inc.
4,968,429 shares of series C convertible
preferred stock, par value $0.0001, entitled
to one vote per share on all matters.
PREEMPTIVE RIGHTS
None. None.
</TABLE>
121
<PAGE>
<TABLE>
<CAPTION>
CURRENT METROMEDIA FIBER CURRENT SITESMITH
--------------------------------------------- ---------------------------------------------
<S> <C>
STOCKHOLDER ACTION
ANNUAL MEETINGS
On such date as may be designated by the On such date as may be designated by the
board of directors or the President. board of directors or the President.
SPECIAL MEETINGS
May be called at any time by the chairman of May be called at any time by the board of
the board of directors, by the president or directors, the chairman of the board of
by the holders of at least 33% of the voting directors, by the president or by the holders
power of the outstanding shares of common of at least 10% of the voting power of the
stock. outstanding shares of capital stock.
ACTION BY WRITTEN CONSENT
Allowed. Allowed.
ADVANCE NOTICE OF DIRECTOR NOMINATIONS AND OTHER PROPOSALS
None. None.
BOARD OF DIRECTORS
CLASSIFICATION
Directors are classified into two classes. Each director holds office until his or her
The class A directors serve a one year term successor is elected and qualified or until
and are elected at each annual meeting by the his or her earlier resignation or removal.
holders of the class A common stock. The
class B directors are elected by the class B
directors at each annual meeting.
CUMULATIVE VOTING FOR DIRECTORS
None. None.
NUMBER OF DIRECTORS
Twelve total; 75% designated by the holders Seven total; 2 designated by the holders of
of class B common stockholders and 25% common stock, 2 designated by the holders of
designated by class A common stockholders. series A convertible preferred stock, one
designated by the holders of the series B
convertible preferred stock and 2 designated
by all the stockholders.
</TABLE>
122
<PAGE>
<TABLE>
<CAPTION>
CURRENT METROMEDIA FIBER CURRENT SITESMITH
--------------------------------------------- ---------------------------------------------
<S> <C>
REMOVAL
With or without cause, only by the holders of With or without cause, only by the holders of
the class or classes of common stock or the common stock or series of convertible
series of preferred stock that, as of the preferred stock that, as of the date such
date such removal is effected, would be removal is effected, would be entitled to
entitled to elect such directorship at the elect such directorship at the next annual
next annual meeting of stockholders. meeting of stockholders.
BOARD VACANCIES
Vacancies in a directorship may be filled Vacancies in a directorship may be filled
only by (a) the remaining directors elected only by the remaining directors elected by
by holders of each class of common stock or holders of common stock or each series of
series of preferred stock that (x) elected convertible preferred stock that (x) elected
such directorship and (y) as of the date such such directorship and (y) as of the date such
vacancy is filled, would be entitled to elect vacancy is filled, would be entitled to elect
such directorship at the next annual meeting such directorship at the next annual meeting
of stockholders or, (b) if there are no such of stockholders.
remaining directors, then by the vote of the
holders of the class or classes of common
stock or series of preferred stock that, as
of the date such vacancy is filled, would be
entitled to elect such directorship at the
next annual meeting of stockholders, voting
as a separate class at a meeting, special or
otherwise, of the holders of common stock of
such class or classes or series of preferred
stock.
DIRECTOR QUALIFICATIONS
No special requirements. No special requirements.
SPECIAL MEETINGS OF THE BOARD
Special meetings of the board of directors Special meetings of the board of directors
shall be held at such time and place as shall shall be held at such time and place as shall
be designated in the notice of the meeting be designated in the notice of the meeting
whenever called by the chairman of the board, whenever called by the chairman of the board
if any, the president, or by a majority of of directors, if any, the president, any
the directors then in office. vice-president, the secretary or any two
directors.
TRANSACTIONS WITH INTERESTED STOCKHOLDERS' EXTRAORDINARY TRANSACTIONS
AND SECURITIES ISSUANCES
No issuance or selling of any shares of class No selling of any shares of common stock to
B common stock or any securities (including, any person who is not a permitted holder
without limitation, any rights, options, transferee without first offering the shares
warrants or other securities) convertible, of common stock to SiteSmith.
exchangeable or exercisable into shares of
class B common stock to any person who is not
a class B permitted holder.
</TABLE>
123
<PAGE>
<TABLE>
<CAPTION>
CURRENT METROMEDIA FIBER CURRENT SITESMITH
--------------------------------------------- ---------------------------------------------
<S> <C>
CHARTER AMENDMENTS
No specific requirements. No specific requirements.
BY-LAWS AMENDMENTS
May be amended by a vote of a majority of the May be amended by a vote of a majority of the
entire board of directors. Any by-laws made, entire board of directors. Any by-laws made,
amended or adopted by the board of directors amended or adopted by the board of directors
may be amended or repealed, and any by-laws may be amended or repealed, and any by-laws
may be adopted, by the stockholders of the may be adopted, by the stockholders of the
corporation by vote of a majority of the corporation by vote of a majority of the
holders of shares of stock of the holders of shares of stock of the
corporation. corporation.
</TABLE>
124
<PAGE>
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF METROMEDIA FIBER
PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table provides you with information, as of November 3, 2000,
regarding the beneficial ownership of Metromedia Fiber's voting stock after
giving effect to Metromedia Fiber's stock splits by (1) each of Metromedia
Fiber's directors, (2) each person whom Metromedia Fiber believes beneficially
owns more than 5% of Metromedia Fiber's outstanding voting stock, (3) each named
executive officer and (4) all Metromedia Fiber's executive officers and
directors as a group. In accordance with the rules promulgated by the Securities
and Exchange Commission, such 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 such person.
BEFORE THE CONSUMMATION OF THE MERGER
<TABLE>
<CAPTION>
CLASS A COMMON STOCK(1) CLASS B COMMON STOCK(2) PERCENT
----------------------------------- ------------------------- OF TOTAL
PERCENT NUMBER OF PERCENT VOTING
NUMBER OF SHARES OF CLASS SHARES OF CLASS POWER
-------------------- -------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Stephen A. Garofalo................. 88,232,224(3) 18.3% -- -- 7.6%
Metromedia Company(4)............... -- -- 62,924,096 93.2% 54.3%
Putnam Investments, Inc............. 58,716,938(5) 12.2% -- -- 5.1%
Bell Atlantic Investments, Inc...... 51,116,218(6) 10.6% -- -- 4.4%
FMR Corp............................ 31,053,064(7) 6.4% -- -- 2.7%
Gerard Benedetto.................... 555,000(8) * -- -- *
Nicholas M. Tanzi................... 1,010,860(9) * -- -- *
Silvia Kessel....................... 800,144(10) * -- -- *
John W. Kluge....................... 3,727,100(11) * 62,924,096(12) 93.2% 54.6%
David Rockefeller................... 3,867,208(13) * -- -- *
Stuart Subotnick.................... 2,733,500(14) * 67,538,544(12) 100.0% 58.5%
Arnold L. Wadler.................... 874,688(15) * -- -- *
Sherman Tuan........................ 1,915,110(16) * -- -- *
David Rand.......................... 937,850(17) * -- -- *
Janus Capital Corporation........... 20,907,482(18) 4.3% -- -- 1.8%
All Directors and Executive Officers
as a Group........................ 104,653,684(19) 21.7% 67,538,544 100.0% 67.3%
</TABLE>
125
<PAGE>
AFTER THE CONSUMMATION OF THE MERGER
<TABLE>
<CAPTION>
CLASS A COMMON STOCK(1) CLASS B COMMON STOCK(2) PERCENT
--------------------------- ------------------------- OF TOTAL
PERCENT NUMBER OF PERCENT VOTING
NUMBER OF SHARES OF CLASS SHARES OF CLASS POWER
---------------- -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C>
Stephen A. Garofalo.................... 88,232,224(3) 16.8% -- -- 7.3%
Metromedia Company(4).................. -- -- 62,924,096 93.2% 52.4%
Putnam Investments, Inc................ 58,716,938(5) 11.1% -- -- 4.9%
Bell Atlantic Investments, Inc......... 51,116,218(6) 9.7% -- -- 4.2%
FMR Corp............................... 31,053,064(7) 5.9% -- -- 2.6%
Gerard Benedetto....................... 555,000(8) * -- -- *
Nicholas M. Tanzi...................... 1,010,860(9) * -- -- *
Silvia Kessel.......................... 800,144(10) * -- -- *
John W. Kluge.......................... 3,727,100(11) * 62,924,096(12) 93.2% 52.6%
David Rockefeller...................... 3,867,208(13) * -- -- *
Stuart Subotnick....................... 2,733,500(14) * 67,538,544(12) 100.0% 56.4%
Arnold L. Wadler....................... 874,688(15) * -- -- *
Sherman Tuan........................... 1,915,110(16) * -- -- *
David Rand............................. 937,850(17) * -- -- *
Janus Capital Corporation.............. 20,907,482(18) 3.9% -- -- 1.7%
All Directors and Executive Officers as
a Group.............................. 104,653,684(19) 19.8% 67,538,544 100.0% 64.9%
</TABLE>
------------------------
* less than 1.0%
(1) The percent of class A common stock shown does not include outstanding
shares of class B common stock or shares of class A common stock issuable
upon conversion of the class B common stock.
(2) 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.
(3) Includes presently exercisable options to purchase 6,084,000 shares of
class A common stock at an exercise price of $0.123 per share of which
5,435,888 shares are held by the Stephen A. Garofalo 1999 Annuity Trust No.
1 and 301,524 shares are held by the Stephen A. Garofalo 1999 Annuity Trust
No. 2. Mr. Garofalo is the trustee of both trusts. Also includes 813,378
shares of class A common stock owned by the Garofalo Foundation, Inc. of
which Mr. Garofalo is President. Mr. Garofalo's address is c/o Metromedia
Fiber Network, Inc. One North Lexington Avenue, White Plains, New York
10601.
(4) Metromedia Company's address is 810 Seventh Avenue, 29(th) Floor, New York,
New York 10019.
(5) Based solely upon the Schedule 13G/A, dated February 7, 2000, filed by
Putnam Investments, Inc. Putnam Investments, Inc.'s address is One Post
Office Square, Boston, Massachusetts 02109.
(6) Bell Atlantic Investments, Inc. owns 9.4% of the outstanding shares of
class A common stock upon giving effect to the conversion of the outstanding
shares of class B common stock into shares of class A common stock. Bell
Atlantic Investments, Inc.'s address is 3900 Washington Street, Second
Floor, Wilmington, Delaware 19802.
126
<PAGE>
(7) Based solely on the Schedule 13G/A, dated February 14, 2000 filed by FMR
Corp., Edward C. Johnson III and Abigail P. Johnson. FMR's address is 82
Devonshire Street, Boston, Massachusetts 02109.
(8) Includes presently exercisable options to purchase 250,000, 150,000 and
37,500 shares of class A common stock at an exercise price of $.96875,
$2.625 and $13.1875 per share, respectively.
(9) Includes presently exercisable options to purchase 360,000, 223,360 and
37,500 shares of class A common stock at an exercise price of $1.00, $2.625
and $13.1875 per share, respectively and options to purchase 250,000 shares
of class A common stock at an exercise price of $19.88 which becomes
exercisable within 60 days. Mr. Tanzi's address is 360 Hamilton Avenue,
White Plains, New York 10601.
(10) Includes 800,144 presently exercisable options to acquire shares of
class A common stock at an exercise price of $0.123 per share. Does not
include shares owned by Metromedia Company. Ms. Kessel is employed by
Metromedia Company and disclaims beneficial ownership of the shares owned by
Metromedia Company.
(11) Consists of 3,727,100 presently exercisable options to acquire shares of
class A common stock at an exercise price of $0.123 per share. Mr. Kluge's
address is c/o Metromedia Company, 810 Seventh Avenue, 29(th) Floor, New
York, New York 10019.
(12) Includes 62,924,096 shares owned by Metromedia Company. Messrs. Kluge and
Subotnick, Directors of Metromedia Fiber's company, are general partners of
Metromedia Company.
(13) Represents 3,787,208 shares owned by DR & Descendants LLC, of which Mr.
Rockefeller is Managing Member and for which he exercises voting and
investment power. Also includes presently exercisable options to purchase
80,000 shares of class A common stock at an exercise price of $1.00 per
share. Mr. Rockefeller disclaims beneficial ownership of shares owned by DR
& Descendants LLC except as to the one-seventh ( 1/7) of the shares
attributable to his proportionate interest in the LLC. The other interests
of the LLC are owned by Mr. Rockefeller's six children.
(14) Includes 2,733,500 presently exercisable options to acquire shares of
class A common stock at an exercise price of $0.123 per share. Mr.
Subotnick's address is c/o Metromedia Company, 810 Seventh Avenue, 29(th)
Floor, New York, New York 10019.
(15) Includes 811,200 presently exercisable options to acquire shares of
class A common stock at an exercise price of $0.123 per share. Does not
include shares owned by Metromedia Company. Mr. Wadler is employed by
Metromedia Company and disclaims beneficial ownership of the shares owned by
Metromedia Company.
(16) Includes presently exercisable options to purchase 183,250; 293,750;
23,500; 228,050; 11,750; 70,500; and 333,334 shares of class A common stock
at an exercise price of $0.009; $.0855; $.2555; $2.128; $2.58; $33.192;
$16.596; and $13.1875, respectively.
(17) Includes presently exercisable options to purchase 287,394; 1,750; 235,000;
250,000; and 70,500 shares of class A common stock at an exercise price of
$2.128; $2.58; $11.104; $13.1875 and $16.596, respectively.
(18) Based solely on the Schedule 13-G, dated February 17, 2000 filed by Janus
Capital Corporation and Thomas H. Bailey. Janus Capital Corporation's
address is 100 Fillmore Street, Denver, Colorado 80206-4923.
(19) Includes presently exercisable options to acquire shares of class A common
stock in the amounts and at the exercise prices as set forth in the
preceding footnotes.
127
<PAGE>
INFORMATION REGARDING BENEFICIAL OWNERSHIP OF SITESMITH
PRINCIPAL STOCKHOLDERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of SiteSmith's capital stock as of November 3, 2000 by:
- each of SiteSmith's directors;
- SiteSmith's former chief executive officer and current chief executive
officer;
- all directors and executive officers as a group; and
- each person who is known to SiteSmith to own beneficially more than 5% of
SiteSmith's capital stock.
Except as otherwise noted, the address of each person listed in the table is
c/o SiteSmith, Inc., 3283 Scott Boulevard, Santa Clara, CA 95054. Beneficial
ownership is determined in accordance with the rules of the SEC and includes
voting and investment power with respect to shares. To SiteSmith's knowledge,
except under applicable community property laws or as otherwise indicated, the
persons named in the table have sole voting and sole investment control with
respect to all shares beneficially owned. The applicable percentages of
ownership for each stockholder are based on 37,770,027 shares of capital stock
outstanding for SiteSmith as of November 3, 2000 together with applicable
options for that stockholder and 483,358,400 shares outstanding of class A
common stock of Metromedia Fiber as of November 3, 2000. Shares of common stock
issuable upon exercise of options and other rights beneficially owned that are
exercisable within 60 days of November 3, 2000 are deemed outstanding for the
purposes of computing the percentage ownership of the person holding those
options and other rights but are not deemed outstanding for computing the
percentage ownership of any other person. A portion of the shares issuable upon
exercise of the options is subject to repurchase by SiteSmith at the original
purchase price in the event of a termination of the holder's relationship as an
employee or director of SiteSmith. This repurchase right lapses over time.
Shares of SiteSmith series A preferred stock, series B preferred stock and
series C preferred stock are convertible into shares of SiteSmith's common stock
on a one-for-one basis.
BENEFICIAL OWNERSHIP
<TABLE>
<CAPTION>
METROMEDIA FIBER (GIVING
EFFECT TO THE MERGER)
SITESMITH ---------------------------
--------------------------- TOTAL NUMBER
PERCENT OF SHARES PERCENT
TOTAL NUMBER BENEFICIALLY (CLASS A BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES OWNED COMMON) OWNED
------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Entities affiliated with Bedrock Capital 6,042,671 16.0% 7,751,538 1.5%
Partners ....................................
One Boston Place
Boston, MA 02108(1)
Entities affiliated with Com Ventures ......... 6,042,670 16.0 7,751,537 1.5
505 Hamilton Avenue
Palo Alto, CA 94301(2)
Entities affiliated with Weiss, Peck & 4,977,489 13.2 6,385,123 1.2
Greer .......................................
555 California Street, Suite 3130
San Francisco, CA 94104(3)
</TABLE>
128
<PAGE>
<TABLE>
<CAPTION>
METROMEDIA FIBER (GIVING
EFFECT TO THE MERGER)
SITESMITH ---------------------------
--------------------------- TOTAL NUMBER
PERCENT OF SHARES PERCENT
TOTAL NUMBER BENEFICIALLY (CLASS A BENEFICIALLY
NAME AND ADDRESS OF BENEFICIAL OWNER OF SHARES OWNED COMMON) OWNED
------------------------------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Dell USA L.P. ................................ 1,769,912 4.7 2,270,443 *
Mail Stop 8066
One Dell Way
Round Rock, TX 78682(4)
Marvin Tseu(5)................................. 1,165,000 3.1 1,494,462 *
Mark F. Spagnolo(6)............................ 2,771,432 7.1 3,555,193 *
Carolyn V. Aver(7)............................. 100,000 * 128,280 *
Amal M. Johnson(3)............................. 4,977,489 13.2 6,385,123 1.2
James L. McLean(1)............................. 6,042,671 16.0 7,751,538 1.5
Robert John Ryan(8)............................ 6,475,000 17.1 8,306,130 1.6
Edward J. Sanderson, Jr.(7).................... 100,000 * 128,280 *
All directors and executive officers as a group
(16 persons)................................. 25,046,592 62.1% 32,129,768 6.1%
</TABLE>
------------------------
* Less than 1%
(1) Represents shares held by the following entities:
- 2,786,070 shares of series A preferred stock, 1,951,029 shares of
series B preferred stock, and 874,670 shares of series C preferred stock
held by Bedrock Capital Partners I, L.P.;
- 116,730 shares of series A preferred stock, 81,744 shares of series B
preferred stock, and 36,647 shares of series C preferred stock held by
Credit Suisse First Boston Bedrock Fund, L.P.; and
- 97,200 shares of series A preferred stock, 68,067 shares of series B
preferred stock, and 30,514 shares of series C preferred stock held by VWB
Employee Fund, L.P.
The general partner of each of these funds is Bedrock General Partner I,
L.L.C. James L. McLean, a director of SiteSmith, Inc., is a managing member
of Bedrock Partner I, L.L.C. Mr. McLean disclaims beneficial ownership of
these shares, except to the extent of his pecuniary interest in the shares.
(2) Represents shares held by the following entities:
- 142,857 shares of series A preferred stock, 100,042 shares of series B
preferred stock, and 21,147 shares of series C preferred stock held by
Communications Ventures III CEO & Entrepreneurs Fund, L.P.;
- 2,857,143 shares of series A preferred stock, 2,000,798 shares of
series B preferred stock, and 422,961 shares of series C preferred stock
held by Communications Ventures III, L.P.;
- 455,963 shares of series C preferred stock held by ComVentures IV L.P.;
- 35,304 shares of series C preferred stock held by ComVentures IV CEO Fund
L.P.; and
- 6,455 shares of series C preferred stock held by ComVentures IV
Entrepreneurs' Fund, L.P.
ComVen III, LLC is the general partner of Communications Ventures III CEO &
Entrepreneurs Fund, L.P. and Communications Ventures III, L.P. ComVen IV,
L.L.C. is the general partner of
129
<PAGE>
ComVentures IV, L.P., ComVentures IV CEO Fund, L.P., and ComVentures IV
Entrepreneurs' Fund, L.P. Mr. McLean, a director of SiteSmith, Inc., joined
ComVentures in July 2000 but is not a general partner of any of the above
funds.
(3) Represents shares held by the following entities:
- 3,361,345 shares of series B preferred stock and 626,512 shares of
series C preferred stock held by Weiss, Peck and Greer Venture Associates
V, L.L.C.;
- 28,151 shares of series B preferred stock and 5,275 shares of series C
preferred stock held by Weiss, Peck and Greer Venture Associates V-A,
L.L.C.;
- 689,916 shares of series B preferred stock and 128,996 shares of series C
preferred stock held by Weiss, Peck and Greer Ventures Associates V
Cayman, L.P.;
- 75,630 shares of series B preferred stock and 9,294 shares of series C
preferred stock held by WPG Information Sciences Entrepreneur Fund II,
L.L.C.; and
- 46,639 shares of series B preferred stock and 5,731 shares of series C
preferred stock held by WPG Information Sciences Entrepreneur Fund II-A,
L.L.C.
Amal M. Johnson, a director of SiteSmith, Inc., is a managing member of WPG
VC Fund Adviser II, L.L.C., which is the Fund Investment Advisory Member of
Weiss, Peck & Greer Venture Associates V, L.L.C., Weiss, Peck & Greer
Venture Associates V-A, L.L.C., WPG Information Sciences Entrepreneur Fund
II, L.L.C., and WPG Information Sciences Entrepreneur Fund II-A, L.L.C. and
the Fund Investment Advisory Partner of Weiss, Peck and Greer Venture
Associates V Cayman, L.P. Ms. Johnson disclaims beneficial ownership of
these shares, except to the extent of her pecuniary interest in the shares.
(4) Dell Gen. P. Corp. is the general partner of Dell USA L.P.
(5) Does not include an aggregate of 135,000 shares of common stock transferred
by Mr. Tseu to eight different individual transferees and 100,000 shares of
series A preferred stock purchased in October 1999 by Pensco Pension
Services, Inc. Custodian FBO Marvin Tseu IRA, Mr. Tseu's investment
retirement account.
(6) Includes 405,000 shares of common stock held by Spagnolo 2000 Trust, 144,000
shares of common stock held by Spagnolo Extended Family Trust, and 1,361,907
shares of common stock issuable upon exercise of options exercisable within
60 days of October 9, 2000.
(7) All shares issuable upon exercise of options exercisable within 60 days of
October 9, 2000.
(8) Includes 200,000 shares transferred to Ryan Venture L.P. Mr. Ryan and his
wife are the trustees of the Ryan Management Trust, which is the general
partner of Ryan Venture L.P. Does not include an aggregate of 725,000 shares
of common stock transferred by Mr. Ryan to nine individual transferees.
STOCKHOLDER PROPOSALS
Pursuant to Rule 14a-8 under the Exchange Act, stockholders may present
proper proposals for inclusion in a company's proxy statement and for
consideration at the next annual meeting of its stockholders by submitting their
proposals to SiteSmith in a timely manner.
SiteSmith will hold an annual meeting in the year 2000 only if the merger is
not completed. If the merger is not completed and SiteSmith schedules a 2000
annual meeting to be held after December , 2000, stockholders may present a
proposal for inclusion in SiteSmith's proxy statement and presentation at the
annual meeting a reasonable time before SiteSmith begins to print and mail its
proxy materials.
130
<PAGE>
LEGAL MATTERS
The validity of the shares of Metromedia Fiber class A common stock to be
issued pursuant to the terms of the merger agreement will be passed upon by
Arnold L. Wadler, Executive Vice President, General Counsel, Secretary and
Director of Metromedia Fiber. Mr. Wadler owns options to acquire 874,688 shares
of Metromedia Fiber class A common stock. Mr. Wadler is also employed by
Metromedia Company as Senior Vice President and General Counsel. Material United
States Federal income tax consequences of the merger will be passed upon for
Metromedia Fiber by Paul, Weiss, Rifkind, Wharton & Garrison.
Material United States Federal income tax consequences of the merger will be
passed upon for SiteSmith by Venture Law Group, a Professional Corporation. As
of the date of this information statement/prospectus, attorneys of Venture Law
Group and an investment partnership controlled by Venture Law Group beneficially
own 80,000 shares of SiteSmith series A preferred stock.
EXPERTS
The consolidated financial statements of Metromedia Fiber Network, Inc. as
of December 31, 1998 and 1999 for each of the three years in the period ended
December 31, 1999 appearing in this information statement/prospectus and the
related financial statement schedule included elsewhere in the registration
statement, have been audited by Ernst & Young LLP, independent auditors, as
indicated in their reports thereon appearing elsewhere in this registration
statement, and are included in this registration statement in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
The financial statements of SiteSmith, Inc. as of December 31, 1999 and for
the period from September 8, 1999 (inception) through December 31, 1999 included
in this registration statement have been so included in reliance on the report
of PricewaterhouseCoopers LLP, independent accountant, given on the authority of
said firm as experts in auditing and accounting.
AboveNet's consolidated financial statements as of June 30, 1998 and 1999
and for each of the three years in the period ended June 30, 1999 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
The Combined Statement of Assets to be Acquired and Liabilities to be
Assumed of Palo Alto Internet Exchange as of December 26, 1998 and December 27,
1997 and the related Combined Statement of Revenues and Direct Expenses for the
period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 11, 1998 and the fiscal years ended December 27, 1997 and
December 29, 1996, included in this registration statement have been so included
in reliance on the reports of PricewaterhouseCoopers LLP, independent
accountants given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
Metromedia Fiber files annual, quarterly and current reports, proxy
statements and other information with the Securities and Exchange Commission.
You may read and copy any document that we file at the Securities and Exchange
Commission's Public Reference Room at 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. Please call 1-800-SEC-0330 for further information on the operation
of the Public Reference room. Reports, proxy statements and
131
<PAGE>
other information regarding issuers that file electronically with the SEC,
including our filings, are also available to the public from the SEC's Web site
at "http://www.sec.gov."
Metromedia Fiber has filed with the SEC a registration statement on
Form S-4. This joint information statement/prospectus is a part of the
registration statement and constitutes a prospectus of Metromedia Fiber for the
Metromedia Fiber class A common stock to be issued to SiteSmith stockholders in
the merger.
Metromedia Fiber has not authorized anyone to give any information or make
any representation about the merger or about it that differs from or adds to the
information in this document or in its documents or the documents that
Metromedia Fiber publicly file with the SEC. Therefore, if anyone does give you
different or additional information, you should not rely on it.
If you are in a jurisdiction where it is unlawful to offer to exchange or
sell, or to ask for offers to exchange or buy, the securities offered by this
document or to ask for proxies, or if you are a person to whom it is unlawful to
direct such activities, then the offer presented by this document does not
extend to you.
The information contained in this document speaks only as of its date unless
the information specifically indicates that another date applies.
132
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
METROMEDIA FIBER NETWORK, INC.:
Report of Independent Auditors.............................. F-3
AUDITED FINANCIAL STATEMENTS
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-4
Consolidated Statements of Operations for the years ended
December 31, 1999, 1998 and 1997............................ F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1999, 1998 and 1997............................ F-6
Consolidated Statements of Changes in Stockholders' Equity
(Deficiency) for the years ended December 31, 1999, 1998 and
1997........................................................ F-7
Notes to Consolidated Financial Statements.................. F-8
UNAUDITED FINANCIAL STATEMENTS
Consolidated Statements of Operations for the Nine Month
Periods Ended
September 30, 2000 and 1999............................... F-30
Consolidated Balance Sheets as of September 30, 2000 and
1999...................................................... F-31
Consolidated Statements of Cash Flows for the Nine Month
Periods Ended
September 30, 2000 and 1999............................... F-32
Notes to Consolidated Financial Statements.................. F-33
ABOVENET COMMUNICATIONS INC.:
Independent Auditors' Report................................ F-42
Consolidated Balance Sheets as of June 30, 1999 and 1998.... F-43
Consolidated Statements of Operations for the Years Ended
June 30, 1999, 1998 and 1997.............................. F-44
Consolidated Statements of Stockholders' Equity for the
Years Ended
June 30, 1999, 1998 and 1997.............................. F-45
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1999, 1998 and 1997.............................. F-46
Notes to Consolidated Financial Statements.................. F-47
</TABLE>
F-1
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PALO ALTO INTERNET EXCHANGE:
Report of Independent Accountants........................... F-63
Combined Statements of Assets to be Acquired and Liabilities
to be Assumed as of March 27, 1999 (unaudited), December
26, 1998 and December 27, 1997............................ F-65
Combined Statement of Revenues and Direct Expenses for the
Quarters Ended March 27, 1999 and March 26, 1998
(unaudited), period from June 12, 1998 through December
26, 1998, period from December 28, 1997 through June 11,
1998 and the Fiscal Years Ended December 27, 1997 and
December 29, 1996......................................... F-66
Notes to Combined Statements of Assets to be Acquired and
Liabilities to be Assumed and Combined Statements of
Revenues and Direct Expenses.............................. F-67
SITESMITH:
Report of Independent Accountants........................... F-72
Balance Sheets as of September 30, 2000 and December 31,
1999...................................................... F-73
Statements of Operations for the Year Ended December 31,
1999 and the Nine Months Ended September 30, 2000......... F-74
Statements of Stockholders' Deficit for the Year Ended
December 31, 1999 and the Nine Months Ended September 30,
2000...................................................... F-75
Statements of Cash Flows for the Year Ended December 31,
1999 and the Nine Months Ended September 30, 2000......... F-76
Notes to Financial Statements............................... F-77
</TABLE>
F-2
<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, 1999 and
1998, and the related consolidated statements of operations, stockholders'
equity (deficiency) and cash flows for each of the three years in the period
ended December 31, 1999. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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, 1999 and
1998, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999 in conformity with
accounting principles generally accepted in the United States.
As discussed in Note 1 to the financial statements, in 1999 the Company
implemented the provisions of FASB Interpretation No. 43 "Real Estate Sales"
with respect to certain leases.
/s/ Ernst & Young LLP
New York, New York
March 8, 2000
F-3
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1999 1998
---------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,262,391 $569,319
Pledged securities, current portion....................... 31,960 61,384
Accounts receivable, net.................................. 72,166 30,910
Prepaid expenses and other current assets................. 10,948 4,210
---------- --------
Total current assets.................................. 1,377,465 665,823
Fiber optic transmission network and related equipment,
net....................................................... 796,684 244,276
Property and equipment, net................................. 9,215 2,716
Pledged securities.......................................... -- 30,512
Restricted cash............................................. 82,193 --
Marketable securities....................................... 29,628 --
Investments in and advances to joint ventures............... 23,130 4,156
Other assets................................................ 102,573 26,934
Goodwill, net............................................... 1,539,097 --
---------- --------
Total assets.......................................... $3,959,985 $974,417
========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 43,344 $ 6,106
Accrued expenses.......................................... 186,528 96,512
Deferred revenue, current portion......................... 12,867 8,100
Capital lease obligations and notes payable, current
portion................................................... 6,781 55
---------- --------
Total current liabilities............................. 249,520 110,773
Senior notes payable........................................ 1,660,900 650,000
Capital lease obligations and notes payable................. 38,414 22,675
Deferred revenue............................................ 176,475 33,455
Commitments and contingencies (see notes)
Stockholders' equity:
Class A common stock, $.01 par value; 4,808,062,482 shares
authorized; 411,116,800 and 310,420,440 shares issued
and outstanding, respectively........................... 4,111 3,104
Class B common stock, $.01 par value; 1,044,509,564 shares
authorized; 67,538,544 shares issued and outstanding.... 676 676
Additional paid-in capital................................ 1,995,741 195,971
Accumulated deficit....................................... (157,175) (42,237)
Accumulated other comprehensive loss...................... (8,677) --
---------- --------
Total stockholders' equity............................ 1,834,676 157,514
---------- --------
Total liabilities and stockholders' equity.......... $3,959,985 $974,417
========== ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<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,
-------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Revenue..................................................... $ 75,247 $36,436 $ 2,524
Expenses:
Cost of sales............................................. 49,019 13,937 3,572
Selling, general and administrative....................... 51,010 14,712 6,303
Consulting and employment incentives...................... 397 248 19,218
Settlement agreements..................................... 1,932 3,400 --
Depreciation and amortization............................. 45,965 1,532 757
--------- ------- --------
Income (loss) from operations............................... (73,076) 2,607 (27,326)
Interest income........................................... 32,106 8,788 1,808
Interest expense (including financing costs).............. (72,362) (6,861) (741)
Loss from joint ventures.................................. (1,606) (146) --
--------- ------- --------
Income (loss) before income taxes........................... (114,938) 4,388 (26,259)
Income taxes.............................................. -- 3,402 --
--------- ------- --------
Net income (loss)........................................... $(114,938) $ 986 $(26,259)
========= ======= ========
Net income (loss) per share, basic.......................... $ (0.28) $ 0.00 $ (0.14)
========= ======= ========
Net income per share, diluted............................... N/A $ 0.00 N/A
========= ======= ========
Weighted average number of shares outstanding, basic........ 407,192 373,980 189,788
========= ======= ========
Weighted average number of shares outstanding, diluted...... N/A 439,048 N/A
========= ======= ========
</TABLE>
SEE ACCOMPANYING NOTES.
F-5
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1999 1998 1997
---------- --------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................... $ (114,938) $ 986 $(26,259)
---------- --------- --------
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 45,965 1,532 757
Amortization of deferred financing costs................ 2,464 -- --
Stock, stock options and warrants issued for services... 397 248 19,439
Stock and warrants issued for settlement agreements..... 1,932 3,000 --
Deferred taxes.......................................... -- 2,707 --
Reserve for note receivable............................. -- -- 338
Loss from joint ventures................................ 1,606 146 --
Change in operating assets and liabilities:
Accounts receivable................................... (31,716) (30,073) (656)
Prepaid expenses...................................... (4,567) -- --
Accounts payable and accrued expenses................. 54,983 13,449 (12)
Deferred revenue...................................... 110,390 30,060 10,387
Other................................................. (6,851) (4,070) (1,806)
---------- --------- --------
Net cash provided by operating activities............... 59,665 17,985 2,188
---------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities........................... (29,628) -- --
Capital expenditures on fiber optic transmission network and
related equipment......................................... (409,554) (114,849) (19,206)
Deposit payments............................................ -- (4,675) (87)
Investments in and advances to joint venture................ (7,674) (4,246) (56)
Cash acquired through AboveNet acquisition.................. 135,163 -- --
Capital expenditures on property and equipment.............. (8,155) (2,305) (318)
CSD acquisition (net of cash acquired)...................... (24,966) -- --
---------- --------- --------
Net cash used in investing activities................... (344,814) (126,075) (19,667)
---------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 20,353 1,038 133,975
Proceeds from issuance of preferred stock and warrants...... -- -- 32,500
Payment of pre-acquisition debt of acquired business........ (15,028) -- --
Dividends paid on preferred stock........................... -- -- (77)
Repayments of notes payable- private placement.............. -- -- (1,408)
Purchases and sales of pledged securities................... 59,936 (91,896) --
Restricted cash secured by letter of credit................. (50,973) -- --
Repayments of notes payable................................. (1,544) -- (5,950)
Proceeds from senior notes payables, net.................... 1,010,900 630,000 --
Payment of deferred financing costs......................... (36,746) -- --
Payments of capital lease obligations....................... -- (579) --
Purchase of common stock.................................... -- -- (1,140)
Purchase of preferred stock................................. -- -- (2,039)
---------- --------- --------
Net cash provided by financing activities............... 986,898 538,563 155,861
---------- --------- --------
Effect of exchange rate changes on cash..................... (8,677) -- --
Net increase in cash and cash equivalents................... 693,072 430,473 138,382
Cash and cash equivalents--beginning of year................ 569,319 138,846 464
---------- --------- --------
Cash and cash equivalents--end of year...................... $1,262,391 $ 569,319 $138,846
========== ========= ========
Supplemental information:
Interest paid........................................... $ 64,941 $ 219 $ 1,145
========== ========= ========
Income taxes paid....................................... $ 2,771 $ 3,760 $
========== ========= ========
Supplemental disclosure of significant non-cash investing
activities:
Capital lease obligations............................... $ 3,384 $ 23,309 $ --
========== ========= ========
Accrued capital expenditures............................ $ 131,726 $ 82,916 $ --
========== ========= ========
</TABLE>
SEE ACCOMPANYING NOTES.
In connection with the acquisition of all of the common stock of AboveNet,
the Company issued shares of Class A common stock with a total value of
$1,681,102 and options and warrants with a total value of $98,925.
F-6
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
($000'S)
<TABLE>
<CAPTION>
SERIES A & B
PREFERRED CLASS A CLASS B
STOCK COMMON STOCK COMMON STOCK COMMON STOCK
------------------- ------------------- ------------------- -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996...... 600 60 160,024 1,600 -- -- -- --
Issuance of common stock in
connection with the exercise
of warrants................... -- -- 2,432 24 -- -- -- --
Issuance of options to
employees..................... -- -- -- -- -- -- -- --
Issuance of warrants in
connection with debt
extension..................... -- -- -- -- -- -- -- --
Dividends on preferred stock.... -- -- -- -- -- -- -- --
Repurchase and retirement of
Series A preferred stock and
warrants...................... (600) (60) -- -- -- -- -- --
Repurchase and retirement of
common stock and warrants..... -- -- (9,414) (94) -- -- -- --
Sale of Series B Preferred
Stock......................... 32 -- -- -- -- -- -- --
Net proceeds from Initial Public
Offering...................... -- -- -- -- 145,726 1,458 -- --
Conversion of common stock to
Series A common stock......... -- -- (153,042) (1,530) 153,040 1,530 -- --
Conversion of Series B preferred
stock to Series A & B common
stock......................... (32) -- -- -- 628 6 67,538 676
Sale of Series A common stock
for warrant................... -- -- -- -- 192 2 -- --
Net loss for the year........... -- -- -- -- -- -- -- --
---- --- -------- ------ ------- ----- ------ ---
Balance at December 31, 1997...... -- -- -- -- 299,586 2,996 67,538 676
---- --- -------- ------ ------- ----- ------ ---
Issuance of options to
employees..................... -- -- -- -- -- -- -- --
Issuance of warrants in
connection with settlement
agreement..................... -- -- -- -- -- -- -- --
Issuance of common stock in
connection with the exercise
of warrants................... -- -- -- -- 8,634 86 -- --
Issuance of common stock in
connection with the exercise
of stock options.............. -- -- -- -- 2,200 22 -- --
Net income for the year......... -- -- -- -- -- -- -- --
Income tax benefit from
exercises of employee stock
options....................... -- -- -- -- -- -- -- --
---- --- -------- ------ ------- ----- ------ ---
Balance at December 31, 1998...... -- -- -- -- 310,420 3,104 67,538 676
---- --- -------- ------ ------- ----- ------ ---
Issuance of common stock in
connection with the
acquisition of Abovenet....... -- -- -- -- 83,306 834 -- --
Issuance of warrants in
connection with the
acquisition of Abovenet....... -- -- -- -- -- -- -- --
Issuance of common stock in
connection with the exercise
of stock options.............. -- -- -- -- 14,486 144 -- --
Warrant exercises............... -- -- -- -- 2,874 29 -- --
Consulting fees................. -- -- -- -- 30 -- -- --
Net loss for the year........... -- -- -- -- -- -- -- --
Foreign currency translation
adjustment....................
Cumulative comprehensive loss
for the year.................. -- -- -- -- -- -- -- --
---- --- -------- ------ ------- ----- ------ ---
Balance at December 31, 1999...... -- -- -- -- 411,116 4,111 67,538 676
==== === ======== ====== ======= ===== ====== ===
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
PAID-IN ACCUMULATED COMPREHENSIVE
CAPITAL DEFICIT LOSS TOTAL
---------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Balance at December 31, 1996...... 7,221 (15,739) -- (6,858)
Issuance of common stock in
connection with the exercise
of warrants................... (14) -- -- 10
Issuance of options to
employees..................... 19,218 -- -- 19,218
Issuance of warrants in
connection with debt
extension..................... 220 -- -- 220
Dividends on preferred stock.... -- (77) -- (77)
Repurchase and retirement of
Series A preferred stock and
warrants...................... (1,966) (14) -- (2,040)
Repurchase and retirement of
common stock and warrants..... 89 (1,134) -- (1,139)
Sale of Series B Preferred
Stock......................... 32,500 -- -- 32,500
Net proceeds from Initial Public
Offering...................... 132,421 -- -- 133,879
Conversion of common stock to
Series A common stock......... -- -- -- --
Conversion of Series B preferred
stock to Series A & B common
stock......................... (682) -- -- --
Sale of Series A common stock
for warrant................... 84 -- -- 86
Net loss for the year........... -- (26,259) -- (26,259)
--------- -------- ------ ---------
Balance at December 31, 1997...... 189,091 (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................... 75 -- -- 161
Issuance of common stock in
connection with the exercise
of stock options.............. 850 -- -- 872
Net income for the year......... -- 986 -- 986
Income tax benefit from
exercises of employee stock
options....................... 2,707 -- -- 2,707
--------- -------- ------ ---------
Balance at December 31, 1998...... 195,971 (42,237) -- 157,514
--------- -------- ------ ---------
Issuance of common stock in
connection with the
acquisition of Abovenet....... 1,680,268 -- -- 1,681,102
Issuance of warrants in
connection with the
acquisition of Abovenet....... 98,925 -- -- 98,925
Issuance of common stock in
connection with the exercise
of stock options.............. 19,730 -- -- 19,874
Warrant exercises............... 450 -- -- 479
Consulting fees................. 397 -- -- 397
Net loss for the year........... -- (114,938) -- (114,938)
Foreign currency translation
adjustment.................... -- -- (8,677) (8,677)
---------
Cumulative comprehensive loss
for the year.................. -- -- -- (123,615)
--------- -------- ------ ---------
Balance at December 31, 1999...... 1,995,741 (157,175) (8,677) 1,834,676
========= ======== ====== =========
</TABLE>
F-7
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Metromedia
Fiber Network, Inc. and its wholly owned subsidiaries, (collectively, the
"Company"), which includes as of March 11, 1999 Communication Systems
Development, Inc. ("CSD") and as of September 8, 1999, AboveNet Communications,
Inc. ("AboveNet") and it's wholly-owned subsidiary Palo Alto Internet Exchange
("PAIX"), (see note 2). All significant inter-company balances and transactions
have been eliminated in consolidation. Investments in joint ventures which are
not majority owned, or which the Company does not control but over which it
exercises significant influence, are accounted for using the equity method.
Certain reclassifications have been made to the consolidated financial
statements for prior years to conform to the current presentation.
DESCRIPTION OF BUSINESS
The Company provides dedicated fiber optic infrastructure and high-bandwidth
internet connectivity for its communications intensive customers. The Company is
a facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through its acquisition of
AboveNet, the Company also provides "one-hop" connectivity that enables mission
critical internet applications to thrive, as well as high-bandwidth
infrastructure, including managed co-location services. PAIX serves as a packet
switching center for ISPs and also offers secure, fault-tolerant co-location
services to ISPs.
The Company currently has operations in, or under construction in, eleven
Tier I cities throughout the United States and seven selected international
markets. The Company intends to expand its presence to include approximately 50
Tier I and Tier II markets in the United States and 17 major international
markets.
The Company's existing intra-city networks consist of approximately 514,000
fiber miles covering in excess of 1,000 route miles in the first eleven Tier I
cities. Its inter-city network consists of approximately 132,000 fiber miles
primarily covering its 255 route-mile network that the Company has built between
New York City and Washington D.C. The Company has also built or contracted to
acquire (primarily through fiber swaps) a nationwide dark fiber network linking
its intra-city networks.
In February 1999, the Company entered into an agreement with Viatel, Inc.
and Carrier 1 Holdings, Ltd. to jointly build a dark fiber inter-city network
among selected cities throughout Germany. Once completed, our German network
will consist of approximately 320,000 fiber miles covering in excess of 1,450
route miles connecting 14 major cities. The Company has also swapped strands of
fiber in the United States for strands of fiber on the Circe network, which
connects a number of European markets. In addition to its inter-city networks,
the Company is constructing 16 intra-city networks throughout Europe.
Separately, the Company has also entered into a contract to acquire rights to
dark fiber network facilities in Toronto, Canada.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
F-8
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
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 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, 1999, the fair value of the
Company's fixed rate long-term debt for the 10% Senior Notes due in 2008, and
2009 was $650 million, and $1.0 billion, respectively. The recorded amounts for
all other long-term debt of the Company approximates fair values.
FOREIGN CURRENCY TRANSLATION
The statutory accounts of the Company's foreign subsidiaries are maintained
in accordance with local accounting regulations and are stated in local
currencies. Local statements are translated into U.S. generally accepted
accounting principles and U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52 ("SFAS 52"), "Accounting for Foreign Currency
Translation."
Under SFAS 52, foreign currency assets and liabilities are generally
translated using the exchange rates in effect at the balance sheet date. Results
of operations are generally translated using average exchange rates prevailing
throughout the year. The effects of exchange rate fluctuations on translating
foreign currency assets and liabilities into U.S. dollars are accumulated as
part of the foreign currency translation component of other comprehensive income
and stockholders' equity. Gains and losses from foreign currency transactions
are included in net income in the period in which they occur.
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 due 2008 (see Note 12), 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 due 2008 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.
F-9
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
MARKETABLE SECURITIES
Marketable securities primarily consist of investments in United States
Government and corporate obligations and are classified as held-to-maturity.
Accordingly, such investments are carried at cost, with unrealized gains and
losses reported upon maturation of the underlying investment.
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
Fixed assets are stated at cost and depreciation for financial reporting
purposes is calculated using the straight-line method over the estimated useful
lives of the assets ranging from three to five years. Leasehold improvements are
amortized over the lesser of the useful life of the asset or the remaining
period of the lease.
OTHER ASSETS
Other assets include debt issuance costs, franchise agreements and deposits.
Those costs that are amortizable, are amortized on a straight-line basis over a
period ranging from ten to twenty years.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles, including goodwill, 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.
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
F-10
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
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.
During 1999, the Company completed two-for-one stock splits 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 on August 7, 1998, December 8, 1998, and May 3, 1999.
These splits were effective on August 28, 1998, December 22, 1998 and May 19,
1999, respectively.
On May 6, 1999, the total authorized number of shares of stock of the
Company was increased to approximately 5.9 billion shares, par value $0.01 per
share, of which 40 million shares were designated as preferred stock, 4.8
billion shares were designated Class A common stock and 1.0 billion shares were
designated Class B common stock.
On March 2, 2000, the Company announced 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 on March 14, 2000.
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. Revenue on
bandwidth and space requirement charges is recognized in the period in which the
services are provided. In addition, the Company occasionally enters into sales-
type leases for portions of its network. For those leases entered into prior to
completion of the portion of the network and under contracts entered into before
June 30, 1999, the Company recognizes revenue using the percentage of completion
method.
Under the percentage of completion method, progress is generally measured on
performance milestones relating to the contract where such milestones fairly
reflect the progress toward contract completion. Network construction costs
include all direct material and labor costs and those indirect costs related to
contract performance. General and administrative costs are charged to expense as
incurred. If necessary, the estimated loss on an uncompleted contract is
expensed in the period in which it is identified. Contract costs are estimated
using allocations of the total cost of constructing the specific phase of the
network. Revisions to estimated profits on contracts are recognized in the
period that they become known.
Most of the Company's contracts for the provision of dark fiber are
accounted as operating leases under which it recognizes recurring monthly
revenues. For certain other contracts the Company recognizes revenue under the
percentage of completion method for the provision of dark fiber. Effective June
30, 1999, the Financial Accounting Standards Board issued FASB Interpretation
No. 43
F-11
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
"Real Estate Sales" ("FIN 43") which requires that sales or leases of integral
equipment be accounted for in accordance with real estate accounting rules. The
Company believes that the staff of the Securities and Exchange Commission
requires the classification of dark fiber cables in the ground as integral
equipment as defined in FIN 43. Accounting for dark fiber leases as defined by
FIN 43 does not change any of the economics of the contracts. It requires the
Company, however, to recognize the revenue from certain leases as operating
leases over the term of the contract as opposed to the prior method of
recognizing revenue during the period over which the Company delivers the fiber.
As a result, this change in accounting treatment reduces the revenue and income
that the Company recognizes in the earlier years of the contract and spreads it
out over the life of the contract regardless of when the cash was received or
the delivery of the fiber took place.
By way of example, if the Company entered into an agreement for a 25-year
lease for dark fiber with a customer who pays $100.0 million in cash when the
contract is signed, the Company previously recorded revenues of $20.0 million
over the 5 years during which the Company delivered the dark fiber. By contrast,
the real estate accounting rules of FIN 43 would require recognition of revenue
of $4.0 million per year over the 25 year term of the contract, even though the
Company would receive a cash payment of $100.0 million when the contract is
signed.
The Company implemented FIN 43 real estate accounting for certain of its
leases entered into after June 30, 1999, and has not restated any amounts for
contracts executed prior to such date. Although there was no change to the
economics of the contracts or the timing of the cash to be received by the
Company, the impact of the change in accounting resulted in the Company
recording substantially less revenue between the dates of July 1, 1999 and
December 31, 1999 than would have been recorded if this change had not been
imposed. Revenue recognized for the years ended December 31, 1999 and 1998
related to the percentage of completion method was $40.3 million and
$32.8 million respectively. The related cost of sales recorded was
$10.7 million and $11.2 million, respectively, for the years ended December 31,
1999 and 1998. No revenues were recognized or cost of sales incurred relating to
the percentage of completion method in 1997. In the future, similar revenues
will be recognized over the term of the related contracts, typically 20 to
25 years.
The Company also provides installation services for its customers, and as
these services typically are completed within a short time period, the Company
records the revenues and related costs for these services under the completed
contract method.
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 49,525,200 shares of the Company's common stock issued in 1997 to
officers, employees and directors of the Company. The options have been
F-12
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
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 and co-location facilities 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.
COMPREHENSIVE LOSS
Statement of Financial Accounting Standards No. 130 ("SFAS 130") Reporting
Comprehensive Income (Loss) establishes rules for the reporting of comprehensive
income and its components. Comprehensive income (loss) consists of net income
(loss) and foreign currency translation adjustments. The comprehensive income
(loss) for the years ending December 31, 1999, 1998 and 1997 was approximately
($123.6 million), $1.0 million and ($26.3 million), respectively.
SEGMENT INFORMATION
The Company discloses information regarding segments in accordance with SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
SFAS No. 131 establishes standards for reporting of financial information about
operating segments in annual financial statements and requires reporting
selected information about operating segments in interim financial reports. The
disclosure of segment information was not required as the Company operates in
only one business segment.
As of and for the years ended December 31, 1999, 1998 and 1997,
substantially all of the Company's assets were located in the United States and
the Company derived substantially all of its revenue from businesses located in
the United States.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities," which establishes accounting and reporting standards for
derivative instruments and hedging activities. This standard is effective for
all fiscal quarters of fiscal years beginning after June 15, 1999. The
F-13
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SIGNIFICANT
ACCOUNTING POLICIES (CONTINUED)
Company does not expect the adoption of SFAS No. 133 to have an impact on its
results of operations, financial position or cash flows.
NOTE 2: BUSINESS ACQUISITIONS
All acquisitions have been accounted for under the purchase method. The
results of operations of the acquired businesses are included in the
consolidated financial statements from the dates of acquisition.
On September 8, 1999, the Company acquired all of the outstanding common
stock of AboveNet for a total purchase price, paid in Company class A common
stock, of approximately $1.8 billion. The holders of AboveNet common stock,
stock options and warrants received 2.35 shares of the Company's class A common
stock, stock options and warrants, respectively. AboveNet has its primary
operations in San Jose, California and is a leading provider of
facilities-based, managed services for customer-owned Web servers and related
equipment, known as co-location, and high performance internet connectivity
solutions for electronic commerce and other business critical internet
operations. The excess of the purchase price over the fair values of the net
assets acquired was approximately $1.6 billion and has been recorded as
goodwill, which is being amortized on a straight-line basis over 20 years. In
addition, in connection with the acquisition, the Company issued a letter of
credit, secured by the Company's restricted cash in the amount of $25 million,
to further secure a credit facility of AboveNet.
On June 21, 1999, AboveNet acquired certain assets and assumed certain
liabilities of the Palo Alto Internet Exchange ("PAIX") from Compaq Computer
Corporation ("Compaq") for a total purchase price of $76.4 million consisting of
$70 million in cash, certain future ongoing services to be provided by AboveNet
to Compaq, with a value estimated to be $5.0 million, and acquisition related
costs of $1.4 million. PAIX is a high-level switching and peering point for
global and internet service providers and content providers.
On March 11, 1999, the Company acquired all the outstanding common stock of
Communication Systems Development, Inc. ("CSD") for $25 million in cash. CSD has
its primary operations in Dallas, Texas and is engaged in the engineering and
construction of fiber optic networks. The excess of the purchase price over the
fair values of the net assets acquired was approximately $11.2 million and has
been recorded as goodwill, which is being amortized on a straight-line basis up
to 20 years.
The following unaudited pro forma financial information presents the
combined results of operations of the Company and the above acquisitions as if
the acquisitions had occurred as of the beginning of 1999 and 1998, after giving
effect to certain adjustments, including amortization of goodwill and related
income tax effects. The pro forma financial information does not necessarily
reflect the results of operations that would have occurred had the entities
constituted a single entity during such periods. The amounts are presented in
thousands, except per share amounts.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Revenue..................................................... $ 96,487 $ 46,588
Net Income/(Loss)........................................... $(198,853) $(89,306)
Income/(Loss) per share, basic.............................. $ (0.49) $ (0.20)
</TABLE>
F-14
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: BUSINESS ACQUISITIONS (CONTINUED)
Subsequent to the end of the fiscal year, on January 19, 2000 the Company
completed the acquisition of MIBH Inc., a network outsourcing provider offering
full-service management of business internet connectivity solutions for
approximately $51 million in cash and stock.
Under the terms of the agreement, MIBH became a wholly owned subsidiary of
Metromedia Fiber Network, Inc. The shareholders of MIBH, a privately held
company, received an aggregate of 2,078,096 shares of Metromedia Fiber Network
Class A common stock and $3.0 million in cash.
NOTE 3: ACCOUNTS RECEIVABLE
Accounts receivable consists of the following (in 000's):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Trade accounts receivable................................... $20,005 $ 560
Costs and earnings in excess of billings.................... 47,442 30,134
Other....................................................... 4,719 216
------- -------
$72,166 $30,910
======= =======
</TABLE>
At December 31, 1999, two customers accounted for 29% and 25%, 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,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Fiber optic network, net.................................... $318,494 $ 51,418
Data Centers................................................ 97,400 --
Telecommunication equipment & other......................... 51,878 --
Construction in progress.................................... 356,404 195,256
-------- --------
Total Network............................................. 824,176 246,674
Less: accumulated depreciation.............................. (27,492) (2,398)
-------- --------
$796,684 $244,276
======== ========
</TABLE>
Construction in progress includes amounts incurred in the Company's
expansion of its network. These amounts include fiber optic cable and other
materials, engineering and other layout costs, fiber optic cable installation
costs and other network assets held under capital leases. Construction in
progress also includes payments for rights of way for the underlying sections of
the network build. During 1999, $9,383 of interest expense was capitalized.
F-15
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5: PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1999 1998
-------- --------
<S> <C> <C>
Leasehold improvements...................................... $ 1,025 $ 614
Furniture, equipment and software........................... 10,490 2,581
------- ------
11,515 3,195
Less: accumulated depreciation and amortization............. (2,300) (479)
------- ------
$ 9,215 $2,716
======= ======
</TABLE>
NOTE 6: INVESTMENTS IN AND ADVANCES TO JOINT VENTURES
During 1997 the Company formed a joint venture with Racal
Telecommunications, Inc. ("Racal") that provides broad-based transatlantic
communication services between New York and London. During 1999 and 1998, the
Company made capital contributions of $1.8 million and $4.3 million,
respectively. The Company accounts for its investment using the equity method.
For 1999 and 1998, the Company recorded equity losses of $431,000 and $146,000,
respectively based on its 50% interest in the joint venture. Included within the
Company's accounts receivable is $699,000 for administrative services provided
to the joint venture which were not reimbursed as of December 31, 1999.
As part of its international expansion strategy, AboveNet has entered into
joint ventures to provide managed co-location and internet connectivity
solutions for mission critical internet operations overseas. In March 1999,
AboveNet entered into agreements to form joint ventures in Austria, Germany,
France and the United Kingdom. AboveNet invested a total of $15.2 million in
these ventures in 1999. These joint ventures are accounted for under the equity
method of accounting.
In December 1999, AboveNet entered into a joint venture agreement in Japan.
The Company invested a total of $4.0 million and is required to invest an
additional $4.0 million for up to a 40% ownership in this venture.
In February 2000, the Company purchased 100% of the shares owned by the
joint venture partners' of AboveNet's joint venture in the United Kingdom for
shares of the Company's stock with a market value of $10 million.
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. At December 31, 1999,
construction costs of approximately $35.1 million has been incurred and is
included in fiber optic transmission network.
F-16
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8: INVESTMENT IN FIBERNET
On December 20, 1999, the Company signed a lease agreement with FiberNet
Telecom Group, Inc. ("FiberNet") to lease intra-city dark fiber to FiberNet in
key markets over the next 20 years. As part of the transaction, the Company
exchanged its existing interest in one of FiberNet's subsidiaries, Local Fiber,
LLC. Additionally, FiberNet has agreed to provide the Company with access to
certain of FiberNet's commercial office buildings. As partial consideration for
these agreements, FiberNet issued 5 million shares of its common stock, valued
at $30.0 million, to the Company representing approximately 10.0% of FiberNet's
fully diluted shares. The Company is accounting for this investment under the
cost method.
NOTE 9: ACCRUED EXPENSES
Accrued expenses at December 31, 1999 and 1998 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Accrued salaries and wages.................................. $ 4,933 $ 1,195
Accrued taxes............................................... 13,529 2,392
Accrued interest............................................ 20,600 6,931
Accrued capital expenditures - network...................... 131,726 82,916
Other....................................................... 15,740 3,076
-------- -------
186,528 $96,510
======== =======
</TABLE>
NOTE 10: 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
1999 management fee under the agreement was $1.0 million, payable quarterly at a
rate of $250,000. The 1998 management fee under the agreement was $500,000,
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.
NOTE 11: SETTLEMENT AGREEMENTS
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).
