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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-23269
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METROMEDIA FIBER NETWORK, INC.
(Exact name of registrant, as specified in its charter)
DELAWARE 11-3168327
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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C/O METROMEDIA FIBER NETWORK SERVICES, INC.
1 NORTH LEXINGTON AVENUE
WHITE PLAINS, NY 10601
(Address and zip code of principal executive offices)
(914) 421-6700
(Registrant's telephone number, include area code)
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, par value $.01 per share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. /X/
The aggregate market value of voting stock and non-voting common equity
of the registrant held by nonaffiliates of the registrant was approximately
$35,351,355,821 as of March 14, 2000 based on the last reported bid quotation on
the Nasdaq National Market as of that date. The number of shares of Class A
Common Stock outstanding as of March 14, 2000 was 472,575,098. The number of
shares of Class B Common Stock outstanding as of March 14, 2000 was 67,538,544.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Definitive Proxy Statement to be used in connection
with the Registrant's 1999 Annual Meeting of Stockholders, to be held on May 16,
2000, are incorporated by reference into Part III of this Annual Report on Form
10-K.
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METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
TABLE OF CONTENTS
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ITEM NO. DESCRIPTION PAGE
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PART I
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Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Securities Holders . . . . . . . . . . . . . . 22
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . 22
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . 29
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . 29
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . 29
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . 29
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . . . . . 29
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K . . . . . . . . 2
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements in this Annual Report on Form 10-K (this "Form
10-K"), including statements under "Item 1. Business," "Item 3 Legal
Proceedings" and "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," constitute "forward-looking statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended, and the Private
Securities Litigation Reform Act of 1995 (collectively, the "Reform Act").
Certain, but not necessarily all, of such forward-looking statements can be
identified by the use of forward-looking terminology such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Such forward-looking statements
involve known and unknown risks, uncertainties and other factors which may cause
the actual results, performance or achievements of Metromedia Fiber Network,
Inc. and its subsidiaries (collectively, the "Company", "we" or "us") to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. Such factors include,
but are not limited to, the following: general economic and business conditions;
competition in the telecommunications and internet services industries; industry
capacity; success of acquisitions and operating initiatives; management of
growth; dependence on senior management; brand awareness; general risks of the
telecommunications and internet services industries; development risk; risk
relating to the availability of financing; the existence or absence of adverse
publicity; changes in business strategy or development plan; availability, terms
and deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs; changes
in, or failure to comply with, government regulations; construction schedules;
the costs and other effects of legal and administrative proceedings; changes in
methods of marketing and technology; changes in political, social and economic
conditions and other factors referenced in this Form 10-K. The Company does not
undertake and specifically declines any obligation to publicly release the
results of any revisions which may be made to any forward-looking statement to
reflect events or circumstances after the date of such statements or to reflect
the occurrence of anticipated or unanticipated events.
ITEM 1. BUSINESS
GENERAL
We provide dedicated fiber optic infrastructure and high-bandwidth
Internet connectivity for our communications intensive customers. We are a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through our acquisition of
AboveNet Communications, Inc., we also provide "one-hop" connectivity that
enables mission critical Internet applications to thrive, as well as
high-bandwidth infrastructure, including managed co-location services.
We currently have operations in, or under construction in, eleven Tier
I cities throughout the United States and seven selected international markets.
We intend to expand our presence to include approximately 50 Tier I and Tier II
markets in the United States and 17 major international markets.
THE INTRA-CITY NETWORKS. Our 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. We are currently working to expand our existing
local intra-city networks in these metropolitan areas, and to construct
additional intra-city networks in approximately 40 additional Tier I and Tier II
markets in the United States.
THE INTER-CITY NETWORKS. Our inter-city network currently consists of
approximately 132,000 fiber miles primarily covering our 255 route-mile network
that we have built between New York City and Washington, D.C. We have also built
or contracted to acquire -primarily through fiber swaps - a nationwide dark
fiber network linking our intra-city networks.
THE INTERNATIONAL NETWORKS. In addition to our domestic networks, we intend to
expand our international presence to include approximately 17 major markets. In
February 1999, we entered into an agreement with Viatel, Inc. and Carrier 1
Holdings, Ltd. to jointly build a dark fiber inter-city network between selected
cities throughout Germany. Once completed, our German network will consist of
approximately 320,000 fiber miles covering in excess of 1,450 route miles
connecting 14 major cities. We have also swapped strands of fiber in the United
States for strands of fiber
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on the Circe network, which connects a number of European markets. In addition
to our inter-city networks, we are constructing 16 intra-city networks
throughout Europe. Separately, we have also entered into a contract to acquire
rights to dark fiber network facilities in Toronto, Canada.