In March 2000, the Company and other defendants entered into a settlement
agreement with the plaintiffs in VENTO & COMPANY OF NEW YORK, LLC V. METROMEDIA
FIBER NETWORK, INC., ET AL., No. 97 CIV 7751(JGK), which settled and resulted in
the dismissal of the litigation.
F-17
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12: NOTES PAYABLE
On October 25, 1999, the Company issued and sold approximately $1.0 billion
of 10% senior notes due October 15, 2009. The net proceeds of the 10% senior
notes were approximately $950.0 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 April 15 and October 15 of each year,
commencing April 15, 2000. The 10% senior notes due 2009 are subject to
redemption at the option of the Company, in whole or in part, at any time on or
after October 15, 2004, at specified redemption prices. In addition, prior to
October 15, 2002, the Company may use the net cash proceeds from certain
specified equity transactions to redeem up to 35% of the 10% senior notes due
2009 at specified redemption prices.
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.
Both indentures pursuant to which the 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 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 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.
At December 31, 1999, AboveNet had $19.1 million outstanding under its
credit facility (the "Credit Facility"), with no additional borrowings
available. Borrowings outstanding under the Credit Facility are payable in 42
monthly installments, bear interest at rates ranging from 13.3% to 15.1% and are
collateralized by the equipment and leasehold improvements purchased with the
proceeds of the borrowing. Additionally, in connection with the acquisition, the
Company issued a letter of credit, secured by the Company's restricted cash in
the amount of $25.0 million, to further secure the Credit Facility. At December
31, 1999, the outstanding borrowings on the Credit Facility are due as follows:
2000--$5,385, 2001--$6,762, and 2002--$6,934.
F-18
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: EQUITY TRANSACTIONS
COMMON STOCK
On November 3, 1997, the Company completed the initial public offering ("the
"IPO") of 145,728,000 shares of its Class A common stock, at an offering price
of $1 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 153,039,040 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 68,167,776 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 6,398,224 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 5,181,424 shares.
The Chairman thereafter assigned the option to the Company. On February 11,
1997, the Company exercised the option by payment of $500,000.
In September 1999, in connection with the AboveNet acquisition, the Company
issued 83,305,350 shares of common stock in exchange for the outstanding shares
of AboveNet's common stock at an exchange ratio of 2.35. On October 7, 1999, the
Company entered into a securities purchase agreement with Bell Atlantic
Investments, Inc. ("Bell Atlantic"), under which Bell Atlantic would purchase up
to approximately 51.1 million newly issued shares of its class A common stock at
a purchase price of $14.00 per share and a convertible subordinated note of
approximately $975.3 million, which is convertible into shares of its class A
common stock at a conversion price of $17.00 per share. This transaction closed
on March 6, 2000. Assuming the issuance of the 51.2 million shares of class A
common stock and conversion of the convertible subordinated note, this
investment would represent 18.2% of the Company's outstanding shares. Bell
Atlantic has also agreed to pay the Company $550 million over the next three
years in exchange for delivery of fiber optic facilities over the next five
years. The proceeds from these two transactions will be used to fund the
expansion of the Company's network.
PREFERRED STOCK
On April 30, 1997, the Company sold an aggregate of 134,453,200 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 68,167,776 shares of Class B common stock. Further,
on October 28, 1997, a total of 629,232 shares of Class B common stock
outstanding were converted into an equivalent number of shares of Class A common
stock.
A portion of the proceeds from the Metromedia Investment was used to repay
the Metromedia Loan, discussed below, and accrued interest thereon ($4,058,127),
repay other short-term indebtedness ($3,485,000), and redeem (for $2,115,000)
all of the outstanding shares of the Company's preferred stock (the "Series A
preferred stock") and related warrants.
F-19
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: EQUITY TRANSACTIONS (CONTINUED)
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 9,415,520 shares of the Company's common
stock and warrants to purchase 3,326,128 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 2,088,032 shares of common stock at $.50 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 2,636,168 shares
of its common stock at $.50 per share and recorded a charge of $111,306 and
$220,036 in 1996 and 1997, respectively. In 1997, the Company repaid the
outstanding balance of these notes plus all accrued interest. As of December 31,
1999, 3,128,064 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 1,508,832 shares of common stock at an exercise
price of $0.37. The warrants were 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. 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 1,149,744 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.
d. 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 10,706,672 shares of the
Company's common stock. In February 1997, this warrant was exchanged for a new
warrant to purchase 7,300,800 shares of the Company's common stock at $0.30 per
share. The new warrant expires on February 13, 2000. As of December 31, 1999,
none of the warrants have been exercised.
F-20
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: EQUITY TRANSACTIONS (CONTINUED)
e. On December 13, 1996, the Company issued and sold to a private investor,
for an aggregate cash consideration of $2,025,000, (i) 2,400,000 shares of 10%
cumulative convertible preferred stock (the "Series A preferred stock") bearing
dividends at a rate of $.17 per share per annum, (ii) warrants to purchase
1,825,200 shares of Class A common stock at an exercise price of $0.31 per share
and (iii) a contingent stock subscription warrant to purchase a number of shares
of Class A common stock (such number to be determined based on certain future
events) at an exercise price of $0.005 per share. In connection with the
Metromedia Investment, the private investor allowed the Series A preferred stock
and the contingent warrants to be redeemed at an aggregate redemption price of
$2,115,000 (which includes 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 1,825,200 to 3,650,400. 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 2,764,240 common
shares for all its warrants.
f. In June 1996, the Company granted 2,433,600 common stock purchase
warrants to the Company's legal counsel exercisable at $0.005 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, 1999, all of the warrants have been exercised.
g. In September 1999, in connection with the AboveNet acquisition the
Company issued 893,166 common stock warrants in exchange for the outstanding
warrants in AboveNet's common stock as of the date of the acquisition.
As of December 31, 1999, in the aggregate, the Company had reserved
approximately 10,912,200 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 49,523,776 shares of its Class A common stock. The
options have exercise prices between $0.125 and $0.48 per share and expire in
2007. The Company recorded a non-cash charge of $19,218,591 for such issuances.
Of these grants, 8,616,240 were exercised as of December 31, 1999.
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 16,000,000 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 9,800,000 shares of the Company's Class A
common stock were granted at an exercise price of $1.00 per share, the market
price at the date of grant. In 1998, options to purchase 6,800,000 shares of the
Company's Class A common stock were granted at exercise prices ranging from $.97
to $2.15 per share, the market price at the date of grant. Of these grants,
2,230,000 were canceled and 1,931,400 were exercised as of December 31, 1999.
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 40,000,000 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
F-21
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: EQUITY TRANSACTIONS (CONTINUED)
to the Company. In 1998 options to purchase 13,836,000 shares of the Company's
Class A common stock were granted at exercise prices ranging from $1.82 to $6.63
per share, the market prices at the dates of grant. In 1999 option to purchase
12,210,900 shares of the Company's Class A common stock were issued at exercise
prices ranging from $8.52 to $19.88 the market prices at the dates of grant. Of
these grants, 809,800 were canceled and 1,405,880 were exercised as of December
31,1999.
Following the September 8, 1999 merger with AboveNet, options granted
pursuant to the AboveNet plans were converted into stock options exercisable for
10,885,222 of the Company's Class A common stock representing a 2.35 exchange
ratio. Of these options, 147,856 were canceled and 2,985,632 were exercised as
of December 31, 1999.
The compensation committee of the Company's Board of Directors is
responsible for determining the type of award, when and to whom awards are
granted, the number of shares and terms of the awards and the exercise price.
The options are exercisable for a period not to exceed ten years from the date
of the grant. Vesting periods range from immediate vesting to four years.
The following table summarizes the stock option transactions for the three
years ended December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF
OPTIONS EXERCISE PRICES
---------- -----------------
<S> <C> <C> <C>
Granted prior to December 31, 1997........................ 59,323,776 $0.12 to $ 1.00
----------
Balance outstanding at December 31, 1997.................... 59,323,776 0.12 to 2.00
Granted................................................... 20,636,000 0.97 to 6.63
Excercised................................................ 2,200,096 0.12 to 1.87
Cancelled................................................. 2,270,000 1.00 to 2.15
----------
Balance outstanding at December 31, 1998.................... 75,489,680 0.12 to 6.63
Transfer of AboveNet options in acquisition............... 10,885,222 0.01 to 31.97
Granted................................................... 12,210,900 8.52 to 21.97
Excercised................................................ 14,469,152 0.01 to 18.10
Cancelled................................................. 957,656 0.01 to 27.85
----------
Balance outstanding at December 31, 1999.................... 83,158,994 0.01 to 29.63
==========
Exercisable at:
December 31, 1997......................................... 48,964,688 0.12 to .48
December 31, 1998......................................... 49,763,680 0.12 to 1.00
December 31, 1999......................................... 52,309,454 0.01 to 31.97
</TABLE>
F-22
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: EQUITY TRANSACTIONS (CONTINUED)
The following table summarizes information about stock option outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS GRANTED OPTIONS EXERCISABLE
------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE AVERAGE NUMBER AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
RANGES OF EXERCISE PRICES AT 12/31/99 LIFE (YEARS) PRICE AT 12/31/99 PRICE
------------------------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
0.01 to 3.20 64,317,974 7.6 0.73 47,951,974 0.36
3.21 to 6.39 2,783,058 8.7 4.56 692,058 5.03
6.40 to 9.59 1,410,298 9.3 8.06 470,298 7.77
9.60 to 12.79 439,522 9.2 11.13 419,522 11.12
12.80 to 15.99 7,905,904 9.6 13.56 147,218 13.84
16.00 to 19.18 4,690,480 9.6 17.40 2,346,626 16.67
19.19 to 22.38 1,543,848 9.7 20.26 213,848 20.86
22.39 to 25.57 3,524 9.3 22.73 3,524 22.73
25.58 to 28.77 38,536 3.0 27.11 38,536 27.10
28.78 to 31.97 25,850 9.3 29.84 25,850 29.84
---------- --- ------ ---------- ------
83,158,994 8.1 $ 3.58 52,309,454 $ 1.47
========== === ====== ========== ======
</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,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Risk-free interest yield.................................... 4.57 - 6.46% 5.53 - 6.56%
Volatility factor........................................... 0.867 0.499
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 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.
F-23
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: EQUITY TRANSACTIONS (CONTINUED)
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,
--------------------
1999 1998
--------- --------
<S> <C> <C>
Pro forma net loss applicable to common stock............... $(131,810) $ (864)
Pro forma net loss per share applicable to common stock,
basic..................................................... $ (0.32) $(0.01)
</TABLE>
The weighted average fair value of options granted was $10.35, $1.21 and
$.43 for the years ended December 31, 1999, 1998, and 1997, respectively.
Subsequent to the end of the fiscal year, the Company announced on March 2,
2000 that the Executive Committee of its Board of Directors, acting pursuant to
authority delegated by the Board, approved a two-for-one stock split of the
Company's Class A and Class B Common Stock in the form of a 100 percent stock
dividend. All share and per share amounts presented herein give retroactive
effect to the stock split.
NOTE 14: SIGNIFICANT CUSTOMERS
During 1999, three customers accounted for 25%, 12% and 10%, respectively of
the Company's total revenue. During 1998, three customers accounted for 40%, 35%
and 12%, respectively of the Company's total revenue. During 1997, two customers
accounted for 21% and 15%, respectively of the Company's total revenue.
NOTE 15: INCOME TAXES
Income tax expense (benefit) for the years ended December 31, 1999, 1998 and
1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current
Federal..................................................... -- $ 4,513 $ --
State and local............................................. -- 2,720 --
------- ------- -------
-- 7,233 --
------- ------- -------
Deferred
Federal..................................................... -- (2,375) --
State and local............................................. -- (1,456) --
------- ------- -------
-- (3,831) --
------- ------- -------
$ -- $ 3,402 $ --
======= ======= =======
</TABLE>
F-24
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15: INCOME TAXES (CONTINUED)
Total income tax expense (benefit) differed from the amounts computed by
applying the federal statutory income tax rate (35%) to earnings (loss) before
income tax expense (benefit) as a result of the following items for the years
ended December 31, 1999, 1998 and 1997 (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
U.S. statutory rate applied to pre-tax income (loss)........ $(39,552) $1,492 $--
State and local taxes, net of federal tax benefit........... -- 834 --
Non deductible expenses..................................... 8,735 1,118 --
Valuation allowance......................................... 30,726 -- --
Others, net................................................. 91 (42) --
-------- ------ ------
$ -- $3,402 $--
======== ====== ======
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1999, 1998
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
DEFERRED TAX ASSETS
Net operating loss.......................................... $ 101,784 $ -- $ 1,125
Deferred revenue............................................ 49,759 19,923 5,173
Employee benefits........................................... 8,371 9,893 10,074
Cost of sales of IRUs and sales type leases................. 20,081 5,599 573
Capitalized interest........................................ 4,992 --
Others...................................................... 4,297 2,522 1,465
--------- -------- --------
$ 189,284 $ 37,937 $ 18,410
--------- -------- --------
Valuation allowance......................................... (156,033) (18,309) (18,309)
--------- -------- --------
33,251 19,628 101
DEFERRED TAX (LIABILITIES)
Capitalized leases.......................................... (30,162) (14,782) --
Depreciation and amortization............................... 924 (1,003) (89)
Other....................................................... (4,013) (12) (12)
--------- -------- --------
(33,251) (15,797) (101)
--------- -------- --------
Net deferred asset.......................................... $ -- $ 3,831 $ --
========= ======== ========
</TABLE>
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, 1999 and 1997. As of December 31, 1999, the Company has a net
operating loss carryforward in the amount of $226 million. This carryforward
will expire in 2019.
NOTE 16: 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
F-25
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: 401(k) PLAN (CONTINUED)
Code. All full-time employees are eligible to participate in the Plan 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 $293,000 and
$78,000 for the years ending December 31, 1999 and 1998, respectively, as these
matching contributions. The Company bore the nominal administrative cost of the
Plan since inception.
AboveNet implemented a 401(k) Plan (the "AboveNet Plan") which permits
employees to make contributions to the AboveNet 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 $195,000 for the period from the
acquisition date through December 31, 1999, as these matching contributions. The
Company bore the nominal administrative cost of the AboveNet Plan since the
acquisition date. Subsequent to year-end, the AboveNet plan was frozen, and
AboveNet employees were enrolled in the Plan. Pending Internal Revenue Service
approval, the AboveNet Plan will be rolled into the Plan.
NOTE 17: RECONCILIATION OF EARNINGS PER SHARE (IN THOUSANDS):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Net income (loss)........................................... $(114,938) $ 986 $(26,259)
Deduct dividend on preferred shares......................... -- -- 77
--------- -------- --------
Net loss applicable to common stock......................... (114,938) 986 (26,336)
========= ======== ========
Shares
Weighted average number of common shares
outstanding--basic........................................ 407,192 373,980 189,788
Net income (loss) per common share--basic................... $ (0.28) $ 0.00 $ (0.14)
========= ======== ========
Weighted average number of common shares
outstanding--basic........................................ 407,192 373,980 189,788
Assuming conversion of warrants and options outstanding..... -- 65,068 --
--------- -------- --------
Weighted average number of on shares outstanding--diluted... 407,192 439,048 189,788
========= ======== ========
Net income (loss) per common share--diluted................. N/A $ 0.00 N/A
========= ======== ========
</TABLE>
NOTE 18: 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 $148.3 million as of December 31, 1999.
F-26
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 $8,478,000,
$1,673,000 and $607,000 for the years ended December 31, 1999, 1998 and 1997,
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 $4,920,000, $958,000 and $268,000 for
the years ended December 31, 1999, 1998 and 1997, 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, 1999. The capital leases
are held as construction-in-progress until the related portion of the network is
completed.
Approximate minimum payments under the aforementioned agreements are (in
thousands):
<TABLE>
<CAPTION>
FRANCHISE,
LICENSE
AND
RIGHT-OF-
WAY CAPITAL OPERATING
AGREEMENTS LEASES LEASES
---------- -------- ---------
<S> <C> <C> <C>
For the year ended December 31,
2000...................................................... $ 5,476 $ 2,833 $ 30,060
2001...................................................... 3,620 2,827 32,477
2002...................................................... 3,514 2,306 33,242
2003...................................................... 3,231 1,991 33,018
2004...................................................... 3,254 2,060 33,043
Thereafter.................................................. 32,693 40,975 492,624
------- ------- --------
Total minimum lease payments................................ $51,788 52,992 $654,464
======= ========
Less amounts representing interest.......................... 26,878
-------
Present value of future minimum lease payments.............. 26,114
Less amounts due in one year................................ 876
-------
$25,238
=======
</TABLE>
LITIGATION
On or about June 12, 1998, Claudio E. Contardi commenced an action against
Peter Sahagen, Sahagen Consulting Group of Florida and the Company in the United
States District Court for the Southern District of New York, No. 98 CIV
4140(JGK). Mr. Contardi alleges a cause of action for, among other things,
breach of a finder's fee agreement entered into between Mr. Sahagen and
F-27
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18: COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 the Company's shares of
class A common stock which the Company cannot currently ascertain but believe to
be approximately 225,000 shares (calculated as of the date on which the
complaint was filed without taking into account subsequent stock splits) or
damages in an amount which the Company cannot currently ascertain but believe to
be approximately $4.9 million (calculated as of the date on which the complaint
was filed) and all costs and expenses incurred by him in this action. The
Company has filed an answer to the complaint and has raised affirmative
defenses. The Company has moved for summary judgment on the complaint.
In January 2000, Herman Goldsmith and Arnold S. Schickler commenced an
action against the Company, F. Garofalo Electric Co., Inc. and Stephen A.
Garofalo in the Supreme Court of the State of New York, County of New York (No.
600163/00) (the "Goldsmith Litigation"). The complaint alleges a cause of action
for breach of contract in connection with an alleged "finders agreement" entered
into in 1993 between Messrs. Goldsmith and Schickler, on the one hand, and F.
Garofalo Electric Co., Inc. and Stephen A. Garofalo, on the other. Plaintiffs
seek damages of $860,627,590.99, plus interest from September 7, 1999, in
addition to their costs, expenses and reasonable attorneys' fees.
The Company intends to vigorously defend both these actions because the
Company believes that it acted appropriately in connection with the matters at
issue in these two cases. However, there can be no assurance that the Company
will not determine that the advantages of entering into a settlement outweigh
the risk and expense of protracted litigation or that ultimately the Company
will be successful in defending against these allegations. If the Company is
unsuccessful in defending against these allegations, an award of the magnitude
being sought in the Goldsmith litigation would have a material adverse effect on
its financial condition and results of operations.
On or about October 20, 1997, Vento & Company of New York, LLC commenced an
action against the Company, Stephen A. Garofalo, Peter Silverman, the law firm
of Silverman, Collura, Chernis & Balzano, P.C., Peter Sahagen, Sahagen
Consulting Group of Florida, Robert Kramer, Birdie Capital Corp., Lawrence
Black, Sterling Capital LLC, Penrush Limited, Needham Capital Group, Arthur
Asch, Michael Asch and Ronald Kuzon in the United States District Court for the
Southern District of New York, No. 97 CIV 7751(JGK). On or about May 29, 1998,
Vento & Company filed an amended complaint. On or about July 1, 1999, Vento &
Company filed a second amended complaint. In its complaint, as amended, Vento &
Company alleged seven causes of action in connection with its sale of 900,000
shares, not adjusted for subsequent stock splits, of the Company's class A
common stock to Mr. Sahagen and some of the defendants on January 13, 1997.
These seven causes of action included: (i) violation of Section 10(b) of the
Securities Exchange Act of 1934 and Rule 10b-5 promulgated under such Act; (ii)
fraud and fraudulent concealment; (iii) breach of fiduciary duty (but not
against the Company); (iv) negligent misrepresentation and omission; and (v)
breach of contract. Vento & Company was seeking, among other things, rescission
of the stock Sale, or alternatively, damages in an amount, which it contended
was in excess of $460 million, together with interest. In March 2000, the
parties entered into a settlement agreement. Under the Company's portion of the
settlement, the Company is issuing shares of class A common stock having a value
of approximately $1.9 million. As a result, the action has been dismissed with
prejudice.
On June 29, 1999, an alleged stockholder of AboveNet filed a lawsuit,
captioned KAUFMAN V. TUAN, et al, Del. Ch. C.A. No. 17259NC, in the Court of
Chancery of the State of Delaware in and for the
F-28
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18: COMMITMENTS AND CONTINGENCIES (CONTINUED)
New Castle County. The plaintiff, who purports to represent a class of all
AboveNet stockholders, challenges the terms of the proposed merger between the
Company and AboveNet. The complaint names, as defendants, AboveNet, the
directors of AboveNet, and the Company (as an aider and abettor). The complaint
alleges generally that AboveNet's directors breached their fiduciary duty to
stockholders of AboveNet, and seeks an injunction against the merger, or, in the
alternative, rescission and the recovery of unspecified damages, fees and
expenses. AboveNet, the Company and the individual defendants believe the
lawsuit is without merit and intend to defend themselves vigorously. AboveNet
and the individual director defendants' responses were filed on July 22, 1999.
In connection with these responses, a motion to dismiss the complaint in its
entirety and a motion to stay discovery pending the outcome of the motion to
dismiss were filed by the AboveNet and the individual directors of AboveNet on
July 22, 1999. Similar motions to dismiss the complaint and stay discovery were
filed by the Company on July 26, 1999. Upon stipulation of the parties, this
action was dismissed without prejudice in December 1999.
Four other complaints, which are virtually identical to the complaint in
KAUFMAN V. TUAN, have also been filed in the Delaware Court of the Chancery.
None of these four complaints have been served. The four actions are captioned
BROSIOUS V. TUAN, et al, Del. Ch. C.A. No. 17271NC, CHONG V. TUAN, et al, Del.
Ch. C.A. No. 17281NC, EHLERT V. TUAN, et al, Del. Ch. C.A. No. 17284NC, HORN V.
TUAN, et al, Del. Ch. C.A. No. 17300NC.
In addition, the Company is subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, the
Company believes that none of such current claims, or proceedings, individually,
or in the aggregate, including the Contardi litigation and the Goldsmith
litigation, will have a material adverse effect on our financial condition or
results of operations, although the Company can make no assurances in this
regard.
NOTE 19: SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED):
Selected financial information for the quarterly periods in 1999 and 1998 is
presented below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
FIRST QUARTER OF SECOND QUARTER OF
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................................... $ 18,379 $ 1,726 $ 20,294 $ 7,407
Operating income (loss)................................ 2,853 (5,941) 2,157 572
Net income (loss)...................................... (5,814) (4,247) (6,464) 2,190
Income (loss) per common share--Basic.................. $ (0.02) $ (0.01) $ (.02) $ .01
</TABLE>
<TABLE>
<CAPTION>
THIRD QUARTER OF FOURTH QUARTER OF
------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues............................................... $ 10,723 $11,707 $ 25,851 $15,596
Operating income (loss)................................ (23,041) 2,513 (55,045) 5,463
Net income (loss)...................................... (32,012) 3,123 (70,648) (80)
Income (loss) per common share--Basic.................. $ (0.08) $ .01 $ (.16) $ (.01)
</TABLE>
F-29
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
2000 1999
--------- --------
<S> <C> <C>
Revenue..................................................... $ 127,118 $ 49,397
Expenses:
Cost of sales............................................. 133,466 24,414
Selling, general and administrative....................... 94,363 27,369
Deferred compensation..................................... 919 --
Depreciation and amortization............................. 118,567 15,645
--------- --------
Income (loss) from operations............................... (220,197) (18,031)
Other income (expenses):
Interest income........................................... 93,194 19,127
Interest expense.......................................... (142,745) (44,911)
Loss from joint ventures.................................. (2,739) (475)
--------- --------
Net loss.................................................... (272,487) (44,290)
========= ========
Net loss per share, basic................................... $ (0.51) $ (0.23)
========= ========
Net loss per share, diluted................................. N/A N/A
========= ========
Weighted average number of shares outstanding, basic........ 538,811 190,639
========= ========
Weighted average number of shares outstanding, diluted...... N/A N/A
========= ========
</TABLE>
SEE ACCOMPANYING NOTES
F-30
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN 000'S, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
-------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,492,513 $ 352,900
Marketable securities..................................... 188,433 29,628
Pledged securities........................................ -- 63,864
Accounts receivable....................................... 86,249 105,934
Prepaid expenses and other current assets................. 33,291 6,311
---------- ----------
Total current assets.................................... 1,800,486 558,637
Fiber optic transmission network and related equipment,
net....................................................... 2,049,166 557,662
Property and equipment, net................................. 32,613 7,136
Restricted cash............................................. 52,605 94,234
Marketable securities....................................... -- --
Investment in/advances to joint ventures.................... 23,068 20,014
Other assets................................................ 97,642 32,659
Intangibles, net............................................ 1,604,259 1,648,059
---------- ----------
Total assets............................................ $5,659,839 $2,918,401
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 91,242 $ 31,680
Accrued expenses.......................................... 257,674 112,382
Deferred revenue, current portion......................... 21,048 15,863
Capital lease obligations and notes payable, current
portion................................................. 8,037 6,176
---------- ----------
Total current liabilities............................... 378,001 166,101
Senior notes payable........................................ 1,660,900 650,000
Convertible subordinated notes payable...................... 975,281 --
Capital lease obligations and notes payable................. 34,389 39,036
Deferred revenue............................................ 226,278 83,271
Other long term liabilities................................. 16,445 --
Commitments and contingencies (see notes)
Stockholders' equity:
Class A common stock, $.01 par value; 4,808,062,482 shares
authorized; 483,020,162 and 397,644,106 shares issued
and outstanding, respectively........................... 4,829 3,976
Class B common stock, $.01 par value; 1,044,509,564 shares
authorized; 67,538,544 shares issued and outstanding.... 676 676
Additional paid-in capital.................................. 2,812,671 2,062,990
Accumulated deficit......................................... (429,661) (86,526)
Cumulative comprehensive loss............................... (19,970) (1,123)
---------- ----------
Total stockholders' equity.............................. 2,368,545 1,979,993
---------- ----------
Total liabilities and stockholders' equity.............. $5,659,839 $2,918,401
========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
F-31
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN 000'S)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
2000 1999
----------- ---------
<S> <C> <C>
CASH FLOWS (USED IN) PROVIDED BY OPERATING ACTIVITIES:
Net loss.................................................... $ (272,487) $ (44,290)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization........................... 118,567 15,645
Amortization of deferred financing costs................ 4,259 1,503
Stocks, options and warrants issued for services........ 108 401
Deferred compensation................................... 919
Loss from joint ventures................................ 2,739 329
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable..................................... (14,016) (61,465)
Accounts payable and accrued expenses................... 83,172 52,350
Deferred revenue........................................ 57,453 50,765
Other................................................... (5,164) (8,925)
----------- ---------
Net cash (used in) provided by operating activities....... (24,450) 6,313
----------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of marketable securities.......................... (158,805) (29,628)
Capital expenditures on fiber optic transmission network and
related equipment......................................... (1,309,320) (229,104)
Restricted cash secured by letters of credit................ -- (63,014)
Investment in / advances to joint ventures.................. (7,236) (3,359)
Capital expenditures on property and equipment.............. (41,199) (3,284)
Business acquisitions (net of cash acquired)................ (8,426) 117,126
----------- ---------
Net cash used in investing activities..................... (1,524,986) (211,263)
----------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock...................... 757,341 3,559
Purchases and sales of pledged securities, net.............. 31,960 --
Restricted cash secured by letter of credit................. 29,588 --
Repayment of notes payable.................................. (3,319) --
Proceeds from issuance of notes payable..................... 975,281 --
Payments of business acquisition's pre-acquisition debt..... -- (15,028)
----------- ---------
Tax benefit associated with the exercise of stock options... -- --
Net cash provided by (used in) financing activities....... 1,790,851 (11,469)
----------- ---------
EFFECT OF EXCHANGE RATE CHANGES ON CASH..................... (11,293) --
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 230,122 (216,419)
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD............... 1,262,391 569,319
----------- ---------
CASH AND CASH EQUIVALENTS-END OF PERIOD..................... $ 1,492,513 $ 352,900
=========== =========
Supplemental information:
Interest paid............................................. $ 31,489 $ 31,375
=========== =========
Income taxes paid......................................... $ -- $ 2,771
=========== =========
Accrued capital expenditures.............................. $ 105,954 $ 65,629
=========== =========
</TABLE>
In connection with the acquisitions in 2000 of MIBH and of 100% of the shares
owned by the joint venture partners of AboveNet UK Ltd., shares of class A
common stock were issued with a total value of $49,280 and $10,000,
respectively.
SEE ACCOMPANYING NOTES
F-32
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Metromedia
Fiber Network, Inc. and its wholly owned subsidiaries, (collectively, "MFN" or
the "Company"). All significant intercompany balances and transactions have been
eliminated in consolidation. Investments in joint ventures which are not
majority owned, or which the Company does not control but over which it
exercises significant influence, are accounted for using the equity method.
Certain reclassifications have been made to the consolidated financial
statements for prior periods to conform to the current presentation.
The interim unaudited consolidated financial statements in this information
statement/prospectus have been prepared in accordance with the rules and
regulations of the United States Securities and Exchange Commission's
Regulation S-X and consequently do not include all disclosures required under
accounting principles generally accepted in the United States. The interim
unaudited consolidated financial statements should be read in conjunction with
the audited Consolidated Financial Statements of the Company and accompanying
Notes for the year ended December 31, 1999, contained in the Company's Annual
Report on Form 10-K. The Form 10-K includes information with respect to the
Company's significant accounting and financial reporting policies and other
pertinent information. The Company believes that all adjustments of a normal
recurring nature that are necessary for a fair presentation of the results of
the interim periods presented in this report have been made.
DESCRIPTION OF BUSINESS
The Company provides dedicated fiber optic infrastructure and high-bandwidth
Internet connectivity for its communications intensive customers. The Company is
a facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through its acquisition of
AboveNet Communications, Inc. ("AboveNet") on September 8, 1999, the Company
also provides "one-hop" connectivity that enables mission critical Internet
applications to thrive, as well as high-bandwidth infrastructure, including
managed co-location services. AboveNet's wholly owned subsidiary,
PAIX.net, Inc. ("PAIX"), serves as a packet switching center for ISPs and also
offers secure, fault-tolerant co-location services to ISPs.
The Company intends to expand its presence to include approximately 50 Tier
I and Tier II markets in the United States and 17 major international markets.
The Company's existing intra-city networks consist of approximately 924,000
fiber miles covering in excess of 1,600 route miles in the United States. Its
inter-city network consists of approximately 225,000 fiber miles primarily
covering its 255 route-mile network that the Company has built between New York
City and Washington D.C. The Company has also built or contracted to acquire a
nationwide dark fiber network linking its intra-city networks.
In February 1999, the Company entered into an agreement with Viatel, Inc.
and Carrier 1 Holdings, Ltd. to jointly build a dark fiber inter-city network
among selected cities throughout Germany. Once completed, our German network
will consist of approximately 320,000 fiber miles covering in excess of 1,450
route miles connecting 14 major cities. The Company has also acquired fiber on
the Circe network, which connects a number of European markets. In addition to
its inter-city networks, the Company is constructing 16 intra-city networks
throughout Europe. Separately, the Company has also entered into a contract to
acquire rights to dark fiber network facilities in Toronto, Canada.
F-33
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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.
FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
The fiber optic transmission network and related equipment are stated at
cost. Costs incurred 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.
RECAPITALIZATIONS
On March 2, 2000 the Company announced 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 on March 14, 2000. This split was
effective on April 17, 2000.
The accompanying financial statements give retroactive effect to the above
recapitalization.
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. Revenue on
bandwidth and space requirement charges is recognized in the period in which the
services are provided. In addition, the Company had occasionally entered into
sales-type leases for portions of its network. For those leases entered into
prior to completion of the portion of the network and under contracts entered
into before June 30, 1999, the Company recognizes revenue using the percentage
of completion method.
Under the percentage of completion method, progress is generally measured on
performance milestones relating to the contract where such milestones fairly
reflect the progress toward contract completion. Network construction costs
include all direct material and labor costs and those indirect costs related to
contract performance. General and administrative costs are charged to expense as
incurred. If necessary, the estimated loss on an uncompleted contract is
expensed in the period in which it is identified. Contract costs are estimated
using allocations of the total cost of constructing the specific phase of the
network. Revisions to estimated profits on contracts are recognized in the
period that they become known.
Most of the Company's contracts for the provision of dark fiber are
accounted as operating leases under which it recognizes recurring monthly
revenues. For certain other contracts the Company recognizes revenue under the
percentage of completion method for the provision of dark fiber. Effective
June 30, 1999, the Financial Accounting Standards Board issued FASB
Interpretation No. 43 "Real Estate Sales" ("FIN 43") which requires that sales
or leases of integral equipment be accounted for in accordance with real estate
accounting rules. The Company believes that the staff of the Securities and
Exchange Commission requires the classification of dark fiber cables in the
ground as
F-34
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
integral equipment as defined in FIN 43. Accounting for dark fiber leases as
defined by FIN 43 does not change any of the economics of the contracts. It
requires the Company, however, to recognize the revenue from certain leases as
operating leases over the term of the contract as opposed to the prior method of
recognizing revenue when the Company delivers the fiber. As a result, this
change in accounting treatment reduces the revenue and income that the Company
recognizes in the earlier years of the contract and spreads it out over the life
of the contract regardless of when the cash was received or the delivery of the
fiber took place.
By way of example, if the Company entered into an agreement for a 25-year
lease for dark fiber with a customer who pays $100.0 million in cash when the
contract is signed, the Company previously recorded revenues of $20.0 million
per year over the 5 years during which the Company delivered the dark fiber. By
contrast, the real estate accounting rules of FIN 43 would require recognition
of revenue of $4.0 million per year over the 25 year term of the contract, even
though the Company would receive a cash payment of $100.0 million when the
contract is signed.
The Company implemented FIN 43 real estate accounting for certain of its
leases entered into after June 30, 1999, and has not restated any amounts for
contracts executed prior to such date. Although there was no change to the
economics of the contracts or the timing of the cash to be received by the
Company, the impact of the change in accounting resulted in the Company
recording substantially less revenue after July 1, 1999 than would have been
recorded if this change had not been imposed. Revenue recognized for the three
months ended September 30, 2000 and 1999 related to the percentage of completion
method was zero and $4.1 million, respectively. Revenue recognized for the nine
months ended September 30, 2000 and 1999 related to the percentage of completion
method was $325,000 and $37.7 million, respectively. The related cost of sales
recorded was zero and $620,000, respectively, for the three months ended
September 30, 2000 and 1999, and $49,000 and $10.3 million for the nine months
ended September 30, 2000 and 1999, respectively. In the future, similar revenues
will be recognized over the term of the related contracts, typically 20 to
25 years.
DEFERRED REVENUE
Deferred revenue represents prepayments received from customers for future
use of the Company's fiber optic network and co-location facilities 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.
COMPREHENSIVE LOSS
Statement of Financial Accounting Standards No. 130 ("SFAS 130") Reporting
Comprehensive Income establishes rules for the reporting of comprehensive income
and its components. Comprehensive loss consists of net loss and foreign currency
translation adjustments. The comprehensive loss for the three and nine months
ended September 30, 2000 was approximately $100.7 million and $283.8 million,
respectively, compared to a loss of $28.2 million and $45.4 million for the
three and nine months ended September 30, 1999, respectively.
SEGMENT INFORMATION
The Company discloses information regarding segments in accordance with
Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures
about Segments of an Enterprise and
F-35
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION, DESCRIPTION OF THE BUSINESS AND SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Related Information." SFAS 131 establishes standards for reporting of financial
information about operating segments in annual financial statements and requires
reporting selected information about operating segments in interim financial
reports. The disclosure of segment information is not required as the Company
operates in only one business segment. As of and for the three and nine months
ended September 30, 2000 and 1999, substantially all of the Company's assets
were located in the United States and the Company derived substantially all of
its revenue from businesses located in the United States.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2000, the FASB issued FASB Interpretation No. 44 "Accounting for
Certain Transactions involving Stock Compensation" ("FIN 44"), an interpretation
of APB Opinion No. 25 "Accounting for Stock Issued to Employees". FIN 44 is
effective July 1, 2000 and effects the way certain stock options granted to
non-employees will be accounted for. The Company has adopted FIN 44 and in
connection therewith recorded compensation expense of $919,000 for the nine
months ended September 30, 2000.
In December 1999, the Securities and Exchange Commission issued SEC Staff
Accounting Bulletin No. 101 or SAB 101, "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
The Company does not believe the adoption of SAB 101 will have a material impact
on its results of operations.
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 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, 2000. The Company does not expect the adoption of
SFAS 133 to have an impact on its results of operations, financial position or
cash flows.
2. FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
Fiber optic transmission network and related equipment consist of the
following (in 000's):
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
2000 1999
------------- -------------
<S> <C> <C>
Fiber optic network................................ $ 777,510 $149,587
Data Centers....................................... 189,435 49,599
Telecommunication equipment & other................ 82,176 59,638
Construction in progress........................... 1,077,999 315,519
---------- --------
Total Network.................................... 2,127,120 574,343
Less: accumulated depreciation..................... (77,954) (16,681)
---------- --------
$2,049,166 $557,662
========== ========
</TABLE>
Construction in progress includes amounts incurred in the Company's
expansion of its network and data centers. These amounts include fiber optic
cable and other materials, engineering and other layout costs, fiber optic cable
installation costs and other network assets held under capital leases.
Construction in progress also includes payments for rights of way for the
underlying sections of the network build.
F-36
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. INVESTMENT IN/ADVANCES TO JOINT VENTURES
During 1997 the Company formed a joint venture with Racal
Telecommunications, Inc. ("Racal") that provides broad-based transatlantic
communication services between New York and London. During 1999 and 1998, the
Company made capital contributions of $1.8 million and $4.3 million,
respectively. The Company accounts for its investment using the equity method.
The Company records equity losses based on its 50% interest in the joint
venture.
As part of its international expansion strategy, the Company has entered
into joint ventures to provide managed co-location and Internet connectivity
solutions for mission critical Internet operations overseas. In March 1999, the
Company entered into agreements to form joint ventures in Austria, Germany,
France and the United Kingdom. (The Company purchased additional interests in
the joint ventures in Austria, Germany and the United Kingdom in September, June
and February 2000, respectively--see note 4). The Company invested a total of
$30.7 million in these ventures through September 30, 2000. These joint ventures
are accounted for under the equity method of accounting.
In December 1999, the Company entered into a joint venture agreement in
Japan. The Company invested a total of $4.0 million through September 30, 2000,
and is required to invest an additional $4.0 million for up to a 40% ownership
interest in this venture.
In September 2000, the Company entered into a joint venture agreement in
Taiwan, and purchased a 50% interest for approximately $2 million.
4. ACQUISITIONS
In September 2000, the Company purchased the remaining 50% interest in its
50% owned joint venture in Austria, AboveNet Austria GMBH, for approximately
$2 million.
In June 2000, the Company purchased an additional 37.5% interest in its 50%
owned joint venture in Germany, AboveNet Germany GMBH, for approximately
$1.4 million.
On May 9, 2000 the Company finalized an agreement with Pacific Gateway
Exchange ("PGE") to purchase PGE's ownership position in the cable consortia
that owns and operates the TAT-14 and Japan-U.S. Cable Networks, and two of
PGE's subsidiaries. The Japan-U.S. transaction closed in June 2000 and the TAT
-14 transaction closed in August 2000. Under the terms of the sale, the Company
has paid approximately $52 million in net cash proceeds to PGE, primarily to
reimburse it for payments made by PGE to the consortia. MFN has assumed PGE's
future payment obligations to the cable consortia. The acquisition of related
Japanese subsidiary and a related U.S subsidiary has been accounted for under
the purchase method of accounting. The excess of purchase price over the fair
value of net assets acquired of approximately $1.6 million has been recorded as
goodwill.
In February 2000, the Company purchased the remaining 60% of its 40% owned
joint venture in the United Kingdom, AboveNet UK Limited, for shares of the
Company's stock with a market value of $10 million. The excess of purchase price
over the fair values of net assets acquired was approximately $10 million and
has been recorded as goodwill.
On January 19, 2000, the Company completed the acquisition of MIBH Inc., a
network outsourcing provider offering full-service management of business
Internet connectivity solutions for approximately $52.3 million in cash and
stock. The excess of purchase price over the fair values of net assets acquired
was approximately $51 million and has been recorded as goodwill.
Under the terms of the agreement, MIBH became a wholly owned subsidiary of
Metromedia Fiber Network, Inc., and has subsequently merged into Metromedia
Fiber Network Services, Inc. The shareholders of MIBH, a privately held company,
received an aggregate of 1,884,418 shares of
F-37
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. ACQUISITIONS (CONTINUED)
Metromedia Fiber Network class A common stock having a fair market value of
approximately $49.3 million and $3.0 million in cash.
On September 8, 1999, the Company acquired all of the outstanding common
stock of AboveNet for a total purchase price, paid in Company class A common
stock, of approximately $1.8 billion. The holders of AboveNet common stock,
stock options and warrants received, in exchange for those securities, 2.35
shares of the Company's class A common stock, stock options and warrants,
respectively. The excess of the purchase price over the fair values of the net
assets acquired was approximately $1.6 billion and has been recorded as
goodwill.
In addition, in connection with the acquisition, the Company issued a letter
of credit, secured by the Company's restricted cash in the amount of
$25 million, to further secure a credit facility of AboveNet.
On June 21, 1999, AboveNet acquired certain assets and assumed certain
liabilities of PAIX from Compaq Computer Corporation ("Compaq") for a total
purchase price of $76.4 million consisting of $70 million in cash, certain
future ongoing services to be provided by AboveNet to Compaq, with a value
estimated to be $5.0 million, and acquisition related costs of $1.4 million.
On March 11, 1999, the Company acquired all the outstanding common stock of
Communication Systems Development, Inc. ("CSD") for $25 million in cash. CSD has
its primary operations in Dallas, Texas and is engaged in the engineering and
construction of fiber optic networks. The excess of the purchase price over the
fair values of the net assets acquired was approximately $11.2 million and has
been recorded as goodwill.
All acquisitions have been accounted for under the purchase method. The
results of operations of the acquired businesses are included in the
consolidated financial statements from the dates of acquisition. Goodwill is
amortized on a straight-line basis over 10 to 20 years.
5. GERMAN NETWORK BUILD
In February 1999, the Company entered into a joint venture with
Viatel, Inc. and Carrier 1 Holdings, Ltd. to jointly build a national fiber
optic telecommunications network in Germany. Upon completion of construction,
the joint venture will be dissolved and the Company will own its own separate
German broadband network. In connection with the terms of this agreement, the
Company made a deposit payment of $4.7 million, during the third quarter of
1998. Upon signing an 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. During the first quarter of 2000, the letter of credit
amount was increased by $12.5 million. As of September 30, 2000, construction
costs of approximately $136.1 million have been incurred and are included in
fiber optic transmission network.
6. 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 2000 and 1999 annual management fee under the agreement is $1.0 million,
payable monthly. The Company is also
F-38
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. RELATED PARTY TRANSACTIONS (CONTINUED)
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.
7. NOTES PAYABLE
On March 6, 2000, the Company issued $975.3 million of 6.15% convertible
subordinated notes due March 6, 2010, to Bell Atlantic Investments, Inc. ("Bell
Atlantic" now Verizon Communications, or "Verizon"). The notes are convertible
into shares of class A common stock at a conversion price of$17.00 per share.
Interest on the notes is payable semi-annually in arrears on March 15 and
September 15, commencing on September 15, 2000. Upon the occurrence of a change
of control, each holder of convertible subordinated notes will have the right to
require the Company to purchase all or any part of that holder's convertible
subordinated notes at a price equal to 100% of the outstanding principal amount.
The payment of all amounts due on the convertible subordinated notes is
subordinated to the prior payment of the senior notes.
At September 30, 2000, AboveNet had $14.7 million outstanding under its
credit facility (the "Credit Facility"), with no additional borrowings
available. Borrowings outstanding under the Credit Facility are payable in
42 monthly installments, bear interest at rates ranging from 13.3% to 15.1% and
are collateralized by the equipment and leasehold improvements purchased with
the proceeds of the borrowing. Additionally, in connection with the AboveNet
acquisition, the Company issued a letter of credit, secured by the Company's
restricted cash in the amount of $25.0 million, to further secure the Credit
Facility. At September 30, 2000, the outstanding borrowings on the Credit
Facility are due as follows: 2000--$1.5 million, 2001--$7.0 million, and
2002--$6.2 million.
8. VERIZON INVESTMENT
On March 6, 2000, the Company closed a securities purchase agreement with
Verizon, under which Verizon purchased approximately 51.1 million newly issued
shares of MFN class A common stock at a purchase price of $14.00 per share and a
convertible subordinated note of approximately $975.3 million, which is
convertible into shares of MFN class A common stock at a conversion price of
$17.00 per share (see Note 7). After the issuance of the 51.1 million shares of
class A common stock and assuming conversion of the convertible subordinated
notes, this investment represents 18.2% of the Company's outstanding shares.
Verizon has also agreed to pay the Company $550 million over the next three
years in exchange for delivery of fiber optic facilities over the next five
years. The proceeds from these transactions will be used to fund the expansion
of the Company's network.
9. CONTINGENCIES
On or about June 12, 1998, Claudio E. Contardi commenced an action against
Peter Sahagen, Sahagen Consulting Group of Florida and the Company in the United
States District Court for the Southern District of New York, No. 98 CIV 4140
(the "Contardi Litigation"). Mr. Contardi alleges a cause of action for, among
other things, breach of a finder's fee agreement entered into between
Mr. Sahagen and Mr. Contardi on or about November 14, 1996 and breach of an
implied covenant of good faith and fair dealing contained in the finder's fee
agreement. Mr. Contardi is seeking, among other things, a number of our shares
of class A common stock which the Company cannot currently ascertain but believe
to be approximately 112,500 shares (calculated as of the date on which the
complaint was filed without taking into account subsequent stock splits) or
damages in an amount which the Company 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
F-39
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. CONTINGENCIES (CONTINUED)
action. The Company has filed an answer to the complaint and has raised
affirmative defenses and moved for summary judgment on the complaint. On or
about June 5, 2000, the court denied the summary judgment motion. On or about
July 20, 2000, the court entered a stipulation and order dismissing this action
without prejudice on the grounds that the court lacks subject matter
jurisdiction.
In January 2000, Herman Goldsmith and Arnold S. Schickler commenced an
action against the Company, F. Garofalo Electric Co., Inc. and Stephen A.
Garofalo in the Supreme Court of the State of New York, County of New York
(No. 600163/00) (the "Goldsmith Litigation"). The complaint alleges a cause of
action for breach of contract in connection with an alleged "finders agreement"
entered into in 1993 between Messrs. Goldsmith and Schickler, on the one hand,
and F. Garofalo Electric Co., Inc. and Stephen A. Garofalo, on the other.
Plaintiffs seek damages of approximately $861 million, plus interest from
September 7, 1999, in addition to their costs, expenses and reasonable
attorneys' fees. On April 7, 2000, the Company filed a motion to dismiss the
complaint.
The Company intends to vigorously defend both the Goldsmith Litigation (and
the Contardi Litigation if plaintiff pursues the action) because it believes
that it acted appropriately in connection with the matters at issue in these two
cases. However, there can be no assurance that the Company will not determine
that the advantages of entering into a settlement outweigh the risk and expense
of protracted litigation or that ultimately it will be successful in defending
against these allegations. If the Company is unsuccessful in defending against
these allegations, awards of the magnitude being sought in the Goldsmith
Litigation would have a material adverse effect on its financial condition and
results of operations.
On June 29, 1999, an alleged stockholder of AboveNet filed a lawsuit,
captioned Kaufman v. Tuan, et al, Del. Ch. C.A. No. 17259NC, in the Court of
Chancery of the State of Delaware in and for the New Castle County. The
plaintiff, who purports to represent a class of all AboveNet stockholders,
challenges the terms of the proposed merger between the Company and AboveNet.
The complaint names, as defendants, AboveNet, the directors of AboveNet, and the
Company (as an aider and abettor). The complaint alleges generally that
AboveNet's directors breached their fiduciary duty to stockholders of AboveNet,
and seeks an injunction against the merger, or, in the alternative, rescission
and the recovery of unspecified damages, fees and expenses. AboveNet, the
Company and the individual defendants believe the lawsuit is without merit and
intend to defend against it vigorously. AboveNet and the individual director
defendants' responses were filed on July 22, 1999. In connection with these
responses, a motion to dismiss the complaint in its entirety and a motion to
stay discovery pending the outcome of the motion to dismiss were filed by
AboveNet and the individual directors of AboveNet on July 22, 1999. Similar
motions to dismiss the complaint and stay discovery were filed by the Company on
July 26, 1999. Upon stipulation of the parties, this action was dismissed
without prejudice in December 1999.
Four other complaints, which are virtually identical to the complaint in
Kaufman v. Tuan, have also been filed in the Delaware Court of the Chancery.
None of these four complaints have been served. The four actions are captioned
Brosious v. Tuan, et al, Del. Ch. C.A. No. 17271NC, Chong v. Tuan, et al, Del.
Ch. C.A. No. 17281NC, Ehlert v. Tuan, et al, Del. Ch. C.A. No. 17284NC, Horn v.
Tuan, et al, Del. Ch. C.A. No. 17300NC.
In addition, the Company is subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, the
Company believes that none of such current claims, or proceedings, individually,
or in the aggregate, including the Goldsmith Litigation, will have a
F-40
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. CONTINGENCIES (CONTINUED)
material adverse effect on our financial condition or results of operations,
although the Company can make no assurances in this regard.
10. SUBSEQUENT EVENT
On October 9, 2000, the Company entered into an agreement with
SiteSmith Inc. ("SiteSmith"), a provider of Internet infrastructure management
services, to exchange all outstanding shares of SiteSmith common and preferred
stock for the right to receive between 55 million and 62.5 million shares of MFN
class A common stock. The exchange ratio will depend on the average closing
price of MFN class A common stock during the 20 trading day period ending on the
fourth business day prior to the effective time of merger. This transaction is
expected to close during the fourth quarter of fiscal 2000, subject to various
closing conditions.
The aggregate merger consideration will be based on the average trading
price of MFN class A common stock on The Nasdaq National Market during the
twenty trading day period ending four days prior to consummation of the merger
subject to the following conditions:
- If the average trading price is greater than or equal to $24.00 and less
than or equal to $27.2727, then the aggregate merger consideration will be
the number of shares obtained by dividing $1,500,000,000 by the average
trading price.
- If the average trading price is less than $24.00, then the aggregate
merger consideration will be 62,500,000 shares.
- If the average trading price is greater than $27.2727, then the aggregate
merger consideration will be 55,000,000 shares.
F-41
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AboveNet Communications Inc.:
We have audited the accompanying consolidated balance sheets of AboveNet
Communications Inc. as of June 30, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AboveNet Communications Inc. as of
June 30, 1998 and 1999 and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1999 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
July 28, 1999
(September 8, 1999 as to Note 17)
F-42
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents...................................... $ 8,141,200 $209,126,300
Short-term investments.................................... -- 11,744,200
Accounts receivable, net of reserve for doubtful accounts
of $60,000 and $388,300, respectively................... 357,000 3,355,000
Prepaid expenses and other current assets................. 269,600 3,850,400
----------- ------------
Total current assets.................................. 8,767,800 228,075,900
Property and equipment, net................................. 4,436,100 46,590,900
Rights to use fiber optic capacity.......................... -- 12,904,500
Intangible assets........................................... -- 69,474,100
Restricted cash............................................. 300,000 21,475,900
Deposits and other assets................................... 189,400 5,377,400
----------- ------------
Total assets................................................ $13,693,300 $383,898,700
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,301,300 $ 13,593,300
Remaining obligation for rights to use fiber optic
capacity................................................ -- 800,000
Accrued liabilities....................................... 619,900 1,322,600
Unearned revenue.......................................... 309,400 2,510,700
Current portion of long-term obligations.................. 476,000 5,984,800
----------- ------------
Total current liabilities............................. 3,706,600 24,211,400
Convertible notes payable and advances...................... 8,000,000 --
Unearned revenue............................................ -- 4,375,000
Other long-term obligations................................. 1,325,300 21,588,600
Commitments and contingencies (Notes 4, 5 and 12)
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized;
shares issued and outstanding--none..................... -- --
Convertible preferred stock, $0.001 par value:
Series A; shares issued and outstanding: 2,050,000 and
none, respectively.................................... 410,000 --
Series B; shares issued and outstanding: 3,263,792 and
none, respectively.................................... 2,323,100 --
Series C; shares issued and outstanding: 4,006,000 and
none, respectively.................................... 3,873,400 --
Series D; no shares issued and outstanding.............. -- --
Series E; no shares issued and outstanding.............. -- --
Common stock, $0.001 par value, 60,000,000 shares
authorized; shares issued and outstanding: 728,696 and
34,548,308, respectively................................ 38,900 363,218,000
Common stock options...................................... 1,861,500 4,413,800
Deferred stock compensation............................... (540,100) (47,800)
Accumulated deficit....................................... (7,305,400) (33,860,300)
----------- ------------
Total stockholders' equity............................ 661,400 333,723,700
----------- ------------
Total liabilities and stockholders' equity.................. $13,693,300 $383,898,700
=========== ============
</TABLE>
See notes to consolidated financial statements.
F-43
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenues.............................................. $ 551,600 $ 3,436,400 $ 13,967,800
----------- ----------- ------------
Costs and expenses:
Data communications and telecommunications.......... 558,600 2,199,800 12,649,700
Network operations.................................. 416,700 1,571,800 6,084,300
Sales and marketing................................. 382,600 1,618,700 11,251,300
General and administrative.......................... 433,700 1,621,500 6,610,900
Depreciation and amortization....................... 132,700 475,500 3,412,600
Stock-based compensation expense.................... -- 1,276,400 1,688,700
Joint venture termination fee....................... 431,100 -- --
----------- ----------- ------------
Total costs and expenses.......................... 2,355,400 8,763,700 41,697,500
Loss from operations.................................. (1,803,800) (5,327,300) (27,729,700)
Interest expense...................................... (7,400) (160,800) (1,573,100)
Interest and other income............................. 8,400 63,100 2,947,900
----------- ----------- ------------
Loss before equity interest in affiliates............. (1,802,800) (5,425,000) (26,354,900)
Equity interest in losses of affiliates............... -- -- (200,000)
----------- ----------- ------------
Net loss.............................................. $(1,802,800) $(5,425,000) $(26,554,900)
=========== =========== ============
Basic and diluted loss per share...................... $ (4.58) $ (10.34) $ (1.60)
=========== =========== ============
Shares used in basic and diluted loss per share....... 393,236 524,608 16,643,027
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-44
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK COMMON DEFERRED
-------------------------- ------------------------- STOCK STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT OPTIONS COMPENSATION DEFICIT
----------- ------------ ---------- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCES, July 1, 1996.......... -- $ -- 250,000 $ 5,000 $ -- $ -- $ (77,600)
Issuance of common stock........ 125,000 2,500
Issuance of Series A convertible
preferred stock............... 2,050,000 410,000
Exercise of common stock
options....................... 31,250 600
Issuance of Series B convertible
preferred stock............... 1,000,000 600,000
Issuance of Series B convertible
preferred stock in conjunction
with acquisition of DSK, Inc.
(Note 11)..................... 1,000,000 600,000
Net loss........................ (1,802,800)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1997......... 4,050,000 1,610,000 406,250 8,100 -- -- (1,880,400)
Exercise of common stock
options....................... 322,446 30,800
Issuance of warrants in
connection with issuance of
debt.......................... 112,000 45,000
Issuance of Series B convertible
preferred stock............... 1,263,792 1,011,100
Issuance of Series C convertible
preferred stock............... 4,006,000 3,873,400
Compensatory stock
arrangements.................. 1,816,500 (1,816,500)
Amortization of deferred stock
compensation.................. 1,276,400
Net loss........................ (5,425,000)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1998......... 9,319,792 6,606,500 728,696 38,900 1,861,500 (540,100) (7,305,400)
Issuance of Series D convertible
preferred stock............... 4,230,756 10,771,000
Issuance of Series E convertible
preferred stock............... 817,550 3,846,400
Exercise of Series B warrants... 209,400 --
Conversion of convertible
preferred stock to common
stock......................... (14,577,498) (21,223,900) 14,577,498 21,223,900
Issuance of common stock upon
initial public offering....... 11,500,000 67,822,000
Issuance of common stock upon
public offering............... 6,850,356 273,421,500
Exercise of common stock options
and warrants.................. 842,440 439,200
Issuance of common stock under
employee stock purchase
plan.......................... 49,318 272,500
Issuance of warrants in
connection with issuance of
debt and leases............... 1,355,900
Compensatory stock
arrangements.................. 1,196,400 (1,196,400)
Amortization of deferred stock
compensation.................. 1,688,700
Net loss........................ (26,554,900)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1999......... -- $ -- 34,548,308 $363,218,000 $4,413,800 $ (47,800) $(33,860,300)
=========== ============ ========== ============ ========== =========== ============
<CAPTION>
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
BALANCES, July 1, 1996.......... $ (72,600)
Issuance of common stock........ 2,500
Issuance of Series A convertible
preferred stock............... 410,000
Exercise of common stock
options....................... 600
Issuance of Series B convertible
preferred stock............... 600,000
Issuance of Series B convertible
preferred stock in conjunction
with acquisition of DSK, Inc.
(Note 11)..................... 600,000
Net loss........................ (1,802,800)
------------
BALANCES, June 30, 1997......... (262,300)
Exercise of common stock
options....................... 30,800
Issuance of warrants in
connection with issuance of
debt.......................... 157,000
Issuance of Series B convertible
preferred stock............... 1,011,100
Issuance of Series C convertible
preferred stock............... 3,873,400
Compensatory stock
arrangements.................. --
Amortization of deferred stock
compensation.................. 1,276,400
Net loss........................ (5,425,000)
------------
BALANCES, June 30, 1998......... 661,400
Issuance of Series D convertible
preferred stock............... 10,771,000
Issuance of Series E convertible
preferred stock............... 3,846,400
Exercise of Series B warrants... --
Conversion of convertible
preferred stock to common
stock......................... --
Issuance of common stock upon
initial public offering....... 67,822,000
Issuance of common stock upon
public offering............... 273,421,500
Exercise of common stock options
and warrants.................. 439,200
Issuance of common stock under
employee stock purchase
plan.......................... 272,500
Issuance of warrants in
connection with issuance of
debt and leases............... 1,355,900
Compensatory stock
arrangements.................. --
Amortization of deferred stock
compensation.................. 1,688,700
Net loss........................ (26,554,900)
------------
BALANCES, June 30, 1999......... $333,723,700
============
</TABLE>
See notes to consolidated financial statements.
F-45
<PAGE>
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,802,800) $(5,425,000) $(26,554,900)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity interest in losses of affiliates................. -- -- 200,000
Depreciation and amortization........................... 132,700 475,500 3,412,600
Stock-based compensation expense........................ -- 1,276,400 1,688,700
Noncash interest expense................................ -- 133,200 117,000
Joint venture termination fee........................... 431,100 -- --
Changes in assets and liabilities:
Accounts receivable................................... (29,100) (315,900) (2,728,000)
Prepaid expenses and other current assets............. -- (269,600) (3,577,800)
Restricted cash....................................... -- (300,000) (21,175,900)
Accounts payable...................................... 298,900 1,989,300 11,292,000
Accrued liabilities................................... 109,700 510,200 702,700
Unearned revenue...................................... 85,000 224,400 1,313,300
Deferred rent......................................... 30,400 18,200 156,100
----------- ----------- ------------
Net cash used in operating activities............... (744,100) (1,683,300) (35,154,200)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of short-term investments........................ -- -- (11,744,200)
Cash paid for rights to use fiber optic capacity.......... -- -- (7,480,000)
Purchase of property and equipment........................ (474,500) (3,666,000) (37,426,300)
Increase in deposits and other assets..................... (32,700) (111,700) (1,519,000)
Investments in affiliates................................. -- -- (2,630,100)
Cash paid for acquisition................................. -- -- (71,420,200)
----------- ----------- ------------
Net cash used in investing activities............... (507,200) (3,777,700) (132,219,800)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from notes payable and advances.................. 739,900 13,395,000 23,722,300
Debt repayments........................................... -- (70,000) (3,297,100)
Capital lease repayments.................................. (49,600) (84,700) (638,700)
Proceeds from issuance of common stock.................... 3,100 30,800 341,955,200
Proceeds from issuance of convertible preferred stock..... 800,000 -- 6,617,400
----------- ----------- ------------
Net cash provided by financing activities........... 1,493,400 13,271,100 368,359,100
----------- ----------- ------------
Net increase in cash and equivalents........................ 242,100 7,810,100 200,985,100
Cash and equivalents, beginning of period................... 89,000 331,100 8,141,200
----------- ----------- ------------
Cash and equivalents, end of period......................... $ 331,100 $ 8,141,200 $209,126,300
=========== =========== ============
Supplemental cash flow information--cash paid for
interest.................................................. $ 7,400 $ 27,600 $ 1,456,100
=========== =========== ============
Noncash investing and financing activities:
Remaining obligation for rights to use fiber optic
capacity................................................ $ -- $ -- $ 800,000
=========== =========== ============
Acquisition of equipment under capital lease.............. $ 206,200 $ 479,200 $ 5,829,500
=========== =========== ============
Acquisition of leasehold improvements in conjunction with
DSK, Inc. acquisition................................... $ 168,900 $ -- $ --
=========== =========== ============
Exchange of notes, advances, accrued interest and warrants
for convertible preferred stock......................... $ 210,000 $ 4,884,500 $ 8,000,000
=========== =========== ============
Conversion of preferred stock into common stock........... $ -- $ -- $ 21,223,900
=========== =========== ============
Issuance of warrants in connection with issuance of debt
and leases.............................................. $ -- $ 45,000 $ 1,355,900
=========== =========== ============
</TABLE>
See notes to consolidated financial statements.
F-46
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--AboveNet Communications Inc. (the "Company"), was formed on
March 8, 1996 (inception). The Company provides facilities-based, managed
services for customer-owned Web servers and related equipment, known as
co-location, and high performance internet connectivity solutions for electronic
commerce and other business critical internet operations.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the Company and its subsidiaries. All significant intercompany transactions and
amounts are eliminated in consolidation. Minority investments in joint ventures
are accounted for under the equity method of accounting, under which the Company
records in income its proportionate share of the earnings or losses of the joint
ventures.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to concentration of credit risk consist of trade receivables.
However, the Company's credit risk is mitigated by its credit evaluation process
and the reasonably short collection terms. The Company does not require
collateral or other security to support accounts receivable and maintains
reserves for potential credit losses.
CASH AND EQUIVALENTS--The Company considers all highly liquid investments
with maturities of ninety days or less when purchased by the Company to be cash
equivalents.
SHORT-TERM INVESTMENTS--Short term investments consist of treasury bills
with a maturity greater than 90 days but less than twelve months. The Company's
short-term investments are classified as available-for-sale. The investments are
carried at cost, which approximated fair value at June 30, 1999. Material
unrealized gains or losses would be reported as a separate component of
stockholders' equity. No investments were sold in the periods presented.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements and assets acquired
under capital lease are amortized over the shorter of the lease term or the
useful lives of the improvement.
RIGHTS TO USE FIBER OPTIC CAPACITY--Indefeasible rights to use (IRU)
capacity on fiber optic cable systems are stated at cost. Amortization will be
recognized over the shorter of the term of the IRU or its useful life beginning
when such capacity becomes available to the Company.
INTANGIBLE ASSETS--Goodwill is amortized on a straight-line basis over its
estimated life of ten years.
RESTRICTED CASH--Restricted cash consists of certificates of deposit which
are restricted from use pursuant to certain lease agreements.
REVENUE RECOGNITION--Revenue consists primarily of service revenue which is
recognized in the period in which the services are provided. The services
primarily include bandwidth and space requirement charges which are recognized
monthly as well as installation fees which are recognized as
F-47
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
revenue in the period of installation. Unearned revenue consists of customer
advances and the value assigned to certain ongoing services to be rendered to
Compaq Computer Corporation in connection with the acquisition of the Palo Alto
Internet Exchange ("PAIX") (see Note 2). Unearned revenue is recognized in the
period in which the services are rendered.
INCOME TAXES--Deferred tax liabilities are recognized for future taxable
amounts, and deferred tax assets are recognized for future deductions, net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF--The
Company evaluates its long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
NET INCOME (LOSS) PER SHARE--Basic income (loss) per share excludes dilution
and is computed by dividing net income (loss) by the weighted-average number of
common shares outstanding, less shares subject to repurchase by the Company, for
the period. Diluted income (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Common share equivalents are excluded
from the computation in loss periods as their effect would be antidilutive.
RECLASSIFICATIONS--Certain prior period amounts have been reclassified to
conform to the current period presentation. Such reclassifications had no effect
on stockholders' equity (deficiency) or net loss.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, REPORTING COMPREHENSIVE INCOME, which requires an enterprise to report,
by major components and as a single total, the change in the Company's net
assets during the period from nonowner sources. The Company adopted SFAS
No. 130 in fiscal 1999. For all periods presented, comprehensive loss was equal
to the Company's net loss.
Additionally, in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes annual and
interim reporting standards for an enterprise's business segments and related
disclosures about the enterprise's products, services, geographic areas and
major customers. The Company adopted this statement in fiscal 1999. The Company
has determined that it operates in one reporting segment.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1
provides guidance for an enterprise on accounting for the costs
F-48
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 1: ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
of computer software developed or obtained for internal use. SOP 98-1 is
effective for the Company in fiscal 2000. The Company anticipates that
accounting for transactions under SOP 98-1 will not have a material impact on
its financial position or results of operations.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for the Company in fiscal
2001. Although the Company has not fully assessed the implications of SFAS
No. 133, the Company does not believe adoption of this statement will have a
material impact on its financial position or results of operations.
NOTE 2: ACQUISITION OF PALO ALTO INTERNET EXCHANGE
On June 21, 1999, the Company consummated the acquisition of certain assets
and the assumption of certain liabilities of the Palo Alto Internet Exchange
("PAIX"), a business within the Technology and Corporate Development and
Operations Management Services business units of Compaq Computer Corporation
("Compaq"). The total purchase price of $76.4 million consisted of
$70.0 million in cash, certain future ongoing services to be provided by the
Company to Compaq, with a value currently estimated to be $5.0 million, and
acquisition-related costs of $1.4 million. PAIX is a high-level switching and
peering point for global and regional internet service providers and content
providers.
The acquisition has been recorded using the purchase method of accounting.
The excess of the aggregate purchase price over the fair market value of net
assets acquired of $69.7 million was recognized as goodwill and is being
amortized over 10 years. Amortization of goodwill for fiscal 1999 was $190,000.
At June 30, 1999, the Company made a preliminary allocation of the purchase
price. The Company will record adjustments to the purchase price allocation as
deemed necessary.
The operating results of PAIX have been included in the Company's
consolidated financial statements since the date of acquisition. Had the
acquisition of PAIX occurred on July 1, 1997 the unaudited proforma revenue, net
loss applicable to common stockholders and related basic and diluted loss per
share for the years ended June 30, 1998 and 1999 would have been: $6.6 million
and $19.7 million; $23.8 million and $44.4 million, and $45.45 per share and
$2.66 per share, respectively. These results, which are based on various
assumptions, are not necessarily indicative of what would have occurred had the
acquisition been consummated on July 1, 1997.
A reconciliation of the cash and noncash aspects of the above transaction is
as follows:
<TABLE>
<S> <C>
Tangible and intangible assets acquired..................... $76,683,200
Liabilities assumed......................................... (263,000)
Liabilities incurred in connection with purchase............ (5,000,000)
-----------
Net cash paid for acquisition............................... $71,420,200
===========
</TABLE>
F-49
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 3: PROPERTY AND EQUIPMENT, NET
Property and equipment at June 30 are comprised of the following:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Property and equipment at cost:
Telecommunication equipment....................... $2,295,300 $10,255,500
Leasehold improvements (primarily
co-location facilities)......................... 224,700 20,385,900
Office equipment.................................. 186,500 1,262,000
Construction in progress.......................... 2,389,400 18,224,900
---------- -----------
Total............................................... 5,095,900 50,128,300
Less accumulated depreciation and amortization...... (659,800) (3,537,400)
---------- -----------
Property and equipment, net......................... $4,436,100 $46,590,900
========== ===========
</TABLE>
Construction in progress primarily relates to costs incurred during the
expansion of the Company's facilities.
NOTE 4: INDEFEASIBLE RIGHTS TO USE FIBER OPTIC CAPACITY
During fiscal 1999, the Company entered into a series of agreements
providing for the acquisition of an indefeasible right to use capacity on a
fiber optic cable system between the U.S. and the United Kingdom for
$8.3 million, $7.5 million of which has been paid as of June 30, 1999. The terms
of these agreements are 25 years.
In fiscal 1999, the Company entered into a series of agreements to lease
fiber optic cable systems between Washington D.C. and New York City. These
leases were initiated in the fourth quarter of fiscal 1999 and require annual
payments of $630,000 for 20 years. The leases are accounted for as capital
leases and had a net book value of $4.6 million at June 30, 1999.
NOTE 5: JOINT VENTURES
In March 1999, as part of its international expansion strategy, the Company
entered into agreements to form joint ventures in Austria, Germany ("AboveNet
GmbH"), and the United Kingdom to provide managed co-location and internet
connectivity solutions for mission critical internet operations. The Company
invested a total of $2.4 million in fiscal 1999, which is included in deposits
and other assets at June 30, 1999. In addition, the Company has agreed to
provide up to $2 million of additional financing to certain of these joint
ventures, if required, and to arrange or provide for an additional $4.5 million
contingent upon the joint ventures raising an equivalent amount from third
parties. These joint ventures are accounted for under the equity method of
accounting.
In July 1999, the Company agreed to enter into two additional joint ventures
in Germany. The first joint venture will own real property in Frankfurt,
Germany. For an equity contribution of approximately $2 million, the Company
will own 45% and AboveNet GmbH will own 5% of this joint venture. The second
joint venture will lease the real property from the aforementioned joint
venture. It will complete improvements to the property and will manage the
property. This entity will lease managed co-location space to AboveNet GmbH and
provide leased space to other third parties. The Company
F-50
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 5: JOINT VENTURES (CONTINUED)
will own 87.42% of this second joint venture in exchange for equity
contributions which will total approximately $23 million, of which approximately
$8 million will be paid as an initial equity contribution, with the remainder to
be contributed over the following 18 to 24 months.
NOTE 6: CONVERTIBLE NOTES PAYABLE AND ADVANCES
In June 1997, the Company received $739,900 in cash advances from certain
individuals, including stockholders and employees. In July and August 1997, the
Company received an additional $250,000 in cash advances. In August 1997, the
advances were converted into notes payable of $989,900 and warrants to acquire
989,906 shares of Series B convertible preferred stock at $1.00 per share. The
notes generally bore an annual interest rate of 10%. The related warrants were
valued at $112,000, or $0.12 per share, and were recorded as noncash interest
expense in fiscal 1998.
On December 31, 1997, the Company entered into exchange agreements with the
note holders. Pursuant to the exchange agreements, the above notes, accrued
interest of $21,200 and the related warrants were exchanged for (i) 1,263,792
shares of Series B convertible preferred stock and (ii) warrants to acquire
247,472 shares of Series B convertible preferred stock at $1.00 per share.
During fiscal 1998, the Company received $3,873,400 of cash advances from
certain potential investors. In May 1998, these advances were converted into
4,006,000 shares of Series C convertible preferred stock.
On June 30, 1998, in anticipation of the Company's pending sale of preferred
stock, the Company received $8 million in cash, of which $1 million represented
a noninterest-bearing cash advance and $7 million represented convertible notes
payable. The notes bore interest at 6%, were due on July 15, 1998 and were
convertible into Series D convertible preferred stock at $2.60 per share. On
July 15, 1998, the convertible notes and advance were converted into Series D
convertible preferred stock (see Note 9).
F-51
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 7: OTHER LONG-TERM OBLIGATIONS
Long-term obligations at June 30 consist of:
<TABLE>
<CAPTION>
1998 1999
---------- -----------
<S> <C> <C>
Credit facility..................................... $1,201,600 $21,626,800
Capital lease facility.............................. 551,100 5,741,900
Deferred rent....................................... 48,600 204,700
---------- -----------
Total obligations................................... 1,801,300 27,573,400
Less current portion of long-term obligations....... (476,000) (5,984,800)
---------- -----------
Long-term obligations............................... $1,325,300 $21,588,600
========== ===========
</TABLE>
CREDIT FACILITY
At June 30, 1999, the Company had $21.6 million outstanding under its credit
facility (the "Credit Facility"), with no additional borrowings available as of
June 30, 1999. Borrowings outstanding under the Credit Facility are payable in
42 monthly installments, bear interest at rates ranging from 13.3% to 15.1% and
are collateralized by the equipment and leasehold improvements purchased with
the proceeds of the borrowing. At June 30, 1999, the outstanding borrowings on
the Credit Facility are due as follows: fiscal 2000, $5,480,000; fiscal 2001,
$6,286,600; fiscal 2002, $6,874,200; and fiscal 2003, $2,986,000.
CAPITAL LEASE FACILITY
At June 30, 1999, the Company had $820,000 available on a $2.5 million
facility under which the Company leases certain equipment under capital leases.
Leases outstanding at June 30, 1999 expire on various dates through fiscal 2019
(see Note 12).
NOTE 8. INCOME TAXES
The Company's deferred income tax assets at June 30 are comprised of the
following:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Net deferred tax assets:
Net operating loss carryforwards................ $ 1,871,700 $ 10,755,900
Stock compensation expense on nonqualified stock
options....................................... 485,300 1,067,000
Accruals deductible in different periods........ 114,700 935,200
Depreciation and amortization................... (65,200) (231,600)
----------- ------------
2,406,500 12,526,500
Valuation allowance............................... (2,406,500) (12,526,500)
----------- ------------
Total............................................. $ -- $ --
=========== ============
</TABLE>
F-52
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 8. INCOME TAXES (CONTINUED)
The Company's effective rate differs from the federal statutory tax rate for
the years ended June 30, 1997, 1998 and 1999 as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Federal statutory tax rate.............................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit..................... 3.0 3.0 2.9
Joint venture termination fee........................... (9.1) -- --
Other................................................... (0.1) (0.3) (0.4)
Valuation allowance..................................... (28.8) (37.7) (37.5)
----- ----- -----
Effective tax rate...................................... --% --% --%
===== ===== =====
</TABLE>
The Company has no income tax provision due to its history of operating
losses. Due to the uncertainty surrounding the realization of the benefits of
its favorable tax attributes in future tax returns, the Company has fully
reserved its net deferred tax assets as of June 30, 1997,1998 and 1999.
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $28.4 million for federal and $14.2 million for state income tax
purposes. These carryforwards begin to expire in 2003 for state and 2010 for
federal purposes. Additionally, Section 382 of the Internal Revenue Code and the
applicable California law impose annual limitations on the use of net operating
loss carryforwards if there is a change in ownership, as defined, within any
three-year period. The utilization of certain net operating loss carryforwards
may be limited due to the Company's capital stock transactions.
NOTE 9. STOCKHOLDERS' EQUITY
STOCK SPLITS
During November 1998, the Company reincorporated in the State of Delaware
and effected a stock exchange of one share of common stock and preferred stock
for every two and one-half shares of common stock and preferred stock,
respectively, of its California predecessor entity. The Company also effected
another reverse stock split during November 1998 whereby one share of common and
preferred stock was issued for every 1.6 shares of common stock and preferred
stock. All share and per share amounts in these financial statements have been
adjusted to give effect to these reverse stock splits.
On May 7, 1999, the Company distributed a two-for-one stock split effected
as a stock dividend. All share or per share amounts in the consolidated
financial statements have been adjusted to give effect to this stock split.
INITIAL PUBLIC OFFERING
On December 10, 1998, the Company sold 10,000,000 shares of common stock in
an underwritten public offering and on December 30, 1998 sold an additional
1,500,000 shares through the exercise of the underwriters' over-allotment option
for net proceeds of approximately $67,822,000.
F-53
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OFFERING
On April 30, 1999, the Company sold 5,650,356 shares of its common stock in
an underwritten public offering at a price of $42.50 per share and on May 5,
1999 sold an additional 1,200,000 shares through the exercise of the
underwriters' overallotment option for net proceeds to the Company of
approximately $273,421,500.
CONVERTIBLE PREFERRED STOCK AND WARRANTS
In fiscal 1997, the Company issued 2,050,000 shares of Series A convertible
preferred stock for cash of $200,000 and the conversion of advances of $210,000.
Also in fiscal 1997, the Company issued 1,000,000 shares of Series B convertible
preferred stock in connection with the acquisition of DSK, Inc. (see Note 11)
and issued 1,000,000 shares of Series B convertible preferred stock for cash of
$600,000. In fiscal 1998, the Company issued 1,263,792 shares of Series B
convertible preferred stock and 4,006,000 shares of Series C convertible
preferred stock upon conversions of notes, advances, and accrued interest of
$1,011,100 and $3,873,400, respectively (see Note 6). In fiscal 1999, the
Company issued 4,230,756 shares of Series D convertible preferred stock for cash
of $2,771,000 (net of costs of $229,000) and the conversion of notes and
advances of $8,000,000. During the same period, the Company issued 817,550
shares of Series E convertible preferred stock for cash of $3,846,400 (net of
costs of $223,600).
As discussed in Note 6, pursuant to certain exchange agreements entered into
on December 31, 1997, the Company issued warrants to acquire 247,472 shares of
Series B convertible preferred stock at $1.00 per share. Also, during fiscal
1998, the Company issued a warrant to purchase 2,500 shares of Series D
convertible preferred stock at an exercise price of $2.00 per share in
connection with a revolving line of credit from a bank that expired in
May 1999.
Simultaneously with the closing of the initial public offering, all
14,368,098 shares of the Company's preferred stock were converted into common
stock on a share for share basis. Additionally, all of the holders of warrants
to purchase 247,472 shares of Series B convertible preferred stock exercised
such warrants through a net issuance provision and were issued 209,400 shares of
common stock. Also in connection with the initial public offering, the warrant
to acquire 2,500 shares of Series D convertible preferred stock was converted
into a warrant to purchase an equivalent number of common shares at an exercise
price of $2.00 per share.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At June 30, 1999, the Company has reserved the following shares of common
stock for issuance in connection with:
<TABLE>
<S> <C>
Warrants issued and outstanding............................. 350,036
Options issued and outstanding.............................. 5,057,606
Options available under stock option plans.................. 1,108,547
Shares available under 1998 Purchase Plan................... 263,182
---------
Total....................................................... 6,779,371
=========
</TABLE>
F-54
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
COMMON STOCK SUBJECT TO REPURCHASE
Upon the exercise of certain unvested employee stock options, the Company
issued to the employees common stock which is subject to repurchase by the
Company at the original exercise price of the stock option. This right lapses
over the original vesting period. At June 30, 1999, 66,661 shares were subject
to repurchase.
STOCK OPTION PLANS
Under the Company's stock option plans (collectively, the "Plans") a total
of 5,656,712 nonstatutory and incentive common stock options are authorized for
issuance. Nonstatutory stock options may be granted to employees, outside
directors and consultants, and incentive stock options may only be granted to
employees. The Plans provide for the granting of incentive stock options at not
less than 100% of the fair market value of the underlying stock at the grant
date. Nonstatutory stock options may be granted at not less than 85% of the fair
market value of the underlying stock at the date of grant. Options granted to
employees generally vest over four years and expire ten years from the date of
the grant. In addition, upon change in control, all options granted under
certain plans shall immediately vest.
The plans provide that each nonemployee director who is elected to the
Company's board of directors will automatically be granted a nonstatutory stock
option to purchase 18,750 shares of common stock at an exercise price equal to
the fair value of the common stock on the grant date. These grants vest ratably
over three years. An additional option to purchase 6,250 shares of common stock
will be granted to the nonemployee director each year thereafter with an
exercise price equal to the fair market value of the common stock on that date.
These grants vest after one year of service.
EMPLOYEE STOCK PURCHASE PLAN
On December 10, 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (the "1998 Purchase Plan"). Under the 1998 Purchase Plan, eligible
employees are allowed to have salary withholdings of up to 15% of their base
compensation to purchase shares of common stock at a price equal to 85% of the
lower of the market value of the stock at the beginning or end of defined
purchase periods. The initial purchase period commenced on December 10, 1998.
The Company has reserved 312,500 shares of common stock for issuance under this
plan. As of June 30, 1999, 49,318 shares have been issued under the 1998
Purchase Plan.
NONPLAN OPTION GRANT
In connection with its hiring of the Company's President and Chief Operating
Officer in November 1997, the Company granted to this officer options to
purchase 350,000 shares of common stock with an exercise price of $0.20 per
share. The option was immediately exercisable with respect to 20% of the option
shares with the balance exercisable in equal monthly installments over the next
36 months of employment with the Company. However, vesting accelerated upon the
closing of the Company's underwritten public offering. In addition, the option
grant contained an antidilution clause which guaranteed that, prior to any
underwritten initial public offering of the Company's common stock, the number
of shares under the option grant would always be equal to 5% of its outstanding
F-55
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
common stock on a fully diluted basis less 36,666 shares. As a result of various
sales of equity securities and option grants since the initial grant in
November 1997, the officer was issued options to purchase an additional 638,850
shares of common stock at an exercise price of $0.20 per share during fiscal
1999. In connection with this award, the Company recognized $362,100 and
$1,087,200 in stock-based compensation expense during fiscal 1998 and 1999,
respectively.
OPTIONS AND WARRANTS GRANTED TO NONEMPLOYEES
The Company has granted options and warrants to nonemployees for services
performed and to be performed after the date of grant. In connection with these
awards, the Company recognized $310,100 and $601,500 in stock-based compensation
expense during fiscal 1998 and 1999, respectively. At June 30, 1999, options to
purchase 85,000 shares of common stock at an exercise price of $42.53 were
unearned by certain nonemployees. These options vest over three years and have a
term of three years. At June 30, 1999, all services relating to all other
nonemployee awards have been rendered and the related options and warrants were
fully exercisable.
In connection with the Company's formation of its European joint ventures in
March 1999, the Company agreed that it will grant options to purchase up to
600,000 shares of common stock to employees of the joint ventures upon the joint
ventures meeting certain performance criteria of over the next four years. The
exercise price for these options would be based on the fair market value of the
Company's common stock at the date of grant.
In connection with the Credit Facility (see Note 7), in fiscal 1998, the
Company issued warrants to purchase 45,000 shares of common stock at a
weighted-average exercise price of $2.31 per share. The fair value of these
warrants is being recognized as interest expense through June 30, 1999. During
fiscal 1999, in connection with an amendment to the Credit Facility, the Company
issued warrants to purchase 67,032 shares of common stock which have a
weighted-average exercise price of $18.72 per share and a term of five years.
The estimated fair value of these warrants of $787,600 is included in deposits
and other assets at June 30, 1999 and is being amortized to interest expense
over the repayment period.
In connection with the signing of a new facility lease (See Note 12) in
fiscal 1999, the Company issued the lessor a warrant to purchase 200,000 shares
of its common stock at $5.00 per share. The estimated fair value of this warrant
of $609,100 is included in deposits and other assets at June 30, 1999 and will
be amortized to expense over the lease period.
At June 30, 1998, warrants to purchase 64,686 shares of common stock at a
weighted-average exercise price of $2.10 per share were outstanding; such
warrants expire in 2003. All of these warrants were issued during the year ended
June 30, 1998 and had an estimated weighted-average fair value of $1.23 per
share at the date of grant. During fiscal 1999, warrants to purchase 302,662
shares of common stock at a weighted-average exercise price of $7.99 were issued
and had an estimated weighted-average fair value of $4.72 per share at date of
grant. At June 30, 1999, warrants to purchase 350,036 shares of common stock at
a weighted-average exercise price of $7.17 per share were outstanding.
F-56
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
OPTION REPRICING
On December 1, 1998, the Company repriced 928,850 options previously granted
at $6.00 to $8.00 per share to fair value at that date of $5.00 per share.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- --------
<S> <C> <C>
Balance, July 1, 1996 (137,500 shares vested at a
weighted average exercise price of $0.02 per share)... 1,140,000 $ 0.02
Granted................................................. 450,000 0.07
Exercised............................................... (31,250) 0.02
Canceled................................................ (388,750) 0.02
----------
Balance, June 30, 1997 (219,374 shares vested at a
weighted average exercise price of $0.02 per share)... 1,170,000 0.03
Granted................................................. 1,142,612 0.59
Exercised............................................... (322,446) 0.10
Canceled................................................ (32,334) 0.31
----------
Balance, June 30, 1998 (734,270 shares vested at a
weighted average exercise price of $0.19 per share)... 1,957,832 0.34
Granted................................................. 5,058,100 15.61
Exercised............................................... (822,908) 0.50
Canceled................................................ (1,135,418) 6.35
----------
Balance, June 30, 1999.................................. 5,057,606 $14.24
==========
</TABLE>
F-57
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information as of June 30, 1999 concerning
currently outstanding and vested options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED
------------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING LIFE (YEARS) PRICE OF SHARES PRICE
----------------------- ----------- ------------ -------- --------- --------
<S> <C> <C> <C> <C> <C>
$ 0.02 - $ 0.60 1,621,374 8.3 $ 0.17 1,185,423 $ 0.19
2.00 - 2.60 276,628 8.5 2.29 45,397 2.12
4.00 - 6.50 1,337,654 9.2 5.17 337,103 5.36
12.25 - 41.06 1,595,550 9.7 33.34 690,668 36.47
42.53 - $75.13 226,400 9.5 48.55 7,500 46.63
--------- --- -------- --------- --------
5,057,606 9.1 $ 14.24 2,266,091 $ 12.21
========= === ======== ========= ========
</TABLE>
At June 30, 1999, 1,108,547 shares remained available for future grant.
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related
interpretations.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net income (loss) and net income (loss) per share had
the Company adopted the fair value method since the Company's inception. Under
SFAS No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values.
The Company's calculations for employee grants were made using the minimum
value method for grants prior to September 8, 1998 and the fair value method for
grants after that date with the following weighted average assumptions: expected
life, one year following vesting; risk free interest rate of 6%; and no
dividends during the expected term. In addition, volatility of 70% was used for
grants valued under the fair value method. The Company's calculations are based
on a multiple award valuation approach and forfeitures are recognized as they
occur. If the computed values of the Company's stock-based awards to employees
had been amortized to expense over the vesting period of the awards as specified
under SFAS No. 123, net loss would have been $1,803,800 ($4.59 per basic and
diluted share), $5,111,000 ($9.75 per basic and diluted share) and $37,202,000
($2.24 per basic and diluted share) for the years ended June 30, 1997, 1998 and
1999, respectively.
F-58
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
NOTE 9. STOCKHOLDERS' EQUITY (CONTINUED)
The number and estimated weighted-average grant date value per option for
employee and nonemployee awards during the year are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- ---------- ----------
<S> <C> <C> <C>
Employee options:
Number of shares......................... -- 1,003,250 4,957,600
Estimated weighted average value......... $ -- $ 0.10 $ 5.98
Nonemployee options:
Number of shares......................... 450,000 139,362 100,500
Estimated weighted average value......... $ 0.02 $ 0.08 $ 20.43
</TABLE>
NOTE 10: NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share at June 30:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net loss (numerator), basic and
diluted............................. $(1,802,800) $(5,425,000) $(26,554,900)
=========== =========== ============
Shares (denominator):
Weighted average common shares
Outstanding....................... 393,236 530,224 16,675,822
Weighted average common shares
Outstanding subject to
repurchase........................ -- (5,616) (32,795)
----------- ----------- ------------
Shares used in computation, basic and
diluted............................. 393,236 524,608 16,643,027
=========== =========== ============
Net loss per share, basic and
diluted............................. $ (4.58) $ (10.34) $ (1.60)
=========== =========== ============
</TABLE>
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic net income per share in the future, but
were excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. At June 30, 1999,
outstanding potentially dilutive securities consist of 66,661 outstanding shares
of common stock subject to repurchase, and options and warrants to purchase
5,407,642 shares of common stock.
NOTE 11: JOINT VENTURE TERMINATION FEE
In fiscal 1996, the Company entered into a joint venture agreement (the
"Agreement") with DSK, Inc. ("DSK") to cooperatively market and develop the
Company's services. The Company paid $33,700 to DSK during the year ended
June 30, 1997 related to the Agreement.
In April 1997, the Company terminated the Agreement and hired the majority
stockholders of DSK as either employees or consultants by issuing 1,000,000
fully vested shares of the Series B preferred stock with a fair value of $0.60
per share, or $600,000, for the outstanding shares of common stock of DSK. The
Company recorded the transaction by allocating the value of the shares issued to
F-59
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
NOTE 11: JOINT VENTURE TERMINATION FEE (CONTINUED)
property and equipment (at DSK's net book value of $168,900, which approximated
fair value), with the balance of $431,100 reflected as a joint venture
termination fee.
Additionally, in April 1997, the Company granted to certain of the former
owners of DSK options to purchase a total of 250,000 shares of its common stock
at $0.06 per share for real estate consulting services to be performed. In
June 1998, the Company accelerated the vesting of all the DSK options awarded.
In conjunction with this award, the Company recognized $604,200 of stock-based
compensation expense during fiscal 1998.
NOTE 12: COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities under noncancelable operating leases.
These leases expire on various dates through fiscal 2002. Minimum future lease
payments under noncancelable operating and capital leases as of June 30, 1999
are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDING CAPITAL OPERATING
JUNE 30, LEASES LEASES
------------ ----------- -----------
<S> <C> <C>
2000...................................................... $ 1,320,600 $ 3,903,200
2001...................................................... 1,282,100 4,108,000
2002...................................................... 921,500 4,215,100
2003...................................................... 630,000 4,305,600
2004...................................................... 630,000 4,341,700
Thereafter.................................................. 9,060,000 47,604,800
----------- -----------
Total minimum lease payments................................ $13,844,200 $68,478,400
=========== ===========
Less amount representing interest at rates ranging from
13.253% to 14.68%......................................... (8,102,300)
-----------
Present value of minimum lease payments..................... 5,741,900
Less current portion........................................ (569,200)
-----------
Long-term portion........................................... $ 5,172,700
===========
</TABLE>
Rent expense under operating leases for the years ended June 30, 1997, 1998
and 1999 was $444,900, $917,000 and $1.3 million, respectively.
Effective in fiscal 2000, the Company has committed to lease additional
facilities. The lease is for a minimum term of 20 years with annual rental
payments increasing from approximately $3 million to $4 million over the lease
term.
On June 29, 1999, the Company entered into an agreement to purchase
approximately nine acres of land in Fairfax County, Virginia, for $7,750,000
which is expected to close in fiscal 2000. The Company intends to open a
facility on the site in fiscal 2001.
See Note 4 regarding the Company's agreements to lease fiber optic cable
systems.
F-60
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
NOTE 12: COMMITMENTS AND CONTINGENCIES (CONTINUED)
PURCHASE COMMITMENTS
The Company has entered into noncancelable commitments to purchase property
and equipment related to the expansion of its operations facilities. As of
June 30, 1999, approximately $48 million was committed for purchases under these
agreements through fiscal 2000.
TELECOMMUNICATIONS AND PEERING ARRANGEMENTS
The Company has guaranteed to pay certain monthly usage levels or fees with
various communications or interconnect providers. Minimum payments under these
agreements at June 30, 1999 are approximately $24.8 million in fiscal 2000;
$24.7 million in fiscal 2001; $23.1 million in fiscal 2002; $14.4 million in
fiscal 2003; $13.7 million in fiscal 2004; and $8.6 million in fiscal 2005.
The Company is a party to numerous peering agreements with other internet
providers to allow for the exchange of internet traffic. These agreements do not
have fee commitments and generally have a one year term with automatic renewals.
The Company does not record any revenue or expense associated with these
non-cash transactions as such transactions do not represent the culmination of
the earnings process and the fair value of such transactions are not reasonably
determinable.
LEGAL MATTERS
On June 29, 1999, an alleged stockholder of AboveNet filed a lawsuit in the
Court of Chancery of the State of Delaware. The plaintiff, who purports to
represent a class of all AboveNet stockholders, challenges the terms of the
merger between AboveNet and Metromedia Fiber Network, Inc. ("Metromedia") (see
Note 17). Four other vitually identical complaints have also been filed in the
Delaware Court of Chancery. None of these four complaints has been served.
AboveNet believes these lawsuits are without merit and intends to defend itself
vigorously, and accordingly, management does not expect that the outcome of
these cases will have a material effect on the Company's financial position or
results of operations.
NOTE 13: RELATED PARTY TRANSACTIONS
A member of the Board of Directors is the president of an entity which is
the co-manager of the Company's primary facilities. Rent expense in fiscal 1997,
1998 and 1999 for these facilities was $16,400, $265,200 and $1,073,200,
respectively. The Company believes that its lease arrangements were on an arm's
length basis.
During fiscal 1999, the same entity was granted a warrant to purchase
200,000 shares of common stock in connection with the signing of a new facility
lease (see Note 9). The estimated fair value of the warrant when granted was
$609,100.
NOTE 14: MAJOR CUSTOMERS
For the year ended June 30, 1999, no one customer accounted for more than
10% of revenues. One customer accounted for 14% and 12% of revenues in fiscal
1998 and 1997, respectively.
At June 30, 1999, one customer accounted for approximately 10% of trade
receivables. At June 30, 1998, two customers accounted for approximately 22% and
13% of trade receivables.
F-61
<PAGE>
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
NOTE 15: GEOGRAPHIC DATA
During the year ended June 30, 1999, the Company generated approximately 14%
of its revenues from customers domiciled in countries other than the United
States, primarily in Asia. For the years ended June 30, 1998 and 1997,
substantially all of the Company's revenues were derived from domestic
customers.
NOTE 16: 401(K) PLAN
In May 1998, the Company began a 401(k) plan (the Plan) that covers all
employees who meet the Plan's eligibility requirements. Eligible employees can
contribute up to 15% of their salary, subject to certain IRS limitations. The
Company's contributions related to fiscal 1998 and 1999 were zero and $168,100,
respectively.
NOTE 17: SUBSEQUENT EVENTS
In August 1999, the Company entered into an additional agreement for the
acquisition of an indefeasible right to use additional capacity on a fiber optic
cable system between the U.S. and the United Kingdom for a 25-year period. The
agreement commits the Company to pay approximately $15.8 million in a series of
installments through October 1999.
On September 8, 1999, the Company completed a merger with Metromedia Fiber
Network, Inc. ("MFN"). Under the terms of the agreement, AboveNet stockholders
received 1.175 shares of MFN Class A common stock for each AboveNet share owned.
Additionally, upon completion of the merger, all outstanding stock options
granted prior to June 18, 1999 became immediately vested.
F-62
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Compaq Computer Corporation
We have audited the accompanying Combined Statement of Assets to be Acquired
and Liabilities to be Assumed of Palo Alto Internet Exchange (the "Business") as
of December 26, 1998 and the related Combined Statement of Revenues and Direct
Expenses for the period June 12, 1998 through December 26, 1998. These
statements are the responsibility of the Business' and Compaq Computer
Corporation's management. Our responsibility is to express an opinion on these
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audit provides a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in the Current Report on Form 8-K of AboveNet Communications Inc.) as
described in Note 2 and are not intended to be a complete presentation of the
Business' financial position or results of operations.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets to be acquired and liabilities to be assumed as of
December 26, 1998 and the revenues and direct expenses described in Note 2 of
the Business for the period June 12, 1998 through December 26, 1998, in
conformity with generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 15, 1999
F-63
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Compaq Computer Corporation
We have audited the accompanying Combined Statement of Assets to be Acquired
and Liabilities to be Assumed of Palo Alto internet Exchange (the "Business") as
of December 27, 1997 and the related Combined Statement of Revenues and Direct
Expenses for the period December 28, 1997 through June 11, 1998 and the fiscal
years ended December 27, 1997 and December 29, 1996. These statements are the
responsibility of the Business' and Compaq Computer Corporation's management.
Our responsibility is to express an opinion on these statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall presentation of the statements. We believe that
our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared for the purpose of complying with
the rules and regulations of the Securities and Exchange Commission (for
inclusion in the Current Report on Form 8-K of AboveNet Communications Inc.) as
described in Note 2 and are not intended to be a complete presentation of the
Business' financial position or results of operations.
In our opinion, the statements referred to above present fairly, in all
material respects, the assets to be acquired and liabilities to be assumed as of
December 27, 1997 and the revenues and direct expenses described in Note 2 of
the Business for the period December 28, 1997 through June 11, 1998 and the
fiscal years ended December 27, 1997 and December 29, 1996, in conformity with
generally accepted accounting principles.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 15, 1999
F-64
<PAGE>
PALO ALTO INTERNET EXCHANGE
COMBINED STATEMENT OF ASSETS TO BE ACQUIRED AND LIABILITIES TO BE ASSUMED
(IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 27,
1999 DECEMBER 26, DECEMBER 27,
(UNAUDITED) 1998 1997
----------- ------------ ------------
<S> <C> <C> <C>
ASSETS TO BE ACQUIRED:
Unbilled accounts receivable........... $ 102 $ 18 $ 14
Prepaid expenses....................... 29 2 1
Property and equipment, net............ 3,405 3,088 2,750
Intangible assets, net................. 32,863 33,756 --
------- ------- ------
Total assets to be acquired........ $36,399 $36,864 $2,765
======= ======= ======
LIABILITIES TO BE ASSUMED:
Unearned service revenue............... 166 200 106
------- ------- ------
Total liabilities to be assumed.... 166 200 106
------- ------- ------
Net assets to be acquired........ $36,233 $36,664 $2,659
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
PALO ALTO INTERNET EXCHANGE
COMBINED STATEMENT OF REVENUES AND DIRECT EXPENSES
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
QUARTER QUARTER JUNE 12, 1998 PERIOD FROM FISCAL FISCAL
ENDED ENDED THROUGH DECEMBER 28, YEAR ENDED YEAR ENDED
MARCH 27, MARCH 26, DECEMBER 26, 1997 THROUGH DECEMBER 27, DECEMBER 29,
1999 1998 1998 JUNE 11, 1998 1997 1996
--------- --------- ------------- ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Service revenues....................... $1,534 $ 892 $ 2,630 $1,732 $ 1,895 $ 155
------ ----- ------- ------ ------- -------
Direct expenses:
Cost of revenues..................... 616 817 1,548 1,440 2,579 537
Research and development............. -- 4 9 8 54 599
Selling, general and administrative
expenses........................... 131 83 191 242 700 121
Amortization of intangible assets.... 893 -- 1,944 -- -- --
------ ----- ------- ------ ------- -------
Total direct expenses............ 1,640 904 3,692 1,690 3,333 1,257
------ ----- ------- ------ ------- -------
Excess (shortfall) of revenues
over direct expenses......... $ (106) $ (12) $(1,062) $ 42 $(1,438) $(1,102)
====== ===== ======= ====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES
(AMOUNTS IN THOUSANDS)
NOTE 1: DESCRIPTION OF BUSINESS
The Palo Alto Internet Exchange ("PAIX" or the "Business") is a business
within the Technology & Corporate Development and Operations Management Services
business units of Compaq Computer Corporation ("Compaq," formerly Digital
Equipment Corporation, "Digital," collectively the "Company"). The Business is a
high-level switching and peering point for global and regional Internet Service
Providers ("ISP") and content providers. The Business features a data center to
provide global services to PAIX customers for transmission of data in
high-volume over the worldwide internet network. The Business utilizes a highly
redundant fiber-based infrastructure owned by multiple data carriers, including
the 30-mile fiber ring owned by the City of Palo Alto. The Business was started
in 1993 as a research project within the Company and commenced meaningful
operations during fiscal year 1996. The business is engaged primarily in
providing internet interconnectivity solutions and related services in support
of mission critical internet operations of its customers.
NOTE 2: BASIS OF PRESENTATION
The accompanying Combined Statement of Assets to be Acquired and Liabilities
to be Assumed and Combined Statement of Revenues and Direct Expenses ("the
financial statements") have been prepared for the purpose of complying with the
rules and regulations of the Securities and Exchange Commission for inclusion in
the Current Report on Form 8-K of AboveNet Communications, Inc. ("AboveNet").
The Combined Statement of Assets to be Acquired and Liabilities to be Assumed
includes the Business' assets to be sold to and liabilities to be assumed by
AboveNet, in accordance with the Asset Purchase Agreement dated May 21, 1999
(the "Agreement"). Compaq and AboveNet also entered into certain service
contracts and other arrangements that are described in the Agreement. These
arrangements include, but are not limited to, access to the internet, favorable
pricing terms on such future services, and non-relocation and non-compete
arrangements. The terms of such contracts and other arrangements range from one
to 20 years. The assets to be acquired and liabilities to be assumed include
unbilled accounts receivable, prepaid expenses, property and equipment,
intangibles and unearned service revenue. The Combined Statement of Revenues and
Direct Expenses includes only those revenues and expenses directly related to
the Business to be sold. The financial statements exclude any other activity and
related expense that are not directly attributable to the Business, such as
corporate general and administrative costs, income taxes and interest expense.
The financial statements of the Business are derived from the historic books
and records of Digital through June 11, 1998. As a result of the acquisition of
Digital by Compaq on June 11, 1998, the financial statements of the Business
after the acquisition date are derived from the historic books and records of
Compaq.
As mentioned above, indirect costs allocated to the Business from the
Company, such as certain corporate general and administrative costs, have been
excluded from the financial statements on the basis that such costs are not
direct costs of the Business. However, in determining the Business' direct
expenses, certain allocations were made for expenses incurred by the Company, as
appropriate, that are directly attributed to the services provided to the
Business. These allocations relate primarily to engineering support in
connection with the delivery of services, facility and other occupancy costs,
and other general and administrative functions performed directly on behalf and
for the benefit of the
F-67
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES
(AMOUNTS IN THOUSANDS)
NOTE 2: BASIS OF PRESENTATION (CONTINUED)
Business. Costs for such services have been reflected in the financial
statements on the basis of activity or utilization, estimated support provided
to the Business, or other methods management believe to be reasonable.
Cost of revenues primarily consists of costs relating to facility rent, data
communications and telecommunication expenses, service delivery and engineering
support personnel and depreciation expense.
The financial statements have been prepared in accordance with the Company's
accounting policies and generally accepted accounting principles. However, these
statements do not purport to represent the costs and expenses which may be
incurred by an unaffiliated company to achieve similar results. In addition, the
financial statements do not purport to represent the financial position of the
Business.
FISCAL YEAR
For purposes of these financial statements the fiscal year of PAIX is a
fifty-two week period ending the Saturday nearest the last day of December.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
direct expenses, and related disclosure of contingent assets and liabilities.
Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT
Building improvements, computer, telecommunications, and office equipment
and construction-in-progress are stated at cost less depreciation, which is
computed using the straight-line method. Expenditures for improvements which
substantially extend the useful life or increase the capacity of an asset are
capitalized. Ordinary repairs and maintenance are expensed as incurred.
Estimated useful lives for purposes of computing depreciation expense range from
two to 10 years.
INTANGIBLE ASSETS
Intangible assets, which consist of goodwill and customer lists related to
the acquisition of Digital by Compaq, are amortized on a straight-line basis
over 10 years.
REVENUE
Service revenue relating to internet and colocation service contracts are
recognized over the contract period the services are provided. The Business
recognizes installation and certain other service fees as revenue on a per event
basis. Unearned service revenue represents the unearned portion of prepaid
service from internet and colocation service contracts with customers. Such
amounts are amortized to revenue over the contract period, which ranges from one
year to three years. The
F-68
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES
(AMOUNTS IN THOUSANDS)
NOTE 2: BASIS OF PRESENTATION (CONTINUED)
Business provides for estimated future losses on internet and colocation service
contracts, to the extent such losses are probable and estimable.
RESEARCH AND DEVELOPMENT
Research and development costs of the Business are charged to expense in the
period incurred.
LONG-LIVED ASSETS
The Business reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. An impairment loss would be recognized when estimated future
cash flows expected to result from the use of the asset and its eventual
disposition is less than its carrying amount.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
The Business sells to customers primarily in the internet and
Telecommunications industries and customers are primarily located in the United
States. The Company performs ongoing credit evaluations of its customers'
financial condition and maintains adequate provisions for uncollectible amounts
when necessary.
For the periods in the fiscal year ended December 26, 1998, and for the
years ended December 27, 1997 and December 29, 1996, PAIX generated more than
10% of its total revenue from the following customers:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
UUNet...................................................... 12% 19% 35%
BBN\GTE Internetworking.................................... -- -- 14%
Epoch...................................................... -- -- 31%
Genuity.................................................... -- -- 11%
</TABLE>
As of December 26, 1998 and December 27, 1997, customers which comprised 10%
or more of accounts receivable were as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
UUNet....................................................... 23% 25%
Epoch....................................................... -- 20%
</TABLE>
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial information for the quarters ended March 27, 1999 and
March 26, 1998 is unaudited and has been prepared on the same basis as the
audited financial statements. In the opinion of management, such unaudited
information includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the interim information.
Results for the
F-69
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES
(AMOUNTS IN THOUSANDS)
NOTE 2: BASIS OF PRESENTATION (CONTINUED)
three months ended March 27, 1999 are not necessarily indicative of results to
be expected for the year ending December 31, 1999.
NOTE 3: PROPERTY AND EQUIPMENT
Major classifications of property and equipment consisted of the following:
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 26, DECEMBER 27,
USEFUL LIVES 1998 1997
--------------- ------------ ------------
<S> <C> <C> <C>
Building improvements............... 10 years $2,479 $2,450
Computer equipment.................. 2-3 years 52 87
Office equipment.................... 10 years 6 --
Electrical and telecommunications
equipment......................... 3 years 251 388
Construction in progress............ -- 521 112
------ ------
Less: accumulated depreciation...... (221) (287)
------ ------
$3,088 $2,750
====== ======
</TABLE>
Depreciation expense was approximately $221, $184, $286 and $1 for the
period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 11, 1998, and the fiscal years ended December 27, 1997 and
December 29, 1996, respectively.
NOTE 4: INTANGIBLE ASSETS
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 26, JUNE 11,
1998 1998
------------ --------
<S> <C> <C>
Goodwill............................................... $27,400 $27,400
Customer lists......................................... 8,300 8,300
Less: accumulated amortization......................... (1,944) --
------- -------
$33,756 $35,700
======= =======
</TABLE>
On June 11, 1998, Compaq consummated its acquisition of Digital and
allocated its purchase price to the assets acquired and liabilities assumed
based on Compaq's estimates of fair value. The fair value assigned to intangible
assets acquired was based on a valuation prepared by an independent third-party
appraisal company and included goodwill and customer lists related to the
Business.
NOTE 5: COMMITMENTS AND CONTINGENCIES
The Company, on behalf of the Business, has entered into service contracts
with customers and telecommunications vendors to provide services.
F-70
<PAGE>
PALO ALTO INTERNET EXCHANGE
NOTES TO COMBINED STATEMENTS OF ASSETS TO BE ACQUIRED
AND LIABILITIES TO BE ASSUMED AND
COMBINED STATEMENTS OF REVENUES AND DIRECT EXPENSES
(AMOUNTS IN THOUSANDS)
NOTE 5: COMMITMENTS AND CONTINGENCIES (CONTINUED)
In some instances, the Company provides limited warranties to customers in
connection with internet and colocation service contracts. To date, costs
incurred in connection with such warranties have been immaterial.
NOTE 6: LEGAL MATTERS
The Company is involved in lawsuits, claims, investigations, and proceedings
which are being handled and defended in the ordinary course of business. There
are no such matters pending that the Company and its General Counsel expect to
be material in relation to the Business and no amounts have been accrued in the
financial statements for such matters.
NOTE 7: RELATED PARTY TRANSACTIONS
As described in Note 2, the Company incurred expenses for services performed
directly on behalf and for the benefit of the Business. Costs for such services
have been reflected in the accompanying Statement of Revenues and Direct
Expenses on the basis of activity or utilization, estimated support provided to
the Business, or other methods management believe to be reasonable. The cost of
such services is presented as cost of revenue, research and development and
general and administrative.
The Business has no external borrowings and there has been no allocation of
the Company's consolidated borrowings and related interest expense in the
financial statements.
The Business recognized revenue from AboveNet of $66, $36, $22 and $0 for
the period June 12, 1998 through December 26, 1998, the period December 28, 1997
through June 11, 1998, and the fiscal years ended December 27, 1997 and
December 29, 1996, respectively. Accounts receivable from AboveNet are $11 and
$4 at December 26, 1998 and December 27, 1997, respectively.
F-71
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders'
of SiteSmith, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of stockholders' deficit and of cash flows present fairly, in all
material respects, the financial position of SiteSmith, Inc. at December 31,
1999 and the results of its operations and its cash flows for the period from
September 8, 1999 (inception) through December 31, 1999, in conformity with
accounting principles generally accepted in the United States. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States, which require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
As discussed in Note 1 to the financial statements, failure to generate
sufficient revenues, raise additional capital or reduce certain discretionary
spending could have a material adverse effect on the Company's ability to
achieve its intended business objectives.
/s/ PRICEWATERHOUSECOOPERS LLP
San Jose, California
July 28, 2000
F-72
<PAGE>
SITESMITH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
DECEMBER 31, 2000
1999 (UNAUDITED)
------------ -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,416,341 $ 5,098,955
Restricted cash, current.................................. -- 481,800
Accounts receivable, net.................................. 97,999 6,981,365
Prepaid expenses and other current assets................. 238,895 2,057,778
---------- -----------
Total current assets.................................... 1,753,235 14,619,898
Property and equipment, net............................... 779,835 11,906,998
Restricted cash, non-current.............................. 71,000 3,029,766
Other assets.............................................. 189,353 1,253,309
---------- -----------
Total assets............................................ $2,793,423 $30,809,971
========== ===========
LIABILITIES, MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 523,675 $ 7,250,023
Accrued liabilities....................................... 89,373 4,289,386
---------- -----------
Total current liabilities............................... 613,048 11,539,409
Commitments and contingencies (Note 7)
Mandatorily redeemable convertible preferred stock
(Note 4).................................................. 3,625,000 52,971,277
---------- -----------
Stockholders' deficit:
Common stock, $0.0001 par value; 50,000,000 shares
authorized; 8,536,000 and 16,576,513 shares issued and
outstanding at December 31, 1999 and September 30, 2000,
respectively............................................ 854 1,652
Additional paid-in capital................................ 7,130,911 49,755,183
Unearned stock-based compensation......................... (6,473,547) (30,780,895)
Notes receivable from stockholders -- (4,285,391)
Accumulated deficit....................................... (2,102,843) (48,391,264)
---------- -----------
Total stockholders' deficit............................. (1,444,625) (33,700,715)
---------- -----------
Total liabilities, mandatorily redeemable convertible
preferred stock and stockholders' deficit........... $2,793,423 $30,809,971
========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-73
<PAGE>
SITESMITH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8, 1999 NINE MONTHS
(INCEPTION) THROUGH ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
------------------- ------------------
(UNAUDITED)
<S> <C> <C>
Revenue:
Service revenue.......................................... $ 97,999 $ 9,295,928
Equipment revenue........................................ -- 4,859,958
----------- ------------
97,999 14,155,886
Costs and expenses:
Cost of service revenue (excludes stock-based compensation
of $251,741 and $4,810,490 (unaudited)).................. 484,458 16,559,372
Cost of equipment revenue.................................. -- 4,340,704
Research and development (excludes stock-based compensation
of $92,594 and $875,685 (unaudited))..................... 66,843 593,767
Sales and marketing (excludes stock-based compensation of
$131,658 and $2,734,605 (unaudited))..................... 147,060 10,074,306
General and administrative (excludes stock-based
compensation of $186,925 and $3,479,116 (unaudited))..... 860,651 17,493,844
Stock-based compensation................................... 662,918 11,899,896
----------- ------------
Total costs and expenses............................... 2,221,930 60,961,889
----------- ------------
Loss from operations....................................... (2,123,931) (46,806,003)
Interest income, net....................................... 21,088 517,582
----------- ------------
Net loss................................................... (2,102,843) (46,288,421)
Accretion of redemption premium on mandatorily redeemable
convertible preferred stock............................ (60,000) (2,276,377)
----------- ------------
Net loss attributable to common stockholders............. $(2,162,843) $(48,564,798)
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-74
<PAGE>
SITESMITH, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL UNEARNED RECEIVABLE
--------------------- PAID-IN STOCK-BASED FROM ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION STOCKHOLDERS DEFICIT TOTAL
---------- -------- ----------- ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders in October 1999..... 8,500,000 $ 850 $ 7,650 $ -- $ -- $ -- $ 8,500
Issuance of common stock for
services provided............ 36,000 4 46,796 -- -- -- 46,800
Accretion of redemption premium
on Series A mandatorily
redeemable convertible
preferred stock.............. -- -- (60,000) -- -- -- (60,000)
Unearned employee stock-based
compensation................. -- 7,136,465 (7,136,465) -- -- --
Amortization of unearned
employee stock-based
compensation................. -- -- -- 662,918 -- -- 662,918
Net loss....................... -- -- -- -- -- (2,102,843) (2,102,843)
---------- ------ ----------- ------------ ------------ ------------ ------------
Balance at December 31, 1999... 8,536,000 854 7,130,911 (6,473,547) -- (2,102,843) (1,444,625)
Issuance of common stock for
services provided
(unaudited).................. 102,000 10 175,430 -- -- -- 175,440
Issuance of common stock
warrants for services
provided (unaudited)......... -- -- 2,276,047 -- -- -- 2,276,047
Issuance of preferred stock
warrants in connection with
equipment lease
(unaudited).................. -- -- 573,094 -- -- -- 573,094
Issuance of common stock
options for services provided
(unaudited).................. -- -- 278,120 -- -- -- 278,120
Accretion of redemption premium
on Series A, B and C
mandatorily redeemable
convertible preferred stock
(unaudited).................. -- -- (2,276,377) -- -- -- (2,276,377)
Exercise of common stock
options in exchange for notes
receivable (unaudited)....... 2,409,525 241 4,216,427 -- (4,216,668) -- --
Issuance for common stock for
options exercised
(unaudited).................. 5,639,740 559 997,114 -- -- -- 997,673
Repurchase of common stock
(unaudited).................. (110,752) (12) (27,240) -- -- -- (27,252)
Compensation expense as a
result of acceleration of
options (unaudited).......... -- -- 204,413 -- -- -- 204,413
Unearned employee stock-based
compensation (unaudited)..... -- -- 34,430,351 (34,430,351) -- -- --
Amortization of unearned
employee stock-based
compensation (unaudited)..... -- -- -- 11,704,433 -- -- 11,704,433
Unearned stock-based
compensation for services
provided (unaudited)......... -- -- 1,776,893 (1,776,893) -- -- --
Amortization of stock-based
compensation for services
provided (unaudited)......... -- -- -- 195,463 -- -- 195,463
Interest accrued on notes
receivable from stockholders
(unaudited).................. -- -- -- -- (68,723) -- (68,723)
Net loss (unaudited)........... -- -- -- -- -- (46,288,421) (46,288,421)
---------- ------ ----------- ------------ ------------ ------------ ------------
Balance at September 30, 2000
(unaudited).................. 16,576,513 $1,652 $49,755,183 $(30,780,895) $(4,285,391) $(48,391,264) $(33,700,715)
========== ====== =========== ============ ============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-75
<PAGE>
SITESMITH, INC.
STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8,
1999 NINE MONTHS
(INCEPTION) ENDED
THROUGH SEPTEMBER 30,
DECEMBER 31, 2000
1999 (UNAUDITED)
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,102,843) $(46,288,421)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization........................... 24,687 1,171,284
Allowance for doubtful accounts and returns............. -- 838,515
Issuance of common stock for services................... 46,800 175,440
Issuance of common stock warrants and options for
services.............................................. -- 2,554,167
Interest income on stockholder note receivables......... -- (68,723)
Stock based compensation as a result of acceleration of
options............................................... -- 204,413
Amortization of stock-based compensation................ 662,918 11,899,896
Changes in assets and liabilities:
Accounts receivable..................................... (97,999) (7,721,881)
Prepaid expenses and other assets....................... (238,895) (1,245,789)
Other assets............................................ (189,353) (1,063,956)
Accounts payable........................................ 523,675 6,726,348
Accrued liabilities..................................... 89,373 4,200,013
----------- ------------
Net cash used in operating activities................. (1,281,637) (28,618,694)
----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (804,522) (12,298,447)
Restricted cash........................................... (71,000) (3,440,566)
----------- ------------
Net cash used in investing activities................. (875,522) (15,739,013)
----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 8,500 997,673
Repurchase of common stock................................ -- (27,252)
Proceeds from issuance of preferred stock, net of issuance
costs................................................... 3,565,000 47,069,900
----------- ------------
Net cash provided by financing activities............. 3,573,500 48,040,321
----------- ------------
Net increase in cash and cash equivalents................... 1,416,341 3,682,614
Cash and cash equivalents at beginning of period............ -- 1,416,341
----------- ------------
Cash and cash equivalents at end of period.................. $ 1,416,341 $ 5,098,955
=========== ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-76
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1: THE COMPANY
SiteSmith, Inc. ("SiteSmith" or the "Company") was incorporated as
SiteBrigade, Inc. in Delaware on September 8, 1999. On November 15, 1999, the
Board of Directors approved the change of the Company's name to SiteSmith, Inc.
SiteSmith provides outsourced internet infrastructure management services
designed to maximize the performance, reliability, and security of large-scale,
complex internet sites. SiteSmith offers its customers an outsourced internet
infrastructure management solution. Our offerings consist of core services and
premium services. Our core services include establishing the infrastructure for
our customers' internet operations. Our premium services includes automated
monitoring, security and network redundancy.
The Company has been successful in completing several rounds of private
equity financing. Since inception, the Company has incurred substantial losses
and negative cash flows from operations. For the period from September 8, 1999,
(inception) through September 30, 2000, the Company incurred a loss from
operations of approximately $48.4 million (unaudited) and negative cash flows
from operations of $28.6 million (unaudited). Management expects operating
losses and negative cash flows to continue for the foreseeable future because of
additional costs and expenses related to brand development, marketing and other
promotional activities, hiring consultants, continued development of the
information technology infrastructure, and expansion of product offerings.
Certain of these costs could be reduced if working capital decreased
significantly. Management believes there is sufficient cash on hand and
borrowings available to continue operations until early 2001. However, after
that date, the Company will need to raise additional financing. Failure to
generate sufficient revenues, raise additional capital or reduce certain
discretionary spending could have a material adverse effect on the Company's
ability to continue as a going concern and to achieve its intended business
objectives.
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents consist of highly liquid investment instruments with
original maturities of 90 days or less. The carrying value of cash equivalents
approximates their estimated fair market value.
RESTRICTED CASH
At December 31, 1999 and the nine months ended September 30, 2000, cash
balances of approximately $71,000 and $3,511,566 (unaudited), respectively, were
restricted from withdrawal and held by a bank in the form of certificates of
deposit. These certificates of deposit serve as a collateral supporting standby
letters of credit issued as a guarantee of payment to certain vendors and to the
Company's landlords as security deposits, which will not be available until the
leases for the Company's facilities expire.
F-77
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
In July 2000, the Company opened a subsidiary in the United Kingdom. The
accompanying financial statements as of and for the period ended September 30,
2000, are reported on a consolidated basis. Activity for the year to date period
is immaterial and all intercompany balances have been eliminated in
consolidation.
CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and accounts receivable. The Company places its cash primarily in checking and
money market accounts. The Company's investment policy limits the amount of
credit exposure to any one issuer. The Company's customer base is primarily
composed of businesses throughout the United States. The Company performs
ongoing credit evaluations of its customers.
For the period from September 8, 1999 (inception) through December 31, 1999,
five customers accounted for 31%, 21%, 13%, 12% and 10% of both the Company's
revenue and accounts receivable, respectively. For the nine months ended
September 30, 2000, no customers accounted for 10% or more of revenues or
accounts receivable (unaudited).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments, including cash and cash equivalents,
accounts receivable, accounts payable and accrued liabilities are carried at
cost, which approximate fair value due to the short-term maturity of these
instruments. Redeemable convertible preferred stocks are recorded at their
redemption amounts which is considered to approximate fair value.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line basis over estimated useful lives of
three to six years. Amortization of leasehold improvements is computed on a
straight-line basis over the shorter of the facility lease term or the estimated
useful lives of the improvements. Major additions and improvements are
capitalized, while replacements, maintenance and repairs that do not improve or
extend the life of the assets are charged to operations. In the period assets
are retired or otherwise disposed of, the costs and related accumulated
depreciation and amortization are removed from the accounts, and any gain or
loss on disposal is included in results of operations.
The Company periodically evaluates the carrying value of property and
equipment to be held and used when events and circumstances warrant such a
review. The carrying value of property and equipment is considered impaired when
the anticipated undiscounted cash flows from the asset are separately
identifiable and are less than its carrying value. In that event, a loss is
recognized based on the amount by which the carrying value exceeds the fair
value of the asset. Fair value is determined primarily using the anticipated
cash flows discounted at a rate commensurate with the risk involved.
General and administrative costs include expenses incurred by the Company to
develop its internal software. The Company recognizes software development costs
in accordance with Statement of Position ("SOP") 98-1, "Accounting for the Costs
of Computer Software Developed or Obtained for
F-78
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Internal Use." As such, the Company expenses all costs incurred that relate to
the planning and post implementation phases of development. Costs incurred in
the development phase are capitalized and recognized over the product's
estimated useful life if the product is expected to have a useful life beyond
one year. Costs associated with maintenance and training are included in general
and administration expenses in the accompanying statement of operations.
REVENUE RECOGNITION
The Company's revenues consist of (i) monthly fees for providing internet
infrastructure management services, and (ii) revenues from sales of third-party
equipment to customers.
Service revenues are generally recognized ratably over the term of the
contract, which is generally one year. Monthly fees are based on fixed
contractual rates. If the services rendered in any given month exceed the
contract amount, then any incremental services are billed on a time and
materials basis according to the contractual standard rates and are recognized
as the services are provided. Advance billings are classified as deferred
revenue.
The Company also recognizes revenue from equipment sales, net of estimated
sales returns, when the equipment is delivered to the customer or the internet
data center. For all equipment sales transactions with its customers, the
Company acts as a principal, takes title to all products sold upon shipment,
establishes prices charged to customers, bears credit risk, and bears inventory
risk of loss for returned equipment that is not eligible to be returned to
suppliers. Implementation of the equipment, if required, is performed under a
separate service contract and is billed at the contractual rate per hour as
services are provided.
ADVERTISING
Advertising is expensed as incurred. Advertising and public relations
expenses for the period from September 8, 1999 (inception) through December 31,
1999 and for the nine months ended September 30, 2000 totaled $36,675 and
$5,736,871 (unaudited), respectively.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach which
requires the recognition of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
The measurement of current and deferred tax liabilities and assets are based on
provisions of the enacted tax; the effects of future changes in tax laws or
rates are not anticipated. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
are not expected to be realized.
STOCK-BASED COMPENSATION
The Company follows the disclosure provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based
Compensation." The Company has elected to continue accounting for stock-based
compensation issued to employees using Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and, accordingly,
pro forma disclosures required under SFAS No. 123 have been presented (see
Note 6). Under APB No. 25,
F-79
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
compensation expense is based on the difference, if any, on the date of the
grant, between the fair value of the Company's stock and the exercise price of
the option.
Stock, stock options and warrants for stock issued to non-employees have
been accounted for in accordance with the provisions of SFAS No. 123 and
Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments
that are Issued to Other Than Employees for Acquiring, or in Conjunction with
Selling, Goods or Services."
BUSINESS SEGMENTS
The Company follows SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information." The Company identifies its operating
segments based on business activities and management responsibility. The Company
conducts its business within a single business segment providing internet
infrastructure management services.
COMPREHENSIVE INCOME
The Company follows SFAS No. 130, "Reporting Comprehensive Income" ("SFAS
No. 130"). SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. There was no material difference between the Company's net
loss and its comprehensive loss for any of the periods presented in the
accompanying consolidated statements of operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," was issued. SFAS No. 133 establishes accounting and
reporting standards for derivative financial instruments and hedging activities
related to those instruments, as well as other hedging activities. The Company
does not currently hold any derivative instruments and does not engage in
hedging activities. The Company expects the adoption of SFAS No. 133 will not
have a material impact on its financial position, results of operations or cash
flow. The Company will be required to adopt SFAS No. 133 for the year ending
December 31, 2001.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB 101"),
"Revenue Recognition in Financial Statements," which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosures related to revenue
recognition policies. The adoption of SAB 101 did not have a material effect on
the financial position or results of operations of the Company.
In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"), Accounting
for Certain Transactions Involving Stock Compensation--an Interpretation of APB
25. This Interpretation clarifies (a) the definition of employee for purposes of
applying Opinion 25, (b) the criteria for determining whether a plan qualifies
as a noncompensatory plan, (c) the accounting consequence of various
modifications to the terms of a previously fixed stock option or award, and
(d) the accounting for an exchange of stock compensation awards in a business
combination. This Interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
F-80
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
December 15, 1998, or January 12, 2000. The adoption of the conclusions of FIN
44 did not have a material impact on the Company's financial position and
results of operations.
NOTE 3: BALANCE SHEET COMPONENTS
CASH AND CASH EQUIVALENTS
As of December 31, 1999 cash and cash equivalents included a cash reserve
with a variable interest rate.
Restricted cash consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Due within one year......................... $ -- $ 481,800
Due after one year through six years........ 71,000 3,029,766
------- ----------
71,000 3,511,566
Less: Current portion....................... -- 481,800
------- ----------
$71,000 $3,029,766
======= ==========
</TABLE>
ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Accounts receivable--trade.................. $97,999 $7,819,880
Allowance for doubtful accounts and
returns................................... -- (838,515)
------- ----------
$97,999 $6,981,365
======= ==========
</TABLE>
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
CURRENT
Prepaid expenses............................ $124,169 $1,525,077
Deposits and other assets................... 114,726 532,701
NONCURRENT
Prepaid expenses............................ 636 --
Deposits and other assets................... 188,717 1,253,309
-------- ----------
$428,248 $3,311,087
======== ==========
</TABLE>
F-81
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 3: BALANCE SHEET COMPONENTS (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
<TABLE>
<CAPTION>
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
IN YEARS 1999 2000
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment...................... 3 $ 509,118 $ 7,526,205
Computer software....................... 3 14,959 2,217,631
Office equipment........................ 5 -- 107,919
Furniture and fixtures.................. 5 230,398 750,245
Leasehold improvements.................. 5-6 25,247 996,952
Construction in progress................ -- 24,800 1,504,017
---------- -----------
804,522 13,102,969
Less: Accumulated depreciation and
amortization...................... (24,687) (1,195,971)
---------- -----------
Total................................... $ 779,835 $11,906,998
========== ===========
</TABLE>
Property and equipment depreciation and amortization expenses from inception
through December 31, 1999 and for the nine months ended September 30, 2000 were
$24,687 and $1,171,284 (unaudited), respectively.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Accrued compensation........................ $58,880 $2,028,749
Accrued professional fees................... 25,000 1,665,492
Accrued other............................... 5,493 595,145
------- ----------
$89,373 $4,289,386
======= ==========
</TABLE>
NOTE 4: MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 20,539,290 (unaudited) shares of
preferred stock of which 7,200,000 shares have been designated as Series A
Preferred and 8,610,861 (unaudited) shares have been designated as Series B
Preferred and 4,728,429 (unaudited) has been designated as Series C Preferred.
On October 26, 1999, the Company issued a total of 7,200,000 shares of its
Series A mandatorily redeemable preferred stock ("Series A") for net proceeds of
$3,565,000 (net of $35,000 of issuance costs).
In January and February 2000, the Company issued a total of 8,610,861 shares
of its Series B mandatorily redeemable preferred stock ("Series B") for net
proceeds of $20,456,849 (net of $37,000 of issuance costs).
F-82
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4: MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
In July 2000, the Company issued a total of 4,717,372 (unaudited) shares of
its Series C manditorily redeemable preferred stock ("Series C") for net
proceeds of $26,613,051 (unaudited) (net of $40,081 (unaudited) of issuance
costs) (see Note 10).
From inception through September 30, 2000, the Company issued preferred
stock as follows:
<TABLE>
<CAPTION>
AMOUNT NET LIQUIDATION AND
ORIGINAL OF SHARES ISSUED AND PAR VALUE REDEMPTION
ISSUE PRICE ISSUANCE COSTS AUTHORIZED OUTSTANDING AMOUNT AMOUNT
----------- -------------- ---------- ----------- ----------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Series A................... $0.50 $ 3,565,000 7,200,000 7,200,000 $ 0.0001 $ 3,840,000
Series B................... $2.38 20,456,849 8,610,861 8,610,861 $ 0.0001 21,433,150
Series C (unaudited)....... $5.65 26,613,051 4,968,429 4,717,372 $ 0.0001 27,181,729
----------- ---------- ---------- -----------
Total...................... $50,634,900 20,779,290 20,528,233 -- $52,454,879
=========== ========== ========== ===========
</TABLE>
CONVERSION
Each issued share of Series A and Series B is convertible at the election of
the holder into one share of common stock, and is subject to adjustment in
accordance with antidilution provisions contained in the Company's Articles of
Incorporation. All shares of preferred stock shall automatically be converted
into shares of common stock upon the closing of an underwritten public offering
having an aggregate offering price of at least $25,000,000 and a per share
offering price of at least $5.00.
DIVIDENDS
The holders of Series A and Series B are entitled to receive noncumulative
dividends at the per share rate of $0.005 and $0.0238, respectively, per annum
if and when declared by the Board of Directors. The Company may not make a
distribution to common stockholders until the preferred stock dividends have
been paid in full. The Company has no current intention of declaring dividends.
VOTING RIGHTS
The holder of each share of preferred stock is entitled to vote based on the
number of shares of common stock into which it is convertible.
LIQUIDATION PREFERENCES
In the event of a liquidation, dissolution, winding up of the Company,
Series A and Series B stockholders are entitled to a per share distribution in
preference to common stockholders equal to the original issue price per share of
$0.50 and $2.38 per share, respectively, plus any declared but unpaid dividends.
After this distribution, the remaining assets will be distributed pro rata to
the holders of the common stock and Series A and Series B on an as if converted
basis. In the event funds are insufficient to make a complete distribution to
the holders of Series A and Series B, the holders shall share ratably in any
distribution.
REDEMPTION
Upon the request of the holder of the majority of the outstanding shares of
Series A and Series B at any time after January 13, 2005, but on a date within
thirty days after receipt by the Company of a
F-83
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 4: MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK (CONTINUED)
written request, the shares are redeemable in two equal installments, beginning
no earlier than February 13, 2005, and continuing thereafter on the next
anniversary date. The shares may be redeemed at a price equal to the original
issue price, subject to adjustments for any stock dividends, combinations,
reclassifications, splits, and declared and unpaid dividends. The Company shall
also pay 10% redemption premium, based on the redemption price as outlined
above, to the holders of Series A or Series B for every full year a holder of
Series A or Series B has held such stock. This amount is being accreted ratably
over the period from issuance until the first redemption date.
NOTE 5: COMMON STOCK
The Company's Certificate of Incorporation, as amended, authorizes the
Company to issue 30,000,000 shares of common stock. Each share of common stock
has the right to one vote. The holders of common stock are also entitled to
receive dividends whenever funds are legally available and when declared by the
Board of Directors, subject to the prior rights of the holders of preferred
stock at the time outstanding. In July 2000, the Company amended and restated
its Certificate of Incorporation to increase the authorized share capital to
50,000,000 shares of common stock (See Note 10).
The Company had reserved shares of common stock for future issuance as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
Conversion of Series A mandatorily redeemable
convertible preferred stock....................... 7,200,000 7,200,000
Conversion of Series B mandatorily redeemable
convertible preferred stock....................... -- 8,610,861
Conversion of Series C mandatorily redeemable
convertible preferred stock....................... -- 4,968,429
Exercise of options................................. 9,500,000 19,500,000
---------- ----------
16,700,000 40,279,290
========== ==========
</TABLE>
The Company had not declared or paid cash dividends as of September 30, 2000
(unaudited).
Through September 30, 2000, upon the termination of employment, the Company
repurchased 110,752 (unaudited) shares of common stock previously issued upon
the exercise of options.
FOUNDERS STOCK AGREEMENT
Certain common stock was issued to the founders of the Company and is
subject to repurchase in the event of voluntary termination or involuntary
termination with cause. Certain founder shares vest over a twelve month period,
50% of the shares vest at the end of six month period and the remaining 50% vest
at the end of the second six month period. Certain other shares vest over four
years. At December 31, 1999 and September 30, 2000, 6,662,500 and 4,265,625
(unaudited) shares, respectively, of outstanding common stock were subject to
repurchase by the Company at the original purchase price of $.001.
F-84
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6: STOCK OPTION PLAN
The Company's 1999 Stock Option Plan (the "Option Plan"), authorizes the
Board of Directors to grant up to 9,500,000 incentive stock options and
nonstatutory stock options to employees, directors and consultants. In
April 2000, the Board of Directors has authorized the Company to increase the
authorized number of shares of common stock in the option pool to 15,500,000
shares. The Option Plan provides that incentive stock options may be granted to
employees of the Company and nonstatutory stock options may be granted to
consultants and directors of the Company. Under the Option Plan, no incentive
stock options may be granted to a person who, at the time of grant, owns stock
possessing more than 10% of the total combined voting power of all classes of
stock of the Company unless at the time such options are granted the option
price is at least 110% of the fair market value of the stock. Furthermore, such
options granted shall not be exercisable after ten years from the date of grant.
In July 2000, the Company's Board of Directors adopted the 2000 Executive
Stock Incentive Plan, (the "Executive Plan"). The Company has reserved a total
of 4,000,000 shares of common stock for issuance under the Executive Plan.
The Option Plan is administered by the Board of Directors or its designees
and provides generally that the option price shall not be less than the fair
market value of the shares on the date of grant and no portion may be exercised
beyond ten years from that date. Stock options may be exercised at any time
subsequent to grant. Stock obtained through exercise of unvested options is
subject to repurchase at the original purchase price. The Company's repurchase
rate decreases as the shares vest under the original option terms. Options
granted generally vest 25% on the first anniversary of the date of grant with
the balance vesting in 36 equal monthly increments.
Activity under the Plan is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
---------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OF SHARES PRICE
----------- ---------- --------
<S> <C> <C> <C>
Shares authorized.......................... 9,500,000 -- --
Options granted............................ (5,807,500) 5,807,500 $0.05
Options exercised.......................... -- -- $ --
Options canceled........................... 80,000 (80,000) $0.05
----------- ----------
Balances, December 31, 1999................ 3,772,500 5,727,500 $0.05
Shares authorized (unaudited).............. 10,000,000 --
Options granted (unaudited)................ (10,741,353) 10,741,353 $1.25
Options exercised (unaudited).............. -- (8,049,265) $0.85
Options canceled (unaudited)............... 656,948 (656,948) $0.46
----------- ----------
Balances, September 30, 2000 (unaudited)... 3,688,095 7,762,640 $0.85
=========== ==========
</TABLE>
F-85
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6: STOCK OPTION PLAN (CONTINUED)
The following tables summarizes information with respect to stock options
outstanding and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING WEIGHTED EXERCISE
------------------------- ----------------------
WEIGHTED
AVERAGE
REMAINING
CONTRACTUAL
NUMBER LIFE AVERAGE OPTIONS
EXERCISE PRICE OUTSTANDING (YEARS) PRICE EXERCISABLE
-------------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
$0.05 5,727,500 9.92 $0.05 5,727,500
--------- ----- ----- ----------
5,727,500 $0.05 5,727,500
--------- ===== ==========
</TABLE>
FAIR VALUE DISCLOSURES
The fair value of each option grant has been estimated on the date of grant
using the minimum value method with the following assumptions:
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8, 1999
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Weighted average fair values.............................. $ 1.26 $ 3.69
Assumptions:
Risk-free interest rates.............................. 5.75% 5.92%
Expected lives........................................ 5 years 3 years
Dividend yield........................................ 0% 0%
</TABLE>
Had compensation cost for the Company's stock option plan been determined
based on the fair market values of these stock options at the grant dates
consistent with the provisions of SFAS No. 123, the Company's net loss would
have changed to the pro forma amounts as follows:
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8, 1999
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
Net loss attributable to common stockholders--as reported... $(2,162,843) $(48,564,798)
Net loss attributable to common stockholders--pro forma..... $(2,170,291) $(49,104,330)
</TABLE>
The effects of applying SFAS No. 123 in this pro forma disclosure may not be
indicative of future amounts. Additional awards in future years are anticipated.
UNEARNED STOCK-BASED COMPENSATION
In connection with certain employee stock option grants, the Company
recorded unearned stock-based compensation totaling $34,430,351 (unaudited) at
September 30, 2000, which is being amortized over the vesting periods of the
related options, generally four years using the method set out in FASB
F-86
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 6: STOCK OPTION PLAN (CONTINUED)
Interpretation No. 28 ("FIN 28"). Under the FIN 28 method, each vested tranche
of options is accounted for as a separate option grant awarded for past
services. Accordingly, the compensation expense is recognized over the period
during which the services have been provided. This method results in higher
compensation expense in the earlier vesting periods of the related options.
Amortization of this stock-based compensation recognized during the period from
inception to December 31, 1999 and for the nine months ended September 30, 2000
totaled approximately $663,000 and $11,704,433 (unaudited), respectively.
In connection with certain consultant and Technical Advisory Board Member
stock option grants, the Company recorded unearned stock-based compensation
totaling $1,776,893 (unaudited) at September 30, 2000, which is being amortized
over the vesting periods of the related options. Amortization of this
stock-based compensation recognized during the nine months ended September 30,
2000 totaled approximately $195,463 (unaudited). These option grants are subject
to variable accounting due to the fact that vesting is based on performance,
which may result in substantial increases in the compensation expense, as the
fair value of the Company's common stock may increase in future periods.
The Company's calculation for stock option grants to non-employees and
Technical Advisory Board members were made using the Black-Scholes options
pricing model with the following weighted average assumptions for the period
from September 8, 1999 (inception) to December 31, 1999 and the nine months
ended September 30, 2000 (unaudited): deemed fair value per share $2.42-$15.74,
dividend yield of 0%; expected volatility of 70%; risk-free interest rates of
5.75% for the period from September 8, 1999 (inception) to December 31, 1999 and
5.92% for the nine month period ended September 30, 2000; and a contractual life
of 5 years.
NOTE 7: COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases office space in California, Illinois, New York, New
Jersey and Virginia under noncancelable operating leases with expiration dates
through the year 2010. In addition to office leases, the Company also leases
equipment under noncancelable leases with expiration dates through the year
2002. Rent expense for the year ended December 31, 1999 and for the nine months
ended September 30, 2000 totaled $98,403 and $2,608,682 (unaudited),
respectively.
Future minimum lease payments under noncancelable operating leases at
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31,
-------------------------
<S> <C>
2000........................................................ $ 1,261,638
2001........................................................ 2,242,869
2002........................................................ 1,896,257
2003........................................................ 1,729,049
2004........................................................ 1,788,441
Thereafter.................................................. 4,560,353
-----------
Total minimum lease payments................................ $13,478,607
===========
</TABLE>
F-87
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 7: COMMITMENTS AND CONTINGENCIES (CONTINUED)
EQUIPMENT LEASE LINE
In June 2000, the Company entered into a two year equipment financing
agreement which provided for borrowings of up to $2,000,000, secured by the
assets acquired, and restricted cash equal to six months of lease payments.
CONTINGENT LIABILITIES
From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be made
and such expenditures can be reasonably estimated. In the opinion of management,
there are no pending claims of which the outcome is expected to result in a
material adverse effect in the financial position or results of operations of
the Company.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain officers and
employees of the Company. The agreements generally provide for annual bonuses
and incentive stock options as determined by the Board of Directors as well as
covenants not-to-compete during the employment term and for a period thereafter.
The employment agreements also generally provide for severance and accelerated
vesting clauses in the event the individual is terminated without cause, or a
significant change in control occurs.
EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) plan available to substantially all
employees over the age of 21 years. Participants may contribute up to
20 percent of their annual compensation to the plan, limited to a maximum amount
set by the Internal Revenue Service. The Company may make contributions to the
401(k) plan at the discretion of the Board of Directors. No Company
contributions have been made to the plan since inception.
NOTE 8: INCOME TAXES
No provision for federal and state income taxes has been recorded as the
Company has incurred net operating losses since inception.
At December 31, 1999 and September 30, 2000, the Company had net operating
loss carryforwards available to offset future regular and alternative minimum
taxable income of approximately $1,379,000 and $35,000,000 (unaudited),
respectively. These carryforwards expire between 2007 through 2019, if not
utilized before these dates.
Under the Tax Reform Act of 1986, the amounts of and benefits from net
operating loss carryforwards may be impaired or limited in certain
circumstances. Events which cause limitations in the amount of net operating
losses that the Company may utilize in any year include, but are not limited to,
a cumulative ownership change of more than 50% as defined, over a three-year
period. SiteSmith has not yet determined the extent to which its net operating
loss benefit will be limited.
F-88
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 8: INCOME TAXES (CONTINUED)
The Company's deferred tax assets and liabilities at December 31, 1999 are
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
Deferred tax assets (current):
Net operating loss carry forwards........................... $549,000
Other accruals.............................................. 31,000
--------
Deferred tax assets......................................... 580,000
Deferred tax liabilities (non-current):
Depreciation................................................ (14,000)
--------
Deferred tax liabilities.................................... (14,000)
Net deferred tax assets..................................... 566,000
Valuation allowance......................................... (566,000)
--------
$ --
========
</TABLE>
Due to the uncertainty surrounding the realization of favorable tax
attributes in future tax returns, the Company has placed a valuation allowance
against all of its net deferred tax assets. At such time as it is determined
that it is more likely than not that the deferred tax assets are realizable, the
valuation allowance will be reduced.
NOTE 9: SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
PERIOD FROM
SEPTEMBER 8,
1999
(INCEPTION) NINE MONTHS
THROUGH ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(UNAUDITED)
<S> <C> <C>
SUPPLEMENTAL DISCLOSURES OF NONCASH
INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services
provided................................ $ 46,800 $ 175,440
Preferred stock issued in connection with
lease................................... $ -- $ 573,094
Unearned stock-based compensation for
services provided....................... $ -- $ 1,776,893
Unearned stock-based compensation relating
to employee stock option grants......... $7,136,465 $34,430,351
Accretion of redemption premium on
mandatorily redeemable convertible
preferred stock......................... $ 60,000 $ 2,276,377
</TABLE>
NOTE 10: SUBSEQUENT EVENT (UNAUDITED)
In June 2000, the Company issued approximately $5 million in convertible
promissory notes. The notes bear interest at a rate of 9.5% per annum and are
payable in full in September 2000. The notes
F-89
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10: SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
are convertible into shares of the Company's equity securities issued and sold
at the close of the Company's next equity financing. The notes shall be
convertible into the number of shares of equity securities based on the
principle amount of the notes plus accrued and unpaid interest divided by the
price paid for the equity securities by third parties. As discussed below, the
Company closed an eligible equity financing on July 20, 2000 and as a result the
notes and accrued interest were converted into 889,554 shares of Series C
mandatorily redeemable convertible preferred stock.
On July 1, 2000, Mark F. Spagnolo joined SiteSmith as chief executive
officer. His employment agreement provides for the grant of an option to
purchase 3,000,000 shares of common stock at the fair market value on the grant
date. The option shall vest as follows: 750,000 are fully vested on grant date
and 25% of the remaining 2,250,000 shall vest on the first anniversary of his
start date with the balance vesting in 36 equal monthly increments. The
agreement also provides for a loan to purchase common stock. The loan is full
recourse and will be secured by any shares of stock obtained by exercising the
options described above and other personal property. In July 2000, Mr. Spagnolo
exercised 1,409,525 of his options to purchase common stock by executing a
full-recourse promissory note for $2,466,528. The promissory note is payable on
the earlier of July 1, 2004 or 60 days after his employment with the Company
terminates for any reason and bears an interest of 6.51% of the unpaid principal
balance each year. The agreement further provides acceleration of options and
the payment of certain bonuses and severance in the event of a change in control
or involuntary termination.
In July 2000, David C. Winn joined SiteSmith as a managing director. His
employment agreement provides for the grant of an option to purchase 1,000,000
shares of common stock at the fair market value on the grant date. The option
shall vest as follows: 25% shall vest on the first anniversary of his start date
with the balance vesting in 36 equal monthly increments. The agreement also
provides for a loan to purchase common stock. The loan is full recourse and will
be secured by any shares of stock obtained by exercising the options described
above and other personal property. In July 2000, Mr. Winn exercised 1,000,000 of
his options to purchase common stock by executing a full-recourse promissory
note for $1,749,900. The promissory note is payable on the earlier of
September 1, 2004 or 30 days after his employment with the Company terminates
for any reason and bears an interest of 6.51% of the unpaid principal balance
each year. The agreement further provides acceleration of options, the payment
of certain bonuses and severance in the event of a change in control or in
voluntary termination.
On July 19 and August 1, 2000, upon the completion of a successful executive
search by Heidrick & Struggles, Inc., the Company issued two fully vested
nonforfeitable and exercisable warrants the first to purchase an aggregate of
437,500 shares and the second to purchase 83,333 shares of common stock at an
exercise price of $1.75 per share. The warrants expire on (i) the earlier of one
year after an initial public offering (ii) upon a merger, or (iii) seven years
after the date of issuance. The Company valued the warrants using the
Black-Scholes option pricing model, applying an expected life of seven years, a
weighted average risk free interest rate of 6.43%, an expected dividend yield of
zero percent, a volatility of 70% and a deemed fair value of common stock of
$5.09 per share. The fair value of the warrants of approximately $2,275,000 was
expensed in full during the third quarter.
In July 2000, the Company entered into an operating lease agreement for its
new facility in Santa Clara, California. The agreement is for a minimum of ten
years, with future minimum lease payments of $1,375,836; $2,806,704; $2,918,970;
$3,035,730; $3,157,164 and $19,742,472 for fiscal years 2000, 2001, 2002, 2003,
2004 and thereafter, respectively. Concurrent with the execution of the lease,
the Company
F-90
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10: SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
posted a letter of credit in the amount of $2,850,000, which expires on
October 1, 2001. In connection with the lease agreement, the Company granted the
lessor warrants to purchase up to 10,000 shares of the Company's preferred stock
at an exercise price per share equal to the price paid for the preferred stock
in the Company's next private equity financing. The Company completed a
Series C preferred stock round of financing on July 23, 2000 at a price of $5.65
per share. The warrants expire on the earlier of (i) April 2007, (ii) the sale
of all or substantially all the capital stock on substantially all the assets of
the Company in a merger, business combination or other form of business
transaction in which more than fifty percent (50%) of the voting power of the
Company is disposed of or, (iii) the closing of a firm commitment underwritten
public offering with an offering price not less than $5.00 per share and
aggregate proceeds of $25,000,000. The warrants were valued at $40,680 using the
Black-Scholes option pricing model and will be recorded as additional rent
expense over the life of the lease. The following assumptions were used in
determining the fair value of the warrants: deemed fair value per share of
$5.65, dividend yield of 0%, expected volatility of 70%, risk-free interest rate
of 6.43% and a contractual life of 7 years.
On July 20, 2000, the Company sold 3,827,818 shares of Series C mandatorily
redeemable convertible preferred stock for net proceeds of $21,627,000. Upon the
closing of this financing, the $4,999,999 convertible promissory notes and
accrued interest were automatically converted into 889,554 shares of Series C
mandatorily redeemable convertible preferred stock. The rights, preferences and
privileges of the Series C redeemable preferred stock are consistent with those
outlined for Series A and Series B in Note 4, except as follows:
- Dividends are payable at a rate of $0.45 per share.
- Holders have a liquidation preference at $5.65 per share plus all declared
but unpaid dividends.
In August, the conversion and dividend rights, preferences and privileges of
the Series A mandatorily redeemable convertible and Series B mandatorily
redeemable convertible preferred stock were amended as follows:
- Dividends are payable at a rate of $0.04 per share for Series A
mandatorily redeemable convertible preferred stock and at $0.19 per share
for Series B mandatorily redeemable convertible preferred stock.
- All shares of mandatorily redeemable convertible preferred stock shall
automatically be converted, on a one for one basis, into shares of common
stock upon the closing of an underwritten public offering having an
aggregate offering price of at least $35,000,000 and a per share offering
price of at least $11.30.
In August 2000, the Board of Directors adopted the 2000 Directors' Stock
Plan under which 500,000 shares were reserved for issuance. The plan will become
effective on the effective date of the Registration Statement of the Company's
initial public offering. The plan provides that each person who becomes a
non-employee director after the effective date will be granted a non-statutory
stock option to purchase 25,000 shares of common stock which will vest over four
years. On the date of the Company's annual stockholder meeting each year, an
additional 5,000 shares of common stock which vest over one year will be granted
to non-employee directors who have served on the Board of Directors for at least
six months. Options granted will have an exercise price equal to the fair market
value of the common stock on the date of grant and will have a term of ten
years.
F-91
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10: SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
The Company's Board of Directors adopted the 2000 Executive Stock Incentive
Plan, (the "Executive Plan"), in July 2000. The Company has reserved a total of
4,000,000 shares of common stock for issuance under the Executive Plan. As of
August 1, 2000, 2,409,525 options have been exercised, options to purchase a
total of 1,590,475 shares at a weighted average exercise price of $1.75 per
share were outstanding and no shares remained available for future option or
stock purchase right grants. The Company does not intend to grant any additional
options or stock purchase rights under the Executive Plan after the date of the
Company's initial public offering. Unless terminated earlier, the Executive Plan
will terminate in 2010. The terms of options and stock purchase rights under the
Executive Plan are generally the same as those that may be issued under the
Option Plan, except that the Executive Plan does not impose a limitation on the
number of shares subject to options and stock purchase rights that may be issued
to any individual employee.
In August 2000, the 2000 Employee Stock Purchase Plan (the "Purchase Plan"),
was adopted by the Board of Directors. A total of 750,000 shares of common stock
has been reserved for issuance under the Purchase Plan, plus an annual increase
on the first day of each fiscal year beginning in 2001 and ending in 2010 equal
to the lesser of (i) 500,000 shares; (ii) 1% of the outstanding stock on the
last day of the immediately preceding fiscal year; or (iii) a lesser number
determined by the Board of Directors. This plan will become effective on the
effective date of the Registration Statement of the Company's initial public
offering. The Purchase Plan permits eligible employees to purchase common stock
through payroll deductions, which in any event may not exceed 15% of an
employee's eligible compensation, at a price equal to the lower of 85% of the
fair market value of the common stock at the beginning of the offering period or
at the end of an offering period. Employees may end their participation in the
Purchase Plan at any time during an offering period, and participation ends
automatically on termination of employment. Purchases of common stock will occur
on May 1 and November 1 of each year. The value of shares purchased in any
calendar year may not exceed $25,000. In addition, no employee may purchase more
than 1,000 shares of common stock under the Purchase Plan in any one purchase
period.
In September 2000, the Company amended and restated its Certificate of
Incorporation to change the authorized share capital to 50,000,000 of common
stock and 20,779,290 of mandatorily redeemable convertible preferred stock, of
which 7,200,000 has been designated to Series A, 8,610,681 has been designated
to Series B and 4,968,429 has been designated as Series C.
During the period from October 1, 2000 through November 5, 2000, the Company
granted options to purchase an aggregate of 414,650 shares of common stock
resulting in an additional deferred compensation of approximately $7,505,000.
On September 29, 2000, the Company entered into a Master Lease Agreement
with Comdisco ("Comdisco"). Under the terms of the Master Lease Agreement, the
Company leases certain equipment, software and improvements as defined in the
agreement from Comdisco. The amount of financing to be provided is up to
$3,200,000 for equipment and $800,000 for software and leasehold improvement.
Repayments at borrowing are made monthly over either 36 months for equipment and
30 months for software and improvements. Interest accrues at 9% per annum. No
borrowings have been made to date.
In connection with the Master Lease Agreement, the Company granted Comdisco
a warrant to purchase 35,398 shares of the Company's Series C mandatorily
redeemable preferred stock at $5.65 per
F-92
<PAGE>
SITESMITH, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 10: SUBSEQUENT EVENT (UNAUDITED) (CONTINUED)
share. The warrant is immediately exercisable and expires after ten years from
the date of grant. The fair value of the warrant was determined to be
approximately $573,000 using the Black-Scholes option pricing model with the
following assumptions: deemed fair market value per share of $16.19, dividend
yield of 0%, expected volatility of 70%, risk-free interest rate of 5.92%, and a
contractual life of 10 years. Such amount will be recorded as a discount to the
related capital lease obligation and will be amortized as interest expense,
using the effective interest method, over the life of the agreement.
On October 9, the Company entered into a $3,000,000 Loan and Security
Agreement with Comdisco Inc. Under the terms of the Loan and Security Agreement,
Comdisco will lend the Company up to $3,000,000 in minimum advances of $500,000
for working capital purposes. Principal balances of each advance bear interest
of 12% per annum and are due and payable in 36 equal monthly installments of
principal and interest. The loan is collateralised by substantially all the
Company's assets, Copyrights, Patents, and Trademarks.
In connection with the Loan and Security Agreement, Comdisco received an
option to purchase up to 132,743 shares of the Company's Series C mandatorily
redeemable preferred stock at $5.65 per share. The option can be exercised at
any time, at Comdisco's sole and absolute discretion until the effective date of
a liquidity event, which includes the pending merger with Metromedia Fiber
Network, Inc. The relative fair value of this option is approximately $2,446,000
using the Black-Scholes option pricing model with the following assumptions:
deemed fair market value per share of $18.43, dividend yield of 0%, expected
volatility of 70%, risk-free interest rate of 5.92%, and a contractual life of
3 months.
On October 9, 2000, the Company entered into a definitive agreement with
Metromedia Fiber Network, Inc. ("Metromedia") to exchange all outstanding shares
of its common and preferred stock for the right to receive between 55 million
and 62.5 million shares of Metromedia class A common stock. The exchange ratio
will depend on the average closing price of Metromedia class A common stock
during the 20 trading day period ending on the fourth business day prior to the
effective time of merger. The average closing price of Metromedia Fiber class A
common stock for the 20 days ending November 7, 2000, is $18.76 per share. This
transaction is expected to close during the fourth quarter of fiscal 2000,
subject to various closing conditions.
The aggregate merger consideration will be based on the average trading
price of Metromedia Fiber class A common stock on The Nasdaq National Market
during the twenty trading day period ending four days prior to consummation of
the merger subject to the following conditions:
- If the average trading price is greater than or equal to $24.00 and less
than or equal to $27.2727, then the aggregate merger consideration will be
the number of shares obtained by dividing $1,500,000,000 by the average
trading price.
- If the average trading price is less than $24.00, then the aggregate
merger consideration will be 62,500,000 shares.
- If the average trading price is greater than $27.2727, then the aggregate
merger consideration will be 55,000,000 shares.
F-93
<PAGE>
ANNEXES
Annex A--Merger Agreement
Annex B--Escrow Agreement
Annex C--Voting Agreement
Annex D--Delaware General Corporation Law Section 262
<PAGE>
ANNEX A
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER,
dated as of October 9, 2000,
by and among
METROMEDIA FIBER NETWORK, INC.,
SITESMITH, INC.
and
AQUEDUCT ACQUISITION CORP.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
RECITALS.................................................... A-1
ARTICLE I THE MERGER........................................ A-1
Section 1.1 The Merger.............................. A-1
Section 1.2 Closing................................. A-2
Section 1.3 Effective Time.......................... A-2
Section 1.4 The Certificate of Incorporation........ A-2
Section 1.5 The By-Laws............................. A-2
Section 1.6 Directors of Surviving Corporation...... A-2
Section 1.7 Officers of Surviving Corporation....... A-2
ARTICLE II EFFECT OF THE MERGER ON CAPITAL STOCK; EXCHANGE
OF CERTIFICATES.................................. A-2
Section 2.1 Conversion of Capital Stock............. A-2
Section 2.2 Exchange of Certificates................ A-4
Section 2.3 Escrow.................................. A-7
Section 2.4 Treatment of Company Stock Options and
Company Warrants.................................... A-8
Section 2.5 Appraisal Rights........................ A-9
Section 2.6 Adjustments to Prevent Dilution......... A-9
Section 2.7 Withholding Rights...................... A-9
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY... A-10
Section 3.1 Organization and Qualification;
Subsidiaries........................................ A-10
Section 3.2 Certificate of Incorporation and
By-Laws............................................. A-10
Section 3.3 Capitalization.......................... A-10
Section 3.4 Authority............................... A-12
Section 3.5 No Conflict............................. A-12
Section 3.6 Required Filings and Consents........... A-12
Section 3.7 Permits; Compliance with Law............ A-13
Section 3.8 Company S-1; Financial Statements....... A-13
Section 3.9 Absence of Certain Changes or Events.... A-14
Section 3.10 Employee Benefit Plans................. A-15
Section 3.11 Tax Matters............................ A-16
Section 3.12 Contracts; Debt Instruments............ A-16
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Section 3.13 Litigation............................. A-17
Section 3.14 Environmental Matters.................. A-17
Section 3.15 Intellectual Property.................. A-18
Section 3.16 Taxes.................................. A-19
Section 3.17 Non-Competition Agreements............. A-20
Section 3.18 Certain Agreements..................... A-20
Section 3.19 Real Property.......................... A-20
Section 3.20 Labor Matters.......................... A-21
Section 3.21 Customers.............................. A-21
Section 3.22 Investment Company Act................. A-21
Section 3.23 Brokers................................ A-21
Section 3.24 Certain Statutes....................... A-22
Section 3.25 Vote Required.......................... A-22
Section 3.26 Registration Statement................. A-22
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE PARENT AND
MERGER SUB....................................... A-23
Section 4.1 Organization and Qualification;
Subsidiaries........................................ A-23
Section 4.2 Certificate of Incorporation and
By-Laws............................................. A-23
Section 4.3 Capitalization.......................... A-23
Section 4.4 Authority............................... A-24
Section 4.5 No Conflict............................. A-25
Section 4.6 Required Filings and Consents........... A-25
Section 4.7 Permits; Compliance with Law............ A-25
Section 4.8 SEC Filings; Financial Statements....... A-26
Section 4.9 Absence of Certain Changes or Events.... A-26
Section 4.10 Tax Matters............................ A-27
Section 4.11 Litigation............................. A-27
Section 4.12 Environmental Matters.................. A-28
Section 4.13 Taxes.................................. A-28
Section 4.14 Brokers................................ A-29
Section 4.15 Certain Statutes....................... A-29
Section 4.16 Interim Operations of Merger Sub....... A-29
Section 4.17 Registration Statement................. A-29
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
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<S> <C>
ARTICLE V COVENANTS......................................... A-29
Section 5.1 Conduct of Business of the Company...... A-29
Section 5.2 Other Actions........................... A-31
Section 5.3 Notification of Certain Matters......... A-31
Section 5.4 Access to Information;
Confidentiality..................................... A-32
Section 5.5 No Solicitation......................... A-32
Section 5.6 Affiliates.............................. A-32
Section 5.7 Directors' and Officers' Indemnification
and Insurance....................................... A-33
Section 5.8 Written Consent or Stockholders
Meeting............................................. A-33
Section 5.9 Reasonable Best Efforts................. A-33
Section 5.10 Registration Statement................. A-34
Section 5.11 Consents; Filings; Further Action...... A-34
Section 5.12 Plan of Reorganization................. A-35
Section 5.13 Public Announcements................... A-35
Section 5.14 Obligations of Merger Sub.............. A-35
Section 5.15 NASDAQ/NMS Listings.................... A-35
Section 5.16 Expenses............................... A-35
Section 5.17 Takeover Statutes...................... A-35
Section 5.18 Employee Benefits and Stock Options.... A-36
Section 5.19 Form S-8............................... A-37
Section 5.20 Parent Option Pool..................... A-37
ARTICLE VI CONDITIONS....................................... A-37
Section 6.1 Conditions to Each Party's Obligation to
Effect the Merger................................... A-37
Section 6.2 Conditions to Obligations of the Parent
and Merger Sub...................................... A-38
Section 6.3 Conditions to Obligation of the
Company............................................. A-39
ARTICLE VII TERMINATION..................................... A-40
Section 7.1 Termination............................. A-40
Section 7.2 Effect of Termination................... A-40
Section 7.3 Amendment............................... A-40
Section 7.4 Waiver.................................. A-41
Section 7.5 Expenses Following Certain Termination
Events.............................................. A-41
</TABLE>
iii
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<TABLE>
<CAPTION>
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<S> <C>
ARTICLE VIII SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION
AND REMEDIES, CONTINUING COVENANTS............. A-41
Section 8.1 Survival of Representations............. A-41
Section 8.2 Agreement to Indemnify.................. A-41
Section 8.3 Limitations and Exceptions to
Indemnification..................................... A-42
Section 8.4 Indemnification Procedures.............. A-42
ARTICLE IX MISCELLANEOUS.................................... A-43
Section 9.1 Certain Definitions..................... A-43
Section 9.2 Survival................................ A-43
Section 9.3 Counterparts............................ A-44
Section 9.4 GOVERNING LAW AND VENUE, WAIVER OF JURY
TRIAL............................................... A-44
Section 9.5 Notices................................. A-45
Section 9.6 Entire Agreement........................ A-45
Section 9.7 No Third Party Beneficiaries............ A-45
Section 9.8 Severability............................ A-45
Section 9.9 Interpretation.......................... A-46
Section 9.10 Assignment............................. A-46
Section 9.11 Specific Performance................... A-46
</TABLE>
iv
<PAGE>
EXHIBITS
<TABLE>
<S> <C>
Exhibit A Voting Agreement
Exhibit B-1 Spagnolo Employment Agreement
Exhibit B-2 Ryan Employment Agreement
Exhibit C Form of Escrow Agreement
Exhibit D Form of Affiliate Letter
Exhibit E-1 Form of Parent Tax Representation Letter
Exhibit E-2 Form of Company Tax Representation Letter
</TABLE>
v
<PAGE>
INDEX OF DEFINED TERMS
<TABLE>
<CAPTION>
TERM SECTION
---- ---------------
<S> <C>
Acquisition Proposal........................................ 5.5(c)
Additional Option Grant..................................... 5.19
Affected Employees.......................................... 5.17(b)
affiliate................................................... 9.1(a)
Affiliate Letter............................................ 5.6
Aggregate Share Consideration............................... 2.1(a)(i)
Agreement................................................... Preamble
Average Parent Stock Price.................................. 2.1(a)(i)
Basket...................................................... 8.3(b)
Blue Sky Laws............................................... 3.6
business day................................................ 9.1(b)
Certificate................................................. 2.1(a)(iii)
Certificate of Merger....................................... 1.3
CGCL........................................................ 2.5
Claims...................................................... 3.13
Closing..................................................... 1.2
Closing Date................................................ 1.2
COBRA....................................................... 3.10(d)
Code........................................................ Recital (d)
Company..................................................... Preamble
Company Benefit Plans....................................... 3.10(a)
Company Certificate......................................... 2.1(a)(ii)
Company Charter Documents................................... 3.2
Company Common Stock........................................ 2.1(a)(i)
Company Disclosure Letter................................... 3.1(b)
Company Option Plans........................................ 3.3(a)
Company Permits............................................. 3.7
Company Preferred Stock..................................... 2.1(a)(ii)
Company Real Property Leases................................ 3.19(b)
Company S-1................................................. 3.8
Company Series A Preferred Stock............................ 2.1(a)(ii)
</TABLE>
vi
<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
---- ---------------
<S> <C>
Company Series B Preferred Stock............................ 2.1(a)(ii)
Company Series C Preferred Stock............................ 2.1(a)(ii)
Company Stockholders........................................ 2.3(a)
Company Stockholders Meeting................................ 5.8
Company Stock Options....................................... 3.3(a)
Company Subsidiaries........................................ 3.1(a)
Company Tax Representation Letter........................... 5.12
Company Warrants............................................ 3.3(a)
Confidentiality Agreement................................... 5.4(b)
Contracts................................................... 3.5(a)(iii)
control..................................................... 9.1(a)
controlled by............................................... 9.1(a)
controlling................................................. 9.1(a)
Damages..................................................... 8.2
DGCL........................................................ Recital (a)
Dispute Period.............................................. 8.4(b)
Dissenting Shares........................................... 2.5(a)
Effective Time.............................................. 1.3
Environment................................................. 3.14(b)(i)
Environmental Claims........................................ 3.14(b)(ii)
ERISA....................................................... 3.10(a)
ERISA Affiliate............................................. 3.10(a)
Escrow Agent................................................ 2.3(a)
Escrow Agreement............................................ 2.3(a)
Escrow Period............................................... 2.3(a)
Escrow Release Date......................................... 8.1
Escrow Shares............................................... 2.3(a)
Escrow Representative....................................... 2.3(a)
Excess Parent Shares........................................ 2.2(f)(i)
Exchange Act................................................ 3.6
Exchange Agent.............................................. 2.2(a)
Exchange Fund............................................... 2.2(a)
Exchange Ratio.............................................. 2.1(a)(i)
</TABLE>
vii
<PAGE>
<TABLE>
<CAPTION>
TERM SECTION
---- ---------------
<S> <C>
Exchange Trust.............................................. 2.2(f)(i)
Expenses.................................................... 7.5
For Good Reason............................................. 5.17(c)
GAAP........................................................ 3.8(b)
Governmental Entity......................................... 3.6
group....................................................... 9.1(d)
Hazardous Substance......................................... 3.14(b)(iii)
HSR Act..................................................... 3.6
including................................................... 9.1(c)
Indemnified Parties......................................... 5.7(a)
Indemnified Persons......................................... 8.2
Indemnitors................................................. 8.2
Indemnity Notice............................................ 8.4(b)
Intellectual Property....................................... 3.15(a)(ii)
Investment Company Act...................................... 3.22
IP Licenses................................................. 3.15(a)(ii)
IRS......................................................... 3.10(a)
June Financial Statements................................... 3.8(c)
Law......................................................... 3.5(a)(ii)
Liens....................................................... 3.3(c)
Material Adverse Effect on the Company...................... 3.1(a)
Material Adverse Effect on the Parent....................... 4.1
Material Contract........................................... 3.12
Merger...................................................... Recital (a)
Merger Consideration........................................ 2.1(a)(iii)
Merger Sub.................................................. Preamble
Merger Sub Charter Documents................................ 4.2
NASDAQ/NMS.................................................. 2.1(a)(i)
Parent...................................................... Preamble
Parent Charter Documents.................................... 4.2
Parent Class B Common Stock................................. 4.3(a)
Parent Common Stock......................................... 2.1(a)(i)
Parent Disclosure Letter.................................... 4.3(b)
</TABLE>
viii
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<TABLE>
<CAPTION>
TERM SECTION
---- ---------------
<S> <C>
Parent Filed SEC Reports.................................... 4.9(b)
Parent Permits.............................................. 4.7
Parent Preferred Stock...................................... 4.3(a)
Parent SEC Reports.......................................... 4.8(a)
Parent Stock Options........................................ 4.3(a)
Parent Subsidiaries......................................... 4.1
Parent Tax Representation Letter............................ 5.12
person...................................................... 9.1(d)
Principal Stockholders...................................... Recital (b)
Release..................................................... 3.14(b)(iv)
Registration Statement...................................... 3.26
Representatives............................................. 5.4(a)
Requisite Company Vote...................................... 3.25
Ryan Employment Agreement................................... Recital (c)
Safety and Environmental Laws............................... 3.14(b)(v)
SEC......................................................... 3.8(a)
Securities Act.............................................. 3.6
Software.................................................... 3.15(a)(ii)
Spagnolo Employment Agreement............................... Recital (c)
Sub Common Stock............................................ 2.1(b)
subsidiary.................................................. 9.1(e)
subsidiaries................................................ 9.1(e)
Surviving Corporation....................................... 1.1
Takeover Statute............................................ 3.24
Taxes....................................................... 3.16(a)
Technology.................................................. 3.15(a)(ii)
Terminating Company Breach.................................. 7.1(e)
Terminating Parent Breach................................... 7.1(f)
Third Party Claim........................................... 8.4(a)
Total Company Shares........................................ 2.1(a)(i)
under common control with................................... 9.1(a)
Written Consent............................................. 5.8
1999 Financial Statements................................... 3.8(b)
</TABLE>
ix
<PAGE>
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated as of October 9, 2000 (this
"AGREEMENT"), by and among, Metromedia Fiber Network, Inc., a Delaware
corporation (the "PARENT"), SiteSmith, Inc., a Delaware corporation (the
"COMPANY"), and Aqueduct Acquisition Corp., a Delaware corporation and a
wholly-owned subsidiary of the Parent ("MERGER SUB").
RECITALS
(a) The respective boards of directors of the Parent, Merger Sub and the
Company have determined that it is advisable and in the best interests of their
respective stockholders to combine the respective businesses of the Parent and
the Company, and consequently have approved the merger of Merger Sub with and
into the Company (the "MERGER"), and have approved and adopted this Agreement
and the Merger, in accordance with the General Corporation Law of the State of
Delaware (the "DGCL").
(b) Concurrently with the execution of this Agreement, as a condition to the
willingness of the Parent to enter into this Agreement, certain stockholders of
the Company (the "PRINCIPAL STOCKHOLDERS") are entering into a Voting Agreement,
a copy of which is attached hereto as Exhibit A (the "VOTING AGREEMENT"),
providing for, among other things, the approval and adoption by such
stockholders of this Agreement and the Merger.
(c) Concurrently with the execution of this Agreement, as a condition to the
willingness of the Parent to enter into this Agreement, Mark Spagnolo and Robert
J. Ryan, IV are each entering into Employment Agreements, dated as of the date
hereof and effective as of the Effective Time, with the Company, copies of which
are attached hereto as Exhibit B-1 (the "SPAGNOLO EMPLOYMENT AGREEMENT") and as
Exhibit B-2 (the "RYAN EMPLOYMENT AGREEMENT"), respectively.
(d) It is intended that, for U.S. federal income tax purposes, the Merger
shall qualify as a reorganization under the provisions of Section 368(a) of the
Internal Revenue Code of 1986, as amended (the "CODE"), and the rules and
regulations promulgated under the Code and that this Agreement be, and is
hereby, adopted as a plan of reorganization for purposes of Section 368 of the
Code.
(e) Certain terms used in this Agreement which are not capitalized have the
meanings specified in Section 9.1.
NOW, THEREFORE, in consideration of the mutual representations, warranties
and agreements contained herein, and for other good and valuable consideration
the receipt and sufficiency of which are hereby acknowledged, the parties to
this Agreement, intending to be legally bound by this Agreement, agree as
follows:
ARTICLE I
THE MERGER
SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions set
forth in this Agreement, at the Effective Time and in accordance with the DGCL,
Merger Sub shall be merged with and into the Company in accordance with this
Agreement and the separate corporate existence of Merger Sub shall cease. The
Company shall be the surviving corporation in the Merger (sometimes referred to
as the "SURVIVING CORPORATION") and shall continue to be governed by the laws of
the State of Delaware, and the separate corporate existence of the Company with
all its rights, privileges, immunities, powers and franchises shall continue
unaffected by the Merger. The Merger shall have the effects set forth in the
DGCL, including Section 259 of the DGCL. Without limiting the generality of the
foregoing, and subject thereto, at the Effective Time, all the properties,
rights, privileges, powers
A-1
<PAGE>
and franchises of the Company and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of the Company and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
SECTION 1.2 CLOSING. The closing of the Merger (the "CLOSING") shall take
place: (a) at the offices of Paul, Weiss, Rifkind, Wharton & Garrison, New York,
New York at 10:00 A.M. on the business day after the day on which the last to be
fulfilled or waived of the conditions set forth in Article VI (other than those
conditions that by their nature are to be satisfied at the Closing, but subject
to the fulfillment or waiver of those conditions) shall be satisfied or waived
in accordance with this Agreement; or (b) at such other place and time and/or on
such other date as the Parent and the Company may agree in writing (the "CLOSING
DATE").
SECTION 1.3 EFFECTIVE TIME. As soon as practicable following the Closing,
the parties hereto will cause a Certificate of Merger (the "CERTIFICATE OF
MERGER") to be signed, acknowledged and delivered for filing with the Secretary
of State of the State of Delaware as provided in Section 251 of the DGCL. The
Merger shall become effective at the time when a Certificate of Merger has been
duly filed with the Secretary of State of the State of Delaware or such other
subsequent date or time as shall be agreed upon by the parties and set forth in
the Certificate of Merger and in accordance with the DGCL (the "EFFECTIVE
TIME").
SECTION 1.4 THE CERTIFICATE OF INCORPORATION. The certificate of
incorporation of the Company in effect immediately prior to the Effective Time
shall be amended at the Effective Time to read in its entirety as the
certificate of incorporation of Merger Sub then reads and shall, as so amended,
from and after the Effective Time, be the certificate of incorporation of the
Surviving Corporation until duly amended as provided therein or by applicable
law.
SECTION 1.5 THE BY-LAWS. The by-laws of the Company in effect immediately
prior to the Effective Time shall be amended at the Effective Time to read in
their entirety as the by-laws of Merger Sub then read and shall, as so amended,
from and after the Effective Time, be the by-laws of the Surviving Corporation
until duly amended as provided therein or by applicable law.
SECTION 1.6 DIRECTORS OF SURVIVING CORPORATION. The directors of Merger Sub
at the Effective Time shall, from and after the Effective Time, be the directors
of the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the certificate of incorporation and by-laws of the Surviving
Corporation.