INTERNET CONNECTIVITY AND EXCHANGE. Through our acquisition of AboveNet, we are
a leading provider of high performance Internet connectivity services to a wide
range of Internet service providers, Internet content providers and Web hosting
companies and facilities - based, managed co-location services. Our Internet
exchange server facilities provide high performance, reliable and scalable
solutions for electronic commerce and other business critical applications.
AboveNet developed a network architecture based upon strategically located,
fault-tolerant Internet exchange servers. We currently operate two Internet
service exchange campuses, located near two of the major Internet access points,
metropolitan area exchange (often referred to as "MAE") West and MAE East, using
our suite of sophisticated network management and remote monitoring tools. We
believe that our centralized network architecture provides enhanced connectivity
while eliminating the need to build numerous geographically dispersed data
centers. AboveNet's Internet service exchange model offers customers the
benefits of combining direct Internet service providers access with co-location
services for Internet content providers. As of December 31, 1999, AboveNet had
more than 385 direct public and private data exchange agreements, known as
peering arrangements, including relationships with most major network providers.
The convergence of content providers and Internet service providers at our
Internet service exchanges enables Internet service provider customers to
provide their users with "one hop" connectivity, through our local area network,
to the Web sites of the Internet content providers that are co-located at the
same site. This direct connectivity minimizes the risk of delays and data loss
often encountered in the transmission of data over the public Internet
infrastructure.
AboveNet's wholly-owned subsidiary Palo Alto Internet Exchange ("PAIX"), began
operations in 1996 as Digital Equipment Corporation's Palo Alto Internet
Exchange. Having proven itself as a vital part of the Internet infrastructure,
PAIX serves as a packet switching center for Internet service providers or ISPs.
PAIX also offers secure, fault-tolerant co-location services to ISPs. PAIX is
the only major commercial internet exchange - IX - that is not owned by a
telecommunications carrier, which enables ISPs 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. We are focused on providing our broadband communications
infrastructure and Internet connectivity services to two main customer groups
located in Tier I and Tier II markets: communications carriers and
corporate/government customers.
Our targeted customers include a broad range of companies such as:
- incumbent local exchange carriers or ILECs;
- competitive local exchange carriers or CLECs;
- long distance companies/IXCs;
- paging, cellular and PCS companies;
- cable companies;
- ISPs; and
- Web hosting and e-commerce companies.
Our dark fiber customers typically lease our fiber optic capacity with
which they develop their own communications networks. Leasing our fiber optic
capacity is a low-cost alternative to building their own infrastructure or
purchasing metered services from ILECs or CLECs. Our Internet connectivity and
co-location customers typically lease bandwidth and co-location space which
allows them to provide their Internet related services on a reliable and
cost-effective basis. We believe that we are well-positioned to penetrate our
target customer base since we plan to continue to install most of our dark fiber
networks and Internet service exchanges in major markets where these customers
are concentrated. We believe our target customers for our dark fiber and
Internet connectivity are complementary and will provide significant cross
selling opportunities.
NETWORK INFRASTRUCTURE. We have designed our networks to provide high levels of
reliability, security and flexibility by virtue of a self-healing SONET
architecture that prevents interruption in service to our clients by
instantaneously rerouting traffic in the event of a fiber cut. Our advanced
network architecture is also capable of supporting
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state-of-the-art technologies, including DWDM (dense wave division
multiplexing), which significantly increases the transmission capacity of a
strand of fiber optic cable. Because DWDM can boost transmission capacity
significantly, it has greater relevance on our inter-city routes where we have,
on average, fewer strands of fiber installed than in our intra-city markets.
Where practicable, we install additional unused conduits to cost effectively
accommodate future network expansion and eliminate the need for future
construction.
MARKET OPPORTUNITY. We believe that the market for our dark fiber services is
characterized by significant and growing demand for, and limited supply of,
fiber optic capacity. To meet our customers' demand, we tailor the amount of
fiber capacity leased to the needs of our customers. Generally, customers lease
fiber optic capacity from us and connect their own transmission equipment to the
leased fiber, thereby obtaining a high-bandwidth, fixed-cost, secure
communications alternative to the metered communications services offered by
traditional providers. In addition, we believe that we have installation,
operating and maintenance cost advantages per fiber mile relative to our
competitors because we generally install 432 fibers, and have begun installing
as many as 864 fibers, per route mile, as compared to the generally lower number
of fibers per mile in existing competitive networks.