SECTION 1.7 OFFICERS OF SURVIVING CORPORATION. The officers of the Company
at the Effective Time shall, from and after the Effective Time, be the officers
of the Surviving Corporation until their successors have been duly elected or
appointed and qualified or until their earlier death, resignation or removal in
accordance with the certificate of incorporation and by-laws of the Surviving
Corporation.
ARTICLE II
EFFECT OF THE MERGER ON CAPITAL STOCK;
EXCHANGE OF CERTIFICATES
SECTION 2.1 CONVERSION OF CAPITAL STOCK. At the Effective Time, by virtue
of the Merger and without any action on the part of the holder of any capital
stock of the Company:
(a) MERGER CONSIDERATION.
(i) Each share of the common stock, par value $.0001 per share, of the
Company ("COMPANY COMMON STOCK") issued and outstanding immediately prior to
the Effective Time (other than shares of Company Common Stock that are owned
by the Parent, Merger Sub or any other Parent Subsidiary or by the Company)
shall be converted, by virtue of the Merger and without any action
A-2
<PAGE>
on the part of the holder thereof, into the right to receive the number of
shares of Class A Common Stock, par value $ .01 per share, of the
Parent ("PARENT COMMON STOCK") equal to the "EXCHANGE RATIO," which shall be
calculated as follows:
(x) if the Average Parent Stock Price is greater than or equal to
$24.00 and less than or equal to $27.2727, then the AExchange Ratio"
shall be equal to the quotient obtained by dividing (A) the Aggregate
Share Consideration by (B) the Total Company Shares;
(y) if the Average Parent Stock Price is less than $24.00, then the
AExchange Ratio" shall be equal to the quotient obtained by dividing (A)
62,500,000 by (B) the Total Company Shares; and
(z) if the Average Parent Stock Price is greater than $27.2727, then
the AExchange Ratio" shall be equal to the quotient obtained by dividing
(A) 55,000,000 by (B) the Total Company Shares.
The "AGGREGATE SHARE CONSIDERATION" means that number of shares of Parent
Common Stock (rounded to the nearest whole number) equal to the quotient
obtained by dividing $1,500,000,000 by the Average Parent Stock Price.
The "AVERAGE PARENT STOCK PRICE" means the average of the daily closing
prices of the Parent Common Stock as quoted by the Nasdaq Stock Market's
National Market System ("NASDAQ/NMS") (as reported by BLOOMBERG, L.P.) for the
twenty consecutive trading days ending on the fourth business day (including
such fourth business day in the determination) immediately prior to the Closing.
"TOTAL COMPANY SHARES" means the sum of (i) all shares of Company Common
Stock outstanding on the business day immediately prior to the Closing Date and
(ii) all shares of Company Common Stock issuable upon the conversion, exchange
or exercise of all Company securities convertible into or exchangeable or
exercisable for Company Common Stock (including all Company Warrants, Company
Stock Options and Company Preferred Stock) outstanding on the business day
immediately prior to the Closing Date.
(ii) Each share of the Series A Convertible Preferred Stock, par value
$.0001 per share, of the Company (the "COMPANY SERIES A PREFERRED STOCK"),
the Series B Convertible Preferred Stock, par value $.0001 per share, of the
Company (the "COMPANY SERIES B PREFERRED STOCK"), and the Series C
Convertible Preferred Stock, par value $.0001 per share, of the Company (the
"COMPANY SERIES C PREFERRED STOCK," and, together with the Company Series A
Preferred Stock and the Company Series B Preferred Stock, the "COMPANY
PREFERRED STOCK") issued and outstanding immediately prior to the Effective
Time (other than shares of Company Preferred Stock that are owned by the
Parent, any Parent Subsidiary, Merger Sub, the Company or any Company
Subsidiary) shall be converted, by virtue of the Merger and without any
action on the part of the holder thereof, into a number of shares of Parent
Common Stock equal to the product of (x) the number of shares of Company
Common Stock that each such share of Company Preferred Stock would have been
entitled to receive upon conversion pursuant to Article IV(B)(4) of the
Fourth Amended and Restated Certificate of Incorporation of the Company (the
"COMPANY CERTIFICATE") immediately prior to the Closing Date and (y) the
Exchange Ratio.
(iii) The number of shares of Parent Common Stock issuable pursuant to
Section 2.1(a)(i) and (ii) shall be subject to adjustment as provided in
Section 2.6 and such shares, together with cash in lieu of fractional shares
of Parent Common Stock payable pursuant to Section 2.2(f), shall
collectively be referred to as the "MERGER CONSIDERATION." At the Effective
Time, all shares of Company Common Stock and Company Preferred Stock shall
no longer be outstanding, shall be canceled and retired and shall cease to
exist, and each certificate (a "CERTIFICATE") formerly
A-3
<PAGE>
representing such shares shall thereafter represent only the right to
receive the Merger Consideration and any distribution or dividend under
Section 2.2(c).
(b) CAPITAL STOCK OF MERGER SUB. Each share of common stock, par value $.01
per share, of Merger Sub ("SUB COMMON STOCK") issued and outstanding immediately
prior to the Effective Time shall be converted into and become one validly
issued, fully paid and nonassessable share of common stock, par value $.01 per
share, of the Surviving Corporation.
(c) CANCELLATION OF TREASURY STOCK AND PARENT-OWNED STOCK. All shares of
Company Common Stock that are owned by the Company as treasury stock or by the
Parent, Merger Sub or any Parent Subsidiary issued and outstanding immediately
prior to the Effective Time (i) shall, by virtue of the Merger and without any
action on the part of the holder of any such shares, no longer be outstanding,
(ii) shall be canceled and retired without payment of any consideration
therefor, and (iii) shall cease to exist.
SECTION 2.2 EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. Subject to the provisions of Sections 2.3 and 2.5, as of
the Effective Time, the Parent shall deposit with the Parent's transfer agent
for its shares of Parent Common Stock, or with such other bank or trust company
designated by the Parent prior to the Effective Time and reasonably acceptable
to the Company (the "EXCHANGE AGENT"), for the benefit of the holders of
Certificates and for exchange in accordance with this Article II, certificates
representing the number of shares of Parent Common Stock issuable pursuant to
Section 2.1(a) after giving effect to Sections 2.3 and 2.5 (such shares of
Parent Common Stock, together with any dividends or distributions with respect
thereto to which the holders of Certificates may be entitled pursuant to Section
2.2(c) and with the proceeds held in the Exchange Trust, being hereinafter
referred to as the "EXCHANGE FUND") in exchange for outstanding shares of
Company Common Stock and Company Preferred Stock.
(b) EXCHANGE PROCEDURES. Promptly after the Effective Time, the Surviving
Corporation shall cause the Exchange Agent to mail to each holder of record of a
Certificate (i) a letter of transmittal specifying that delivery shall be
effected, and that risk of loss and title to the Certificates shall pass, only
upon delivery of the Certificates (or affidavits of loss in lieu of
Certificates) to the Exchange Agent, in a form and with other customary
provisions specified by the Parent, (ii) instructions for surrendering the
Certificates in exchange for (A) certificates representing shares of Parent
Common Stock, (B) cash in lieu of fractional shares, and (C) any unpaid
dividends and other distributions and (iii) the stock transfer powers required
by the Escrow Agent pursuant to Section 2.3. Upon surrender of a Certificate for
cancellation to the Exchange Agent together with such letter of transmittal,
duly executed, the holder of that Certificate shall be entitled to receive in
exchange (1) a certificate representing that number of whole shares of Parent
Common Stock that the holder is entitled to receive under this Article II (after
giving effect to the provisions of Section 2.3), (2) a check in the amount
(after giving effect to any required tax withholding) of (x) any cash in lieu of
fractional shares plus (y) any unpaid dividends (other than stock dividends) and
any other dividends or other distributions that such holder has the right to
receive under the provisions of this Article 2. Any Certificate so surrendered
shall immediately be canceled. No interest will be paid or accrued on any amount
payable upon due surrender of the Certificates. In the event of a transfer of
ownership of shares of Company Common Stock or Company Preferred Stock that is
not registered in the transfer records of the Company, a certificate
representing the proper number of shares of Parent Common Stock, together with a
check for any cash to be paid upon the surrender of the Certificate and any
other dividends or distributions in respect of those shares, may be issued or
paid to such a transferee if the Certificate formerly representing such shares
of Company Common Stock or Company Preferred Stock is presented to the Exchange
Agent and accompanied by all documents required to evidence and effect the
transfer and to evidence that any applicable stock transfer taxes have been
paid. If any certificate for shares of Parent Common Stock is to be issued in a
name other than that in which the
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surrendered Certificate is registered, it shall be a condition of such exchange
that the person requesting such exchange pay any transfer or other taxes
required by reason of the issuance of certificates for shares of Parent Common
Stock in a name other than that of the registered holder or shall establish to
the satisfaction of the Parent or the Exchange Agent that such tax has been paid
or is not applicable.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED COMPANY COMMON STOCK. Whenever
a dividend or other distribution is declared by the Parent in respect of Parent
Common Stock and the record date for that dividend or other distribution is
after the Effective Time, that declaration shall include dividends or other
distributions in respect of all shares of Parent Common Stock issuable under
this Agreement. No dividends or other distributions in respect of the Parent
Common Stock shall be paid to any holder of any unsurrendered Certificate until
that Certificate is surrendered for exchange in accordance with this Article 2.
Subject to the effect of applicable laws, following surrender of any such
Certificate, there shall be issued or paid to the holder of the certificates
representing whole shares of Parent Common Stock issued in exchange therefor,
without interest, (i) at the time of such surrender, the dividends or other
distributions with a record date after the Effective Time and a payment date on
or prior to the date of issuance of such whole shares of Parent Common Stock and
not previously paid, and (ii) at the appropriate payment date, the dividends or
other distributions payable with respect to such whole shares of Parent Common
Stock with a record date after the Effective Time but with a payment date
subsequent to surrender. For purposes of dividends or other distributions in
respect of shares of Parent Common Stock, all shares of Parent Common Stock to
be issued pursuant to the Merger shall be deemed issued and outstanding as of
the Effective Time.
(d) NO FURTHER OWNERSHIP RIGHTS. Until surrendered as contemplated by this
Section 2.2, each Certificate shall be deemed at any time after the Effective
Time to represent only the right to receive the Merger Consideration. All shares
of Parent Common Stock, together with any cash paid under Section 2.2(c) or
Section 2.2(f) issued upon the surrender for or exchange of Certificates in
accordance with the terms of this Agreement, shall be deemed to have been issued
in full satisfaction of all rights pertaining to the shares of Company Common
Stock or Company Preferred Stock formerly represented by such Certificates.
(e) NO FURTHER TRANSFERS. After the Effective Time, the stock transfer books
of the Company shall be closed and there shall be no further registration of
transfers on the records of the Company of the shares of Company Common Stock or
Company Preferred Stock that were outstanding immediately prior to the Effective
Time.
(f) FRACTIONAL SHARES.
(i) No certificates or scrip representing fractional shares of Parent
Common Stock shall be issued upon the surrender for exchange of
Certificates, and such fractional share interest will not entitle its owner
to vote, to receive dividends or other distributions or to any other rights
of a stockholder of the Parent. Notwithstanding any other provision of this
Agreement, each holder of shares of Company Common Stock or Company
Preferred Stock exchanged pursuant to the Merger who would otherwise have
been entitled to receive a fraction of a share of Parent Common Stock (after
taking into account all Certificates delivered by such holder) shall receive
from the Exchange Agent, in accordance with the provisions of this Article
II, a cash payment in lieu of such fractional share of Parent Common Stock,
representing such holder's proportionate interest, if any, in the net
proceeds from the sale by the Exchange Agent in one or more transactions
(which sale transactions shall be made at such times, in such manner and on
such terms as the Exchange Agent shall determine in its reasonable
discretion) on behalf of all such holders of the aggregate of the fractional
shares of Parent Common Stock, as applicable, which would otherwise have
been issued (the "EXCESS PARENT SHARES"). Until the net proceeds of such
sale or sales have been distributed to the holders of Certificates, the
Exchange Agent will hold such proceeds in trust (the "EXCHANGE TRUST") for
the holders of Certificates. All commissions,
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transfer taxes and other out-of-pocket transaction costs, including the
expenses and compensation of the Exchange Agent, incurred in connection with
this sale of the Excess Parent Shares shall be paid by the Surviving
Corporation. As soon as practicable after the determination of the amount of
cash, if any, to be paid to holders of Certificates in lieu of any
fractional shares of Parent Common Stock, the Exchange Agent shall make
available such amounts to such holders of Certificates without interest. The
Exchange Agent shall determine the portion of such net proceeds to which
each holder of shares of Company Common Stock or Company Preferred Stock
shall be entitled, if any, by multiplying the amount of the aggregate net
proceeds by a fraction the numerator of which is the amount of the
fractional share interest to which such holder is entitled (after taking
into account all shares of Company Common Stock or Company Preferred Stock
then held by such holder) and the denominator of which is the aggregate
amount of fractional share interests to which all holders of Certificates
are entitled.
(ii) Notwithstanding the provisions of clause (i) of this Section
2.2(f), the Parent may elect, at its option exercised prior to the Effective
Time and in lieu of the issuance and sale of Excess Parent Shares and the
making of the payments contemplated in such subsection, to pay to the
Exchange Agent an amount in cash sufficient for the Exchange Agent to pay
each holder of shares of Company Common Stock and Company Preferred Stock an
amount in cash equal to the product obtained by multiplying (A) the
fractional share interest to which such holder would otherwise be entitled
(after taking into account all shares of Company Common Stock held at the
Effective Time by such holder) by (B) the closing price for a share of
Parent Common Stock on the first business day immediately following the
Effective Time as quoted by NASDAQ/NMS (as reported by BLOOMBERG, L.P.) and,
in such case, all references in this Agreement to the cash proceeds of the
sale of the Excess Shares and similar references shall be deemed to mean and
refer to the payments calculated as set forth in this Section 2.2(f)(ii).
(g) TERMINATION OF EXCHANGE FUND; UNCLAIMED STOCK. Any shares of Parent
Common Stock and any portion of the Exchange Fund or of dividends or other
distributions with respect to the Parent Common Stock deposited by the Parent
with the Exchange Agent (including the proceeds of any investments of those
funds) that remains unclaimed by the stockholders of the Company twelve months
after the Effective Time shall be paid to the Parent. Any former stockholders of
the Company who have not theretofore complied with this Article II shall
thereafter look only to the Parent for payment of their Merger Consideration and
any dividends and other distributions issuable or payable pursuant to Section
2.1 and Section 2.2(c) upon due surrender of their Certificates, in each case,
without any interest. Notwithstanding the foregoing, none of the Parent, the
Surviving Corporation, the Exchange Agent or any other person shall be liable to
any former holder of shares of Company Common Stock or Company Preferred Stock
for any amount properly delivered to a public official under applicable
abandoned property, escheat or similar laws. If any Certificates shall not have
been surrendered prior to five years after the Effective Time (or immediately
prior to such earlier date on which any Merger Consideration in respect of such
Certificate would otherwise escheat to or become the property of any
Governmental Entity), any amounts payable in respect of such Certificate shall,
to the extent permitted by applicable law, become the property of the Surviving
Corporation, free and clear of all claims or interests of any person previously
entitled to those amounts.
(h) LOST, STOLEN OR DESTROYED CERTIFICATES. In the event any Certificate
shall have been lost, stolen or destroyed, upon the making of an affidavit of
that fact by the person claiming such Certificate to be lost, stolen or
destroyed and the posting by such person of a bond in the form customarily
required by the Parent as indemnity against any claim that may be made against
it with respect to such Certificate, the Exchange Agent shall issue in exchange
for such lost, stolen or destroyed Certificate the shares of Parent Common
Stock, any unpaid dividends or other distributions and any cash payment in lieu
of a fractional share in respect of that Certificate issuable or payable under
this Article II upon due
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surrender thereof and deliverable in respect of the shares represented by such
Certificate under this Agreement, in each case, without interest.
SECTION 2.3 ESCROW.
(a) At the Closing, the Parent shall withhold from the shares of Parent
Common Stock that would otherwise be issued in the Merger to each holder of
Company Common Stock and Company Preferred Stock (the "COMPANY STOCKHOLDERS")
pursuant to Section 2.1(a), a number of such shares of Parent Common Stock that
is equal to fifteen percent (15%) of the aggregate number of shares of Parent
Common Stock included in the Merger Consideration, and the number of such shares
of Parent Common Stock withheld from each Company Stockholder shall be PRO RATA
and shall be rounded down to the nearest whole number of such shares (such
withheld shares of Parent Common Stock being hereinafter referred to as the
"ESCROW SHARES"). The Parent will deliver certificates representing such Escrow
Shares to an institution reasonably acceptable to the Company, as escrow agent
(the "ESCROW AGENT"), and, at the time prescribed in Section 2.2(b), the Company
Stockholders will deliver to the Escrow Agent related stock transfer powers
executed by the applicable Company Stockholders (with medallion signature
guarantees if requested by the Escrow Agent), to be held by the Escrow Agent as
security for the Company Stockholders' indemnification obligations under Article
VIII and pursuant to the provisions of an escrow agreement in substantially the
form attached hereto as Exhibit C (the "ESCROW AGREEMENT") to be entered into at
the Closing by the Parent, the Escrow Agent and Mark Spagnolo, as the
representative of the Company Stockholders (the "ESCROW REPRESENTATIVE") under
the Escrow Agreement and as the attorney-in-fact and agent for and on behalf of
each Company Stockholder as provided in the Escrow Agreement. The Escrow Shares
shall be withheld from each Company Stockholder PRO RATA in the same proportion
as the total number of shares of Parent Common Stock issuable to such
stockholder under Section 2.1(a) bears to the total number of shares of Parent
Common Stock issued to all Company Stockholders under Section 2.1(a). The Escrow
Shares shall be represented by stock certificates issued in the names of each of
the Company Stockholders in proportion to their respective interests in the
Escrow Shares and shall be held by the Escrow Agent during that time period
commencing on the Effective Time and ending on the first anniversary of the
Effective Time or on such earlier or later date as may be provided in the Escrow
Agreement (such time period being hereafter called the "ESCROW PERIOD").
(b) By their approval of the Merger, the Company Stockholders will be
conclusively deemed to have consented to, approved and agreed to be bound by:
(i) the indemnification provisions of Article VIII; (ii) the Escrow Agreement;
(iii) the appointment of Mark Spagnolo as the Escrow Representative; and (iv)
the taking by the Escrow Representative of any and all actions and the making of
any decisions required or permitted to be taken by the Escrow Representative
under this Agreement and/or the Escrow Agreement, including the exercise of the
power to: (I) authorize delivery to the Parent of Escrow Shares in satisfaction
of indemnity claims by the Parent or any other Indemnified Person pursuant to
Article VIII and/or the Escrow Agreement; (II) agree to, negotiate, enter into
settlements and compromises of, demand arbitration of, and comply with orders of
courts and awards of arbitrators with respect to, such claims; (III) arbitrate,
resolve, settle or compromise any claim for indemnity made pursuant to Article
VIII; and (IV) take all actions necessary in the judgment of the Escrow
Representative for the accomplishment of the foregoing. The Escrow
Representative will have authority and power to act on behalf of each Company
Stockholder with respect to the Escrow Agreement and the disposition, settlement
or other handling of all claims under Article VIII hereof or governed by the
Escrow Agreement, and all rights or obligations arising under the Escrow
Agreement so long as all Company Stockholders are treated in the same manner.
The Company Stockholders will be bound by all actions taken and documents
executed by the Escrow Representative in connection with the Escrow Agreement,
and the Parent will be entitled to rely on any action or decision of the Escrow
Representative. In performing the functions specified in this Agreement and the
Escrow Agreement, the Escrow Representative will not be liable to any Company
Stockholder in the absence of
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gross negligence or willful misconduct on the part of the Escrow Representative.
Any loss, liability or expense reasonably incurred without gross negligence or
willful misconduct by the Escrow Representative in connection with actions taken
by the Escrow Representative pursuant to the terms of the Escrow Agreement
(including the hiring of legal counsel and the incurring of legal fees and
costs) will be paid by the Company Stockholders to the Escrow Representative PRO
RATA in proportion to their respective percentage interests in the Escrow
Shares. In performing the functions specified in this Agreement and the Escrow
Agreement, the Escrow Representative shall have reasonable access to information
about the Parent and the reasonable assistance of the Parent's officers and
employees; PROVIDED, that the Escrow Representative shall treat confidentiality
and not disclose any nonpublic information from or about the Parent or any
Parent Subsidiary to any person (except on a need to know basis to individuals
who agree to treat such information confidentially).
SECTION 2.4 TREATMENT OF COMPANY STOCK OPTIONS AND COMPANY WARRANTS.
(a) The Parent and the Company shall take such actions as are necessary to
provide that, at the Effective Time, each outstanding Company Stock Option and
Company Warrant shall be assumed by the Parent and adjusted in accordance with
the terms thereof and this Agreement to be exercisable to purchase shares of
Parent Common Stock, as provided below. Following the Effective Time, each
Company Stock Option and Company Warrant shall continue to have, and shall be
subject to, the same terms and conditions set forth in the Company Option Plans
or any other agreement pursuant to which such Company Stock Option or Company
Warrant was subject immediately prior to the Effective Time, as the case may be,
except that (i) each such Company Stock Option and Company Warrant, as the case
may be, shall be exercisable for that number of shares of Parent Common Stock
equal to the product of (x) the aggregate number of shares of Company Common
Stock for which such Company Stock Option or Company Warrant, as the case may
be, was exercisable, and (y) the Exchange Ratio, rounded, in the case of any
Company Stock Options, other than an Aincentive stock option" (within the
meaning of Section 422 of the Code), or Company Warrant, up, and, in the case of
any Company Stock Option that is an incentive stock option, down, to the nearest
whole share, and (ii) the exercise price per share of such Company Stock Option
or Company Warrant shall be equal to the aggregate exercise prices of such
Company Stock Option or Company Warrant immediately prior to the Effective Time
divided by the number of shares of Parent Common Stock for which such Company
Stock Option or Company Warrant shall be exercisable as determined in accordance
with the preceding clause (i), rounded to the nearest cent in the case of any
Company Warrant or any Company Stock Option other than an Aincentive stock
option" and, in the case of any Company Stock Option that is an Aincentive stock
option," rounded up to the nearest cent.
(b) As soon as practicable following the Effective Time, the Parent shall
deliver to the holders of Company Stock Options and Company Warrants appropriate
notices setting forth such holders' rights after giving effect to the Merger and
the provisions set forth above. At or prior to the Effective Time, the Company
shall make such amendments and take such other actions, if any, to the Company
Option Plans or such other agreement pursuant to which the Company Stock Options
or Company Warrants were issued as shall be necessary to permit the assumption
and adjustment referred to in this Section 2.4 and except as expressly required
by the terms thereof as in effect on the date hereof and described in Section
3.3 of the Company Disclosure Letter, to ensure that none of the Company Stock
Options or Company Warrants shall vest, and that there shall not be any
acceleration of vesting schedules under the terms of such Company Stock Options
and Company Warrants, as a result of the transactions contemplated hereby.
(c) It is the intention of the parties that, to the extent that any Company
Stock Option constituted an incentive stock option immediately prior to the
Effective Time, such option continue to qualify as an incentive stock option to
the maximum extent permitted by Section 422 of the Code, and that the assumption
of the Company Stock Options provided by this Section 2.4 satisfy the conditions
of Section
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424(a) of the Code. The Parent shall comply with the terms of the Company Option
Plans and ensure, to the extent required by, and subject to the provisions of,
such Company Option Plans, that the Company Stock Options that qualified as
incentive stock options prior to the Effective Time continue to qualify as
incentive stock options after the Effective Time.
(d) The Parent shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Parent Common Stock for delivery upon
exercise of Company Stock Options and Company Warrants at and after the
Effective Time.
SECTION 2.5 APPRAISAL RIGHTS. (a) On the date hereof, the Company shall
send to its stockholders who are entitled to appraisal rights the notice
required by Section 262 of the DGCL and Chapter 13 of the California General
Corporate Law ("CGCL"), if applicable. Notwithstanding anything to the contrary
contained in this Agreement, any shares of capital stock of the Company for
which, as of the date which is 20 days after the mailing of the notice to
stockholders required by Section 262 of the DGCL and Chapter 13 of the CGCL, if
applicable, the holder thereof has demanded an appraisal of their value in
accordance with Section 262 of the DGCL or Chapter 13 of the CGCL, if applicable
("DISSENTING SHARES") shall not be converted into or represent the right to
receive Parent Common Stock in accordance with Section 2.1(a), and the holder or
holders of such shares shall be entitled only to such rights as may be granted
to such holder or holders in Section 262 of the DGCL and Chapter 13 of the CGCL,
if applicable; PROVIDED, HOWEVER, that if the status of any such shares as
Dissenting Shares shall not be perfected in accordance with Section 262 of the
DGCL and Chapter 13 of the CGCL, if applicable, or if any such shares shall lose
their status as Dissenting Shares, as of the later of the Effective Time or the
time of the failure to perfect such status or the loss of such status, such
shares shall automatically be converted into and shall represent only the right
to receive (upon the surrender of the certificate or certificates representing
such shares) Parent Common Stock in accordance with Section 2.1(a).
(b) The Company shall give Parent (i) prompt notice of any written demand
received by the Company to require the Company to purchase Dissenting Shares
pursuant to Section 262 of the DGCL and Chapter 13 of the CGCL, if applicable,
and of any other demand, notice or instrument delivered to the Company prior to
the Effective Time pursuant to the DGCL or CGCL, if applicable, and (ii) the
opportunity to participate in all negotiations and proceedings with respect to
any such demand, notice or instrument. The Company shall not make any payment or
settlement offer prior to the Effective Time with respect to any such demand
unless the Parent shall have consented in writing to such payment or settlement
offer.
SECTION 2.6 ADJUSTMENTS TO PREVENT DILUTION. In the event that prior to the
Effective Time there is a change in the number of shares of Company Common
Stock, Company Preferred Stock or Parent Common Stock or securities convertible
or exchangeable into or exercisable for shares of Company Common Stock, Company
Preferred Stock or shares of Parent Common Stock issued and outstanding as a
result of a distribution, reclassification, stock split (including a reverse
stock split), stock dividend or distribution or other similar transaction, the
Exchange Ratio shall be equitably adjusted to eliminate the effects of that
event.
SECTION 2.7 WITHHOLDING RIGHTS. Each of the Surviving Corporation and the
Parent shall be entitled to deduct and withhold from any amounts otherwise
payable pursuant to this Agreement to any holder of a Certificate such amounts
as it is required to deduct and withhold with respect to the making of such
payment under the Code, or any provisions of Law. To the extent that amounts are
so withheld by the Surviving Corporation or the Parent, as the case may be, and
paid to the appropriate taxing authority, such withheld amounts shall be treated
for purposes of this Agreement as having been paid to the holder of a
Certificate in respect to which such deduction and withholding was made by the
Surviving Corporation or the Parent, as the case may be.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Parent and Merger Sub that:
SECTION 3.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Each of the Company and each subsidiary of the Company (collectively,
the "COMPANY SUBSIDIARIES") has been duly organized and is validly existing and
in good standing under the laws of the State of Delaware and has the requisite
power and authority and all necessary governmental approvals to own, lease and
operate its properties and to carry on its business as it is now being
conducted. Each of the Company and each Company Subsidiary is duly qualified or
licensed to do business, and is in good standing, in each jurisdiction where the
character of the properties owned, leased or operated by it or the nature of its
business makes such qualification or licensing necessary, except for such
failures to be so qualified or licensed and in good standing that, individually
or in the aggregate, have not resulted and could not reasonably be expected to
result in a Material Adverse Effect on the Company. For purposes of this
Agreement, "MATERIAL ADVERSE EFFECT ON THE COMPANY" means any change in or
effect on the business, assets, properties, results of operations or condition
(financial or otherwise) of the Company or any Company Subsidiary that is or
could reasonably be expected to be materially adverse to the Company and the
Company Subsidiaries, taken as a whole, or that could reasonably be expected to
materially impair the ability of the Company to perform its obligations under
this Agreement or to consummate the Merger and the other transactions
contemplated hereby, other than any change or effect relating to, arising out of
or resulting from (i) general changes relating to the internet infrastructure or
telecommunications industry, (ii) general changes in United States economic
conditions, (iii) general changes in the United States securities markets, or
(iv) the announcement of the execution of this Agreement or the pendancy or
occurrence of any of the transactions contemplated hereby.
(b) Section 3.1(b) of the disclosure letter previously delivered by the
Company to the Parent (the "COMPANY DISCLOSURE LETTER") sets forth a correct and
complete list of all of the Company Subsidiaries, their jurisdiction of
organization and the ownership or other interest therein of the Company and of
each other Company Subsidiary. Except as set forth in Section 3.1(b) of the
Company Disclosure Letter, neither the Company nor any Company Subsidiary holds
any material interest in any person other than the Company Subsidiaries so
listed.
SECTION 3.2 CERTIFICATE OF INCORPORATION AND BY-LAWS. The copies of the
Company Certificate and by-laws, each as amended through the date of this
Agreement (the "COMPANY CHARTER DOCUMENTS") previously delivered to the Parent
are correct and complete copies of those documents. The Company has made
available to the Parent correct and complete copies of all organizational
documents of each Company Subsidiary. The Company Charter Documents and all
comparable organizational documents of the Company Subsidiaries are in full
force and effect. Neither the Company nor any Company Subsidiary is in violation
of any of the provisions of its organizational documents.
SECTION 3.3 CAPITALIZATION.
(a) The authorized capital stock of the Company consists of 50,000,000
shares of Company Common Stock and 20,539,110 shares of Company Preferred Stock,
par value $.0001 per share. As of October 9, 2000: (i) 16,568,013 shares of
Company Common Stock were issued and outstanding, all of which were validly
issued and are fully paid, nonassessable and not subject to preemptive rights;
(ii) 7,200,000 shares of Company Series A Preferred Stock, 8,610,861 shares of
Company Series B Preferred Stock and 4,717,372 shares of Company Series C
Preferred Stock were issued or outstanding, all of which were validly issued and
are fully paid, nonassessable and not subject to preemptive rights; and (iii)
(A) 8,293,990 shares of Company Common Stock were reserved for issuance upon the
exercise
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of outstanding stock options (the "COMPANY STOCK OPTIONS") granted pursuant to
the Company's 1999 Stock Plan, 2000 Directors' Stock Option Plan and 2000
Executive Stock Incentive Plan (collectively, the "COMPANY OPTION PLANS"), (B)
3,156,745 shares of Company Common Stock were reserved for issuance pursuant to
options available for grant under the Company Option Plans, (C) 698,974 shares
of Company Common Stock were reserved for issuance upon the exercise of
outstanding warrants (the "COMPANY WARRANTS"), and (D) 20,528,233 shares of
Company Common Stock were reserved for issuance upon the conversion of the
shares of Company Preferred Stock. Section 3.3(a) of the Company Disclosure
Letter sets forth a correct and complete list as of October 6, 2000 of the
holders of all Company Stock Options and Company Warrants, the number of shares
subject to each such option or warrant and the exercise price thereof and the
vesting schedule for all such options (including whether any such vesting is or
will be accelerated or altered as a result of the execution of this Agreement or
the consummation of the Merger). Except as set forth above, as of October 6,
2000, no shares of capital stock or other voting securities of the Company were
issued, reserved for issuance or outstanding and since such date, no shares of
capital stock or other voting securities or options in respect thereof have been
issued except upon the exercise of the Company Stock Options or Company Warrants
outstanding on October 6, 2000.
(b) Except as set forth in Section 3.3(b) of the Company Disclosure Letter
and except for (i) outstanding Company Stock Options, (ii) outstanding Company
Warrants, (iii) outstanding shares of Company Preferred Stock, and (iv) rights
to repurchase restricted shares issued pursuant to the 1999 Stock Plan or 2000
Executive Stock Incentive Plan, there are no options, warrants, conversion
rights, stock appreciation rights, redemption rights, repurchase rights or other
rights, agreements, arrangements or commitments of any character to which the
Company or any Company Subsidiary is a party or by which the Company or any
Company Subsidiary is bound relating to the issued or unissued capital stock of
the Company or any Company Subsidiary or obligating the Company or any Company
Subsidiary to issue or sell any shares of capital stock of, or other equity
interests in, the Company or any Company Subsidiary.
(c) All shares of Company Common Stock subject to issuance, upon issuance
prior to the Effective Time on the terms and conditions specified in the
instruments under which they are issuable, will be duly authorized, validly
issued, fully paid, nonassessable and will not be subject to preemptive rights.
Except as set forth in Section 3.3(c) of the Company Disclosure Letter, there
are no outstanding contractual obligations of the Company or any Company
Subsidiary to repurchase, redeem or otherwise acquire any shares of Company
Common Stock or to effect the registration of any shares of Company Common Stock
or other Company securities under the Securities Act. Each outstanding share of
capital stock of each Company Subsidiary is duly authorized, validly issued,
fully paid, nonassessable and not subject to preemptive rights and each such
share owned by the Company or a Company Subsidiary is free and clear of all
security interests, liens (other than statutory liens), claims, pledges,
options, rights of first refusal, agreements, limitations on the Company's or
such other Company Subsidiary's voting rights, charges and other encumbrances of
any nature whatsoever (collectively, "LIENS"). Except as set forth in Section
3.3(c) of the Company Disclosure Letter, there are no outstanding material
contractual obligations of the Company or any Company Subsidiary to provide
funds to, or make any investment (in the form of a loan, capital contribution or
otherwise) in, any entity that is not wholly owned by the Company or in any
other person.
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SECTION 3.4 AUTHORITY.
(a) The Company has all necessary corporate power and authority to execute
and deliver this Agreement, to perform its obligations under this Agreement and
to consummate the Merger and the other transactions contemplated hereby to be
consummated by the Company. The execution and delivery of this Agreement by the
Company and the consummation by the Company of such transactions have been duly
and validly authorized by all necessary corporate action and no other corporate
proceedings on the part of the Company are necessary to authorize this Agreement
or to consummate such transactions. This Agreement has been duly authorized and
validly executed and delivered by the Company and constitutes a legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms, subject to bankruptcy, insolvency, reorganization, moratorium or
other laws now or hereafter in effect relating to creditors' rights generally or
to general principles of equity.
(b) The Board of Directors of the Company (i) has unanimously adopted the
plan of merger set forth in this Agreement and approved this Agreement and the
other transactions contemplated by this Agreement and (ii) has declared that the
Merger and this Agreement and the other transactions contemplated by this
Agreement are advisable and in the best interests of the Company, and
recommended that the stockholders of the Company adopt this Agreement.
SECTION 3.5 NO CONFLICT.
(a) Except as set forth in Section 3.5(a) of the Company Disclosure Letter,
the execution and delivery of this Agreement by the Company do not, and the
performance of this Agreement by the Company will not:
(i) conflict with or violate any provision of the Company Charter Documents
or any comparable organizational documents of any Company Subsidiary;
(ii) assuming (w) that all consents, approvals, authorizations and other
actions described in Section 3.6 have been obtained, (x) all filings
and obligations described in Section 3.6 have been made, (y) approval
of this Agreement by the Requisite Company Vote, and (z) all applicable
waiting periods have terminated or expired, conflict with or violate in
any material respect any foreign or domestic law, statute, ordinance,
rule, regulation, order, judgment or decree ("LAW") applicable to the
Company or any Company Subsidiary or by which any property or asset of
the Company or any Company Subsidiary is or may be bound or affected;
or
(iii) result in any material breach of or constitute a material default (or
an event which with or without notice or lapse of time or both would
become a default) under, or give to others any right of termination,
amendment, acceleration or cancellation of, or result in the creation
of a Lien on any property or asset of the Company or any Company
Subsidiary under any note, bond, mortgage, indenture, contract,
agreement, commitment, lease, license, permit, franchise or other
instrument or obligation (collectively, "CONTRACTS") to which the
Company or any Company Subsidiary is a party or by which any of them or
their assets or properties is or may be bound or affected.
(b) Section 3.5(b) of the Company Disclosure Letter sets forth a correct and
complete list of all material Contracts to which the Company is a party
or by which it or its assets or properties are or may be bound or
affected under which consents or waivers are or may be required prior to
consummation of the transactions contemplated by this Agreement.
SECTION 3.6 REQUIRED FILINGS AND CONSENTS. The execution and delivery of
this Agreement by the Company do not, and the performance of this Agreement by
the Company will not, require any consent, approval, authorization or permit of,
or filing with or notification to, any domestic or foreign
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national, federal, state, provincial or local governmental, regulatory or
administrative authority, agency, commission, court, tribunal or arbitral body
or self-regulated entity (each, a "GOVERNMENTAL ENTITY"), except for (a)
applicable requirements of the Securities Exchange Act of 1934, as amended
(together with the rules and regulations promulgated thereunder, the "EXCHANGE
ACT"), (b) applicable requirements of the Securities Act of 1933, as amended
(together with the rules and regulations promulgated thereunder, the "SECURITIES
ACT"), (c) applicable requirements of state securities or Ablue sky" laws,
including the California Securities Law ("BLUE SKY LAWS"), (d) the rules and
regulations of NASDAQ/NMS, (e) applicable requirements of Takeover Statutes, (f)
the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended, and the rules and regulations promulgated
thereunder (the "HSR ACT"), or (g) the filing of the Certificate of Merger as
required by the DGCL.
SECTION 3.7 PERMITS; COMPLIANCE WITH LAW. Each of the Company and each
Company Subsidiary is in possession of all material franchises, grants,
authorizations, licenses, permits, easements, variances, exceptions, consents,
certificates, approvals and orders of any Governmental Entity necessary for the
Company or any Company Subsidiary to own, lease and operate its properties or to
carry on its business as it is now being conducted (collectively, the "COMPANY
PERMITS"). As of the date of this Agreement, no suspension or cancellation of
any of the Company Permits is pending or, to the knowledge of the Company,
threatened, except where the suspension or cancellation of, any of the Company
Permits, individually or in the aggregate, has not resulted and could not
reasonably be expected to result in a Material Adverse Effect on the Company.
Neither the Company nor any Company Subsidiary is in material conflict with, or
in material default or violation of, (i) any Law applicable to the Company or
any Company Subsidiary or by which any property or asset of the Company or any
Company Subsidiary is or may be bound or affected or (ii) any Company Permits.
SECTION 3.8 COMPANY S-1; FINANCIAL STATEMENTS.
(a) The Registration Statement on Form S-1 filed by the Company (the
"COMPANY S-1") with the U.S. Securities and Exchange Commission (the "SEC")
(including all exhibits, annexes, supplements and amendments to the Company S-1)
under the Securities Act at the time it was filed (i) complied in all material
respects with the requirements of the Securities Act applicable to the Company
S-1 and (ii) did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated or necessary in order to make the
statements made in the Company S-1, in the light of the circumstances under
which they were made, not misleading. The Company has made available to the
Parent all correspondence from the SEC or any national securities exchange or
quotation service or comparable Governmental Entity with respect to the Company
S-1.
(b) The Company has delivered to the Parent the audited consolidated
balance sheet (including the related notes and independent auditors' report
thereon) of the Company as of December 31, 1999, and the related audited
consolidated statements of operations, changes in stockholders' equity and cash
flows for the period ended December 31, 1999 (collectively, the "1999 FINANCIAL
STATEMENTS"). The balance sheet (including the related notes) included in the
1999 Financial Statements presents fairly, in all material respects, the
financial position of the Company and the Company Subsidiaries as of December
31, 1999, and other related statements (including related notes) included in the
1999 Financial Statements present fairly, in all material respects, the results
of operations and cash flows of the Company and the Company Subsidiaries for the
period or as of the date set forth therein. Each of the balance sheet and
statements of operations, changes in stockholders' equity and cash flows
(including related notes) included in the 1999 Financial Statements has been
prepared, in all material respects, in accordance with the U.S. Generally
Accepted Accounting Principles ("GAAP").
(c) The Company has delivered to the Parent the audited consolidated
balance sheet of the Company as of June 30, 2000 and the audited consolidated
statements of operations, changes in stockholders' equity and cash flows of the
Company and the Company Subsidiaries for the three-month
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period ended June 30, 2000 (collectively, the "JUNE FINANCIAL STATEMENTS").
Except for normally recurring year-end adjustments and the absence of any notes
to the June Financial Statements, (i) the balance sheet included in the June
Financial Statements presents fairly, in all material respects, the financial
position of the Company and the Company Subsidiaries as of June 30, 2000;
(ii) the other related statements included in the June Financial Statements
present fairly, in all material respects, the results of operations and cash
flows of the Company and the Company Subsidiaries for the six-month period ended
June 30, 2000, and (iii) each of the balance sheet, the statement of operations,
changes in stockholders' equity and cash flows included in the June Financial
Statements has been prepared, in all material respects, in accordance with GAAP,
except as otherwise noted therein.
(d) Except as and to the extent set forth on the June Financial Statements,
neither the Company nor any Company Subsidiary has any liabilities or
obligations of any nature (whether accrued, absolute, contingent or otherwise)
that would be required to be reflected on a balance sheet or in the related
notes prepared in accordance with GAAP, except for liabilities or obligations
incurred in the ordinary course of business since June 30, 2000 that,
individually or in the aggregate, have not resulted and could not reasonably be
expected to result in a Material Adverse Effect on the Company.
SECTION 3.9 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as set forth in Section 3.9(a) of the Company Disclosure Letter,
since June 30, 2000, the Company and the Company Subsidiaries conducted their
business only in the ordinary course and in a manner consistent with past
practice and, since such date, there has not been any Material Adverse Effect on
the Company.
(b) Except as set forth in Section 3.9(b) of the Company Disclosure Letter,
since June 30, 2000, there has not been:
(i) any damage, destruction or other casualty loss with respect to any asset
or property owned, leased or otherwise used by the Company or any
Company Subsidiary whether or not covered by insurance, which damage,
destruction or loss, individually or in the aggregate, has resulted or
could reasonably be expected to result in a Material Adverse Effect on
the Company;
(ii) any material change by the Company in its or any Company Subsidiary's
accounting methods, principles or practices, except as required by
GAAP;
(iii) any declaration, setting aside or payment of any dividend or
distribution in respect of shares of capital stock of the Company or
any redemption, purchase or other acquisition of any of the Company's
securities;
(iv) any increase in the compensation or benefits or establishment of any
bonus, insurance, severance, deferred compensation, pension,
retirement, profit sharing, stock option (including the granting of
stock options, stock appreciation rights, performance awards or
restricted stock awards), stock purchase or other employee benefit
plan, or any other increase in the compensation payable or to become
payable to any executive officers of the Company or any Company
Subsidiary except in the ordinary course of business consistent with
past practice or except as required by applicable Law;
(v) (A) any incurrence or assumption by the Company or any Company
Subsidiary of any indebtedness for borrowed money or (B) any guarantee,
endorsement or other incurrence or assumption of material liability
(whether directly, contingently or otherwise) by the Company or any
Company Subsidiary for the obligations of any other person, other than
in the ordinary course of business consistent with past practice;
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(vi) any creation or assumption by the Company or any Company Subsidiary of
any Lien on any material asset of the Company or any Company
Subsidiary, other than in the ordinary course of business consistent
with past practice;
(vii) any making of any loan, advance or capital contribution to or
investment in any person by the Company or any Company Subsidiary,
other than in the ordinary course of business consistent with past
practice and other than between the Company and any Company Subsidiary;
or
(viii) (A) any contract or agreement entered into by the Company or any
Company Subsidiary on or prior to the date hereof relating to any
material acquisition or disposition of any assets or business or
(B) any modification, amendment, assignment or termination of or
relinquishment by the Company or any Company Subsidiary of any rights
under any other Contract (including any insurance policy naming it as a
beneficiary or a loss payable payee) that has resulted or could
reasonably be expected to result in, individually or in the aggregate,
a Material Adverse Effect on the Company other than transactions,
commitments, contracts or agreements in the ordinary course of business
consistent with past practice or those contemplated by this Agreement.
SECTION 3.10 EMPLOYEE BENEFIT PLANS.
(a) Except as set forth in Section 3.10(a) of the Company Disclosure Letter:
(i) each pension, retirement, savings, disability, medical, dental, health,
life, death benefit, group insurance, profit sharing, deferred compensation,
stock option, bonus, incentive, severance pay, or other employee benefit plan,
trust, arrangement, contract, commitment, agreement or policy (collectively,
"COMPANY BENEFIT PLANS") of the Company or any Company Subsidiary has been
administered and is in material compliance with the terms of such plan and all
applicable laws, rules and regulations in all material respects; (ii) no
Areportable event" (as such term is used in Section 4043 of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")) (other than those
events for which the 30 day notice has been waived pursuant to the regulations),
non-exempt Aprohibited transaction" (as such term is used in Section 406 of
ERISA or Section 4975 of the Code) or Aaccumulated funding deficiency" (as such
term is used in Section 412 or 4971 of the Code) has heretofore occurred with
respect to any Company Benefit Plan or any Benefit Plan of its affiliates and
any trade or business which is or within the past five years has been under
common control or which is or within the past five years has been treated as a
single employer with the Company under Section 414(b), (c), (m) or (o) of the
Code ("ERISA AFFILIATE"); and (iii) with respect to the Company Benefit Plans
intended to qualify under Section 401 of the Code, the Company has received a
letter from the Internal Revenue Service ("IRS") setting forth the determination
that such Company Benefit Plans are so qualified and the trusts maintained
pursuant thereto are exempt from federal income taxation under Section 501 of
the Code, the Company may rely on an opinion letter issued with respect to a
standardized prototype plan adopted in accordance with the requirements for such
reliance, or the Company has applied (or there is time remaining to apply) to
the IRS for such determination letter and to make amendments necessary to obtain
a favorable determination with respect to all periods since the date of adoption
of such Company Benefit Plan, and that nothing has occurred with respect to the
operation of the Company Benefit Plans which could cause the loss of such
qualification or exemption or the imposition of any liability, penalty or tax
under ERISA or the Code which would have, individually or in the aggregate, a
Material Adverse Effect on the Company, and no notice has been received from the
IRS with respect to the revocation of such qualification.
(b) There is no litigation or administrative or other proceeding involving
any Company Benefit Plan (other than routine claims for benefits and
administrative appeals with respect to such claims) nor has the Company or any
Company Subsidiary received notice that any such proceeding is threatened, in
each case where an adverse determination, individually or in the aggregate, has
had or could reasonably be expected to have a Material Adverse Effect on the
Company. The Company has not incurred, nor,
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to the Company's knowledge, is reasonably likely to incur any withdrawal
liability with respect to any Amultiemployer plan" (within the meaning of
Section 3(37) of ERISA) that, individually or in the aggregate, has had or could
reasonably be expected to have a Material Adverse Effect on the Company. The
termination of, or withdrawal from, any Company Benefit Plan or multiemployer
plan to which the Company or any Company Subsidiary contributes, on or prior to
the Closing Date, will not subject the Company or any Company Subsidiary to any
liability under Title IV of ERISA that, individually or in the aggregate, has
had or could reasonably be expected to have a Material Adverse Effect on the
Company.
(c) Section 3.10(c) of the Company Disclosure Letter lists all material
Company Benefit Plans. Correct and complete copies of the following documents,
with respect to each of the Company Benefit Plans (other than a multiemployer
plan), have been made available or delivered to the Parent by the Company, to
the extent applicable: (i) any plans, all amendments thereto and related trust
documents, and amendments thereto; (ii) the most recent Forms 5500 and all
schedules thereto and the most recent actuarial report, if any; (iii) the most
recent IRS determination letter, if any; (iv) summary plan descriptions;
(v) written communications to employees relating to the Company Benefit Plans;
and (vi) written descriptions of all non-written agreements relating to the
Company Benefit Plans.
(d) Except as set forth in Section 3.10(d) of the Company Disclosure Letter,
none of the Company Benefit Plans provide for post-employment life or health
insurance, benefits or coverage for any participant or any beneficiary of a
participant, except as may be required under the Consolidated Omnibus Budget
Reconciliation Act of 1985, as amended ("COBRA") and at the expense of the
participant or the participant's beneficiary. Except as set forth in
Section 3.10(d) of the Company Disclosure Letter and except as individually or
in the aggregate do not have or could not reasonably be expected to have a
Material Adverse Effect on the Company, each of the Company and any ERISA
Affiliate which maintains a Agroup health plan" within the meaning of
Section 5000(b)(1) of the Code has complied with the notice and continuation
requirements of Section 4980B of the Code, COBRA, Part 6 of Subtitle B of
Title I of ERISA and the regulations thereunder.
(e) Except as set forth in Section 3.10(e) of the Company Disclosure Letter,
neither the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will (i) result in any payment becoming due to
any employee (current, former or retired) of the Company, (ii) increase any
benefits otherwise payable under any Company Benefit Plan or (iii) result in the
acceleration of the time of payment or vesting of any such benefits under any
such plan.
(f) Except as set forth in Section 3.10(f) of the Company Disclosure Letter,
there is no contract, plan or arrangement (written or otherwise) covering any
employee or former employee of the Company or any Company Subsidiary that,
individually or collectively, could give rise to the payment of any amount that
would not be deductible pursuant to the terms of Section 280G of the Code, and
neither the Company nor any Company Subsidiary has made any payment that would
not be deductible pursuant to the terms of Section 162(m) of the Code.
SECTION 3.11 TAX MATTERS. Neither the Company nor, to the knowledge of the
Company, any of its affiliates has taken or agreed to take any action, nor is
the Company aware of any agreement, plan or other circumstance, that would
prevent the Merger from constituting a transaction qualifying as a
reorganization under Section 368(a) of the Code.
SECTION 3.12 CONTRACTS; DEBT INSTRUMENTS. Except for the Contracts
disclosed in Section 3.12 of the Company Disclosure Letter, correct and complete
copies of which have been made available to the Parent, there is no Contract
that is material to the business, financial condition or results of operations
of the Company or any of the Company Subsidiaries, taken as a whole (each a
"MATERIAL CONTRACT"). Each of the Material Contracts constitutes a valid and
legally binding obligation of the Company or such Company Subsidiary and of the
other parties thereto, enforceable in accordance with its terms, and is in full
force and effect. Neither the Company nor any Company Subsidiary, nor to the
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Company's knowledge, any other person, is in material violation of or in
material default under (nor does there exist any condition which with the
passage of time or the giving of notice would cause such a violation of or
default under) any Contract to which the Company or any Company Subsidiary is a
party or by which it or any of their respective properties or assets is or may
be bound or affected.
SECTION 3.13 LITIGATION. Except as disclosed in Section 3.13 of the
Company Disclosure Letter, there is no suit, claim, action, proceeding or
investigation (collectively, "CLAIMS") pending or, to the knowledge of the
Company, threatened against the Company or any Company Subsidiary before any
Governmental Entity nor to the Company's knowledge is there any investigation or
review by any Governmental Entity pending or threatened against, relating to or
affecting the Company or any Company Subsidiary that, if adversely determined,
individually or in the aggregate, has resulted or could reasonably be expected
to result in a judgment against the Company, any Company Subsidiary or their
respective property or assets in excess of $250,000 or otherwise result in a
Material Adverse Effect on the Company. Neither the Company nor any Company
Subsidiary is subject to any outstanding material order, writ, injunction or
decree.
SECTION 3.14 ENVIRONMENTAL MATTERS.
(a) Except as disclosed on Section 3.14 of the Company Disclosure Letter or
as could not reasonably be expected to have a Material Adverse Effect on the
Company:
(i) Neither the Company nor any Company Subsidiary is or has been in
violation of any applicable Safety and Environmental Law;
(ii) To the Company's knowledge, the Company and the Company Subsidiaries
have all Company Permits required pursuant to Safety and Environmental
Laws that are material to the conduct of the businesses of the Company
and the Company Subsidiaries, all such Permits are in full force and
effect, no action or proceeding to revoke, limit or modify any of such
Permits is pending, and the Company and the Company Subsidiaries are in
compliance in all material respects with all terms and conditions
thereof;
(iii) Neither the Company nor any Company Subsidiary has received any
Environmental Claim;
(iv) To the Company's knowledge, there is not now and has not been at any
time in the past a Release or threatened Release of Hazardous
Substances into the Environment for which the Company or any Company
Subsidiary is directly or indirectly responsible; and
(v) To the Company's knowledge, there is not now and has not been at any
time in the past at, on or in any of the real properties owned, leased
or operated by the Company or any Company Subsidiary and, to the
Company's knowledge, was not at, on or in any real property previously
owned, leased or operated by the Company or any Company Subsidiary or
any predecessor: (A) any generation, use, handling, Release, treatment,
recycling, storage or disposal of any Hazardous Substances, (B) any
underground storage tank, surface impoundment, lagoon or other
containment facility (past or present) for the temporary or permanent
storage, treatment or disposal of Hazardous Substances, (C) any
asbestos-containing material in a condition requiring abatement,
(D) any Release or threatened Release, or any visible signs of Releases
or threatened Releases, of a Hazardous Substance to the Environment in
form or quantity requiring remedial action under Safety and
Environmental Laws, or (E) any Hazardous Substances present at such
property, excepting such quantities as are handled in all material
respects in accordance with all applicable manufacturer's instructions
and Safety and Environmental Laws and in proper storage containers, and
as are necessary for the operations of the Company and the Company
Subsidiaries.
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(b) For purposes of this Agreement, the following terms have the following
meanings:
(i) "ENVIRONMENT" means navigable waters, waters of the contiguous zone,
ocean waters, natural resources, surface waters, ground water, drinking
water supply, land surface, subsurface strata, ambient air, both inside
and outside of buildings and structures, man-made buildings and
structures, and plan and animal life on earth.
(ii) "ENVIRONMENTAL CLAIMS" means any written notification, whether direct
or indirect, pursuant to Safety and Environmental Laws or principles of
common law relating to pollution, protection of the Environment or
health safety, that any of the current or past operations of any of the
Parent, any Parent Subsidiary, the Company or any Company Subsidiary
has or may have violated any such Safety and Environmental Law or
principles of common law.
(iii) "HAZARDOUS SUBSTANCE" means any toxic waste, pollutant, hazardous
substance, toxic substance, hazardous waste, special waste, industrial
substance or waste, petroleum or petroleum-derived substance or waste,
radioactive substance or waste, or any constituent of any such
substance or waste, or any other substance regulated under or defined
by any Safety and Environmental Law.
(iv) "RELEASE" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or
migration into or through the indoor or outdoor Environment or into,
through or out of any property, including the movement of Hazardous
Substances through or in the air, soil, surface water, ground water or
property.
(v) "SAFETY AND ENVIRONMENTAL LAWS" means all federal, state and local laws
and orders relating to pollution, protection of the Environment, public
or worker health and safety, or the emission, discharge, release or
threatened release of pollutants, contaminants or industrial, toxic or
hazardous substances or wastes into the Environment or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of pollutants, contaminants or
Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section9601 ET SEQ., the Resource Conservation and Recovery Act,
42 U.S.C. Section6901 ET SEQ., the Toxic Substances Control Act,
15 U.S.C. Section2601 ET SEQ., the Federal Water Pollution Control Act,
33 U.S.C. Section1251 ET SEQ., the Clean Air Act, 42 U.S.C. Section7401
ET SEQ., the Federal Insecticide, Fungicide and Rodenticide Act,
7 U.S.C. Section121 ET SEQ., the Occupational Safety and Health Act,
29 U.S.C. Section651 ET SEQ., the Asbestos Hazard Emergency Response
Act, 15 U.S.C. Section2601 ET SEQ., the Safe Drinking Water Act,
42 U.S.C. Section300f ET SEQ., the Oil Pollution Act of 1990 and
analogous state acts.
SECTION 3.15 INTELLECTUAL PROPERTY.
(a)(i) Section 3.15(a)(i) of the Company Disclosure Letter sets forth all
material U.S. and foreign patents, trademark and service mark registrations and
applications, internet domain name registrations and applications, and copyright
registrations and applications owned or licensed by the Company or any Company
Subsidiary, specifying as to each item, as applicable: (A) the jurisdictions in
which the item is issued or registered or in which an application for issuance
or registration has been filed; and (B) the issuance, registration or
application numbers and dates.
(ii) Section 3.15(a)(ii) of the Company Disclosure Letter sets forth all
material licenses, sublicenses, and other agreements or permissions
("IP LICENSES") pursuant to which the Company or any Company Subsidiary
is a licensor or licensee of or otherwise is authorized to use or
practice under third parties' rights in any Intellectual Property on an
exclusive basis and any non-exclusive IP License that is not available
to parties other than the Company or any Company Subsidiary on
comparable commercial terms to which it is licensed to the Company or
such Company Subsidiary. To the knowledge of the Company, all such IP
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Licenses are valid, enforceable and in full force and effect in
accordance with their respective terms. For purposes of this Agreement,
"INTELLECTUAL PROPERTY" means all of the following as they exist in all
jurisdictions throughout the world, in each case, to the extent owned
by, licensed to, or otherwise used by the Company: (A) patents, patent
applications, and other patent rights (including any divisions,
continuations, continuations-in-part, substitutions, or reissues
thereof, whether or not patents are issued on any such applications and
whether or not any such applications are modified, withdrawn, or
resubmitted); (B) trademarks, service marks, trade dress, trade names,
brand names, internet domain names, designs, logos or corporate names,
whether registered or unregistered, and all registrations and
applications for registration thereof; (C) copyrights, including all
renewals and extensions, copyright registrations and applications for
registration and non-registered copyrights; (D) trade secrets,
concepts, ideas, designs, research, processes, procedures, techniques,
methods, know-how, data, mask works, discoveries, inventions,
modifications, extensions, improvements, and other proprietary rights
(whether or not patentable or subject to copyright, mask work, or trade
secret protection) (collectively, "TECHNOLOGY"); and (E) computer
software programs, including all source code, object code, and
documentation related thereto (the "SOFTWARE").
(b) Except as set forth in Section 3.15(b) of the Company Disclosure
Letter, the Company and the Company Subsidiaries own, free and clear of all
material Liens, or have valid rights to use all Intellectual Property material
to their businesses and operations (including the right to license such
Intellectual Property to third parties in the ordinary course of its business).
(c) Neither the Company nor any Company Subsidiary has been a party to any
Claim, nor, to the knowledge of the Company, is any Claim threatened, that
challenges the validity, enforceability, ownership, or right to use, sell or
license any Intellectual Property material to their businesses and operations.
To the knowledge of the Company, no third party is infringing in any material
respect upon any Intellectual Property material to its business and operations.
(d) The Company and the Company Subsidiaries have taken all commercially
reasonable actions to maintain and protect each item of Intellectual Property
owned or exclusively licensed by them which are material to their businesses or
operations.
(e) All Software that is material to the Company's and the Company
Subsidiaries' businesses and operations performs in all material respects the
functions for which such Software is used by the Company and the Company
Subsidiaries.
(f) After the completion of the transactions contemplated by this
Agreement, the Company and the Company Subsidiaries will continue to own all
right, title and interest in and to or have a license to use all Intellectual
Property (including all Software) material to their businesses or operations on
terms and conditions identical in all material respects to those the Company and
the Company Subsidiaries enjoyed immediately prior to such transactions.
SECTION 3.16 TAXES. (a) Except as set forth in Section 3.16(a) of the
Company Disclosure Letter, (i) each of the Company and each Company Subsidiary
has timely filed (after giving effect to any extensions of the time to file
which were obtained) prior to the date of this Agreement, and will file prior to
the Effective Time, all tax returns required to be filed prior to the date of
this Agreement and/or required to be filed prior to the Effective Time and has
paid, or has or will set up an adequate reserve for the payment of, all federal,
state, local, foreign and other taxes, together with interest and penalties
thereon ("TAXES"), required to be paid prior to the date of the Agreement or the
Effective Time, as the case may be, and the Unaudited Financials reflect an
adequate reserve for all Taxes payable by the Company and the Company
Subsidiaries accrued through June 30, 2000 and (ii) no deficiencies for any
Taxes have been proposed, asserted or assessed against the Company and the
Company Subsidiaries other than those which are being contested in good faith
and by proper proceedings by the Company.
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(b) The federal income tax returns of the Company and each Company
Subsidiary and any affiliated, consolidated, combined or unitary group that
includes the Company or any Company Subsidiary have not to date been examined by
the IRS.
(c) Except as set forth in Section 3.16(c) of the Company Disclosure
Letter, neither the Company nor any Company Subsidiary has filed or entered into
any election, consent or extension agreement that extends any applicable statute
of limitations or the time within which a tax return must be filed which such
statute of limitations has not expired or tax return has not been timely filed.
(d) Except as set forth in Section 3.16(d) of the Company Disclosure
Letter, (i) neither the Company nor any Company Subsidiary is a party to any
action or proceeding pending nor, to the Company's knowledge, is any such action
or proceeding threatened by any governmental authority for assessment or
collection of Taxes, (ii) no unresolved claim for assessment or collection of
Taxes has, to the knowledge of the Company, been asserted and (iii) no audit or
investigation of the Company or any Company Subsidiary by any governmental
authority is pending or, to the knowledge, threatened.
SECTION 3.17 NON-COMPETITION AGREEMENTS. Except as set forth in Section
3.17 of the Company Disclosure Letter, the Company is not a party to any
Contract which purports to restrict or prohibit in any material respect the
Company from, directly or indirectly, engaging in any business currently engaged
in by the Company. To the knowledge of the Company, except as set forth in
Section 3.17 of the Company Disclosure Letter, none of the Company's officers,
directors or key employees is a party to any agreement which, by virtue of such
person's relationship with the Company, restricts in any material respect the
Company from, directly or indirectly, engaging in any business currently engaged
in by the Company.
SECTION 3.18 CERTAIN AGREEMENTS. Except as set forth in Section 3.18 of
the Company Disclosure Letter, neither the Company nor any Company Subsidiary is
a party to any oral or written (i) agreement with any executive officer or other
key employee of the Company or any Company Subsidiary the benefits of which are
contingent, or the terms of which are materially altered, upon the occurrence of
a transaction involving the Company or any Company Subsidiary of the nature
contemplated by this Agreement, or (ii) plan, including any stock option plan,
stock appreciation right plan, restricted stock plan or stock purchase plan, any
of the benefits of which will be increased, or the vesting of the benefits of
which will be accelerated, by the occurrence of any of the transactions
contemplated by this Agreement or the value of any of the benefits of which will
be calculated on the basis of any of the transactions contemplated by this
Agreement.
SECTION 3.19 REAL PROPERTY. (a) Neither the Company nor any Company
Subsidiary owns fee title to any real property.
(b) Except as set forth in Section 3.19(b) of the Company Disclosure Letter
(the "COMPANY REAL PROPERTY LEASES"), neither the Company nor any Company
Subsidiary is a party to any material lease, sublease and other agreement under
which the Company or any Company Subsidiary uses or occupies or has the right to
use or occupy, now or in the future, any real property. The Company has
heretofore made available to the Parent correct and complete copies of all
Company Real Property Leases (and all modifications, amendments and supplements
thereto and all side letters to which the Company or any Company Subsidiary is a
party affecting the obligations of any party thereunder). Assuming the due
authorization, execution and delivery by the other parties thereto, each Company
Real Property Lease constitutes the valid and legally binding obligation of the
Company or any Company Subsidiary enforceable in accordance with its terms,
subject to bankruptcy, insolvency, reorganization, moratorium or other laws now
or hereafter in effect relating to creditors' rights generally or to general
principles of equity, and is in full force and effect, except to the extent the
failure to be so valid, binding or enforceable, individually or in the
aggregate, has not and could not reasonably be expected to result in a Material
Adverse Effect on the Company. All material amounts payable by the Company or
any
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Company Subsidiary as tenant under each Company Real Property Lease are current,
no termination event or condition or uncured default of a material nature on the
part of the Company or any Company Subsidiary exists under any Company Real
Property Lease. The Company and the Company Subsidiaries have a valid leasehold
interest in each parcel of real property leased by them free and clear of all
Liens, except (a) Taxes and general and special assessments not in default and
payable without penalty and interest, (b) Liens under applicable Law, and
(c) other Liens which do not materially interfere with the Company's or any
Company Subsidiaries' use and enjoyment of such real property or materially
detract from or diminish the value thereof.
SECTION 3.20 LABOR MATTERS. (a) Section 3.20 of the Company Disclosure
Letter sets forth a list of (i) all employment agreements currently in effect
providing for annual base salary in excess of $200,000 or which extend for more
than one year after the Effective Time and (ii) any labor or collective
bargaining agreements, to which the Company or any Company Subsidiary is a
party. The Company has heretofore made available to the Parent correct and
complete copies of the employment agreements listed on Section 3.20 of the
Company Disclosure Letter, together with all amendments, modifications,
supplements and side letters affecting the duties, rights and obligations of any
party thereunder.
(b) Neither the Company nor any Company Subsidiary is the subject of any
suit, action or proceeding which is pending or, to the knowledge of the Company,
threatened, asserting that the Company or any Company Subsidiary has committed
an unfair labor practice (within the meaning of the National Labor Relations Act
or applicable state statutes) or seeking to compel the Company or any Company
Subsidiary to bargain with any labor organization as to wages and conditions of
employment, in any such case, that is reasonably expected to result in a
material liability of the Company or any Company Subsidiary. No strike or other
labor dispute involving the Company or any Company Subsidiary is pending or, to
the knowledge of the Company, threatened, and, to the knowledge of the Company,
there is no activity involving any employees of the Company or any Company
Subsidiary seeking to certify a collective bargaining unit or engaging in any
other organizational activity, except for such disputes or activity which,
individually or in the aggregate, has not had or could not reasonably be
expected to have a Material Adverse Effect on the Company.
SECTION 3.21 CUSTOMERS. Section 3.21 of the Company Disclosure Letter sets
forth a list of (a) the top 25 customers of the Company and the Company
Subsidiaries (based on revenue through August 31st of the current fiscal year),
(b) for each such customer, the amount of the dollar volume for such period, and
(c) confirmation of whether a written agreement exists between the Company or
any Company Subsidiary and each such customer and the effective date of each
such written agreement. Except as has not had or could not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect on
the Company, the relationships of the Company and the Company Subsidiaries with
such customers are good commercial working relationships. Except as set forth in
Section 3.21 of the Company Disclosure Letter, no person listed in Section 3.21
of the Company Disclosure Letter has, within the last twelve months, canceled or
otherwise terminated the relationship of such person with the Company or any of
the Company Subsidiaries.
SECTION 3.22 INVESTMENT COMPANY ACT. Neither the Company nor any Company
Subsidiary is an Ainvestment company," or a company Acontrolled" by, or an
Aaffiliated company" with respect to, an Ainvestment company," within the
meaning of the Investment Company Act of 1940, as amended (the "INVESTMENT
COMPANY ACT").
SECTION 3.23 BROKERS. Except as set forth in Section 3.23 of the Company
Disclosure Letter, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
the other transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company. Prior to the date of this Agreement, the
Company has made available to the Parent correct and complete copies of all
agreements between the
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Company and any financial advisor that would be entitled to any payment related
to the Merger or such other transactions.
SECTION 3.24 CERTAIN STATUTES. The Board of Directors of the Company has
taken or will take all appropriate and necessary actions to ensure that the
restrictions on business combinations in Section 203 of the DGCL will not have
any effect on the Merger or the other transactions contemplated by this
Agreement. No Afair price," Amoratorium," Acontrol share acquisition" or other
similar state or federal anti-takeover statute or regulation (each, a "TAKEOVER
STATUTE") is, as of the date of this Agreement, applicable to the Merger or such
other transactions.
SECTION 3.25 VOTE REQUIRED. The affirmative vote by Company Stockholders
representing (a) a majority of the Company Common Stock voting as a single
class, (b) a majority of the Company Preferred Stock voting as a single class,
and (c) a majority of the Company Common Stock and the Company Preferred Stock
voting together as a single class (clauses (a), (b) and (c) being referred to
collectively as the "REQUISITE COMPANY VOTE") are the only votes of the holders
of any class or series of the Company's capital stock necessary (under the
Company Charter Documents, the DGCL, the CGCL, if applicable, other applicable
Law or otherwise) to approve this Agreement, the Merger or the other
transactions contemplated by this Agreement.
SECTION 3.26 REGISTRATION STATEMENT. None of the information to be
supplied by the Company for inclusion in the registration statement on Form S-4
(or such other or successor form as shall be appropriate) pursuant to which the
shares of Parent Common Stock to be issued in the Merger will be registered with
the SEC (the "REGISTRATION STATEMENT") will, at the time the Registration
Statement (including any amendments or supplements thereto) is declared
effective by the SEC, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they were
made, not misleading, or omit to state any material fact necessary to correct
any statement in any earlier communication which has become false or misleading.
If at any time prior to the Effective Time any event relating to the Company,
the Company Subsidiary or any of their respective affiliates, officers or
directors should be discovered by the Company which should be set forth in an
amendment or a supplement to the Registration Statement, the Company shall
promptly inform the Parent. Notwithstanding the foregoing, the Company makes no
representation or warranty with respect to any information supplied by the
Parent and Merger Sub which is contained in any of the foregoing documents.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
OF THE PARENT AND MERGER SUB
Each of the Parent and Merger Sub represents and warrants to the Company
that:
SECTION 4.1 ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. Each of the
Parent, Merger Sub, and each subsidiary of the Parent (collectively, the "PARENT
SUBSIDIARIES") has been duly organized and is validly existing and in good
standing under the laws of its jurisdiction of incorporation or organization, as
the case may be, and has the requisite power and authority and all necessary
governmental approvals to own, lease and operate its properties and to carry on
its business as it is now being conducted. Each of the Parent, Merger Sub and
each Parent Subsidiary is duly qualified or licensed to do business, and is in
good standing, in each jurisdiction where the character of the properties owned,
leased or operated by it or the nature of its business makes such qualification
or licensing necessary, except for such failures to be so qualified or licensed
and in good standing that, individually or in the aggregate, have not resulted
and could not reasonably be expected to result in a Material Adverse Effect on
the Parent. For purposes of this Agreement, "MATERIAL ADVERSE EFFECT ON THE
PARENT" means any change in or effect on the business, assets, properties,
results of operations or condition (financial or otherwise) of the Parent or any
Parent Subsidiaries that is or could reasonably be expected to be materially
adverse to the Parent and the Parent Subsidiaries, taken as a whole, or that
could reasonably be expected to materially impair the ability of the Parent or
Merger Sub to perform its obligations under this Agreement or to consummate the
transactions contemplated by hereby, other than any change or effect relating
to, arising out of or resulting from (i) general changes relating to the
internet infrastructure or telecommunications industry or (ii) general changes
in United States economic conditions, (iii) general changes in the United States
securities markets or (iv) the announcement of the execution of this Agreement
or the pendancy or occurrence of any of the transactions contemplated hereby.
SECTION 4.2 CERTIFICATE OF INCORPORATION AND BY-LAWS. The copies of the
Parent's certificate of incorporation and by-laws, each as amended through the
date of this Agreement (collectively, the "PARENT CHARTER DOCUMENTS") that are
exhibits to the Parent's annual report on Form 10-K for the year ended
December 31, 1999 are correct and complete copies of those documents. The copies
of Merger Sub's certificate of incorporation and by-laws, each as amended
through the date of this Agreement (collectively, the "MERGER SUB CHARTER
DOCUMENTS") previously delivered by the Parent to the Company, are correct and
complete copies of those documents. The Parent Charter Documents, the Merger Sub
Charter Documents and all comparable organizational documents of the other
Parent Subsidiaries are in full force and effect. Neither the Parent nor any
Parent Subsidiary is in violation of any of the provisions of its organized
documents.
SECTION 4.3 CAPITALIZATION.
(a) The authorized capital stock of the Parent consists of
(i) 2,404,031,240 shares of Parent Common Stock, (ii) 522,254,782 shares of
Class B Common Stock, par value $.01 per share ("PARENT CLASS B COMMON STOCK"),
and (iii) 20,000,000 shares of Preferred Stock, par value $.01 per share
("PARENT PREFERRED STOCK"). As of October 2, 2000, (A) 483,025,721 shares of
Parent Common Stock were issued and outstanding, all of which were validly
issued and are fully paid, nonassessable and not subject to preemptive rights,
(B) 67,538,544 shares of Parent Class B Common Stock were issued and
outstanding, all of which were validly issued and are fully paid, nonassessable
and not subject to preemptive rights, (C) no shares of Parent Preferred Stock
were outstanding, (D) 93,747,253 shares of Parent Common Stock were reserved for
issuance upon exercise of outstanding stock options and warrants to acquire
shares of Parent Common Stock ("PARENT STOCK OPTIONS"), and (E) 57,369,492
shares of Parent Common Stock were reserved for issuance upon conversion of the
Parent's 6.15%
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Convertible Subordinated Notes due 2010. Except as set forth above, as of
October 2, 2000, no shares of capital stock or other voting securities of the
Parent were issued, reserved for issuance or outstanding and, since such date,
no shares of capital stock or other voting securities or options in respect
thereof have been issued except upon the exercise of the Parent Stock Options
outstanding on such date or in the ordinary course of business.
(b) Except (i) for outstanding Parent Stock Options, (ii) for outstanding
shares of Parent Class B Common Stock and (iii) as set forth in Section 4.3(b)
of the disclosure letter previously delivered by the Parent to the Company (the
"PARENT DISCLOSURE LETTER"), there are no options, warrants, calls, conversion
rights, stock appreciation rights, redemption rights, repurchase rights or other
rights, agreements, arrangements or commitments of any character to which the
Parent is a party or by which the Parent is bound relating to the issued or
unissued capital stock of the Parent, Merger Sub or any Parent Subsidiary or
obligating the Parent, Merger Sub or any Parent Subsidiary to issue or sell any
shares of capital stock of, other equity interests in, or securities
exchangeable for or convertible into the capital stock or other equity interests
in the Parent, Merger Sub or any Parent Subsidiary.
(c) There are no outstanding contractual obligations of the Parent, Merger
Sub or any Parent Subsidiary to repurchase, redeem or otherwise acquire any
shares of Parent Common Stock or any capital stock of Merger Sub or any Parent
Subsidiary. Each outstanding share of capital stock of each Parent Subsidiary is
duly authorized, validly issued, fully paid, nonassessable and not subject to
preemptive rights and each such share owned by the Parent or a Parent Subsidiary
is free and clear of all Liens except for Liens under applicable Law. There are
no outstanding material contractual obligations of the Parent, Merger Sub or any
Parent Subsidiary to provide funds to, or make any investment (in the form of a
loan, capital contribution or otherwise) in, any Parent Subsidiary that is not
wholly owned by the Parent, or in any other person.
(d) The authorized capital stock of Merger Sub consists of 1,000 shares of
Sub Common Stock. All of the issued and outstanding shares of Sub Common Stock
are (A) owned by the Parent or a Parent Subsidiary wholly owned by the Parent
and (B) duly authorized, validly issued, fully paid and nonassessable.
(e) All shares of Parent Common Stock to be issued in the Merger and all
shares of Parent Common Stock to be issued upon the exercise of Company Stock
Options and Company Warrants to be assumed by the Parent pursuant to this
Agreement, when issued, will be duly authorized, validly issued, fully paid and
non-assessable and free and clear of all Liens.
SECTION 4.4 AUTHORITY.
(a) Each of the Parent and Merger Sub has all necessary corporate power and
authority to execute and deliver this Agreement, to perform its obligations
hereunder and to consummate the Merger and the other transactions contemplated
hereby to be consummated by it. The execution and delivery of this Agreement by
each of the Parent and Merger Sub and the consummation by each of the Parent and
Merger Sub of such transactions have been duly and validly authorized by all
necessary corporate action and no other corporate proceedings on the part of the
Parent or Merger Sub are necessary to authorize this Agreement or to consummate
such transactions. This Agreement has been duly authorized and validly executed
and delivered by each of the Parent and Merger Sub and constitutes a legal,
valid and binding obligation of each of the Parent and Merger Sub, enforceable
against each of the Parent and Merger Sub in accordance with its terms, subject
to bankruptcy, insolvency, reorganization, moratorium or other laws now or
hereafter in effect relating to creditors' rights generally or to general
principles of equity.
(b) Each of the Board of Directors of the Parent and Merger Sub (i) has
unanimously adopted the plan of merger set forth in this Agreement and approved
this Agreement and the other transactions contemplated by this Agreement and
(ii) has declared that the Merger and this Agreement and the
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other transactions contemplated by this Agreement are advisable and in the best
interests of the Company.
SECTION 4.5 NO CONFLICT.
(a) The execution and delivery of this Agreement by the Parent and Merger
Sub do not, and the performance of this Agreement by each of the Parent and
Merger Sub will not:
(i) conflict with or violate any provision of the Parent Charter
Documents, Merger Sub Charter Documents or any comparable organizational
documents of any other Parent Subsidiary;
(ii) assuming (w) that all consents, approvals, authorizations and other
actions described in Section 4.6 have been obtained, (x) all filings and
obligations described in Section 4.6 have been made, (y) all applicable
waiting periods have terminated or expired and (z) approval of this
Agreement by the Requisite Company Vote, conflict with or violate any Law
applicable to the Parent, Merger Sub or any Parent Subsidiary or by which
any property or asset of the Parent, Merger Sub or any Parent Subsidiary is
or may be bound or affected, except for any such conflicts or violations
that, individually or in the aggregate, have not resulted and could not
reasonably be expected to result in a Material Adverse Effect on the Parent;
or
(iii) result in any breach of or constitute a default (or an event which
with or without notice or lapse of time or both would become a default)
under, or give to others any right of termination, amendment, acceleration
or cancellation of, or result in the creation of a Lien on any property or
asset of the Parent, Merger Sub, or any Parent Subsidiary under, any
Contract to which the Parent, Merger Sub or any Parent Subsidiary is a party
or by which any of them or their assets or properties is or may be bound or
affected, except for any such breaches, defaults or other occurrences which,
individually or in the aggregate, have not resulted and could not reasonably
be expected to result in a Material Adverse Effect on the Parent.
(b) Section 4.5(b) of the Parent Disclosure Letter sets forth a correct and
complete list in all material respects of Contracts to which the Parent or any
Parent Subsidiaries are a party or by which they or their assets or properties
are or may be bound or affected under which consents or waivers are or may be
required prior to consummation of the transactions contemplated by this
Agreement.
SECTION 4.6 REQUIRED FILINGS AND CONSENTS. The execution and delivery of
this Agreement by the Parent and Merger Sub do not, and the performance of this
Agreement by the Parent and Merger Sub will not, require any consent, approval,
authorization or permit of, or filing with or notification to, any Governmental
Entity except for (a) applicable requirements of the Exchange Act,
(b) applicable requirements of the Securities Act, (c) applicable requirements
of Blue Sky Laws, (d) the rules and regulations of NASDAQ/NMS, (e) applicable
requirements of Takeover Statutes, (f) the pre-merger notification requirements
of the HSR Act, (g) for the filing of the Certificate of Merger as required by
the DGCL, or (h) such consents, approvals, authorizations, permits, filings or
notifications the failure of which to obtain or make has not and could not
reasonably be expected to result in a Material Adverse Effect on the Parent and
Parent Subsidiaries taken as a whole.
SECTION 4.7 PERMITS; COMPLIANCE WITH LAW. Each of the Parent and the Parent
Subsidiaries is in possession of all franchises, grants, authorizations,
licenses, permits, easements, variances, exceptions, consents, certificates,
approvals and orders of any Governmental Entity necessary for the Parent or any
Parent Subsidiary to own, lease and operate its properties or to carry on its
business as it is now being conducted (collectively, the "PARENT PERMITS"),
except where the failure to have, or the suspension or cancellation of, any of
the Parent Permits, individually or in the aggregate, has not resulted and could
not reasonably be expected to result in a Material Adverse Effect on the Parent,
and, as of the date of this Agreement, no suspension or cancellation of any of
the Parent Permits is pending or, to the knowledge of the Parent, threatened,
except where the failure to have, or the suspension or
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cancellation of, any of the Parent Permits, individually or in the aggregate,
has not resulted and could not reasonably be expected to result in a Material
Adverse Effect on the Parent. Neither the Parent nor any Parent Subsidiary is in
conflict with, or in default or violation of, (i) any Law applicable to the
Parent or any Parent Subsidiary or by which any property or asset of the Parent
or any Parent Subsidiary is or may be bound or affected or (ii) any Parent
Permits, except for any such conflicts, defaults or violations that,
individually or in the aggregate, have not resulted and could not reasonably be
expected to result in a Material Adverse Effect on the Parent.
SECTION 4.8 SEC FILINGS; FINANCIAL STATEMENTS.
(a) The Parent has filed all forms, reports, schedules, statements and other
documents (including all exhibits, annexes, supplements and amendments to such
documents) required to be filed by it under the Exchange Act and the Securities
Act with the SEC since October 29, 1997 (collectively, including any such
documents filed subsequent to the date of this Agreement, the "PARENT SEC
REPORTS"). The Parent SEC Reports, at the time they were filed, (i) complied in
all material respects with the requirements of the Exchange Act or the
Securities Act or both, as the case may be, applicable to those Parent SEC
Reports and (ii) did not contain any untrue statement of a material fact or omit
to state a material fact required to be stated or necessary in order to make the
statements made in those Parent SEC Reports, in the light of the circumstances
under which they were made, not misleading. No Parent Subsidiary is subject to
the periodic reporting requirements of the Exchange Act or is otherwise required
to file any documents with the SEC or any national securities exchange or
quotation service or comparable Governmental Entity.
(b) Each of the consolidated balance sheets included in or incorporated by
reference into the Parent SEC Reports (including the related notes and
schedules) fairly presented, in all material respects, the consolidated
financial position of the Parent as of the dates set forth in those consolidated
balance sheets. Each of the consolidated statements of income and of cash flows
included in or incorporated by reference into the Parent SEC Reports (including
any related notes and schedules) fairly presented, in all material respects, the
consolidated results of operations and cash flows, as the case may be, of the
Parent and the consolidated Parent Subsidiaries for the periods set forth in
those consolidated statements of income and of cash flows (subject, in the case
of unaudited quarterly statements, to notes and normal year-end audit
adjustments that will not be material in amount or effect), in each case in
conformity with GAAP (except as may be indicated in the notes thereto or, in the
case of unaudited quarterly statements, as permitted by Form 10-Q of the SEC)
consistently applied throughout the periods indicated. All of such balance
sheets and financial statements complied as to form in all material respects
with applicable accounting requirements and with the published rules and
regulations of the SEC with respect thereto.
(c) Except as and to the extent set forth on the consolidated balance sheet
of the Parent and the consolidated Parent Subsidiaries as of December 31, 1999
including the related notes, neither the Parent nor any Parent Subsidiary has
any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) that would be required to be reflected on a balance
sheet or in the related notes prepared in accordance with GAAP, except for
liabilities or obligations incurred in the ordinary course of business since
December 31, 1999 that, individually or in the aggregate, have not resulted and
could not reasonably be expected to result in a Material Adverse Effect on the
Parent.
SECTION 4.9 ABSENCE OF CERTAIN CHANGES OR EVENTS.
(a) Except as set forth in Section 4.9(a) of the Parent Disclosure Letter,
since December 31, 1999, the Parent, Merger Sub and the Parent Subsidiaries have
conducted their businesses only in the ordinary course and in a manner
consistent with past practice and, since such date, there has not been any
Material Adverse Effect on the Parent.
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(b) Except as disclosed in the Parent SEC Reports filed with the SEC since
December 31, 1999 and which have been filed and are publicly available at least
two business days prior to the date of this Agreement (the "PARENT FILED SEC
REPORTS"), except as permitted pursuant to Section 5.2 and except as set forth
in Section 4.9(a) of the Parent Disclosure Letter, since December 31, 1999,
there has not been:
(i) any damage, destruction or other casualty loss with respect to any
asset or property owned, leased or otherwise used by it or any Parent
Subsidiaries, whether or not covered by insurance, which damage, destruction
or loss, individually or in the aggregate, has resulted or could reasonably
be expected to result in a Material Adverse Effect on the Parent;
(ii) any material change by the Parent in its or any Parent Subsidiary's
accounting methods, principles or practices, except as required by GAAP;
(iii) any declaration, setting aside or payment of any dividend or
distribution in respect of Parent Shares or any redemption, purchase or
other acquisition of any of the Parent's securities;
(iv) any increase in the compensation or benefits or establishment of
any bonus, insurance, severance, deferred compensation, pension, retirement,
profit sharing, stock option (including the granting of stock options, stock
appreciation rights, performance awards or restricted stock awards), stock
purchase or other employee benefit plan, or any other increase in the
compensation payable or to become payable to any executive officers of the
Parent or any Parent Subsidiary except in the ordinary course of business
consistent with past practice or except as required by applicable Law;
(v) (A) any incurrence or assumption by the Parent or any Parent
Subsidiary of any indebtedness for borrowed money or (B) any guarantee,
endorsement or other incurrence or assumption of material liability (whether
directly, contingently or otherwise) by the Parent or any Parent Subsidiary
for the obligations of any other person (other than any wholly-owned Parent
Subsidiary), other than in the ordinary course of business consistent with
past practice;
(vi) any creation or assumption by the Parent or any Parent Subsidiary
of any Lien on any material asset of the Parent or any Parent Subsidiary,
other than in the ordinary course of business, consistent with past practice
and other than between the Parent and the Parent Subsidiaries;
(vii) any making of any loan, advance or capital contribution to or
investment in any person by the Parent or any Parent Subsidiary, other than
in the ordinary course of business, consistent with past practice; or
(viii) (A) any contract or agreement entered into by the Parent or any
Parent Subsidiary on or prior to the date hereof relating to any material
acquisition or disposition of any assets or business or (B) any
modification, amendment, assignment or termination of or relinquishment by
the Parent or any Parent Subsidiary of any rights under any other Contract
(including any insurance policy naming it as a beneficiary or a loss payable
payee) that has resulted or could reasonably be expected to result in,
individually or in the aggregate, a Material Adverse Effect on the Parent
other than transactions, commitments, contracts or agreements in the
ordinary course of business consistent with past practice or those
contemplated by this Agreement.
SECTION 4.10 TAX MATTERS. Neither the Parent nor Merger Sub, nor to the
knowledge of the Parent, any of Parent's affiliates has taken or agreed to take
any action, nor is the Parent aware of any agreement, plan or other
circumstance, that would prevent the Merger from constituting a transaction
qualifying as a reorganization under Section 368(a) of the Code.
SECTION 4.11 LITIGATION. Except as disclosed in the Parent Filed SEC
Reports, there is no Claim pending or, to the knowledge of the Parent,
threatened against the Parent or any Parent Subsidiary
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before any Governmental Entity nor to the Parent's knowledge are there any
investigations or reviews by any Governmental Entity pending or threatened
against, relating to or affecting the Parent or any of the Parent Subsidiaries,
that, if adversely determined, individually or in the aggregate, has resulted or
could reasonably be expected to result in a Material Adverse Effect on the
Parent. Neither the Parent nor any Parent Subsidiary is subject to any
outstanding order, writ, injunction or decree which, individually or in the
aggregate, has resulted or could reasonably be expected to result in a Material
Adverse Effect on the Parent.
SECTION 4.12 ENVIRONMENTAL MATTERS. Except as has not resulted and could
not reasonably be expected to result in a Material Adverse Effect on the Parent:
(a) the Parent and the Parent Subsidiaries are and have been in compliance
with all applicable Environmental Laws;
(b) there is no Environmental Claim pending or threatened against the Parent
or any Parent Subsidiary;
(c) there is no civil, criminal or administrative judgment or notice of
violation outstanding against the Parent or any Parent Subsidiary pursuant to
Environmental Laws or principles of common law relating to pollution, protection
of the environment or health and safety; and
(d) there are no past or present events, conditions, circumstances,
activities, practices, incidents, actions or plans which may prevent compliance
of the Parent or any of the Parent Subsidiaries with Environmental Laws, or
which have given rise to or could reasonably be expected to give rise to an
Environmental Claim against the Parent or any of the Parent Subsidiaries or to
liability or obligations pursuant to Environmental Laws incurred by the Parent
or any of the Parent Subsidiaries.
SECTION 4.13 TAXES.
(a) Except as to any items that would not or could not reasonably be
expected to have, individually or in the aggregate, a Material Adverse Effect on
the Parent, (i) the Parent and each Parent Subsidiary has timely filed (after
giving effect to any extensions of the time to file which were obtained) prior
to the date of this Agreement, and will file prior to the Effective Time, all
tax returns required to be filed prior to the date of this Agreement and/or
required to be filed prior to the Effective Time by any of them, and has paid
(or the Parent has paid on its behalf), or has or will set up an adequate
reserve for the payment of, all Taxes required to be paid prior to the date of
the Agreement or the Effective Time, as the case may be, and the most recent
financial statements contained in the Parent SEC Reports reflect an adequate
reserve for all Taxes payable by the Parent and the Parent Subsidiaries accrued
through the date of such financial statements and (ii) no deficiencies for any
Taxes have been proposed, asserted or assessed against the Parent or any Parent
Subsidiary other than those which are being contested in good faith and by
proper proceedings by the Parent.
(b) The federal income tax returns of the Parent and each Parent Subsidiary
and any affiliated, consolidated, combined or unitary group that includes the
Parent or any Parent Subsidiary have not to date been examined by the IRS.
(c) Except as has not or could not reasonably be expected to have a Material
Adverse Effect on the Parent, none of the Parent, any Parent Subsidiary, or to
the Parent's knowledge, any affiliated, consolidated, combined or unitary group
of which the Parent or any Parent Subsidiary is now or ever was a member, has
filed or entered into any election, consent or extension agreement that extends
any applicable statute of limitations or the time within which a tax return must
be filed which such statute of limitations has not expired or tax return has not
been timely filed.
(d) Except as has not or could not reasonably be expected to have a Material
Adverse Effect on the Parent, (i) none of the Parent, any Parent Subsidiary or,
to the Parent's knowledge, any group of which the Parent or any Parent
Subsidiary is now or ever was a member, is a party to any action or
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proceeding pending or, to the Parent's knowledge, threatened by any governmental
authority for assessment or collection of Taxes, (ii) no unresolved claim for
assessment or collection of Taxes has, to the Parent's knowledge, been asserted
and (iii) no audit or investigation of the Parent or any Parent Subsidiary by
any governmental authority is pending or, to the Parent's knowledge, threatened.
SECTION 4.14 BROKERS. Except as set forth in Section 4.14 of the Parent
Disclosure Letter, no broker, finder or investment banker is entitled to any
brokerage, finder's or other fee or commission in connection with the Merger or
the other transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Parent or Merger Sub.
SECTION 4.15 CERTAIN STATUTES. The Board of Directors of the Parent has
taken or will take all appropriate and necessary actions to ensure that the
restrictions on business combinations in Section 203 of the DGCL will not have
any effect on the Merger or the other transactions contemplated by this
Agreement. No Takeover Statute is, as of the date of this Agreement, applicable
to the Merger or such other transactions.
SECTION 4.16 INTERIM OPERATIONS OF MERGER SUB. Merger Sub was formed
solely for the purpose of engaging in the transactions contemplated by this
Agreement and has not engaged in any business activities or conducted any
operations other than in connection with the transactions contemplated by this
Agreement.
SECTION 4.17 REGISTRATION STATEMENT. None of the information to be
supplied by the Parent for inclusion in the Registration Statement will, at the
time the Registration Statement (including any amendments or supplements
thereto) is declared effective by the SEC, contain any statement which, at such
time and in light of the circumstances under which it shall be made, is false or
misleading with respect to any material fact, or shall omit to state any
material fact necessary in order to make the statements made therein not false
or misleading, or omit to state any material fact necessary to correct any
statement in any earlier communication which has become false or misleading. If
at any time prior to the Effective Time, any event relating to the Parent,
Merger Sub, any other Parent Subsidiary or any of their respective affiliates,
officers or directors should be discovered by the Parent which should be set
forth in an amendment or a supplement to the Registration Statement, the Parent
shall promptly inform the Company. Notwithstanding the foregoing, the Parent
makes no representations or warranty with respect to any information supplied by
the Company which is contained in any of the foregoing documents.
ARTICLE V
COVENANTS
SECTION 5.1 CONDUCT OF BUSINESS OF THE COMPANY. Except as contemplated by
this Agreement or with the prior written consent of the Parent, during the
period from the date of this Agreement to the Effective Time, the Company will,
and will cause each of the Company Subsidiaries to, conduct its operations only
in the ordinary course of business consistent with past practice and, to the
extent consistent therewith, use all reasonable best efforts to keep available
the services of its officers and key employees, and to preserve the goodwill of
and business relationships with customers, suppliers, facilities providers and
other persons having business relationships with it, with the intent that such
goodwill and ongoing business relationships shall be unimpaired in all material
respects at the Effective Time. Without limiting the generality of the
foregoing, and except as otherwise contemplated by this Agreement or disclosed
in Section 5.1 of the Company Disclosure Letter, prior to the Effective Time,
the Company will not, and will not permit any Company Subsidiary to, without the
prior written consent of the Parent:
(a) except as required by applicable Law, adopt any amendment to the Company
Charter Documents or the comparable organizational documents of the Company
Subsidiary;
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(b) issue, reissue, sell or pledge, or authorize the issuance, reissuance,
sale or pledge of (i) additional shares of capital stock or other equity
securities of any class, or securities convertible into capital stock or other
equity securities or any rights, warrants or options to acquire any such
convertible securities or capital stock or other equity securities, other than
the issuance of additional shares of Company Common Stock or additional shares
of an existing series of Company Preferred Stock to the extent reasonably
necessary to fund the Company's working capital needs prior to the Effective
Date and 500,000 options to acquire shares of Company Common Stock per month (it
being understood and agreed that all such shares and options will be included in
the definition of Total Company Shares, will be issued under the Company Option
Plans, will provide for vesting provisions consistent with past practice and
will not provide for acceleration of vesting upon consummation of the Merger);
PROVIDED, HOWEVER, that the Company shall not issue any such additional shares
or options for any reason whatsoever during the one-week period preceding the
Closing Date, or (ii) any other securities in respect of, in lieu of, or in
substitution for, Company Common Stock outstanding on the date hereof;
(c) declare, set aside, make or pay any dividend or other distribution
(whether in cash, securities or property or any combination thereof) in respect
of any class or series of its capital stock;
(d) split, combine, subdivide, reclassify or redeem, retire, purchase or
otherwise acquire, or propose to redeem, retire or purchase or otherwise
acquire, any shares of its capital stock, or any of its other securities;
(e) except for increases in salary, wages and benefits of officers or
employees of the Company or the Company Subsidiaries in accordance with past
practice or increases in salary, wages and benefits granted to officers and
employees of the Company or the Company Subsidiaries in conjunction with new
hires, promotions or other changes in job status that are consistent with past
practices, (i) increase the compensation or fringe benefits payable or to become
payable to its directors, officers or employees (whether from the Company or any
Company Subsidiary), (ii) pay any benefit not required by any existing plan or
arrangement (including the options, stock appreciation rights, shares of
restricted stock or performance units) or grant any severance or termination pay
to (except pursuant to existing agreements, plans or policies), or enter into
any employment or severance agreement with, any director, officer or other
employee of the Company or any Company Subsidiary, or (iii) establish, adopt,
enter into, amend or take any action to accelerate rights under any collective
bargaining, bonus, profit sharing, thrift, compensation, stock option,
restricted stock, pension, retirement, savings, welfare, deferred compensation,
employment, termination, severance or other employee benefit plan, agreement,
trust, fund, policy or arrangement for the benefit or welfare of any directors,
officers or current or former employees, or to accelerate the vesting of any
unvested options to purchase Company Common Stock that may be accelerated as a
result of the consummation of the Merger or otherwise, except in each case to
the extent required by applicable Law; PROVIDED, HOWEVER, that nothing in this
Agreement will be deemed to prohibit the payment of benefits as they become
payable;
(f) acquire, sell, lease, license, transfer, pledge, encumber, grant or
dispose of (whether by merger, consolidation, purchase, sale or otherwise) any
material property or assets, including capital stock of any Company Subsidiary
(other than the acquisition and sale of inventory or the disposition of used or
excess equipment and the purchase of supplies and equipment, in either case in
the ordinary course of business consistent with past practice), or enter into
any material commitment or transaction outside the ordinary course of business;
(g) (i) except as set forth in Section 5.1(g) of the Company Disclosure
Letter, incur, assume or prepay any long-term indebtedness or incur or assume
any short-term indebtedness (including, in either case, by issuance of debt
securities), except that the Company or any Company Subsidiary may incur, assume
or prepay indebtedness in the ordinary course of business consistent with past
practice under existing lines of credit or existing equipment financing
arrangements disclosed in Section 3.12 of the Company Disclosure Letter,
(ii) assume, guarantee, endorse or otherwise become liable or responsible
(whether directly, contingently or otherwise) for the obligations of any other
person except in the
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ordinary course of business consistent with past practice, or (iii) make any
loans, advances or capital contributions to, or investments in, any other person
except in the ordinary course of business consistent with past practice;
(h) terminate, cancel or request any material change in, or agree to any
material change in any Contract which is material to the Company and the Company
Subsidiaries, taken as a whole, or enter into any Contract which would be
material to the Company or the Company Subsidiaries, taken as a whole, in either
case other than in the ordinary course of business consistent with past
practice;
(i) enter into any joint venture agreement, partnership agreement or similar
arrangement;
(j) make or authorize any capital expenditure, other than capital
expenditures that are not, in the aggregate, for this fiscal year and fiscal
year 2001, in excess of the capital expenditures provided for in the Company's
budget which is set forth in Section 5.1 of the Company Disclosure Letter);
(k) adopt a plan of complete or partial liquidation, dissolution, merger,
consolidation, restructuring, recapitalization or other reorganization of the
Company (other than the Merger) or any Company Subsidiary;
(l) create or acquire any new subsidiary;
(m) take any action with respect to accounting policies or procedures, other
than actions in the ordinary course of business and consistent with past
practice or as required pursuant to applicable Law or GAAP;
(n) waive, release, assign, settle or compromise any material rights, claims
or litigation;
(o) enter into any agreement or arrangement that materially limits or
otherwise materially restricts the Company or any Company Subsidiary, or that
would, after the Effective Time, limit or restrict the Surviving Corporation and
its affiliates (including the Parent) or any successor thereto, from engaging or
competing in the Parent's or the Company's lines of business or in any
geographic area;
(p) make any Tax election or settle or compromise any material federal,
state, local or foreign Tax liability; or
(q) authorize or enter into any formal or informal written or other
agreement or otherwise make any commitment to do any of the foregoing.
SECTION 5.2 OTHER ACTIONS. During the period from the date hereof to the
Effective Time, the Parent, Merger Sub and the Company shall not, and shall not
permit any of their respective subsidiaries to, voluntarily take any action that
would, or that could reasonably be expected to, result in any of the conditions
to the Merger set forth in Article VI of this Agreement not being satisfied.
SECTION 5.3 NOTIFICATION OF CERTAIN MATTERS. The Parent and the Company
shall promptly notify each other of: (a) the occurrence or non-occurrence of any
fact or event which could reasonably be expected (i) to cause any representation
or warranty contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date of this Agreement to the Effective
Time, (ii) to cause any material covenant, condition or agreement hereunder not
to be complied with or satisfied in all material respects, or (iii) to result
in, in the case of Parent, a Material Adverse Effect on the Parent and, in the
case of the Company, a Material Adverse Effect on the Company; (b) any failure
of the Company or the Parent, as the case may be, to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder in any material respect; PROVIDED, HOWEVER, that no such notification
shall affect the representations or warranties of any party or the conditions to
the obligations of any party hereunder; (c) any notice or other material
communications from any Governmental Entity in connection with the transactions
contemplated hereby; and (d) the commencement of any suit, action or proceeding
that seeks to prevent, seeks damages in respect of, or otherwise relates to the
consummation of the transactions contemplated hereby.
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SECTION 5.4 ACCESS TO INFORMATION; CONFIDENTIALITY.
(a) Except as required under any confidentiality agreement or similar
agreement or arrangement to which the Parent or the Company or any of the Parent
Subsidiaries is a party or under applicable Law or the regulations or
requirements of any securities exchange or quotation service or other self
regulatory organization with whose rules the parties are required to comply,
from the date of this Agreement to the Effective Time, the Parent and the
Company shall (and shall cause their respective subsidiaries to): (i) provide to
the other (and its officers, directors, employees, accountants, consultants,
legal counsel, financial advisors, investment bankers, agents and other
representatives (collectively, "REPRESENTATIVES")) access at reasonable times
upon prior notice to the officers, employees, agents, properties, offices and
other facilities of the other and its subsidiaries and to the books and records
thereof; and (ii) furnish promptly such information concerning the business,
properties, Contracts, assets, liabilities, personnel and other aspects of the
other party and its subsidiaries as the other party or its Representatives may
reasonably request. No investigation conducted under this Section 5.4 shall
affect or be deemed to modify any representation or warranty made in this
Agreement.
(b) The parties shall comply with, and shall cause their respective
Representatives to comply with, all of their respective obligations under the
Confidentiality Agreement, dated September 25, 2000 (the "CONFIDENTIALITY
AGREEMENT"), between the Parent and the Company with respect to the information
disclosed under this Section 5.4.
SECTION 5.5 NO SOLICITATION.
(a) From the date hereof until the termination hereof, the Company will not,
nor will it permit any Company Subsidiary, nor will it authorize or permit any
officer, director or employee of the Company or any Company Subsidiary and each
investment banker, attorney, accountant or other advisor or representative of,
the Company or any Company Subsidiary to, directly or indirectly, (i) solicit,
initiate or encourage the submission of any Acquisition Proposal or
(ii) participate in any discussions or negotiations regarding, or furnish to any
person any information with respect to, or take any other action to knowingly
facilitate, an Acquisition Proposal or any inquiries or the making of any
proposal that constitutes, or may reasonably be expected to lead to, an
Acquisition Proposal.
(b) Immediately after the execution and delivery of this Agreement, the
Company will, and will cause its subsidiaries and affiliates, and their
respective officers, directors, employees, investment bankers, attorneys,
accountants and other agents to, cease and terminate any existing activities,
discussions or negotiations with any parties conducted heretofore with respect
to any possible Acquisition Proposal. The Company agrees that it will take the
necessary steps to promptly inform the individuals or entities referred to in
the first sentence of Section 5.5(a) of the obligations undertaken in this
Section 5.5.
(c) For purposes of this Agreement, "ACQUISITION PROPOSAL" means an inquiry,
offer or proposal regarding any of the following (other than the transactions
contemplated by this Agreement) involving the Company or any Company Subsidiary:
(i) any merger, consolidation, share exchange, recapitalization, business
combination or other similar transaction; (ii) any sale, lease, exchange,
mortgage, pledge, transfer or other disposition of all or substantially all the
assets of the Company and the Company Subsidiaries, taken as a whole, in a
single transaction or series of related transactions; (iii) any tender offer or
exchange offer for fifteen percent (15%) or more of the outstanding shares of
Company Common Stock or the filing of a registration statement under the
Securities Act in connection therewith; or (iv) any public announcement of a
proposal or plan to do any of the foregoing or any agreement to engage in any of
the foregoing.
SECTION 5.6 AFFILIATES. The Company has identified each person who, to the
knowledge of the Company, is an "affiliate" of the Company under Rule 145 under
the Securities Act in Section 5.6 of the Company Disclosure Letter. The Company
shall deliver to the Parent, prior to the Effective Time,
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copies of letter agreements, each in the form of Exhibit D hereto (each, an
"AFFILIATE LETTER"), executed by each such person so identified as an
"affiliate" of the Company.
SECTION 5.7 DIRECTORS' AND OFFICERS' INDEMNIFICATION AND INSURANCE.
(a) The Parent agrees that all rights to indemnification now existing in
favor of any employee, agent, director or officer of the Company and the Company
Subsidiaries (the "INDEMNIFIED PARTIES") as provided in their respective
charters or by-laws, in an agreement between an Indemnified Party and the
Company or one of the Company Subsidiaries, or otherwise in effect on the date
of this Agreement shall be maintained by the Surviving Corporation and shall
survive the Merger and shall continue in full force and effect for a period of
not less than six years from the Effective Time; PROVIDED that in the event any
claim or claims are asserted or made within such six-year period, all rights to
indemnification in respect of any such claim or claims shall continue until
final disposition of any and all such claims. The Parent also agrees to
indemnify all Indemnified Parties with respect to all acts and omissions arising
out of such individuals' services as officers, directors, employees or agents of
the Company or any of the Company Subsidiaries or as trustees or fiduciaries of
any plan for the benefit of employees, or otherwise on behalf of, the Company or
any of the Company Subsidiaries, occurring prior to the Effective Time,
including the transactions contemplated by this Agreement. Without limiting the
foregoing, in the event any such Indemnified Party is or becomes involved in any
capacity in any action, proceeding or investigation in connection with any
matter, including the transactions contemplated by this Agreement, occurring
prior to, and including, the Effective Time, the Parent will pay as incurred
such Indemnified Party's legal and other expenses (including the cost of any
investigation and preparation) incurred in connection therewith.
(b) In the event that the Surviving Corporation or any of its successors or
assigns (i) consolidates with or merges into any other person and is not the
continuing or surviving corporation or entity of such consolidation or merger or
(ii) transfers or conveys all or substantially all of its properties and assets
to any person, then, in each such case, the Parent shall cause proper provision
to be made so that the successors or assigns of the Surviving Corporation assume
the obligations set forth in this Section 5.7.
SECTION 5.8 WRITTEN CONSENT OR STOCKHOLDERS MEETING. The Company shall
prepare and deliver to each Principal Stockholder a written consent in lieu of a
meeting of stockholders (the "WRITTEN CONSENT"), or, if for any reason the
Company cannot obtain or make use of the Written Consent after using its
reasonable best efforts, the Company shall call and hold a meeting of the
stockholders of the Company (the "COMPANY STOCKHOLDERS MEETING"), in either case
as promptly as practicable after the Registration Statement Effective Date, for
the purpose of consenting to or voting upon the approval and adoption of this
Agreement. The Company shall use its reasonable best efforts (through its agents
or otherwise) to solicit from its stockholders consents or proxies in favor of
the approval and adoption of this Agreement, and shall take all other action
necessary or advisable to secure Requisite Company Vote.
SECTION 5.9 REASONABLE BEST EFFORTS. Subject to the terms and conditions
provided in this Agreement and to applicable legal requirements, each of the
parties to this Agreement agrees to use its reasonable best efforts to take, or
cause to be taken, all action, and to do, or cause to be done, in the case of
the Company, and to assist and cooperate with the other parties to this
Agreement in doing, as promptly as practicable, all things necessary, proper or
advisable under applicable laws and regulations to ensure that the conditions
set forth in Article VI are satisfied and to consummate and make effective the
transactions contemplated hereby. If, at any time after the Effective Time, any
further action is necessary or desirable to carry out the purposes of this
Agreement, including the execution of additional instruments, the proper
officers and directors of each party to this Agreement shall take all such
necessary action.
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SECTION 5.10 REGISTRATION STATEMENT. As promptly as practicable after the
execution of this Agreement, the Parent shall finish the preparation of and,
with the cooperation and assistance of the Company, file with the SEC, a
Registration Statement in connection with the registration under the Securities
Act of the shares of Parent Common Stock to be issued to the Company
Stockholders pursuant to the Merger. The Parent shall use commercially
reasonable efforts to have or cause the Registration Statement to become
effective as promptly as practicable, and shall take any action required under
any applicable federal or state securities laws in connection with the issuance
of shares of Parent Common Stock pursuant to the Merger. The Company shall
furnish all information concerning the Company as the Parent may reasonably
request in connection with such actions and the preparation of the Registration
Statement.
SECTION 5.11 CONSENTS; FILINGS; FURTHER ACTION.
(a) Upon the terms and subject to the conditions of this Agreement, each of
the parties to this Agreement shall use its reasonable best efforts to
(i) take, or cause to be taken, all appropriate action, and do, or cause to be
done, all things necessary, proper or advisable under applicable Law or
otherwise to consummate and make effective the Merger and the other transactions
contemplated by this Agreement, (ii) obtain from Governmental Entities any
consents, licenses, permits, waivers, approvals, authorizations or orders
required to be obtained or made by the Parent or the Company or any of their
respective subsidiaries in connection with the authorization, execution and
delivery of this Agreement and the consummation of the Merger and the other
transactions contemplated by this Agreement, (iii) make all necessary filings,
and thereafter make any other submissions either required or deemed appropriate
by each of the parties, with respect to this Agreement and the Merger and the
other transactions contemplated by this Agreement required under (A) the
Securities Act, the Exchange Act and any other applicable federal or Blue Sky
Laws, (B) the HSR Act, (C) the DGCL, (D) the CGCL, if applicable, (E) any other
applicable Law and (F) the rules and regulations of NASDAQ/NMS. The parties to
this Agreement shall cooperate and consult with each other in connection with
the making of all such filings, including by providing copies of all such
documents to the nonfiling party and its advisors prior to filing, and none of
the parties will file any such document if any of the other parties shall have
reasonably objected to the filing of such document. No party to this Agreement
shall consent to any voluntary extension of any statutory deadline or waiting
period or to any voluntary delay of the consummation of the Merger and the other
transactions contemplated by this Agreement at the behest of any Governmental
Entity without the consent and agreement of the other parties to this Agreement,
which consent shall not be unreasonably withheld or delayed.
(b) Without limiting the generality of Section 5.11(a), each party to this
Agreement shall promptly inform the others of any material communication from
the Federal Trade Commission, the Department of Justice or any other domestic or
foreign government or governmental or multinational authority regarding any of
the transactions contemplated hereby. If any party or any affiliate thereof
receives a request for additional information or documentary material from any
such government or authority with respect to the transactions contemplated by
this Agreement, then such party will endeavor in good faith to make, or cause to
be made, as soon as reasonably practicable and after consultation with the other
party, an appropriate response in compliance with such request. The Parent will
advise the Company promptly in respect of any understandings, undertakings or
agreements (oral or written) which the Parent proposes to make or enter into
with the Federal Trade Commission, the Department of Justice or any other
domestic or foreign government or governmental or multinational authority in
connection with the transactions contemplated by this Agreement. In furtherance
and not in limitation of the foregoing, the Parent shall use its reasonable best
efforts to resolve such objections, if any, as may be asserted with respect to
the transactions contemplated by this Agreement under any antitrust, competition
or trade regulatory laws, rules or regulations of any domestic or foreign
government or governmental authority or any multinational authority.
Notwithstanding the foregoing, nothing in this Section 5.11 shall require, or be
construed to require, the Parent or the Company, in connection with
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the receipt of any regulatory approval, to proffer to, or agree to (i) sell or
hold separate and agree to sell, divest or to discontinue or limit, before or
after the Effective Time, any assets, businesses, or interest in any assets or
businesses of the Parent, the Company or any of their respective affiliates (or
to the consent to any sale, or agreement to sell, or discontinuance or
limitation by the Parent or the Company, as the case may be, of any of its
assets or businesses) or (ii) agree to any conditions relating to, or changes or
restrictions in, the operations of any such asset or businesses which, in either
case, could reasonably be expected to result in a Material Adverse Effect on the
Parent or a Material Adverse Effect on the Company or to materially and
adversely impact the economic or business benefits to such party of the
transactions contemplated by this Agreement.
SECTION 5.12 PLAN OF REORGANIZATION. This Agreement is intended to
constitute a "plan of reorganization" within the meaning of Section 1.368-2(g)
of the income tax regulations promulgated under the Code. From and after the
date of this Agreement and until the Effective Time, each party to this
Agreement shall use its reasonable best efforts to cause the Merger to qualify,
and will not, without the prior written consent of the parties to this
Agreement, knowingly take any actions or cause any actions to be taken which
could prevent the Merger from qualifying, as a reorganization under the
provisions of Section 368(a) of the Code. Following the Effective Time, and
consistent with any such consent, none of the Surviving Corporation, the Parent
or any of their affiliates shall knowingly take any action or knowingly cause
any action to be taken which would cause the Merger to fail to so qualify as a
reorganization under Section 368(a) of the Code. The Parent shall execute and
deliver to each of Paul, Weiss, Rifkind, Wharton & Garrison, counsel to the
Parent, and Venture Law Group, a Professional Corporation, counsel to the
Company, a tax representation letter substantially in the form attached hereto
as Exhibit E-1 (the "PARENT TAX REPRESENTATION LETTER"), and the Company shall
execute and deliver to each of those law firms a tax representation letter
substantially in the form attached hereto as Exhibit E-2 (the "COMPANY TAX
REPRESENTATION LETTER"), in connection with the delivery by those law firms of
the tax opinions referred to in Sections 6.2(h) and 6.3(c).
SECTION 5.13 PUBLIC ANNOUNCEMENTS. The initial press release concerning the
Merger shall be a joint press release and, thereafter, the Parent, Merger Sub
and the Company shall consult with each other before issuing any press release
or otherwise making any public statements with respect to this Agreement or any
of the transactions contemplated hereby and shall not issue any such press
release or make any such public statement prior to such consultation, except to
the extent required by applicable Law or the requirements of NASDAQ/NMS, in
which case the issuing party shall use its reasonable best efforts to consult
with the other parties before issuing any such release or making any such public
statement.
SECTION 5.14 OBLIGATIONS OF MERGER SUB. The Parent shall take all actions
necessary to cause Merger Sub to perform its obligations under this Agreement
and to consummate the Merger on the terms and subject to the conditions set
forth in this Agreement.
SECTION 5.15 NASDAQ/NMS LISTINGS. The Parent shall use its reasonable best
efforts to cause the shares of Parent Common Stock to be issued in the Merger to
be approved for listing on the NASDAQ/NMS, subject to official notice of
issuance, prior to the Effective Time.
SECTION 5.16 EXPENSES. Except as otherwise provided in Section 7.5(b),
whether or not the Merger is consummated, all Expenses incurred in connection
with this Agreement and the Merger and the other transactions contemplated by
this Agreement shall be paid by the party incurring such Expense, except that
Expenses incurred in connection with the filing fee for the Merger under the HSR
Act shall be shared equally by the Parent and the Company.
SECTION 5.17 TAKEOVER STATUTES. If any Takeover Statute is or may become
applicable to the Merger or the other transactions contemplated by this
Agreement, each of the Parent and the Company and its respective board of
directors shall grant such approvals and take such actions as are
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necessary so that such transactions may be consummated as promptly as
practicable on the terms contemplated by this Agreement and otherwise act to
eliminate or minimize the effects of such statute or regulation on such
transactions.
SECTION 5.18 EMPLOYEE BENEFITS AND STOCK OPTIONS.
(a) From and after the Effective Time, the Parent shall, except as may
otherwise be required by applicable Law, cause the Surviving Corporation to
honor in accordance with their terms all benefits and obligations under the
Benefit Plans, each as in effect on the date of this Agreement (or as amended as
contemplated hereby or with the prior written consent of the Parent). The Parent
shall cause the Surviving Corporation to continue in effect any Company Benefit
Plan under which any former employee of the Company is receiving COBRA
continuation coverage as of the Effective Time until the later of (i) such time
as a plan maintained by the Parent assumes such COBRA continuation coverage and
(ii) such time that the COBRA continuation coverage expires other than by reason
of termination of such Company Benefit Plan.
(b) For a period of one year following the Effective Time, the Parent shall
provide to individuals who are employed by the Company or any of the Company
Subsidiaries as of the Effective Time ("AFFECTED EMPLOYEES"), employee benefits
which, in the aggregate, are substantially equivalent to the benefits provided
pursuant to the Benefit Plans in effect immediately prior to the Effective Time.
(c) Except to the extent necessary to prevent the duplication of benefits,
the Parent will, or will cause the Surviving Corporation to, give Affected
Employees full credit for purposes of eligibility, vesting, benefit accrual and
determination of the level of benefits under any employee benefit plans or
arrangements maintained by the Parent or any Parent Subsidiary for such Affected
Employees' service with the Company or any Company Subsidiary to the same extent
recognized by the Company immediately prior to the Effective Time.