We believe the market for our Internet service exchanges is
characterized by significant and growing demand for, and limited access to,
highly reliable Internet connectivity and co-location services. To meet our
customers' demands, we provide scalable connectivity and co-location services
that drive our customers' electronic commerce and other mission critical
Internet applications. Our customers lease bandwidth and co-location space from
us to gain highly reliable, secure and cost effective Internet connectivity.
Through our existing and planned networks, we believe we have the low cost
position relative to those competitors who lease rather than own their networks.
MANAGEMENT EXPERTISE. We benefit from the support of our controlling stockholder
Metromedia Company. On April 30, 1997, Metromedia Company and certain of its
affiliates made a substantial equity investment in our company (the "Metromedia
Investment"). As a result, Metromedia Company and its partners own all of our
outstanding shares of class B common stock, par value $.01 per share. Our class
B common stock is entitled to 10 votes per share and to vote separately to elect
at least 75% of the members of the Board of Directors. As of December 31, 1999,
Metromedia Company and its partners own and control approximately 62.2% of the
outstanding voting power of our company; after the Bell Atlantic investment,
Metromedia Company and its partners own and control approximately 58.8% of such
outstanding voting power.
BELL ATLANTIC INVESTMENT. We also anticipate benefits from the March 6, 1999
investment in us by Bell Atlantic Investments, Inc.. On October 7, 1999, we
entered into a securities purchase agreement with Bell Atlantic, under which
Bell Atlantic Investments would purchase up to approximately 51.2 million newly
issued shares of our 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 our 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 our
outstanding shares. Bell Atlantic has also agreed to pay us $550 million over
the next three years in exchange for delivery of fiber optic facilities over the
next five years. The proceeds from these two transactions will be used to fund
the expansion of our network.
BUSINESS STRATEGY
Our objective is to become the preferred facilities-based provider of
broadband communications infrastructure and Internet connectivity solutions to
communications carriers, corporations and government agencies, in our target
markets. The following are the key elements of our strategy to achieve this
objective:
ESTABLISH THE COMPANY AS THE PREFERRED CARRIERS' CARRIER OF BROADBAND
COMMUNICATIONS INFRASTRUCTURE AND INTERNET CONNECTIVITY SOLUTIONS
- Lease broadband communications infrastructure on a fixed cost
basis;
- Enable carriers to penetrate markets previously too costly to
build or purchase;
- Continue to differentiate ourselves as the only company with a
central mission of providing dark fiber on a fixed cost basis;
- Lease high-bandwidth long haul capacity to provide seamless
connectivity between our intra-city networks;
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- Provide Internet connectivity services through leasing
bandwidth and co-location space to ISPs;
- Enable ISPs to provide reliable, high-quality Internet access
services; and
- Capitalize on the fact that we do not offer competing metered
communications or retail Internet connectivity solutions in
competition with our carrier and ISP customers.
POSITION THE COMPANY AS THE PREFERRED PROVIDER OF BROADBAND COMMUNICATIONS
INFRASTRUCTURE AND INTERNET CONNECTIVITY SERVICES TO CORPORATE AND GOVERNMENT
CUSTOMERS
- Target broadband communications infrastructure customers with
significant transmission and high security needs;
- Provide scalable services for customers seeking lower
broadband transmission capacity;
- Offer our dark fiber services on a fixed cost rather than
metered basis, to provide a more economical solution to our
customers;
- Target Internet connectivity customers who require reliable,
secure and cost effective connectivity to the Internet to
drive their electronic commerce and other mission critical
business Internet applications; and
- Capitalize on the complementary customer bases for our
infrastructure and Internet connectivity services through
effective cross selling.
REPLICATE SUCCESSFUL BUSINESS MODEL IN NEW MARKETS
- Leverage our success in existing markets by replicating our
network architecture in a number of additional markets;
- Rapidly roll out our U.S. network to a total of approximately
50 intra-city networks in Tier I and Tier II markets;
- Expand our international market coverage to a total of
approximately 17 markets; and
- Deploy Internet service exchanges in selected U.S. and
international markets, replicating the successful AboveNet
design.
CREATE A LOW COST POSITION
- Provide our customers a cost effective alternative to
constructing their own networks and Internet connectivity
facilities;
- Install trunks with up to 864 fibers per route mile, which is
substantially more fiber than we believe our competitors are
installing, reducing our per mile cost to construct, upgrade
and operate our networks;
- Capitalize on the operating and maintenance cost advantages
generated by our newly constructed networks, with advanced
fiber optic technology;
- Create first mover advantages for us versus new entrants by
securing rights of way and building our networks quickly;
- Install spare conduit where practical to reduce expansion and
upgrade costs in the future and provide significant excess
capacity;
- Establish a low cost advantage for our Internet connectivity
services by utilizing our own network rather than leasing
capacity like some of our competitors; and
- Use our low cost position to remain price competitive with
other providers of broadband communications infrastructure and
Internet connectivity services.