(d) The Parent will, or will cause the Surviving Corporation to, use its
reasonable best efforts to (i) waive all limitations as to preexisting
conditions, exclusions and waiting periods with respect to participation and
coverage requirements applicable to Affected Employees under any welfare benefit
plans that such employees may be eligible to participate in after the Effective
Time, other than limitations or waiting periods that are already in effect with
respect to such employees and that have not been satisfied as of the Effective
Time under any welfare plan maintained for the Affected Employees immediately
prior to the Effective Time, and (ii) provide each Affected Employee with credit
for any co-payments and deductibles paid prior to the Effective Time in
satisfying any applicable deductible or out-of-pocket requirements under any
welfare plans that such employees are eligible to participate in after the
Effective Time.
(e) Notwithstanding anything to the contrary contained in this Agreement,
if, at any time from the date of this Agreement through and including the date
that is two years following the Effective Time, the employment of any person who
is an employee of the Company at the Effective Date (i) is terminated by the
Parent or the Surviving Corporation as a result of redundancy of position or
(ii) voluntarily resigns his or her employment with the Parent or the Surviving
Corporation "For Good Reason" (as defined below), then the Parent shall cause
the unvested portion of each Company Stock Option held by such employee at the
Effective Time to fully accelerate and become immediately exercisable. The
determination as to whether any such termination of employment by Parent or the
Surviving Corporation shall have been "as a result of redundancy" shall be made
by Mark Spagnolo (or, in the event that Mr. Spagnolo's employment shall be
terminated, his designee) in his reasonable discretion following consultation in
good faith with the Parent. For the purposes of this Section 5.17(e), a
resignation "FOR GOOD REASON" shall be deemed to occur if any employee resigns
his or her employment with written notice to the Parent or the Surviving
Corporation within 30 days after the occurrence of any of the following events:
(A) a material reduction or change in job duties,
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responsibilities and requirements inconsistent with the employee's position with
the Company and the employee's prior duties, responsibilities and requirements,
taking into account the differences in job title and duties that are normally
occasioned by reason of an acquisition of one company by another and that do not
actually result in a material change in duties, responsibilities and
requirements inconsistent with an employee's prior position with the acquired
company, (B) a reduction of greater than 5% in the aggregate amount of the
employee's current base salary and other non-performance based, guaranteed cash
compensation, other than as a result of poor performance (without regard to any
compensation payable as a result of the consummation of the Merger) or (C) a
relocation of principal place of employment by more than 50 miles. The Parent
agrees to deliver to the employees of the Company prior to the Closing a letter
in a form acceptable to the Company, in its reasonable discretion, explaining
the rights that each such employee has been granted pursuant this Section 5.18.
SECTION 5.19 FORM S-8. No later than three business days following the
Effective Time, the Parent shall file with the SEC a registration statement on
an appropriate form or a post-effective amendment to a previously filed
registration statement under the Securities Act, with respect to the Parent
Common Stock issuable in respect of Company Stock Options and Company Warrants,
and shall use its reasonable best efforts to maintain the effectiveness of such
registration statement or statements (and maintain the current status of the
prospectus contained therein), as well as comply with any applicable state
securities or "blue sky" laws, for as long as such Company Stock Options and
Company Warrants remain outstanding.
SECTION 5.20 PARENT OPTION POOL. The Parent will grant stock options to
purchase 1,000,000 shares of Parent Common Stock to the employees (other than
Mark Spagnolo and Robert J. Ryan, IV) of the Company (the "ADDITIONAL OPTION
GRANT") at the Effective Time in order to reasonably provide incentives for, and
to retain, such employees after the Effective Time. The Additional Option Grant
shall be made to such employees in such amounts as shall be mutually agreed by
the Parent and the Company prior to the Effective Time.
ARTICLE VI
CONDITIONS
SECTION 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligations of each party to effect the Merger and consummate the
other transactions contemplated by this Agreement to be consummated on the
Closing Date are subject to the satisfaction or waiver at or prior to the
Effective Time of each of the following conditions:
(a) STOCKHOLDER APPROVAL. This Agreement and the Merger shall have been duly
adopted and approved by the Requisite Company Vote;
(b) LISTING. The shares of Parent Common Stock issuable to Company
Stockholders pursuant to this Agreement shall have been authorized for quotation
on NASDAQ/NMS upon official notice of issuance.
(c) HSR. The waiting period applicable to the consummation of the Merger
under the HSR Act shall have expired or been terminated.
(d) CONSENTS. All consents, approvals and action of any Governmental Entity
required to permit the consummation of the Merger and the other transactions
contemplated by this Agreement shall have been obtained or made, free of any
condition that could reasonably be expected to result in a Material Adverse
Effect on the Parent or a Material Adverse Effect on the Company.
(e) REGISTRATION STATEMENT. The Registration Statement shall have become
effective under the Securities Act and all applicable notice or waiting periods
under the Securities Act, the DGCL and the CGCL, if applicable, shall have
expired or been satisfied. No stop order suspending the effectiveness of
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the Registration Statement or any part thereof shall have been issued, and no
proceedings for that purpose shall have been initiated or threatened by the SEC,
and all requests for additional information on the part of the SEC, shall have
been complied with to the reasonable satisfaction of the parties hereto.
(f) INJUNCTIONS. No court or Governmental Entity of competent jurisdiction
shall have enacted, issued, promulgated, enforced or entered any Law, orders,
injunction or decree (whether temporary, preliminary or permanent) that is in
effect and restrains, enjoins or otherwise prohibits consummation of the Merger
or the other transactions contemplated by this Agreement or that, individually
or in the aggregate with all other such Laws, orders, injunctions or decrees,
could reasonably be expected to result in a Material Adverse Effect on the
Parent, a Material Adverse Effect on the Company, or a material adverse effect
on the Company and the Parent and their respective subsidiaries, taken as a
whole after giving effect to the Merger, and no Governmental Entity shall have
instituted any proceeding seeking any such Law, order injunction or decree.
(g) ESCROW AGREEMENT. The Parent, the Escrow Agent and the Escrow
Representative shall have entered into the Escrow Agreement.
SECTION 6.2 CONDITIONS TO OBLIGATIONS OF THE PARENT AND MERGER SUB. The
obligations of each of the Parent and Merger Sub to effect the Merger and
consummate the other transactions contemplated by this Agreement to be
consummated on the Closing Date are also subject to the satisfaction or waiver
by the Parent at or prior to the Effective Time of the following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company set forth in this Agreement that are qualified as to "Material
Adverse Effect" shall be true and correct, and the other representations and
warranties of the Company set forth in this Agreement that are not so qualified
shall be true and correct in all respects, except where the failure to be so
true and correct could not reasonably be expected to have a Material Adverse
Effect on the Company, in each case as of the date of this Agreement and as of
the Closing Date, as though made on and as of the Closing Date, except to the
extent the representation or warranty is expressly limited by its terms to
another date, and the Parent shall have received a certificate (which
certificate may be qualified by knowledge to the same extent as the
representations and warranties of the Company contained in this Agreement are so
qualified) signed on behalf of the Company by an executive officer of the
Company to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE COMPANY. The Company shall have
performed in all material respects all obligations required to be performed by
it under this Agreement at or prior to the Closing Date, and the Parent shall
have received a certificate signed on behalf of the Company by an executive
officer of the Company to such effect.
(c) CONSENTS UNDER AGREEMENTS. The Company shall have obtained the consent,
approval or waiver of each person that is not a Governmental Entity whose
consent, approval or waiver shall be required in order to consummate the
transactions contemplated by this Agreement, except those for which the failure
to obtain such consent, approval or waiver, individually or in the aggregate,
could not reasonably be expected to result in a Material Adverse Effect on the
Company.
(d) EMPLOYMENT AGREEMENTS. The Employment Agreements entered into between
Mark F. Spagnolo and Robert J. Ryan, IV and the Company on the date hereof shall
remain in full force and effect.
(e) APPRAISAL RIGHTS. The Company shall have sent to the Company
Stockholders the notices required by Section 262 of the DGCL and Section 13 of
the CGCL, if applicable, and at least 20 days shall have elapsed from the date
of mailing such notice and the Company Stockholders holding no more than five
percent (5%) of the outstanding capital stock of the Company shall have
exercised or
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given notice of their intent to exercise dissenter's rights in accordance with
the DGCL or the CGCL, if applicable.
(f) INVESTOR RIGHTS AGREEMENT. The Investor Rights Agreement dated as of
July 20, 2000 among the Company and holders of Company Preferred Stock shall
have been terminated and be of no further force and effect.
(g) WAIVER AGREEMENTS. The Waiver Agreements dated the date hereof between
the Company and each of Mark Spagnolo and Robert J. Ryan, IV providing for the
waiver of the acceleration of the vesting of Company Stock Options as a result
of the execution of this Agreement and the consummation of the Merger shall
remain in full force and effect.
(h) TAX OPINION. The Parent shall have received the opinion of Paul, Weiss,
Rifkind, Wharton & Garrison, counsel to the Parent, dated as of the Closing
Date, to the effect that the Merger will be treated for federal income tax
purposes as a reorganization within the reviewing of Section 368(a) of the Code,
and each of the Parent, Merger Sub and the Company will be a party to that
reorganization within the meaning of Section 368(a) of the Code (the issuance of
such opinion shall be conditioned upon the receipt by such counsel of the Parent
Tax Representation Letter and the Company Tax Representation Letter).
SECTION 6.3 CONDITIONS TO OBLIGATION OF THE COMPANY. The obligation of the
Company to effect the Merger and consummate the other transactions contemplated
by this Agreement to be consummated on the Closing Date is also subject to the
satisfaction or waiver by the Company at or prior to the Effective Time of the
following conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
each of the Parent and Merger Sub set forth in this Agreement that are qualified
as to "Material Adverse Effect" shall be true and correct, and the
representations and warranties of the Parent and Merger Sub set forth in this
Agreement that are not so qualified shall be true and correct in all respects,
except where the failure be so true and correct could not reasonably be expected
to have a Material Adverse Effect on the Parent, in each case as of the date of
this Agreement and as of the Closing Date, as though made on and as of the
Closing Date, except to the extent the representation or warranty is expressly
limited by its terms to another date, and the Company shall have received a
certificate (which certificate may be qualified by knowledge to the same extent
as the representations and warranties of each of the Parent and Merger Sub
contained in this Agreement are so qualified) signed on behalf of each of the
Parent and Merger Sub by an executive officer of the Parent to such effect.
(b) PERFORMANCE OF OBLIGATIONS OF THE PARENT AND MERGER SUB. Each of the
Parent and Merger Sub shall have performed in all material respects all
obligations required to be performed by it under this Agreement at or prior to
the Closing Date, and the Company shall have received a certificate signed on
behalf of the Parent and Merger Sub by an executive officer of the Parent to
such effect.
(c) TAX OPINION. The Company shall have received the opinion of Venture Law
Group, A Professional Corporation, counsel to the Company, dated as of the
Closing Date, to the effect that the Merger will be treated for federal income
tax purposes as a reorganization within the meaning of Section 368(a) of the
Code, and that each of the Parent, Merger Sub and the Company will be a party to
that reorganization within the meaning of Section 368(b) of the Code (the
issuance of such opinion shall be conditioned upon the receipt by such counsel
of the Parent Tax Representation Letter and the Company Tax Representation
Letter).
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ARTICLE VII
TERMINATION
SECTION 7.1 TERMINATION. This Agreement may be terminated and the Merger
may be abandoned at any time prior to the Effective Time, notwithstanding any
requisite approval and adoption of this Agreement, as follows:
(a) by mutual written consent of the Parent and the Company duly authorized
by their respective boards of directors;
(b) by either the Parent or the Company, if the Effective Time shall not
have occurred on or before March 31, 2001; PROVIDED, HOWEVER, that the right to
terminate this Agreement under this Section 7.1(b) shall not be available to the
party whose failure to fulfill any obligation under this Agreement shall have
been the cause of, or resulted in, the failure of the Effective Time to occur on
or before such date;
(c) by either the Parent or the Company, if any order, injunction or decree
preventing the consummation of the Merger shall have been entered by any court
of competent jurisdiction or Governmental Entity and shall have become final and
nonappealable;
(d) by the Parent or the Company, if this Agreement shall fail to receive
the Requisite Company Vote by the Written Consent or at the Company Stockholders
Meeting or any adjournment or postponement thereof;
(e) by the Parent, upon a breach of any material representation, warranty,
covenant or agreement on the part of the Company set forth in this Agreement, or
if any representation or warranty of the Company shall have become untrue, in
either case such that the conditions set forth in either of Section 6.2(a) or
6.2(b) would not be satisfied (a "TERMINATING COMPANY BREACH"); PROVIDED,
HOWEVER, that, if such Terminating Company Breach is curable by the Company
through the exercise of its reasonable best efforts and for so long as the
Company continues to exercise such reasonable best efforts, the Parent may not
terminate this Agreement for a 20 day period from the date the Parent gives the
Company notice of the proposed termination; or
(f) by the Company, upon breach of any material representation, warranty,
covenant or agreement on the part of the Parent set forth in this Agreement, or
if any representation or warranty of the Parent shall have become untrue, in
either case such that the conditions set forth in either of Section 6.3(a) or
6.3(b) would not be satisfied (a "TERMINATING PARENT BREACH"); PROVIDED,
HOWEVER, that, if such Terminating Parent Breach is curable by the Parent
through its reasonable best efforts and for so long as the Parent continues to
exercise such reasonable best efforts, the Company may not terminate this
Agreement for a 20 day period from the date the Company gives the Parent notice
of the proposed termination.
SECTION 7.2 EFFECT OF TERMINATION. Except as provided in Section 9.2, in
the event of termination of this Agreement pursuant to Section 7.1, this
Agreement shall forthwith become void, there shall be no liability under this
Agreement on the part of the Parent, Merger Sub or the Company or any of their
respective Representatives, and all rights and obligations of each party to this
Agreement shall cease, subject to the remedies of the parties as set forth in
Article VIII; PROVIDED, HOWEVER, that nothing in this Agreement shall relieve
any party from liability for the wilful and material breach of any of its
representations and warranties or the breach of any of its covenants or
agreements set forth in this Agreement.
SECTION 7.3 AMENDMENT. This Agreement may be amended by the agreement of
each of the parties hereto by action taken by or on behalf of their respective
Boards of Directors at any time prior to the Effective Time; PROVIDED that,
after the approval of this Agreement by the stockholders of the Company, no
amendment may be made that would (i) reduce the amount or change the type of
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consideration into which each share of Company Common Stock or Company Preferred
Stock shall be converted upon consummation of the Merger or (ii) affect
Article VIII of this Agreement. This Agreement may not be amended except by an
instrument in writing signed by each of the parties hereto.
SECTION 7.4 WAIVER. At any time prior to the Effective Time, any party
hereto may (a) extend the time for the performance of any obligation or other
act of any other party to this Agreement, (b) waive any inaccuracy in the
representations and warranties contained in this Agreement or in any document
delivered pursuant hereto, and (c) subject to the proviso of Section 7.3, waive
compliance with any agreement or condition contained in this Agreement. Any
waiver of a condition set forth in Section 6.1, or any determination that such a
condition has been satisfied, will be effective only if made in writing by each
of the Company and the Parent and, unless otherwise specified in such writing,
shall thereafter operate as a waiver (or satisfaction) of such conditions for
any and all purposes of this Agreement. Any such extension or waiver shall be
valid if set forth in an instrument in writing signed by the party or parties to
be bound thereby.
SECTION 7.5 EXPENSES FOLLOWING CERTAIN TERMINATION EVENTS. All Expenses
incurred in connection with this Agreement and the transactions contemplated
hereby shall be paid in accordance with the provisions of Section 5.16. For
purposes of this Agreement, "EXPENSES" consist of all out-of-pocket expenses
(including, all fees and expenses of counsel, accountants, investment bankers,
experts and consultants to a party hereto and its affiliates) incurred by a
party or on its behalf in connection with or related to the authorization,
preparation, negotiation, execution and performance of this Agreement, the
solicitation of stockholder approvals and all other matters related to the
closing of the transactions contemplated hereby.
ARTICLE VIII
SURVIVAL OF REPRESENTATIONS, INDEMNIFICATION
AND REMEDIES, CONTINUING COVENANTS
SECTION 8.1 SURVIVAL OF REPRESENTATIONS. All representations, warranties
and covenants of the Company contained in this Agreement will remain operative
and in full force and effect, regardless of any investigation made by or on
behalf of the Parent, until that date (the "ESCROW RELEASE DATE") which is the
earlier of (i) the termination of this Agreement or (ii) the first anniversary
of the Effective Time.
SECTION 8.2 AGREEMENT TO INDEMNIFY. Subject to the provisions of Sections
8.3 and 8.4 below, the Company Stockholders (the "INDEMNITORS") will, severally,
on a PRO RATA basis, and not jointly, indemnify and hold harmless the Parent and
the Surviving Corporation and their respective officers, directors, agents,
stockholders and employees, and each person, if any, who controls or may control
the Parent or the Surviving Corporation within the meaning of the Securities Act
or the Exchange Act (each an "INDEMNIFIED PERSON" and collectively, "INDEMNIFIED
PERSONS") from and against any and all claims, demands, suits, actions, causes
of actions, losses, costs, damages, liabilities and expenses including
reasonable attorneys' fees, other professionals' and experts' reasonable fees
and court or arbitration costs (collectively, "DAMAGES"), directly or indirectly
incurred, resulting or and arising out of any inaccuracy, misrepresentation,
breach of, or default in, any of the representations, warranties or covenants
given or made by the Company in this Agreement, in the Company Disclosure
Letter, or in any certificate delivered by or on behalf of the Company of an
officer of the Company pursuant to any provision of Article 6 (if such
inaccuracy, misrepresentation, breach or default existed at the Closing Date).
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SECTION 8.3 LIMITATIONS AND EXCEPTIONS TO INDEMNIFICATION.
(a) In seeking indemnification from an Indemnitor, the Indemnified Persons
will exercise their remedies solely with respect to the Escrow Shares and any
other assets deposited in escrow pursuant to the Escrow Agreement.
(b) The Indemnification provided for in Section 8.2 shall not apply unless
and until the aggregate cumulative Damages for which one or more Indemnified
Persons have sought indemnification under this Section, exclusive of legal fees,
exceeds $750,000 (the "BASKET") and then the indemnification shall extend to the
amount of such cumulative Damages.
SECTION 8.4 INDEMNIFICATION PROCEDURES.
(a) Promptly after receipt by an Indemnified Person of notice of the
commencement of any claim or demand asserted by a third party (a "THIRD PARTY
CLAIM"), such Indemnified Person will, if a claim in respect thereof is to be
made against the Indemnitors, notify the Escrow Representative in writing of the
commencement thereof (an "INDEMNITY NOTICE"), PROVIDED that (i) the failure to
notify the Escrow Representative will not relieve the Indemnitors from any
liability which they may have hereunder unless and except to the extent such
failure results in the forfeiture by the Indemnitors of substantial rights and
defenses, and (ii) the omission so to notify the Escrow Representative will not
relieve the Indemnitors from liability which they may have to an Indemnified
Person otherwise than on account of this indemnity or in connection with the
transactions contemplated under this Agreement. In case any such proceedings are
brought against any Indemnified Person and it notifies the Escrow Representative
of the commencement thereof, the Escrow Representative will be entitled to
participate therein, and to the extent that it may elect by written notice
delivered to the Indemnified Person, to assume the defense thereof, with counsel
reasonably satisfactory to such Indemnified Person; PROVIDED that, if the
defendants in any such proceedings include both the Indemnified Person and an
Indemnitor, and the Indemnified Person shall have concluded that there may be
legal defenses available to it which are different from or additional to those
available to the Indemnitor, the Indemnified Person shall have the right to
select separate counsel to assert such legal defenses on behalf of such
Indemnified Person, if, in the reasonable judgment of the Indemnified Person,
(x) the Indemnitor has a conflicting or contrary defense or position or (y) the
Indemnitor fails to adequately assert such defense. Upon receipt of notice from
the Escrow Representative to such Indemnified Person of the Escrow
Representative's election so to assume the defense of such proceedings and
approval by the Indemnified Person of counsel, the Indemnitor will not be liable
to such Indemnified Person for expenses incurred hereafter by the Indemnified
Person in connection with the defense thereof unless (i) the Indemnified Person
shall have employed separate counsel in connection with the assertion of legal
defenses in accordance with the proviso to the next preceding sentence (it being
understood, however, that the Indemnitor shall not be liable for the expenses of
more than one separate counsel (in addition to one local counsel firm in the
jurisdiction in which any proceeding is brought), approved by the Indemnified
Parties, representing all the Indemnified Parties who are parties to such
proceedings), (ii) the Escrow Representative shall not have employed counsel
reasonably satisfactory to the Indemnified Person to represent the Indemnified
Person within a reasonable time after notice of commencement of the proceedings
or (iii) the Escrow Representative has authorized in writing the employment of
counsel for the Indemnified Person. The indemnity and reimbursement obligations
of an Indemnitor hereunder shall be binding upon and inure to the benefit of any
successors of the Indemnitor and any Indemnified Person. If an Indemnified
Person seeks to settle any Third Party Claim and in respect of which Third Party
Claim such Indemnified Person might seek indemnity under this Section 8.4(a),
then such Indemnified Person shall obtain the prior written consent of the
Escrow Representative to such settlement, which consent shall not be
unreasonably withheld, conditioned or delayed.
(b) In the event of any claim or demand, including Third Party Claims, in
respect of which an Indemnified Person might seek indemnity under this
Section 8.4(a), the Indemnified Person shall
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deliver notice with reasonable promptness to the Escrow Representative. The
failure by any Indemnified Person to give notice shall not impair such party's
rights hereunder except to the extent that an Indemnitor demonstrates that it
has been irreparably prejudiced thereby. The Escrow Representative will notify
the Indemnified Person within the 30 day period following its actual receipt of
such notice (the "DISPUTE PERIOD") as to whether the Escrow Representative
disputes the liability to the Indemnified Person hereunder. If the Escrow
Representative notifies the Indemnified Person that it does not dispute the
claim described in such notice, or fails to notify the Indemnified Person within
the Dispute Period whether the Escrow Representative disputes the claim
described in such Indemnity Notice, the Damages specified in the notice will be
conclusively deemed a liability of the Indemnitors and the Indemnitors shall pay
the amount of such Loss, when it has been finally determined, to the Indemnified
Person on demand. If the Escrow Representative has timely disputed the liability
with respect to such claim, the Escrow Representative and the Indemnified Person
will proceed in good faith to negotiate a resolution of such dispute, and if not
resolved through negotiations within 60 days following the Indemnified Person's
receipt of a written notice from the Escrow Representative disputing such claim,
such dispute shall be finally settled by litigation in a court of competent
jurisdiction.
ARTICLE IX
MISCELLANEOUS
SECTION 9.1 CERTAIN DEFINITIONS. For purposes of this Agreement:
(a) The term "AFFILIATE," as applied to any person, means any other person
directly or indirectly controlling, controlled by, or under common control with,
that person. For the purposes of this definition, "CONTROL" (including, with
correlative meanings, the terms "CONTROLLING," "CONTROLLED BY" and "UNDER COMMON
CONTROL WITH"), as applied to any person, means the possession, directly or
indirectly, of the power to direct or cause the direction of the management and
policies of that person, whether through the ownership of voting securities, by
contract or otherwise.
(b) The term "BUSINESS DAY" means any day, other than Saturday, Sunday or a
federal holiday, and shall consist of the time period from 12:01 a.m. through
12:00 midnight Eastern time. In computing any time period under this Agreement,
the date of the event which begins the running of such time period shall be
included EXCEPT that if such event occurs on other than a business day such
period shall begin to run on and shall include the first business day
thereafter.
(c) The term "INCLUDING" means, unless the context clearly requires
otherwise, including but not limited to the things or matters named or listed
after that term.
(d) The term "PERSON" shall include individuals, corporations, limited and
general partnerships, trusts, limited liability companies, limited liability
partnerships, associations, joint ventures, Governmental Entities and other
entities and groups (which term shall include a "GROUP" as such term is defined
in Section 13(d)(3) of the Exchange Act).
(e) The term "SUBSIDIARY" or "SUBSIDIARIES" means, with respect to the
Parent, the Company or any other person, any entity of which the Parent, the
Company or such other person, as the case may be (either alone or through or
together with any other subsidiary), owns, directly or indirectly, stock or
other equity interests constituting more than 50% of the voting or economic
interest in such entity.
SECTION 9.2 SURVIVAL. The representations, warranties and agreements in
this Agreement and in any instrument delivered under this Agreement shall
terminate upon the termination of this Agreement under Section 7.1 or on the
first anniversary of the Effective Time; PROVIDED that in the case of a
termination pursuant to Section 7.1, the agreements set forth in Sections
5.4(b), 5.16, 7.2 and 7.5 and this Article IX shall survive termination of this
Agreement. Each party agrees that, except for the representations and warranties
contained in this Agreement, the Company Disclosure Letter and the Parent
Disclosure Letter, no party to this Agreement has made any other representations
and
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warranties, and each party disclaims any other representations and warranties,
made by itself or any of its officers, directors, employees, agents, financial
and legal advisors or other representatives with respect to the execution and
delivery of this Agreement or the transactions contemplated hereby,
notwithstanding the delivery of disclosure to any other party or any party's
representatives of any documentation or other information with respect to any
one or more of the foregoing.
SECTION 9.3 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each such counterpart being deemed to be an original instrument,
and all such counterparts shall together constitute the same agreement.
SECTION 9.4 GOVERNING LAW AND VENUE, WAIVER OF JURY TRIAL.
(a) THIS AGREEMENT SHALL BE DEEMED TO BE MADE IN AND IN ALL RESPECTS SHALL
BE INTERPRETED, CONSTRUED AND GOVERNED BY AND IN ACCORDANCE WITH THE LAW OF THE
STATE OF DELAWARE WITHOUT REGARD TO CONFLICT OF LAW PRINCIPLES. The parties
hereto irrevocably submit to the jurisdiction of the courts of the State of
Delaware solely in respect of the interpretation and enforcement of the
provisions of this Agreement and of the documents referred to in this Agreement,
and in respect of the transactions contemplated by this Agreement and by those
documents, and hereby waive, and agree not to assert, as a defense in any
action, suit or proceeding for the interpretation or enforcement of this
Agreement or of any such document, that it is not subject to this Agreement or
that such action, suit or proceeding may not be brought or is not maintainable
in said courts or that the venue thereof may not be appropriate or that this
Agreement or any such document may not be enforced in or by such courts, and the
parties hereto irrevocably agree that all claims with respect to such action or
proceeding shall be heard and determined in such a court. The parties hereby
consent to and grant any such court jurisdiction over the person of such parties
and over the subject matter of such dispute and agree that mailing of process or
other papers in connection with any such action or proceeding in the manner
provided in Section 9.5 or in such other manner as may be permitted by law,
shall be valid and sufficient service thereof.
(b) EACH PARTY ACKNOWLEDGES AND AGREES THAT ANY CONTROVERSY WHICH MAY ARISE
UNDER THIS AGREEMENT IS LIKELY TO INVOLVE COMPLICATED AND DIFFICULT ISSUES, AND
THEREFORE EACH SUCH PARTY HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVES ANY
RIGHT SUCH PARTY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION
DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT, OR THE
TRANSACTIONS CONTEMPLATED BY THIS AGREEMENT. EACH PARTY CERTIFIES AND
ACKNOWLEDGES THAT (i) NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY
HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE
EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER, (ii) EACH SUCH PARTY
UNDERSTANDS AND HAS CONSIDERED THE IMPLICATIONS OF THIS WAIVER, (iii) EACH SUCH
PARTY MAKES THIS WAIVER VOLUNTARILY, AND (iv) EACH SUCH PARTY HAS BEEN INDUCED
TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND
CERTIFICATIONS IN THIS SECTION 9.4(b).
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SECTION 9.5 NOTICES. Any notice, request, instruction or other document to
be given hereunder by any party to the others shall be in writing and delivered
personally, sent by a nationally recognized overnight courier service or by
facsimile:
IF TO THE PARENT OR MERGER SUB, TO:
Metromedia Fiber Network, Inc.
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, New Jersey 07073
Attention: Arnold L. Wadler, Esq.
Fax: (201) 531-2803
WITH A COPY TO:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, New York 10019-6064
Attention: Douglas A. Cifu, Esq.
Fax: (212) 757-3990
IF TO THE COMPANY, TO:
SiteSmith, Inc.
3283 Scott Boulevard
Santa Clara, California 95054
Attention: Mark Spagnolo
Fax: (408) 588-1204
WITH A COPY TO:
Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Attention: Steven J. Tonsfeldt, Esq.
Fax: (650) 233-8386
or to such other persons or addresses as may be designated in writing by the
party to receive such notice as provided above.
SECTION 9.6 ENTIRE AGREEMENT. This Agreement (including any exhibits and
annexes to this Agreement), the Escrow Agreement, Affiliate Letters, the Company
Disclosure Letter and the Parent Disclosure Letter constitute the entire
agreement and supersede all other prior agreements, understandings,
representations and warranties, both written and oral, among the parties, with
respect to the subject matter of this Agreement.
SECTION 9.7 NO THIRD PARTY BENEFICIARIES. Except as provided in
Section 5.7 and Article VIII, this Agreement is not intended to confer upon any
person other than the parties to this Agreement any rights or remedies under
this Agreement.
SECTION 9.8 SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability or the other provisions of this Agreement.
If any provision of this Agreement, or the application of that provision to any
person or any circumstance, is invalid or unenforceable, (a) a suitable and
equitable provision shall be substituted for that provision in order to carry
out, so far as may be valid and enforceable, the intent and purpose of the
invalid or unenforceable provision and (b) the remainder of this Agreement
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<PAGE>
and the application of the provision to other persons or circumstances shall not
be affected by such invalidity or unenforceability, nor shall such invalidity or
unenforceability affect the validity or enforceability of the provision, or the
application of that provision, in any other jurisdiction.
SECTION 9.9 INTERPRETATION. The table of contents and headings in this
Agreement are for convenience of reference only, do not constitute part of this
Agreement and shall not be deemed to limit or otherwise affect any of the
provisions of this Agreement. Where a reference in this Agreement is made to a
Section, exhibit or annex, that reference shall be to a Section of or exhibit or
annex to this Agreement unless otherwise indicated.
SECTION 9.10 ASSIGNMENT. This Agreement shall not be assignable by
operation of law or otherwise, except that the Parent may designate, by written
notice to the Company, a Parent Subsidiary that is wholly owned directly or
indirectly by the Parent to be merged with and into the Company in lieu of
Merger Sub, in which event all references in this Agreement to Merger Sub shall
be deemed references to such Parent Subsidiary, and in that case, all
representations and warranties made in this Agreement with respect to Merger Sub
as of the date of this Agreement shall be deemed representations and warranties
made with respect to such Parent Subsidiary as of the date of such designation.
SECTION 9.11 SPECIFIC PERFORMANCE. The parties to this Agreement agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement were not performed in accordance with their specific terms or were
otherwise reached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement in any court of
the United States or any state having jurisdiction, this being in addition to
any other remedy to which they are entitled at law or in equity.
[Remainder of Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, this Merger Agreement has been duly executed and
delivered by the duly authorized officers of the parties to this Agreement as of
the date first written above.
<TABLE>
<S> <C> <C>
METROMEDIA FIBER NETWORK, INC.
By: /s/ SILVIA KESSEL
-----------------------------------------
Name: Silvia Kessel
Title: Executive Vice President
SITESMITH, INC.
By: /s/ MARK F. SPAGNOLO
-----------------------------------------
Name: Mark F. Spagnolo
Title: Chairman and Chief
Executive Officer
AQUEDUCT ACQUISITION CORP.
By: /s/ SILVIA KESSEL
-----------------------------------------
Name: Silvia Kessel
Title: Vice President
</TABLE>
A-47
<PAGE>
ANNEX B
ESCROW AGREEMENT
ESCROW AGREEMENT, dated as of , 2000 (this "AGREEMENT"), by and
among Metromedia Fiber Network, Inc., a Delaware corporation (the "PARENT"),
Mark Spagnolo, appointed by the Company Stockholders as their representative for
all purposes under this Agreement (the "ESCROW REPRESENTATIVE"), and
, as escrow agent (the "ESCROW AGENT").
WHEREAS, concurrently with the execution and delivery of this Agreement and
pursuant to an Agreement and Plan of Merger, dated as of October 9, 2000 (the
"MERGER AGREEMENT"; capitalized terms not defined herein shall have the meanings
ascribed to them in the Merger Agreement) by and among the Parent, SiteSmith,
Inc., a Delaware corporation (the "COMPANY"), and Aqueduct Acquisition Corp., a
Delaware corporation ("MERGER SUB"), Merger Sub will be merged with and into the
Company and each share of Company Common Stock owned by the Company Stockholders
immediately prior to the Effective Time will be converted into that number of
shares of Parent Common Stock as is determined in accordance with the Merger
Agreement; and
WHEREAS, the Merger Agreement provides that (i) the Parent, the Escrow
Representative and the Escrow Agent will enter into this Agreement, (ii) the
Parent will withhold a portion of the shares (the "ESCROW SHARES") of Parent
Common Stock that would otherwise be issued to the Company Stockholders on the
date hereof pursuant to the Merger Agreement, (iii) the Parent will deliver
certificates representing the Escrow Shares to the Escrow Agent, and (iv) the
Company Stockholders will deliver to the Escrow Agent executed stock transfer
powers related to the Escrow Shares.
NOW, THEREFORE, the Parent, the Escrow Representative and the Escrow Agent
hereby agree as follows:
1. APPOINTMENT OF THE ESCROW AGENT; DEPOSIT OF ESCROW SHARES. The Escrow
Representative and the Parent hereby constitute and appoint the Escrow Agent as,
and the Escrow Agent hereby agrees to assume and perform the duties of, the
escrow agent under and pursuant to this Agreement. The Escrow Agent acknowledges
receipt of (i) an executed copy of the Merger Agreement and this Agreement, (ii)
certificates from the Parent representing the number of Escrow Shares set forth
opposite each Company Stockholder's name on Schedule 1 hereto, and (iii) duly
executed stock transfer powers relating to the Escrow Shares from each Company
Stockholder,.
2. HOLDING OF THE ESCROW SHARES. The Escrow Agent shall hold each Company
Stockholder's Escrow Shares in escrow in the separate account maintained for the
benefit of such Company Stockholder and Parent. The Escrow Shares shall not be
subject to lien or attachment by any creditor of any party hereto or the Company
Stockholders and shall be used solely for the purpose set forth in this
Agreement. The Escrow Shares or any proceeds thereof shall not be available to,
and shall not be used by, the Escrow Agent to set off any obligations of any of
the Company Stockholders, the Escrow Representative or the Parent owing to the
Escrow Agent in any capacity.
3. DIVIDENDS AND OTHER DISTRIBUTIONS. Except for tax-free distributions
paid in stock declared with respect to the Escrow Shares pursuant to Section
305(a) of the Code, the Escrow Agent shall, upon receipt thereof, promptly
distribute to each Company Stockholder any dividends or other distributions of
any kind made in respect of any Company Stockholder's Escrow Shares. In the
event that the Escrow Shares are exchanged for any other securities and/or cash
or other property by reason of a merger, consolidation, recapitalization,
reorganization or similar corporate transaction, such securities and/or cash or
other property shall be substituted for the Escrow Shares for purposes of this
Agreement, and the Parent and the Escrow Representative shall agree to such
equitable adjustments in the provisions of this Agreement as may be necessary to
give effect to this sentence.
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<PAGE>
4. VOTING. Prior to the later of (i) the first anniversary of the Closing
Date (the "TERMINATION DATE"), or (ii) the time at which all Escrow Shares have
been distributed to the Company Stockholders pursuant to this Agreement, each
Company Stockholder will have voting rights with respect to his, her or its
Escrow Shares, and the Parent shall take commercially reasonable steps to
cooperate with the exercise of such rights. While the Escrow Shares remain in
the Escrow Agent's possession pursuant to this Agreement, the Company
Stockholders shall retain and be able to exercise all other incidents of
ownership of the Escrow Shares which are not inconsistent with the terms and
conditions of this Agreement and the Merger Agreement.
5. CLAIMS FOR INDEMNITY.
(a) Concurrently with the delivery of an Indemnity Notice under the Merger
Agreement, the Parent will deliver to the Escrow Agent a certificate in
substantially the form of Annex I attached hereto (a "CERTIFICATE OF
INSTRUCTION"). No Certificate of Instruction may be delivered by the Parent
after the close of business on the business day immediately preceding the
Termination Date. The Escrow Agent shall give written notice to the Escrow
Representative of its receipt of a Certificate of Instruction not later than the
fifth business day following receipt thereof, together with a copy of such
Certificate of Instruction.
(b) If the Escrow Agent (i) shall not, within thirty (30) calendar days
following its receipt of a Certificate of Instruction (the "OBJECTION PERIOD"),
have received from the Escrow Representative a certificate in substantially the
form of Annex II attached hereto (an "OBJECTION CERTIFICATE") disputing the
Company Stockholders' obligation to pay the Owed Amount referred to in such
Certificate of Instruction, or (ii) shall have received such an Objection
Certificate within the Objection Period and shall thereafter have received
either (A) a certificate from Parent and the Escrow Representative substantially
in the form of Annex III attached hereto (a "RESOLUTION CERTIFICATE") stating
that Parent and the Escrow Representative have agreed that the Owed Amount
referred to in such Certificate of Instruction (or a specified portion thereof)
is payable to one or more of the Indemnified Persons or (B) a copy of an order
of a court of competent jurisdiction (accompanied by a certificate of Parent and
the Escrow Representative substantially in the form of Annex IV attached hereto
(a "LITIGATION CERTIFICATE")) stating that the Owed Amount referred to in such
Certificate of Instruction (or a specified portion thereof) is payable to one or
more of the Indemnified Persons by the Company Stockholders, then the Escrow
Agent shall, on the business day next following (A) the expiration of the
Objection Period or (B) the Escrow Agent's receipt of a Resolution Certificate
or a Litigation Certificate, as the case may be, deliver to the Parent from each
Company Stockholder's portion of the Escrow Shares (pro rata in accordance with
paragraph (g) of this Section 5) a certificate or certificates evidencing in the
aggregate that number of whole Escrow Shares (rounding to the nearest whole
share), as is equal to the quotient obtained by dividing (x) the Owed Amount
(or, if such Resolution Certificate or Litigation Certificate specifies that a
lesser amount than such Owed Amount is payable, such lesser amount) by (y) the
Average Parent Stock Price, calculated as of the date of the Litigation
Certificate or the Resolution Certificate, as applicable, or if no Objection
Certificate is received, the Certificate of Instruction.
(c) The Escrow Agent shall give written notice to the Parent of its receipt
of an Objection Certificate not later than the fifth business day following
receipt thereof, together with a copy of such Objection Certificate. The Escrow
Agent shall give written notice to the Escrow Representative of its receipt of a
Litigation Certificate not later than the fifth business day following receipt
thereof, together with a copy of such Litigation Certificate.
(d) Upon the payment by the Escrow Agent of the Owed Amount referred to in a
Certificate of Instruction, such Certificate of Instruction shall be deemed
canceled. Upon the receipt by the Escrow Agent of a Resolution Certificate or a
Litigation Certificate and the payment by the Escrow Agent of the Owed Amount
referred to therein, the related Certificate of Instruction shall be deemed
canceled.
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<PAGE>
(e) Upon the Parent's determination that it has no claim or has released its
claim with respect to an Owed Amount referred to in a Certificate of Instruction
(or a specified portion thereof), the Parent will promptly deliver to the Escrow
Agent a certificate substantially in the form of Annex V attached hereto (a
"PARENT CANCELLATION CERTIFICATE") canceling such Certificate of Instruction (or
such specified portion thereof, as the case may be), and such Certificate of
Instruction (or portion thereof) shall thereupon be deemed canceled. The Escrow
Agent shall give written notice to the Escrow Representative of its receipt of a
Parent Cancellation Certificate not later than the fifth business day following
receipt thereof, together with a copy of such Parent Cancellation Certificate.
(f) Upon receipt of an order of a court of competent jurisdiction stating
that none of the Owed Amount (or such specified portion thereof, as the case may
be) referred to in a Certificate of Instruction as to which the Escrow
Representative delivered an Objection Certificate within the Objection Period is
payable to any Indemnified Person by the Company Stockholders, the Escrow
Representative may deliver a copy of such order (accompanied by a certificate of
the Escrow Representative substantially in the form of Annex VI attached hereto
(a "STOCKHOLDER CANCELLATION CERTIFICATE")) canceling such Certificate of
Instruction, and such Certificate of Instruction shall thereupon be deemed
canceled. The Escrow Agent shall give written notice to the Parent of its
receipt of a Stockholder Cancellation Certificate not later than the business
day next following receipt thereof, together with a copy of such Stockholder
Cancellation Certificate.
(g) To the extent that the Escrow Agent is required to deliver Escrow Shares
to Parent hereunder, it shall deliver to Parent (i) such shares obtained from
the escrow accounts maintained for the Company Stockholders on a PRO RATA basis
based on the respective ownership of Escrow Shares set forth on Schedule I
hereto, and (ii) stock transfer powers related to such shares. Parent shall
cause the transfer agent for the Parent Common Stock to cooperate with the
Escrow Agent in providing replacement stock certificates for shares of Parent
Common Stock in substitution for those held by the Escrow Agent in order to
enable the Escrow Agent to make the distributions of Escrow Shares required
under this Agreement.
(h) No certificate shall be delivered pursuant to this Section 5 unless it
shall have been prepared in good faith by the party delivering such certificate,
and all certificates delivered pursuant to this Section 5 shall represent bona
fide notice for purposes of this Agreement.
6. RELEASE OF ESCROW SHARES.
(a) On the date on which the Parent files its Annual Report on Form 10-K for
the year ended December 31, 2000, the Escrow Agent shall deliver to each Company
Stockholder 50% of the Escrow Shares that remain in possession of the Escrow
Agent and have not been cancelled pursuant to Section 5.
(b) The escrow established by this Agreement shall terminate on the
Termination Date; PROVIDED that this Agreement shall continue in effect until
the resolution of all outstanding indemnification claims as to which the Escrow
Agent has properly received a Certificate of Instruction in accordance with
Section 5(a) hereof on or prior to the Termination Date, and the escrow
established hereby shall continue with respect to such claims until such claims
have been resolved in accordance herewith.
(c) The Escrow Agent shall deliver on the Termination to each Company
Stockholder (i) any dividends or other distributions received and not previously
distributed pursuant to Section 3, (ii) a certificate or certificates evidencing
the remaining number of each Company Stockholder's Escrow Shares, if any, less
that number of Escrow Shares as shall represent (at the Per Share Price,
calculated as of the date of receipt by the Escrow Agent of the Certificate of
Instruction) any amounts designated in Certificates of Instruction received by
the Escrow Agent prior to the Termination Date that have not been canceled in
accordance with paragraph (d), (e) or (f) of Section 5, and (iii) each Company
Stockholder's remaining executed stock transfer powers, if any. At such time on
or following the
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<PAGE>
Termination Date as all Certificates of Instruction received by the Escrow Agent
prior to the Termination Date have been canceled in accordance with paragraph
(d), (e) or (f) of Section 5, the Escrow Agent shall promptly deliver to each
Company Stockholder the certificate or certificates evidencing each Company
Stockholder's remaining Escrow Shares, if any, and this Agreement (other than
Sections 7, 8 and 9) shall automatically terminate.
7. DUTIES AND OBLIGATIONS OF THE ESCROW AGENT. The duties and obligations
of the Escrow Agent shall be limited to and determined solely by the provisions
of this Agreement and the certificates delivered in accordance herewith, and the
Escrow Agent is not charged with knowledge of or any duties or responsibilities
in respect of any other agreement or document. In furtherance and not in
limitation of the foregoing:
(a) the Escrow Agent shall be fully protected in relying in good faith upon
any written certification, notice, direction, request, waiver, consent, receipt
or other document (including any such certification, notice, direction, request,
waiver, consent, receipt or other document delivered by the Escrow
Representative pursuant to Section 5 of this Agreement) that the Escrow Agent
reasonably believes to be genuine and duly authorized, executed and delivered;
(b) the Escrow Agent shall not be liable for any error of judgment, or for
any act done or omitted by him, or for any mistake in fact or law, or for
anything that he may do or refrain from doing in connection herewith; PROVIDED,
HOWEVER, that notwithstanding any other provision in this Agreement, the Escrow
Agent shall be liable for its willful misconduct or gross negligence or breach
of this Agreement;
(c) the Escrow Agent may seek the advice of legal counsel selected with
reasonable care in the event of any dispute or question as to the construction
of any of the provisions of this Agreement or its duties hereunder, and the
Escrow Agent shall incur no liability and shall be fully protected in respect of
any action taken, omitted or suffered by it in good faith in accordance with the
opinion of such counsel;
(d) in the event that the Escrow Agent shall in any instance, after seeking
the advice of legal counsel pursuant to the immediately preceding clause, in
good faith be uncertain as to its duties or rights hereunder, the Escrow Agent
shall be entitled to refrain from taking any action in that instance and its
sole obligation, in addition to those of its duties hereunder as to which there
is no such uncertainty, shall be to keep safely all property held in escrow
until the Escrow Agent shall be directed otherwise in writing by each party
hereto or by a final, nonappealable order of a court of competent jurisdiction;
PROVIDED, HOWEVER, in the event that the Escrow Agent has not received such
written direction or court order within one hundred eighty (180) calendar days
after requesting the same, the Escrow Agent shall have the right to interplead
Parent and the Escrow Representative in any court of competent jurisdiction and
request that such court determine its rights and duties hereunder; and
(e) the Escrow Agent may execute any of its powers or responsibilities
hereunder and exercise any rights hereunder either directly or by or through
agents or attorneys selected with reasonable care, nothing in this Agreement
shall be deemed to impose upon the Escrow Agent any duty to qualify to do
business or to act as fiduciary or otherwise in any jurisdiction other than the
State of New York, and the Escrow Agent shall not be responsible for and shall
not be under a duty to examine or pass upon the validity, binding effect,
execution or sufficiency of this Agreement or of any agreement amendatory or
supplemental hereto.
8. COOPERATION. The Parent and the Escrow Representative shall provide to
the Escrow Agent all instruments and documents within their respective powers to
provide that are necessary for the Escrow Agent to perform its duties and
responsibilities hereunder.
9. FEES AND EXPENSES; INDEMNITY. The Parent shall pay the fees of the
Escrow Agent for its services hereunder as and when billed by the Escrow Agent,
and shall reimburse and indemnify the Escrow Agent for, and hold the Escrow
Agent harmless against any loss, damages, cost or expense,
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<PAGE>
including but not limited to attorneys' fees, reasonably incurred by the Escrow
Agent in connection with the Escrow Agent's performance of its duties and
obligations under this Agreement, as well as the reasonable costs and expenses
of defending against any claim or liability relating to this Agreement; PROVIDED
that notwithstanding the foregoing, the Parent shall not be required to
indemnify the Escrow Agent for any such loss, liability, cost or expense arising
as a result of the Escrow Agent's willful misconduct or gross negligence or
breach of this Agreement.
10. RESIGNATION AND REMOVAL OF THE ESCROW AGENT.
(a) The Escrow Agent may resign as such not less than thirty (30) calendar
days following the giving of written notice thereof to the Escrow Representative
and the Parent. In addition, the Escrow Agent may be removed and replaced on a
date designated in a written instrument signed by the Escrow Representative and
the Parent and delivered to the Escrow Agent. Notwithstanding the foregoing, no
such resignation or removal shall be effective until a successor escrow agent
has acknowledged its appointment as such as provided in paragraph (c) below. In
either event, upon the effective date of such resignation or removal, the Escrow
Agent shall deliver the Escrow Shares, the executed stock transfer powers
relating thereto, and any dividends and other distributions received in respect
thereof and not previously distributed to the Parent or the Company
Stockholders, together with earnings thereon, if any, to such successor escrow
agent, together with such records maintained by the Escrow Agent in connection
with its duties hereunder and other information with respect to the Escrow
Shares as such successor may reasonably request.
(b) If a successor escrow agent shall not have acknowledged its appointment
as such as provided in paragraph (c) below, in the case of a resignation, prior
to the expiration of thirty (30) calendar days following the date of a notice of
resignation or, in the case of a removal, on the date designated for the Escrow
Agent's removal, as the case may be, because the Escrow Representative and the
Parent are unable to agree on a successor escrow agent, or for any other reason,
the Escrow Agent may select a successor escrow agent (which shall be a
depositary institution or trust company with offices in New York, New York
having combined capital and surplus of at least $100 million) and any such
resulting appointment shall be binding upon all of the parties to this
Agreement.
(c) Upon written acknowledgment by a successor escrow agent appointed in
accordance with the foregoing provisions of this Section of its agreement to
serve as escrow agent hereunder and the receipt of the Escrow Shares, the
executed stock transfer powers relating thereto and dividends and other
distributions received in respect thereof and not previously distributed to the
Parent or the Company Stockholders, together with earnings thereon, if any, the
Escrow Agent shall be fully released and relieved of all duties,
responsibilities and obligations under this Agreement, subject to the proviso
contained in clause (ii) of Section 7, and such successor escrow agent shall for
all purposes hereof be the Escrow Agent.
11. DUTIES AND OBLIGATIONS OF THE ESCROW REPRESENTATIVE. The duties and
obligations of the Escrow Representative shall be limited to and determined
solely by the provisions of this Agreement. The Escrow Representative shall be
fully protected in relying in good faith upon any determination made by the
Escrow Representative and on any written certification, notice, direction,
request, waiver, consent, receipt or other document that the Escrow
Representative reasonably believes to be genuine and duly authorized, executed
and delivered. The Escrow Representative shall not be liable for any error of
judgment, or for any act done or omitted by him, or for any mistake in fact or
law, or for anything that he may do or refrain from doing in connection
herewith. The Escrow Representative may seek the advice of legal counsel
selected with reasonable care in the event of any dispute or question as to the
construction of any of the provisions of this Agreement or its duties hereunder,
and the Escrow Representative shall incur no liability and shall be fully
protected in respect of any action taken, omitted or suffered by it in good
faith in accordance with the opinion of such counsel.
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12. NOTICES. All notices, requests and other communications hereunder must
be in writing and will be deemed to have been duly given if delivered personally
or by facsimile transmission or sent by a nationally recognized overnight
courier service to the parties at the following addresses or facsimile numbers:
If to the Parent, to:
Metromedia Fiber Network, Inc.
c/o Metromedia Company
One Meadowlands Plaza
East Rutherford, New Jersey 07073
Facsimile No.: (203) 531-2803
Attn: Arnold L. Wadler, Esq.
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019-6064
Facsimile No.: (212) 757-3990
Attn: Douglas A. Cifu, Esq.
If to the Escrow Representative, to:
Mark Spagnolo
SiteSmith, Inc.
3283 Scott Boulevard
Santa Clara, CA 95054
Facsimile No.: (408) 588-1204
with a copy to:
Venture Law Group
2800 Sand Hill Road
Menlo Park, California 94025
Facsimile No.: (650) 233-8386
Attn: Steven J. Tonsfeldt, Esq.
If to the Escrow Agent, to:
[ ]
[ ]
[ ]
Facsimile No.: [ ]
Attn: [ ]
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section, be deemed given upon receipt if received on a business
day during normal business hours, and if not then received, on the next business
day, and (iii) if delivered by mail in the manner described above to the address
as provided in this Section, be deemed given upon receipt (in each case
regardless of whether such notice, request or other communication is received by
any other Person to whom a copy of such notice is to be delivered pursuant to
this Section). Any party from time to time may change its address, facsimile
number or other information for the purpose of notices to that party by giving
notice specifying such change to the other parties hereto.
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<PAGE>
13. AMENDMENTS, ETC. This Agreement may be amended or modified, and any of
the terms hereof may be waived, only by a written instrument duly executed by or
on behalf of the Parent and the Escrow Representative and, with respect to any
amendment that would adversely affect the Escrow Agent, the Escrow Agent. No
waiver by any party of any term or condition contained of this Agreement, in any
one or more instances, shall be deemed to be or construed as a waiver of the
same or any other term or condition of this Agreement on any future occasion.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware applicable to a contract
executed and performed in such State, without giving effect to the conflicts of
laws principles thereof.
15. BUSINESS DAY. For all purposes of this Agreement, the term "business
day" shall mean a day other than Saturday, Sunday or any day on which banks
located in the State of New York are authorized or obligated to close.
16. MISCELLANEOUS. This Agreement is binding upon and will inure to the
benefit of the parties hereto and their respective successors and permitted
assigns. The headings used in this Agreement have been inserted for convenience
of reference only and do not define or limit the provisions hereof. This
Agreement may be executed in any number of counterparts, each of which will be
deemed an original, but all of which together will constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
<TABLE>
<S> <C> <C>
METROMEDIA FIBER NETWORK, INC.
By:
-----------------------------------------
Name:
Title:
By:
-----------------------------------------
Mark Spagnolo
ESCROW AGENT
By:
-----------------------------------------
Name:
Title:
</TABLE>
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<PAGE>
ANNEX C
VOTING AGREEMENT
VOTING AGREEMENT, dated as of October 9, 2000 (this "AGREEMENT"), by and
among Metromedia Fiber Network, Inc., a Delaware corporation (the "PARENT"), and
the stockholders of SiteSmith, Inc., a Delaware corporation (the "COMPANY"),
listed on the signature pages hereto (each, a "STOCKHOLDER" and, collectively,
the "STOCKHOLDERS").
WHEREAS, the Parent and the Company propose to enter into an Agreement and
Plan of Merger, dated as of the date hereof (the "MERGER AGREEMENT"), which
provides for, among other things, the merger of a wholly-owned subsidiary of the
Parent with and into the Company (the "MERGER");
WHEREAS, as of the date hereof, the Stockholders are holders of record or
Beneficially Own (as defined below) shares of common stock, par value $.0001 per
share, of the Company ("COMPANY COMMON STOCK"), shares of Series A Convertible
Preferred Stock, par value $.0001 per share, of the Company ("COMPANY SERIES A
PREFERRED STOCK"), shares of Series B Convertible Preferred Stock, par value
$.0001 per share, of the Company ("COMPANY SERIES B PREFERRED STOCK"), and/or
shares of Series C Convertible Preferred Stock, par value $.0001 per share, of
the Company ("COMPANY SERIES C PREFERRED STOCK" and, together with the Company
Common Stock, the Company Series A Preferred Stock and the Company Series B
Preferred Stock, the "COMPANY STOCK"); and
WHEREAS, as a condition to the willingness of the Parent to enter into the
Merger Agreement, the Parent has required that each Stockholder agree, and in
order to induce the Parent to enter into the Merger Agreement, each Stockholder
has agreed, severally and not jointly, to enter into this Agreement with respect
to all of the shares of Company Stock now held of record or Beneficially Owned,
and which may hereafter be acquired, by such Stockholder (collectively, the
"SHARES").
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements contained herein, and intending to be legally bound hereby, the
parties hereto hereby agree as follows:
ARTICLE I
CERTAIN DEFINITIONS
SECTION 1.1 GENERAL. Capitalized terms used and not defined herein have
the respective meanings ascribed to them in the Merger Agreement.
SECTION 1.2 BENEFICIAL OWNERSHIP. For purposes of this Agreement,
"BENEFICIALLY OWN" or "BENEFICIAL OWNERSHIP" with respect to any securities
shall mean "beneficial ownership" of such securities (as determined pursuant to
Rule 13d-3 under the Exchange Act), including pursuant to any agreement,
arrangement or understanding, whether or not in writing.
ARTICLE II
VOTING
SECTION 2.1 VOTING AGREEMENT. Each of the Stockholders hereby agrees as
follows:
(a) in a written consent of the stockholders of the Company in lieu of a
meeting (the "WRITTEN CONSENT"), which shall be prepared and delivered to each
Stockholder by the Company as promptly as practicable after the Registration
Statement Effective Date pursuant to the terms of the Merger Agreement, and with
respect to any Shares held of record or Beneficially Owned by such Stockholder,
to consent to the approval and adoption of the Merger Agreement and the Merger;
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<PAGE>
(b) to execute the Written Consent and deliver it to the Parent within one
Business Day after receipt thereof by such Stockholder;
(c) if the Company fails to deliver the Written Consent to such Stockholder,
to appear, or cause the holder of record on any applicable record date with
respect to any Shares Beneficially Owned by such Stockholder (the "RECORD
HOLDER") to appear, in person or by proxy, for the purpose of obtaining a quorum
at any annual or special meeting of the Stockholders of the Company and at any
adjournment thereof at which matters relating to the Merger Agreement and the
Merger are considered, and to vote or cause to be voted by the Record Holder, in
person or by proxy, the Shares held of record or Beneficially Owned by such
Stockholder in favor of approval and adoption of the Merger Agreement and the
Merger;
(d) to vote, or cause to be voted by the Record Holder, the Shares held of
record or Beneficially Owned by such Stockholder, against (and, with respect to
such Shares, not to consent to) any proposal for any extraordinary corporate
transaction, such as a recapitalization, dissolution, liquidation or sale of
assets of the Company or any merger, consolidation or other business combination
(other than the Merger) between the Company and any Person (other than the
Parent or a Parent Subsidiary) or any other action or agreement in each case in
this Section 2.1(d) that is intended or that reasonably could be expected to
(x) result in a breach of any covenant, representation or warranty or any other
obligation or agreement of the Company under the Merger Agreement, (y) result in
any of the conditions to the Company's obligations under the Merger Agreement
not being fulfilled, or (z) impede, interfere with, delay, postpone or
materially adversely affect the Merger and the transactions contemplated by the
Merger Agreement; and
(e) Notwithstanding the foregoing, nothing in this Agreement shall limit or
restrict Stockholder from (i) acting in Stockholder's capacity as a director or
officer of the Company, to the extent applicable, it being understood that this
Agreement shall apply to Stockholder solely in Stockholder's capacity as a
stockholder of the Company or (ii) voting in Stockholder's sole discretion on
any matter other than those referred to in Section 2.1.
SECTION 2.2 IRREVOCABLE PROXY. Concurrently with the execution and
delivery of this Agreement, each Stockholder is delivering to the Parent a duly
executed proxy in the form attached hereto as Annex I (each, a "PROXY") with
respect to any Shares held of record or Beneficially Owned by such Stockholder,
and each Stockholder hereby revokes any and all prior proxies or powers of
attorney with respect to such Shares.
SECTION 2.3 NO OWNERSHIP INTEREST. Nothing contained in this Agreement
shall be deemed to vest in the Parent any direct or indirect ownership or
incidence of ownership of or with respect to any Shares. All rights, ownership
and economic benefits of and relating to the Shares shall remain and belong to
the Stockholders, and the Parent shall have no authority to manage, direct,
restrict, regulate, govern or administer any of the policies or operations of
the Company or exercise any power or authority to direct the Stockholders in the
voting of any of the Shares except as otherwise provided herein, or the
performance of the Stockholders' duties or responsibilities as stockholders of
the Company.
SECTION 2.4 EVALUATION OF INVESTMENT. Each Stockholder, by reason of its
knowledge and experience in financial and business matters, believes
himself/itself capable of evaluating the merits and risks of the investment in
shares of Parent Common Stock contemplated by the Merger Agreement. Each of the
Stockholders acknowledges his/its receipt and review of a copy of the Merger
Agreement and the Parent's annual report on Form 10-K for the fiscal year ended
December 31, 1999, the Parent's Proxy Statement dated April 26, 2000, and each
report and registration statement filed with the Securities and Exchange
Commission by the Parent on Forms 10-Q and 8-K since December 31, 1999.
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<PAGE>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF EACH STOCKHOLDER
Each of the Stockholders hereby represents and warrants, severally and not
jointly, to the Parent as follows:
SECTION 3.1 AUTHORITY RELATIVE TO THIS AGREEMENT. Such Stockholder has all
necessary power and authority to execute and deliver this Agreement, to perform
its obligations hereunder and to consummate the transactions contemplated
hereby. Where such Stockholder is a corporation, partnership or other entity,
the execution and delivery of this Agreement by such Stockholder and the
consummation by such Stockholder of the transactions contemplated hereby have
been duly and validly authorized by the board of directors or other governing
body of such Stockholder, and no other proceedings on the part of such
Stockholder are necessary to authorize this Agreement or to consummate such
transactions. Where such Stockholder is an individual, such individual has the
capacity to enter into this Agreement. This Agreement has been duly and validly
executed and delivered by such Stockholder and, assuming the due authorization,
execution and delivery by the other parties hereto, constitutes a legal, valid
and binding obligation of such Stockholder, enforceable against such Stockholder
in accordance with its terms, except to the extent enforceability may be limited
by bankruptcy, insolvency, moratorium or other similar laws affecting creditors'
rights generally or by general principles governing the availability of
equitable remedies.
SECTION 3.2 NO CONFLICT. (a) The execution and delivery of this Agreement
by such Stockholder does not, and the performance of this Agreement by such
Stockholder shall not, (i) where such Stockholder is a corporation, partnership
or other entity, conflict with or violate the organizational documents of such
Stockholder, (ii) conflict with or violate any agreement, arrangement, law,
rule, regulation, order, judgment or decree to which such Stockholder is a party
or by which such Stockholder (or the Shares held of record or Beneficially Owned
by such Stockholder) is bound or affected, or (iii) result in any breach of or
constitute a default (or an event that with notice or lapse or time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of a lien
or encumbrance on any of the Shares held of record or Beneficially Owned by such
Stockholder pursuant to any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which such Stockholder is a party or by which such Stockholder (or the Shares
held of record or Beneficially Owned by such Stockholder) is bound or affected,
except, in the case of clauses (ii) and (iii) of this Section 3.2(a), for any
such conflicts, violations, breaches, defaults or other occurrences that would
not prevent the performance by such Stockholder of its obligations under this
Agreement.
(b) The execution and delivery of this Agreement by such Stockholder does
not, and the performance of this Agreement by such Stockholder shall not,
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental entity except for applicable requirements, if
any, of federal or state securities and antitrust laws and except where the
failure to obtain such consents, approvals, authorizations or permits, or to
make such filings or notifications, would not prevent the performance by such
Stockholder of its obligations under this Agreement.
SECTION 3.3 TITLE TO THE SHARES. As of the date hereof, such Stockholder
is the record or Beneficial Owner of the Shares listed underneath the name of
such Stockholder on such Stockholder's signature page hereto. The Shares listed
underneath the name of such Stockholder on such Stockholder's signature page
hereto are all the securities of the Company either held of record or
Beneficially Owned by such Stockholder as of the date hereof. Such Stockholder
has not appointed or granted any proxy, which appointment or grant is still
effective, with respect to the Shares held of record or Beneficially Owned by
such Stockholder. The Shares listed underneath the name of such Stockholder on
such Stockholder's signature page hereto are owned free and clear of all Liens,
other than Liens under applicable Law or as expressly provided in this
Agreement.
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<PAGE>
ARTICLE IV
COVENANTS OF EACH STOCKHOLDER
SECTION 4.1 NO INCONSISTENT AGREEMENTS. Each Stockholder hereby
represents, warrants, covenants and agrees that, except as contemplated by this
Agreement and the Merger Agreement, such Stockholder has not and shall not, and
shall use its reasonable best efforts not to permit any Person under such
Stockholder's control (including any Record Holder) to, enter into any voting
agreement or grant a proxy or power of attorney with respect to the Shares held
of record or Beneficially Owned by such Stockholder that, in either case, is
inconsistent with this Agreement.
SECTION 4.2 TRANSFER OF TITLE. Each Stockholder hereby covenants and
agrees that such Stockholder will not, prior to the termination of this
Agreement, either directly or indirectly, offer or otherwise agree to sell,
assign, pledge, hypothecate, transfer, exchange or dispose of any Shares or
options, warrants or other convertible securities to acquire or purchase Company
Stock (collectively, "DERIVATIVE SECURITIES") or any other securities or rights
convertible into or exchangeable for shares of Company Stock, owned either
directly or indirectly by such Stockholder or with respect to which such
Stockholder has the power of disposition, whether now or hereafter acquired,
without the prior written consent of the Parent (PROVIDED, that nothing
contained herein will be deemed to restrict the exercise or conversion of
Derivative Securities outstanding on the date hereof), unless the Person to whom
the Shares or Derivative Securities have been sold, assigned, pledged,
hypothecated, transferred, exchanged or disposed agrees to be bound by this
Agreement as if a party hereto. Each Stockholder hereby agrees and consents to
the entry of stop transfer instructions by the Company against the transfer of
any Shares inconsistent with the terms of this Section 4.2.
ARTICLE V
MISCELLANEOUS
SECTION 5.1 NO SOLICITATION. Each Stockholder hereby covenants and agrees
that, from the date hereof until the Effective Time or, if earlier, the
termination of the Merger Agreement in accordance with its terms and except in
each case to the extent permitted or contemplated by the Merger Agreement, such
Stockholder, in its capacity as a stockholder of the Company, (a) shall not
have, or shall immediately terminate any discussions with, any third party
concerning an Acquisition Proposal, and (b) shall not, and shall not permit any
officer, director, employee, partner, controlled Affiliate, investment banker,
attorney, accountant or other agent (in such agency capacity) of the Stockholder
to, directly or indirectly, (i) solicit, engage in discussions or negotiate with
any Person (whether such discussions or negotiations are initiated by the
Stockholder or otherwise) or take any other action intended or designed to
facilitate the efforts of any Person other than the Parent relating to an
Acquisition Proposal, (ii) provide information with respect to the Company or
any of the Company Subsidiaries to any Person other than the Parent relating to
a possible Acquisition Proposal by any Person other than the Parent,
(iii) enter into an agreement with any Person other than the Parent providing
for a possible Acquisition Proposal, or (iv) make or authorize any statement,
recommendation or solicitation in support of any possible Acquisition Proposal
by any Person other than by the Parent.
SECTION 5.2 TERMINATION. This Agreement shall terminate upon the earlier
to occur of (a) the Effective Time, (b) the termination of the Merger Agreement
in accordance with its terms, and (c) as to any Stockholder, the written
agreement of the Parent and such Stockholder to terminate this Agreement as to
such Stockholder. Upon such termination, no party hereto shall have any further
obligations or liabilities hereunder; PROVIDED, HOWEVER, that nothing in this
Agreement shall relieve any party hereto from liability for the breach of any of
its representations, warranties, covenants and agreements set forth in this
Agreement prior to such termination.
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<PAGE>
SECTION 5.3 ADDITIONAL SHARES. If, after the date hereof, a Stockholder
acquires the right to vote any additional shares of Company Stock (any such
shares shall be referred to herein as "ADDITIONAL SHARES"), including, without
limitation, upon exercise or conversion of any Derivative Security or through
any stock dividend or stock split, the provisions of this Agreement applicable
to the Shares shall be applicable to such Additional Shares as if such
Additional Shares had been outstanding Shares of such Stockholder as of the date
hereof. The provisions of the immediately preceding sentence shall be effective
with respect to Additional Shares without action by any Person immediately upon
the acquisition by such Stockholder of record or Beneficial Ownership of such
Additional Shares.
SECTION 5.4 SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof, in addition to any other
remedy at law or in equity.
SECTION 5.5 ENTIRE AGREEMENT. This Agreement, together with the Affiliate
Letters in the form attached as an exhibit to the Merger Agreement, if and to
the extent entered into by a Stockholder and the Parent, constitutes the entire
agreement between the Parent and each Stockholder with respect to the subject
matter hereof and supersedes all prior agreements and understandings, both
written and oral, between the Parent and each Stockholder with respect to the
subject matter hereof.
SECTION 5.6 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed by the parties hereto.
SECTION 5.7 SEVERABILITY. If any term or other provision of this Agreement
is adjudicated by a court of competent jurisdiction invalid, illegal or
incapable of being enforced by reason of any rule or law, or public policy, all
other terms and provisions of this Agreement shall nevertheless remain in full
force and effect so long as the economic and legal substance of this Agreement
is not affected in any manner materially adverse to any party hereto. Upon such
determination that any term or other provision is invalid, illegal or incapable
of being enforced, the parties hereto shall negotiate in good faith to modify
this Agreement so as to effect the original intent of the parties as closely as
possible to the fullest extent permitted by applicable law in a mutually
acceptable manner in order that the terms of this Agreement remain as originally
contemplated.
SECTION 5.8 NOTICES. All notices and other communications given or made
pursuant hereto shall be in writing and shall be deemed to have been duly given
or made and shall be effective upon receipt, if delivered personally, upon
receipt of a transmission confirmation if sent by facsimile (with a confirming
copy sent by overnight courier) and on the next business day if sent by Federal
Express, United Parcel Service, Express Mail or other reputable overnight
courier to the parties at the following addresses (or at such other address for
a party as shall be specified by notice) provided in accordance with this
Section 5.8:
If to a Stockholder, to the address set forth on such Stockholder's
signature page hereto.
If to the Parent, to:
Metromedia Fiber Network, Inc.
c/o Metromedia Company
One Meadowland Plaza
East Rutherford, NJ 07073
Attention: Arnold L. Wadler
Facsimile: (201) 531-2803
C-5
<PAGE>
with a copy to:
Paul, Weiss, Rifkind, Wharton & Garrison
1285 Avenue of the Americas
New York, NY 10019
Attention: Douglas A. Cifu, Esq.
Facsimile: (212) 757-3990
SECTION 5.9 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware applicable to
agreements made and to be performed entirely within such state without giving
effect to the provisions thereof relating to conflicts of law.
SECTION 5.10 JURISDICTION; VENUE. Each party hereto irrevocably submits to
the jurisdiction of the courts of the State of Delaware in respect of the
interpretation and enforcement of the provisions of this Agreement, and in
respect of the transactions contemplated by this Agreement, and hereby waives,
and agrees not to assert, as a defense in any action, suit or proceeding for the
interpretation or enforcement of this Agreement, that it is not subject to this
Agreement or that such action, suit or proceeding may not be brought or is not
maintainable in said courts or that the venue thereof may not be appropriate or
that this Agreement may not be enforced in or by such courts, and each party
hereto irrevocably agrees that all claims with respect to such action, suit or
proceeding shall be heard and determined in such a courts of the State of
Delaware. Each party hereby consents to and grants any such court jurisdiction
over the person of such parties and over the subject matter of such dispute and
agree that mailing of process or other papers in connection with any such
action, suit or proceeding in the manner provided in Section 5.8 or in such
other manner as may be permitted by law, shall be valid and sufficient service
thereof.
SECTION 5.11 SEVERAL OBLIGATIONS OF STOCKHOLDERS. The obligations of the
Stockholders hereunder shall be "several" and not either "joint" or "joint and
several." Without limiting the generality of the foregoing, under no
circumstances will any Stockholder have any liability or obligation with respect
to any misrepresentation or breach of covenant of any other Stockholder.
SECTION 5.12 COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be an original and all of which, when taken
together, shall constitute one and the same instrument.
[Remainder of Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, each of the Stockholders and the Parent have caused this
Agreement to be duly executed on the date hereof.
<TABLE>
<S> <C> <C>
METROMEDIA FIBER NETWORK, INC.
By: /s/ SILVIA KESSEL
-----------------------------------------
Name: Silvia Kessel
Title: Executive Vice President
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
SPAGNOLO 2000 TRUST
By: /s/ KAREN C. CATHEY
-----------------------------------------
Name: Karen C. Cathey
Title: Trustee
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK:
405,000
NUMBER OF SHARES OF COMPANY SERIES A PREFERRED
STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B PREFERRED
STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES C PREFERRED
STOCK: 0
ADDRESS: P.O Box 387
McKinney, TX 75070
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
SPAGNOLO EXTENDED FAMILY TRUST
By: /s/ KAREN C. CATHEY
-----------------------------------------
Name: Karen C. Cathey
Title: Trustee
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK:
144,000
NUMBER OF SHARES OF COMPANY SERIES A PREFERRED
STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B PREFERRED
STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES C PREFERRED
STOCK: 0
ADDRESS: P.O Box 387
McKinney, TX 75070
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
By: /s/ MARK F. SPAGNOLO
-----------------------------------------
Mark F. Spagnolo
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK:
860,525
NUMBER OF SHARES OF COMPANY SERIES A PREFERRED
STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B PREFERRED
STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES C PREFERRED
STOCK: 0
ADDRESS: 841 Creekwood Circle
Fairview, TX 75069
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
BEDROCK CAPITAL PARTNERS I, L.P.
By: Bedrock General Partner I, L.L.C.
By: /s/ JAMES MCLEAN
-----------------------------------------
Name: James McLean
Title: Managing Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A PREFERRED
STOCK: 2,786,070
NUMBER OF SHARES OF COMPANY SERIES B PREFERRED
STOCK: 1,951,029
NUMBER OF SHARES OF COMPANY SERIES C PREFERRED
STOCK: 874,670
ADDRESS: James McLean
Bedrock Capital Partners
c/o ComVentures
505 Hamilton Avenue
Suite 305
Palo Alto, CA 94301
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
CREDIT SUISSE FIRST BOSTON
BEDROCK FUND, L.P.
By: Bedrock General Partner I, L.L.C.,
Its Attorney in Fact
By: /s/ JAMES MCLEAN
-----------------------------------------
Name: James McLean
Title: Managing Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A PREFERRED
STOCK: 116,730
NUMBER OF SHARES OF COMPANY SERIES B PREFERRED
STOCK: 81,744
NUMBER OF SHARES OF COMPANY SERIES C PREFERRED
STOCK: 36,647
ADDRESS: James McLean
Bedrock Capital Partners
c/o ComVentures
505 Hamilton Avenue
Suite 305
Palo Alto, CA 94301
</TABLE>
C-12
<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
VBW EMPLOYEE BEDROCK FUND, L.P.
By: Bedrock General Partner I, L.L.C.
By: /s/ JAMES MCLEAN
-----------------------------------------
Name: James McLean
Title: Managing Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A PREFERRED
STOCK: 97,200
NUMBER OF SHARES OF COMPANY SERIES B PREFERRED
STOCK: 68,067
NUMBER OF SHARES OF COMPANY SERIES C PREFERRED
STOCK: 30,514
ADDRESS: James McLean
Bedrock Capital Partners
c/o ComVentures
505 Hamilton Avenue
Suite 305
Palo Alto, CA 94301
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
COMVENTURES IV ENTREPRENEURS' FUND, L.P.
By: its General Partner, ComVen IV, LLC
By: /s/ ROLAND A. VAN DER MEER
-----------------------------------------
Name: Roland A. Van der Meer
Title: Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 6,455
ADDRESS: Roland A. Van der Meer
ComVentures
505 Hamilton Avenue
Suite 305
Palo Alto, CA 94301
</TABLE>
C-14
<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
COMVENTURES IV CEO FUND, L.P.
By: its General Partner, ComVen IV, LLC
By: /s/ ROLAND A. VAN DER MEER
-----------------------------------------
Name: Roland A. Van der Meer
Title: Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 35,304
ADDRESS: Roland A. Van der Meer
ComVentures
505 Hamilton Avenue
Suite 305
Palo Alto, CA 94301
</TABLE>
C-15
<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
COMVENTURES IV, L.P.
By: its General Partner, ComVen IV, LLC
By: /s/ ROLAND A. VAN DER MEER
-----------------------------------------
Name: Roland A. Van der Meer
Title: Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 455,963
ADDRESS: Roland A. Van der Meer
ComVentures
505 Hamilton Avenue
Suite 305
Palo Alto, CA 94301
</TABLE>
C-16
<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
COMMUNICATIONS VENTURES III, L.P.
By: its General Partner, ComVen III, LLC
By: /s/ ROLAND A. VAN DER MEER
-----------------------------------------
Name: Roland A. Van der Meer
Title: Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 2,857,143
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 2,000,798
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 422,961
ADDRESS: Roland A. Van der Meer
ComVentures
505 Hamilton Avenue
Suite 305
Palo Alto, CA 94301
</TABLE>
C-17
<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
COMMUNICATIONS VENTURES III CEO &
ENTREPRENEURS' FUND, LP
By: its General Partner, ComVen III, LLC
By: /s/ ROLAND A. VAN DER MEER
-----------------------------------------
Name: Roland A. Van der Meer
Title: Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 142,857
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 100,042
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 21,147
ADDRESS: Roland A. Van der Meer
ComVentures
505 Hamilton Avenue
Suite 305
Palo Alto, CA 94301
</TABLE>
C-18
<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
WEISS, PECK & GREER VENTURE ASSOCIATES V
CAYMAN, LP
By: WPG VC Fund Advisor II, L.L.C., Fund
Investment Advisory Partner
By: /s/ AMAL M. JOHNSON
-----------------------------------------
Name: Amal M. Johnson
Title: Managing Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 689,916
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 128,996
ADDRESS: Amal M. Johnson
Weiss, Peck & Greer, LLC
555 California Street
Suite 313D
San Francisco, CA 94104
</TABLE>
C-19
<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
WPG INFORMATION SCIENCES ENTREPRENEUR FUND II,
L.L.C.
By: WPG VC Fund Advisor II, L.L.C.,
Fund Investment Advisory Member
By: /s/ AMAL M. JOHNSON
-----------------------------------------
Name: Amal M. Johnson
Title: Managing Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 75,630
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 9,294
ADDRESS: Amal M. Johnson
Weiss, Peck & Greer, LLC
555 California Street
Suite 313D
San Francisco, CA 94104
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
WPG INFORMATION SCIENCES
ENTREPRENEUR FUND II-A, L.L.C.
By: WPG VC Fund Advisor II, L.L.C.,
Fund Investment Advisory Member
By: /s/ AMAL M. JOHNSON
-----------------------------------------
Name: Amal M. Johnson
Title: Managing Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 46,639
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 5,731
ADDRESS: Amal M. Johnson
Weiss, Peck & Greer, LLC
555 California Street
Suite 313D
San Francisco, CA 94104
</TABLE>
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<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
WEISS, PECK & GREER VENTURE
ASSOCIATES V-A, L.L.C.
By: WPG VC Fund Advisor II, L.L.C.,
Fund Investment Advisory Member
By: /s/ AMAL M. JOHNSON
-----------------------------------------
Name: Amal M. Johnson
Title: Managing Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 28,151
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 5,275
ADDRESS: Amal M. Johnson
Weiss, Peck & Greer, LLC
555 California Street
Suite 313D
San Francisco, CA 94104
</TABLE>
C-22
<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
WEISS, PECK & GREER VENTURE
ASSOCIATES V, L.L.C.
By: WPG VC Fund Advisor II, L.L.C.
Fund Investment Advisory Member
By: /s/ AMAL M. JOHNSON
-----------------------------------------
Name: Amal M. Johnson
Title: Managing Member
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 3,361,345
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 626,512
ADDRESS: Amal M. Johnson
Weiss, Peck & Greer, LLC
555 California Street
Suite 313D
San Francisco, CA 94104
</TABLE>
C-23
<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
/s/ ROBERT J. RYAN, IV
---------------------------------------------
Robert J. Ryan, IV
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK:
6,275,000
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 0
ADDRESS: Robert J. Ryan, IV
1035 Louise Avenue
San Jose, CA 95125
</TABLE>
C-24
<PAGE>
<TABLE>
<S> <C> <C>
STOCKHOLDER:
/s/ MARVIN TSEU
---------------------------------------------
Marvin Tseu
</TABLE>
<TABLE>
<S> <C>
NUMBER OF SHARES OF COMPANY COMMON STOCK:
1,165,000
NUMBER OF SHARES OF COMPANY SERIES A
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES B
PREFERRED STOCK: 0
NUMBER OF SHARES OF COMPANY SERIES C
PREFERRED STOCK: 0
ADDRESS: Marvin Tseu
12002 Old Snakey Road
Los Altos Hills, CA 94022
</TABLE>
C-25
<PAGE>
ANNEX I
IRREVOCABLE PROXY
Reference is made to the Voting Agreement, dated as of the date hereof (the
"VOTING AGREEMENT"), by and among Metromedia Fiber Network, Inc., a Delaware
Corporation (the "PARENT"), the undersigned and certain other stockholders of
SiteSmith, Inc., a Delaware corporation (the "COMPANY"), set forth on the
signature pages thereto. Capitalized terms used and not defined herein have the
respective meanings assigned to them in the Voting Agreement.
The undersigned stockholder of the Company hereby irrevocably appoints
Silvia Kessel and Arnold L. Wadler, and each of them, as the sole and exclusive
attorneys-in-fact and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting rights (to the
full extent that the undersigned is entitled to do so and including, without
limitation, the power to execute and deliver written consents) with respect to
the Shares held of record or Beneficially Owned by the undersigned in accordance
with the terms of this Irrevocable Proxy. Upon the undersigned?s execution of
this Irrevocable Proxy, any and all prior proxies given by the undersigned with
respect to the voting of any of the Shares on the matters referred to herein are
hereby revoked and the undersigned agrees not to grant any subsequent proxies
with respect to such matters until after the Expiration Date (as defined below).
This Irrevocable Proxy is irrevocable, is coupled with an interest, and is
granted in consideration of Parent entering into that certain Agreement and Plan
of Merger (the "MERGER AGREEMENT"), dated as of the date hereof, by and among
the Parent, the Company and Aqueduct Acquisition Corp., a Delaware corporation
and a wholly owned subsidiary of the Parent ("MERGER SUB"), which provides for,
among other things, the merger of Merger Sub with and into the Company (the
"MERGER"). The effectiveness of this Irrevocable Proxy shall terminate upon the
consummation of the Merger, but in the event that the Merger Agreement is
terminated in accordance with its terms prior to the consummation of the Merger,
then the effectiveness of this Irrevocable Proxy shall terminate simultaneously
with the termination of the Merger Agreement (the date on which the
effectiveness of this Irrevocable Proxy shall terminate in accordance with the
foregoing being the "EXPIRATION DATE").
The attorneys and proxies named above, and each of them are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned?s attorney-in-fact and proxy to vote the Shares
held of record or Beneficially Owned, and to exercise all voting rights of the
undersigned with respect to such Shares (including, without limitation, the
power to execute and deliver written consents), at every annual, special or
adjourned meeting of the stockholders of the Company and in every written
consent in lieu of such meeting, in the manner agreed to by the undersigned
pursuant to Section 2.1 of the Voting Agreement. The attorney-in-fact and
proxies named above may not exercise this Irrevocable Proxy on any other matter
except as provided in the previous sentence. The undersigned stockholder may
vote the Shares on all other matters.
All authority herein conferred shall survive the death or incapacity of the
undersigned and any obligation of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned.
<TABLE>
<S> <C> <C>
STOCKHOLDER:
---------------------------------------------
(Print Name of Stockholder)
</TABLE>
Dated: October , 2000
C-26
<PAGE>
ANNEX D
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
SECTION262 APPRAISAL RIGHTS.
(a) Any stockholder of a corporation of this State who holds shares of stock
on the date of the making of a demand pursuant to subsection (d) of this section
with respect to such shares, who continuously holds such shares through the
effective date of the merger or consolidation, who has otherwise complied with
subsection (d) of this section and who has neither voted in favor of the merger
or consolidation nor consented thereto in writing pursuant to Section228 of this
title shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances described in
subsections (b) and (c) of this section. As used in this section, the word
"stockholder" means a holder of record of stock in a stock corporation and also
a member of record of a nonstock corporation; the words "stock" and "share" mean
and include what is ordinarily meant by those words and also membership or
membership interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a depository
representing an interest in one or more shares, or fractions thereof, solely of
stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section251 (other than a merger effected pursuant to
Section251(g) of this title), Section252, Section254, Section257, Section258,
Section263 or Section264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to
determine the stockholders entitled to receive notice of and to vote at the
meeting of stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or (ii) held
of record by more than 2,000 holders; and further provided that no appraisal
rights shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require for its
approval the vote of the stockholders of the surviving corporation as
provided in subsection (f) of Section251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series
of stock of a constituent corporation if the holders thereof are required by
the terms of an agreement of merger or consolidation pursuant to
SectionSection251, 252, 254, 257, 258, 263 and 264 of this title to accept
for such stock anything except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock (or depository receipts in
respect thereof) or depository receipts at the effective date of the
merger or consolidation will be either listed on a national securities
exchange or designated as a national market system security on an
interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this
paragraph; or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
<PAGE>
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section253 of this title is not owned by
the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections
(d) and (e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting,
shall notify each of its stockholders who was such on the record date for
such meeting with respect to shares for which appraisal rights are available
pursuant to subsections (b) or (c) hereof that appraisal rights are
available for any or all of the shares of the constituent corporations, and
shall include in such notice a copy of this section. Each stockholder
electing to demand the appraisal of his shares shall deliver to the
corporation, before the taking of the vote on the merger or consolidation, a
written demand for appraisal of his shares. Such demand will be sufficient
if it reasonably informs the corporation of the identity of the stockholder
and that the stockholder intends thereby to demand the appraisal of his
shares. A proxy or vote against the merger or consolidation shall not
constitute such a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10 days after the
effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation
who has complied with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the merger or
consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to Section228
or Section253 of this title, each constituent corporation, either before the
effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval
of the merger or consolidation and that appraisal rights are available for
any or all shares of such class or series of stock of such constituent
corporation, and shall include in such notice a copy of this section;
provided that, if the notice is given on or after the effective date of the
merger or consolidation, such notice shall be given by the surviving or
resulting corporation to all such holders of any class or series of stock of
a constituent corporation that are entitled to appraisal rights. Such notice
may, and, if given on or after the effective date of the merger or
consolidation, shall, also notify such stockholders of the effective date of
the merger or consolidation. Any stockholder entitled to appraisal rights
may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such holder's shares. If such
notice did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send a
second notice before the effective date of the merger or consolidation
notifying each of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or
resulting corporation shall send such a second notice to all such holders on
or within 10 days after such effective date; provided, however, that if such
second notice is sent more than 20 days following the sending of the first
notice, such second notice need only to be sent to each stockholder who is
entitled to appraisal rights and who has demanded appraisal of
D-2
<PAGE>
such holder's shares in accordance with this subsection. An affidavit of the
secretary or assistant secretary or of the transfer agent of the corporation
that is required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the facts stated
therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record
date that shall be not more than 10 days prior to the date the notice is
given, provided, that if the notice is given on or after the effective date
of the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the next
day preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or consolidation,
the surviving or resulting corporation or any stockholder who has complied with
subsections (a) and (d) hereof and who is otherwise entitled to appraisal
rights, may file a petition in the Court of Chancery demanding a determination
of the value of the stock of all such stockholders. Notwithstanding the
foregoing, at any time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw his demand for
appraisal and to accept the terms offered upon the merger or consolidation.
Within 120 days after the effective date of the merger or consolidation, any
stockholder who has complied with the requirements of subsections (a) and
(d) hereof, upon written request, shall be entitled to receive from the
corporation surviving the merger or resulting from the consolidation a statement
setting forth the aggregate number of shares not voted in favor of the merger or
consolidation and with respect to which demands for appraisal have been received
and the aggregate number of holders of such shares. Such written statement shall
be mailed to the stockholder within 10 days after his written request for such a
statement is received by the surviving or resulting corporation or within 10
days after expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a copy
thereof shall be made upon the surviving or resulting corporation, which shall
within 20 days after such service file in the office of the Register in Chancery
in which the petition was filed a duly verified list containing the names and
addresses of all stockholders who have demanded payment for their shares and
with whom agreements as to the value of their shares have not been reached by
the surviving or resulting corporation. If the petition shall be filed by the
surviving or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the Court, shall
give notice of the time and place fixed for the hearing of such petition by
registered or certified mail to the surviving or resulting corporation and to
the stockholders shown on the list at the addresses therein stated. Such notice
shall also be given by 1 or more publications at least 1 week before the day of
the hearing, in a newspaper of general circulation published in the City of
Wilmington, Delaware or such publication as the Court deems advisable. The forms
of the notices by mail and by publication shall be approved by the Court, and
the costs thereof shall be borne by the surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have
D-3
<PAGE>
had to pay to borrow money during the pendency of the proceeding. Upon
application by the surviving or resulting corporation or by any stockholder
entitled to participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may proceed to
trial upon the appraisal prior to the final determination of the stockholder
entitled to an appraisal. Any stockholder whose name appears on the list filed
by the surviving or resulting corporation pursuant to subsection (f) of this
section and who has submitted his certificates of stock to the Register in
Chancery, if such is required, may participate fully in all proceedings until it
is finally determined that he is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the shares
of such objecting stockholders would have been converted had they assented to
the merger or consolidation shall have the status of authorized and unissued
shares of the surviving or resulting corporation.
D-4
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a Delaware
corporation may indemnify any person who was or is a party or is threatened to
be made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding") (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. A Delaware corporation may indemnify any person
under such section in connection with a proceeding by or in the right of the
corporation to procure judgment in its favor, as provided in the preceding
sentence, against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection with the defense or settlement of such
action, except that no indemnification shall be made in respect thereof unless,
and then only to the extent that, a court of competent jurisdiction shall
determine upon application that such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper. A Delaware
corporation must indemnify any person who was successful on the merits or
otherwise in defense of any action, suit or proceeding or in defense of any
claim, issue or matter in any proceeding, by reason of the fact that such person
is or was a director, officer, employee or agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection therewith. A Delaware corporation may pay
for the expenses (including attorneys' fees) incurred by an officer or director
in defending a proceeding in advance of the final disposition upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the corporation.
Metromedia Fiber's amended and restated certificate of incorporation
provides that Metromedia Fiber will indemnify any person, including persons who
are not directors or officers of Metromedia Fiber, to the extent permitted by
Section 145 of the Delaware General Corporation Law.
Section 102(b)(7) of the Delaware General Corporation Law provides that a
Delaware corporation may in its articles of incorporation eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director except for
liability: for any breach of the director's duty of loyalty to the corporation
or its stockholders; for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; under Section 174 of the
Delaware General Corporation Law (pertaining to certain prohibited acts
including unlawful payment of dividends or unlawful purchase or redemption of
the corporation's capital stock); or for any transaction from which the director
derived an improper personal benefit. Metromedia Fiber's Amended and Restated
Certificate of Incorporation eliminates the liability of directors for monetary
damages for breach of fiduciary duty as a director, except for liability
(i) for any breach of the director's duty of loyalty to Metromedia Fiber or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the Delaware General Corporation Law, or (iv) for any transaction from which the
director derived an improper personal benefit, and provides that if the Delaware
General Corporation Law is amended to authorize corporate action further
eliminating or limiting the personal
II-1
<PAGE>
liability of directors, then the liability of a director of Metromedia Fiber
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
The Delaware General Corporation Law permits the purchase of insurance on
behalf of directors and officers against any liability asserted against
directors and officers and incurred by such persons in such capacity, or arising
out of their status as such, whether or not the corporation would have the power
to indemnify officers and directors against such liability. Metromedia Fiber's
Amended and Restated Certificate of Incorporation allows Metromedia Fiber to
maintain insurance, at its expense, to protect itself and any director, officer,
employee or agent of Metromedia Fiber or another corporation, partnership, joint
venture, trust or other enterprise against any expense, liability or loss,
whether or not Metromedia Fiber would have the power to indemnify such person
against such expense, liability or loss under the Delaware General Corporation
Law. Metromedia Fiber has obtained liability coverage, which includes coverage
to reimburse Metromedia Fiber for amounts required or permitted by law to be
paid to indemnify directors and officers.
Metromedia Fiber's Amended and Restated Certificate of Incorporation limits
the liability of directors thereof to the extent permitted by Section 102(b)(7)
of the Delaware General Corporation Law.
Metromedia Fiber's Directors' and Officers' liability insurance policy is
designed to reimburse Metromedia Fiber for payments made by it pursuant to the
foregoing indemnification. Such policy has aggregate coverage of $25 million.
No person has been authorized to give any information or to make any
representations other than those contained in this prospectus, and, if given or
made, 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 since the date hereof or that the information
contained herein is correct as of any time subsequent to its date.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
2.1 Agreement and Plan of Merger by and among Metromedia Fiber
Network, Inc., AboveNet Communications Inc. and Magellan
Acquisition, Inc., dated June 22, 1999 (incorporated by
reference to Metromedia Fiber Network, Inc.'s Current Report
on Form 8-K filed for the event dated June 22, 1999).
2.2 Agreement and Plan of Merger by and among Metromedia Fiber
Network, Inc., SiteSmith, Inc. and Aqueduct Acquisition
Corp., dated October 9, 2000 (incorporated by reference to
Metromedia Fiber Network, Inc.'s Current Report on Form 8-K
filed for the event dated October 11, 2000).
3.1 Form of Amended and Restated Certificate of Incorporation of
Metromedia Fiber Network, Inc. (incorporated by reference to
Metromedia Fiber Network, Inc.'s Registration Statement on
Form S-1 (Registration No. 333-33653)).
3.2 Form of Amended and Restated Bylaws of Metromedia Fiber
Network, Inc. (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
4.1 Specimen Class A Common Stock Certificate of Metromedia
Fiber Network, Inc. (incorporated by reference to Metromedia
Fiber Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
4.2 Indenture, dated as of November 25, 1998, between Metromedia
Fiber Network, Inc. and IBJ Whitehall Bank & Trust Company
(formerly IBJ Schroder Bank & Trust Company) (incorporated
by reference to Metromedia Fiber Network, Inc.'s
Registration Statement on Form S-4 (Registration No.
333-71129)).
4.3 Form of 10% Series A Senior Notes due 2008 of Metromedia
Fiber Network, Inc. (incorporated by reference to Metromedia
Fiber Network, Inc.'s Registration Statement on Form S-4
(Registration No. 333-71129)).
4.4 Form of 10% Series B Senior Notes due 2008 of Metromedia
Fiber Network, Inc. (incorporated by reference to Metromedia
Fiber Network, Inc.'s Registration Statement on Form S-4
(Registration No. 333-71129)).
4.5 Indenture, dated as of November 17, 1999, between Metromedia
Fiber Network, Inc. and The Bank of New York, as trustee
(incorporated by reference to Metromedia Fiber Network,
Inc.'s current Report on Form 8-K filed November 24, 1999.)
4.6 Form of 10% Senior Notes due 2009 of Metromedia Fiber
Network, Inc. (incorporated by reference to Metromedia Fiber
Network, Inc.'s current Report on Form 8-K filed
November 24, 1999.)
5.1* Opinion of Arnold L. Wadler, Esq., General Counsel of
Metromedia Fiber Network, Inc., regarding the legality of
the shares being issued pursuant to the Merger Agreement.
8.1* Form of Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
regarding certain United States federal income tax matters.
8.2* Form of Opinion of Venture Law Group regarding certain
United States federal income tax matters.
10.1 Form of Metromedia Fiber Network, Inc. 1997 Incentive Stock
Plan (incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-1 (Registration No.
333-33653)).
10.2 Employment Agreement by and between National Fiber Network,
Inc. and Stephen A. Garofalo, dated as of February 26, 1997
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-1 (Registration No.
333-33653)).
10.3 Agreement dated as of April 30, 1997, as amended by a
Modification Agreement dated as of October, 1997 by and
among Metromedia Company, Stuart Subotnick, Arnold Wadler,
Silvia Kessel, Stephen A. Garofalo and National Fiber
Network, Inc. (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
10.4 Franchise Agreement between The City of New York and
National Fiber Network, Inc., dated as of December 20, 1993
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-1 (Registration No.
333-33653)).
10.5 Conduit Occupancy Agreement by and between New York
Telephone Company and National Fiber Network, Inc., dated as
of May 1993 (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
10.6 Consulting Agreement between National Fiber Network and
Realprop Capital Corporation, dated as of February 1, 1996
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-1 (Registration No.
333-33653)).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
10.7 Letter Agreement from National Fiber Network, Inc. to Peter
Sahagen, dated February 11, 1997 (incorporated by reference
to Metromedia Fiber Network, Inc.'s Registration Statement
on Form S-1 (Registration No. 333-33653)).
10.8 Office Lease by and between National Fiber Network, Inc. and
110 East 42nd Street Associates, dated as of March 19, 1997
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-1 (Registration No.
333-33653)).
10.9 Office Lease by and between National Fiber Network, Inc. and
110 East 42nd Street, dated as of June 1997 (incorporated by
reference to Metromedia Fiber Network, Inc.'s Registration
Statement on Form S-1 (Registration No. 333-33653)).
10.10 Trademark License Agreement by and between Metromedia
Company and Metromedia Fiber Network, Inc., dated as of
August 14, 1997 (incorporated by reference to Metromedia
Fiber Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
10.11 Fiber Optic Use Agreement between National Fiber Network,
Inc. and NextLink New York, L.L.C., dated as of June 3, 1997
(portions of this exhibit are subject to a request to the
Securities and Exchange Commission for confidential
treatment, and omitted material has been separately filed
with the Securities and Exchange Commission) (incorporated
by reference to Metromedia Fiber Network, Inc.'s
Registration Statement on Form S-1 (Registration No.
333-33653)).
10.12 Amended and Restated Agreement for the Provision of a Fiber
Optic Transmission Network, dated as of the Effective Date
by and between US ONE Communications of New York, Inc. and
National Fiber Network, Inc. (portions of this exhibit are
subject to a request to the Securities and Exchange
Commission for confidential treatment, and omitted material
has been separately filed with the Securities and Exchange
Commission) (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
10.13 Fiber Lease and Innerduct Use Agreement by and between
Metromedia Fiber Network, Inc. and NextLink Communications,
Inc., dated as of February 23, 1998 (portions of this
exhibit are subject to a request to the Securities and
Exchange Commission for confidential treatment, and omitted
material has been separately filed with the Securities and
Exchange Commission) (incorporated by reference to
Metromedia Fiber Network, Inc.'s Annual Report on Form 10-K
(File No. 000-2369)).
10.14 Amendment No. 1 to Fiber Lease and Innerduct Use Agreement
by and between Metromedia Fiber Network, Inc. and NextLink
Communications, Inc., made and entered into as of March 4,
1998 (portions of this exhibit are subject to a request to
the Securities and Exchange Commission for confidential
treatment, and omitted material has been separately filed
with the Securities and Exchange Commission) (incorporated
by reference to Metromedia Fiber Network, Inc.'s Annual
Report on Form 10-K (File No. 000-23269)).
10.15 Agreement of Lease by and between Connecticut General Life
Insurance Company and Metromedia Fiber Network Services,
Inc., dated as of March 9, 1998 (incorporated by reference
to Metromedia Fiber Network, Inc.'s Annual Report on Form
10-K (File No. 000-23269)).
10.16 Purchase Agreement, dated November 20, 1998 among Metromedia
Fiber Network, Inc., Salomon Smith Barney, Inc., Chase
Securities, Inc., Deutsche Bank Securities Inc. and
Donaldson Lufkin & Jenrette Securities Corporation
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-4 (Registration
No. 333-71129)).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
10.17 Registration Rights Agreement, dated as of November 25, 1998
among Metromedia Fiber Network, Inc., Salomon Smith Barney,
Inc., Chase Securities, Inc., Deutsche Bank Securities Inc.
and Donaldson Lufkin & Jenrette Securities Corporation
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-4 (Registration
No. 333-71129)).
10.18 Security Agreement, dated as of November 25, 1998, between
Metromedia Fiber Network, Inc. and IBJ Schroder Bank & Trust
Company (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-4
(Registration No. 333-71129)).
10.19 Employment Agreement by and between Metromedia Fiber
Network, Inc. and Vincent A. Galluccio, dated as of August
31, 1998 (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-4
(Registration No. 333-71129)).
10.20 Employment Agreement by and between Metromedia Fiber
Network, Inc. and Gerard Benedetto, dated as of August 31,
1998 (incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-4 (Registration No.
333-71129)).
10.21 Employment Agreement by and between Metromedia Fiber
Network, Inc. and Nicholas M. Tanzi, dated as of August 31,
1998 (incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-4 (Registration No.
333-71129)).
10.22 Franchise Agreement between the City of New York and
National Fiber Network, Inc., dated as of December 20, 1993
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1999).
10.23 Form of Escrow Agreement to be entered into by and among
Metromedia Fiber Network, Inc., Mark F. Spagnolo and an
escrow agent to be determined (incorporated by reference to
Metromedia Fiber Network, Inc.'s Current Report on Form 8-K
filed for the event dated October 11, 2000).
10.24 Voting Agreement by and among Metromedia Fiber Network, Inc.
and certain stockholders of SiteSmith, Inc. listed therein
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Current Report on Form 8-K filed for the event dated
October 11, 2000).
10.25* Employment Agreement by and between Metromedia Fiber
Network, Inc., SiteSmith, Inc. and Mark F. Spagnolo, dated
October 9, 2000.
10.26* Employment Agreement by and between Metromedia Fiber
Network, Inc., SiteSmith, Inc. and Robert J. Ryan, IV, dated
October 9, 2000.
21.1 List of Subsidiaries of Metromedia Fiber Network, Inc.
(incorporated by reference to Metromedia Fiber Networks,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1999).
23.1* Consent of Ernst & Young LLP
23.2* Consent of PricewaterhouseCoopers, LLP, Independent
Accountants
23.3* Consent of Deloitte & Touche LLP
23.4* Consent of PricewaterhouseCoopers, LLP, Independent
Accountants
23.5* Consent of Arnold L. Wadler, Esq., General Counsel of
Metromedia Fiber Network, Inc. (included in the opinion
filed as Exhibit 5.1 to this Registration Statement).
23.6* Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in the opinion filed as Exhibit 8.1 to this
Registration Statement).
23.7* Consent of Venture Law Group (included in the opinion filed
as Exhibit 8.2 to this Registration Statement).
24.1 Power of Attorney from officers and directors.
27.1 Financial Data Schedule
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
99.1* Form of Written Consent
</TABLE>
------------------------
* Filed herewith.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II - Valuation and Qualifying Accounts.
(C) OPINIONS
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 20, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
The undersigned registrant hereby undertakes as follows:
(a) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter
within the meaning of Rule 145(c) the issuer undertakes that such
reoffering prospectus will contain the information called for by the
applicable registration form with respect to reofferings by persons who
may be deemed underwriters, in addition to the information called for by
the other Items of the applicable form.
(b) Every prospectus (i) that is filed pursuant to the paragraph immediately
preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment
to the registration statement and will not be used until such amendment
is effective, and that, for purposes of determining any liability under
the Securities act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Metromedia Fiber Network, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on November 8, 2000.
<TABLE>
<S> <C> <C>
Metromedia Fiber Network, Inc.
By: /s/ STEPHEN A. GAROFALO
-----------------------------------------
Name: Stephen A. Garofalo
Title: Chief Executive Officer and
Chairman of the Board
of Directors
</TABLE>
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Silvia
Kessel, Arnold L. Wadler and Gerard Benedetto, and each or either of them, his
true and lawful attorney-in-fact, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and to cause the same to be filed, with all
exhibits thereto and the other documents in connection therewith, with the
Securities and Exchange Commission, hereby granting to said attorneys-in-fact
and agents, and each of them. Full power and authority to do and perform each
and every act and thing whatsoever requisite or desirable to be done, as fully
to all intents and purposes as the undersigned might or could do in person,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
either of them, or their or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement and the foregoing Power-of-Attorney have been signed by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ STEPHEN A. GAROFALO Chief Executive Officer and
-------------------------------------- Chairman of the Board of November 8, 2000
Stephen A. Garofalo Directors
/s/ GERARD BENEDETTO
-------------------------------------- Senior Vice President--Chief November 8, 2000
Gerard Benedetto Financial Officer
/s/ NICHOLAS M. TANZI
-------------------------------------- President, Chief Operating November 8, 2000
Nicholas M. Tanzi Officer and Director
/s/ SILVIA KESSEL
-------------------------------------- Executive Vice President and November 8, 2000
Silvia Kessel Director
/s/ JOHN W. KLUGE
-------------------------------------- Director November 8, 2000
John W. Kluge
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ DAVID ROCKEFELLER
-------------------------------------- Director November 8, 2000
David Rockefeller
/s/ STUART SUBOTNICK
-------------------------------------- Director November 8, 2000
Stuart Subotnick
/s/ ARNOLD L. WADLER Executive Vice President,
-------------------------------------- General Counsel, Secretary and November 8, 2000
Arnold L. Wadler Director
/s/ LEONARD WHITE
-------------------------------------- Director November 8, 2000
Leonard White
/s/ SHERMAN TUAN
-------------------------------------- Director November 8, 2000
Sherman Tuan
/s/ DAVID RAND
-------------------------------------- Director November 8, 2000
David Rand
</TABLE>
II-8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Metromedia Fiber Network, Inc.
We have audited the financial statements of Metromedia Fiber Network, Inc.
as of December 31, 1999 and 1998 and for each of the three years in the period
ended December 31, 1999 and have issued our report thereon dated March 8, 2000
(included elsewhere in this Registration Statement). Our audits also included
the financial statement schedule listed in Item 21(b) of this Registration
Statement. This schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, 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 8, 2000
S-1
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT ADDITIONS BALANCE AT
BEGINNING OF CHARGED TO COSTS END OF
DESCRIPTION YEAR AND EXPENSES ADJUSTMENTS YEAR
----------- ------------ ---------------- ----------- ----------
<S> <C> <C> <C> <C>
Reserves deducted from assets to which they
apply:
TRADE RECEIVABLES
1997......................................... $ -- $ -- $ -- $ --
1998......................................... $ -- $ -- $ -- $ --
1999......................................... $ -- $ -- $ 450,000 $450,000
OTHER CURRENT ASSETS
1997......................................... $ -- $337,500 $ -- $337,500
1998......................................... $337,500 $ -- $ -- $337,500
1999......................................... $337,500 $ -- $(126,562) $210,938
</TABLE>
S-2
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
2.1 Agreement and Plan of Merger by and among Metromedia Fiber
Network, Inc., AboveNet Communications Inc. and Magellan
Acquisition, Inc., dated June 22, 1999 (incorporated by
reference to Metromedia Fiber Network, Inc.'s Current Report
on Form 8-K filed for the event dated June 22, 1999).
2.2 Agreement and Plan of Merger by and among Metromedia Fiber
Network, Inc., SiteSmith, Inc. and Aqueduct Acquisition
Corp., dated October 9, 2000 (incorporated by reference to
Metromedia Fiber Network, Inc.'s Current Report on Form 8-K
filed for the event dated October 11, 2000).
3.1 Form of Amended and Restated Certificate of Incorporation of
Metromedia Fiber Network, Inc. (incorporated by reference to
Metromedia Fiber Network, Inc.'s Registration Statement on
Form S-1 (Registration No. 333-33653)).
3.2 Form of Amended and Restated Bylaws of Metromedia Fiber
Network, Inc. (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
4.1 Specimen Class A Common Stock Certificate of Metromedia
Fiber Network, Inc. (incorporated by reference to Metromedia
Fiber Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
4.2 Indenture, dated as of November 25, 1998, between Metromedia
Fiber Network, Inc. and IBJ Whitehall Bank & Trust Company
(formerly IBJ Schroder Bank & Trust Company) (incorporated
by reference to Metromedia Fiber Network, Inc.'s
Registration Statement on Form S-4 (Registration No.
333-71129)).
4.3 Form of 10% Series A Senior Notes due 2008 of Metromedia
Fiber Network, Inc. (incorporated by reference to Metromedia
Fiber Network, Inc.'s Registration Statement on Form S-4
(Registration No. 333-71129)).
4.4 Form of 10% Series B Senior Notes due 2008 of Metromedia
Fiber Network, Inc. (incorporated by reference to Metromedia
Fiber Network, Inc.'s Registration Statement on Form S-4
(Registration No. 333-71129)).
4.5 Indenture, dated as of November 17, 1999, between Metromedia
Fiber Network, Inc. and The Bank of New York, as trustee
(incorporated by reference to Metromedia Fiber Network,
Inc.'s current Report on Form 8-K filed November 24, 1999.)
4.6 Form of 10% Senior Notes due 2009 of Metromedia Fiber
Network, Inc. (incorporated by reference to Metromedia Fiber
Network, Inc.'s current Report on Form 8-K filed
November 24, 1999.)
5.1* Opinion of Arnold L. Wadler, Esq., General Counsel of
Metromedia Fiber Network, Inc., regarding the legality of
the shares being issued pursuant to the Merger Agreement.
8.1* Form of Opinion of Paul, Weiss, Rifkind, Wharton & Garrison
regarding certain United States federal income tax matters.
8.2* Form of Opinion of Venture Law Group regarding certain
United States federal income tax matters.
10.1 Form of Metromedia Fiber Network, Inc. 1997 Incentive Stock
Plan (incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-1 (Registration No.
333-33653)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
10.2 Employment Agreement by and between National Fiber Network,
Inc. and Stephen A. Garofalo, dated as of February 26, 1997
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-1 (Registration No.
333-33653)).
10.3 Agreement dated as of April 30, 1997, as amended by a
Modification Agreement dated as of October, 1997 by and
among Metromedia Company, Stuart Subotnick, Arnold Wadler,
Silvia Kessel, Stephen A. Garofalo and National Fiber
Network, Inc. (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
10.4 Franchise Agreement between The City of New York and
National Fiber Network, Inc., dated as of December 20, 1993
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-1 (Registration No.
333-33653)).
10.5 Conduit Occupancy Agreement by and between New York
Telephone Company and National Fiber Network, Inc., dated as
of May 1993 (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
10.6 Consulting Agreement between National Fiber Network and
Realprop Capital Corporation, dated as of February 1, 1996
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-1 (Registration No.
333-33653)).
10.7 Letter Agreement from National Fiber Network, Inc. to Peter
Sahagen, dated February 11, 1997 (incorporated by reference
to Metromedia Fiber Network, Inc.'s Registration Statement
on Form S-1 (Registration No. 333-33653)).
10.8 Office Lease by and between National Fiber Network, Inc. and
110 East 42nd Street Associates, dated as of March 19, 1997
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-1 (Registration No.
333-33653)).
10.9 Office Lease by and between National Fiber Network, Inc. and
110 East 42nd Street, dated as of June 1997 (incorporated by
reference to Metromedia Fiber Network, Inc.'s Registration
Statement on Form S-1 (Registration No. 333-33653)).
10.10 Trademark License Agreement by and between Metromedia
Company and Metromedia Fiber Network, Inc., dated as of
August 14, 1997 (incorporated by reference to Metromedia
Fiber Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
10.11 Fiber Optic Use Agreement between National Fiber Network,
Inc. and NextLink New York, L.L.C., dated as of June 3, 1997
(portions of this exhibit are subject to a request to the
Securities and Exchange Commission for confidential
treatment, and omitted material has been separately filed
with the Securities and Exchange Commission) (incorporated
by reference to Metromedia Fiber Network, Inc.'s
Registration Statement on Form S-1 (Registration No.
333-33653)).
10.12 Amended and Restated Agreement for the Provision of a Fiber
Optic Transmission Network, dated as of the Effective Date
by and between US ONE Communications of New York, Inc. and
National Fiber Network, Inc. (portions of this exhibit are
subject to a request to the Securities and Exchange
Commission for confidential treatment, and omitted material
has been separately filed with the Securities and Exchange
Commission) (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-1
(Registration No. 333-33653)).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
10.13 Fiber Lease and Innerduct Use Agreement by and between
Metromedia Fiber Network, Inc. and NextLink Communications,
Inc., dated as of February 23, 1998 (portions of this
exhibit are subject to a request to the Securities and
Exchange Commission for confidential treatment, and omitted
material has been separately filed with the Securities and
Exchange Commission) (incorporated by reference to
Metromedia Fiber Network, Inc.'s Annual Report on Form 10-K
(File No. 000-2369)).
10.14 Amendment No. 1 to Fiber Lease and Innerduct Use Agreement
by and between Metromedia Fiber Network, Inc. and NextLink
Communications, Inc., made and entered into as of March 4,
1998 (portions of this exhibit are subject to a request to
the Securities and Exchange Commission for confidential
treatment, and omitted material has been separately filed
with the Securities and Exchange Commission) (incorporated
by reference to Metromedia Fiber Network, Inc.'s Annual
Report on Form 10-K (File No. 000-23269)).
10.15 Agreement of Lease by and between Connecticut General Life
Insurance Company and Metromedia Fiber Network Services,
Inc., dated as of March 9, 1998 (incorporated by reference
to Metromedia Fiber Network, Inc.'s Annual Report on Form
10-K (File No. 000-23269)).
10.16 Purchase Agreement, dated November 20, 1998 among Metromedia
Fiber Network, Inc., Salomon Smith Barney, Inc., Chase
Securities, Inc., Deutsche Bank Securities Inc. and
Donaldson Lufkin & Jenrette Securities Corporation
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-4 (Registration
No. 333-71129)).
10.17 Registration Rights Agreement, dated as of November 25, 1998
among Metromedia Fiber Network, Inc., Salomon Smith Barney,
Inc., Chase Securities, Inc., Deutsche Bank Securities Inc.
and Donaldson Lufkin & Jenrette Securities Corporation
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-4 (Registration
No. 333-71129)).
10.18 Security Agreement, dated as of November 25, 1998, between
Metromedia Fiber Network, Inc. and IBJ Schroder Bank & Trust
Company (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-4
(Registration No. 333-71129)).
10.19 Employment Agreement by and between Metromedia Fiber
Network, Inc. and Vincent A. Galluccio, dated as of August
31, 1998 (incorporated by reference to Metromedia Fiber
Network, Inc.'s Registration Statement on Form S-4
(Registration No. 333-71129)).
10.20 Employment Agreement by and between Metromedia Fiber
Network, Inc. and Gerard Benedetto, dated as of August 31,
1998 (incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-4 (Registration No.
333-71129)).
10.21 Employment Agreement by and between Metromedia Fiber
Network, Inc. and Nicholas M. Tanzi, dated as of August 31,
1998 (incorporated by reference to Metromedia Fiber Network,
Inc.'s Registration Statement on Form S-4 (Registration No.
333-71129)).
10.22 Franchise Agreement between the City of New York and
National Fiber Network, Inc., dated as of December 20, 1993
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1999).
10.23 Form of Escrow Agreement to be entered into by and among
Metromedia Fiber Network, Inc., Mark F. Spagnolo and an
escrow agent to be determined (incorporated by reference to
Metromedia Fiber Network, Inc.'s Current Report on Form 8-K
filed for the event dated October 11, 2000).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<C> <S>
10.24 Voting Agreement by and among Metromedia Fiber Network, Inc.
and certain stockholders of SiteSmith, Inc. listed therein,
dated October 9, 2000 (incorporated by reference to
Metromedia Fiber Network, Inc.'s Current Report on Form 8-K
filed for the event dated October 11, 2000).
10.25* Employment Agreement by and between Metromedia Fiber
Network, Inc., SiteSmith, Inc. and Mark F. Spagnolo, dated
October 9, 2000.
10.26* Employment Agreement by and between Metromedia Fiber
Network, Inc., SiteSmith, Inc. and Robert J. Ryan, IV, dated
October 9, 2000.
21.1 List of Subsidiaries of Metromedia Fiber Network, Inc.
(incorporated by reference to Metromedia Fiber Network,
Inc.'s Annual Report on Form 10-K for the fiscal year ended
December 31, 1999).
23.1* Consent of Ernst & Young LLP
23.2* Consent of PricewaterhouseCoopers, LLP, Independent
Accountants
23.3* Consent of Deloitte & Touche LLP
23.4* Consent of PricewaterhouseCoopers, LLP, Independent
Accountants
23.5* Consent of Arnold L. Wadler, Esq., General Counsel of
Metromedia Fiber Network, Inc. (included in the opinion
filed as Exhibit 5.1 to this Registration Statement).
23.6* Consent of Paul, Weiss, Rifkind, Wharton & Garrison
(included in the opinion filed as Exhibit 8.1 to this
Registration Statement).
23.7* Consent of Venture Law Group (included in the opinion filed
as Exhibit 8.2 to this Registration Statement).
24.1 Power of Attorney from officers and directors.
27.1 Financial Data Schedule
99.1* Form of Written Consent
</TABLE>
------------------------
* Filed herewith.