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UTILIZE FIBER SWAPS AND STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF OUR
NETWORKS
- Opportunistically utilize fiber swaps, as we have in the past,
to expand our network reach at little incremental cost; and
- Enter into strategic relationships, such as our joint build
arrangement with Viatel, to cost effectively expand our
network footprint.
EXPAND PRODUCT AND SERVICE OFFERINGS TO UTILIZE DARK FIBER NETWORK CAPACITY
- Vertically expand our service offering by identifying
additional uses for our dark fiber network, such as with the
AboveNet acquisition, that will drive new revenue
opportunities and cost synergies;
- Maintain our competitive advantage by offering services that
do not directly compete with our carrier customers; and
- Focus on serving our carrier and large corporate/government
customers' bandwidth intensive communications needs.
INSTALL TECHNOLOGICALLY ADVANCED NETWORKS AND INTERNET SERVICE EXCHANGES
- Continue to install a technologically advanced network based
on self-healing SONET architecture;
- Use our self-healing SONET architecture to minimize the
interruption to service caused by fiber cuts;
- Construct our networks to deliver the high levels of
reliability, security and flexibility that our customers
demand;
- Continually monitor and maintain quality control over our
networks on a 24-hour basis;
- Continue to ensure our network is capable of providing the
highest commercially available capacity transmission (OC-192)
to support capacity intensive data applications such as Frame
Relay, ATM and Internet applications;
- Provide fault tolerant Internet service exchange facilities
designed to enable the uninterrupted operations necessary for
mission critical business applications; and
- Use our proprietary software to monitor our network
connections for latency and packet loss and automatically
reroute Internet traffic to avoid Internet congestion points.
BUILD ON MANAGEMENT EXPERIENCE AND METROMEDIA COMPANY RELATIONSHIP
Leverage the communications industry knowledge and sales expertise of
our management team and board of directors including:
- Stephen Garofalo, our Chairman and Chief Executive Officer and
founder, who has approximately 25 years of experience in the
cable installation business;
- Howard M. Finkelstein, our Vice Chairman who served in various
capacities in Metromedia Company and its affiliates over a
period of 16 years, including 9 years as President of
Metromedia Company's long distance telephone company, until
its merger with MCI/WorldCom, Inc. in 1993;
- Nick Tanzi, our President and Chief Operating Officer, who
served as Vice President - Sales from August 1997 to January
2000, and has held various executive positions in the
telecommunications industry;
- David Rand and Sherman Tuan who joined our Board of Directors
following the acquisition of AboveNet and have extensive
experience with Internet related ventures; and
- John W. Kluge, Stuart Subotnick and David Rockefeller, each of
whom bring extensive communications industry expertise and
corporate governance experience.
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BUILD-OUT OF NETWORKS
We have concentrated on developing and constructing our networks. We
have either obtained or are currently pursuing the acquisition of necessary
licenses, franchises and rights-of-way to construct these networks. In
constructing our fiber optic networks, we seek to create strategic alliances
with the engineering and construction management firms that we have engaged to
develop routes, easements and manage deployment plans. Firms with whom we are
allied in this regard have deployed local loop network infrastructure for ILECs
as well as for CLECs. Though we anticipate outsourcing much of the actual
construction to various construction firms, we maintain strict oversight of the
design and implementation of our fiber optic communications networks. We utilize
only advanced commercially available fiber. We have ordered a substantial
portion of our fiber optic cable from Lucent Technologies, Inc. However, we
believe that we could obtain advanced fiber from other suppliers on acceptable
terms.
Our existing intra-city networks currently consist of approximately
514,000 fiber miles covering in excess of 1,000 route miles in six of our
announced markets. Our inter-city network consists of approximately 132,000
fiber miles primarily covering our 255 route-mile network that we have built
between New York City and Washington D.C. We have also built or, contracted to
acquire, primarily through fiber swaps, a nationwide dark fiber network linking
our intra-city networks.
We have 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, our 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. We have also swapped strands
of fiber in the United States for strands of fiber on the Circe networks,
which connects a number of European markets. In addition to our inter-city
networks, we are constructing 16 intra-city networks throughout Europe.
Separately, we have also entered into a contract to acquire rights to dark
fiber network facilities in Toronto, Canada. Our networks will be
high-capacity broadband networks capable of supporting high-quality voice,
video, internet protocol and data traffic and built using a self-healing SONET
architecture.
THE INTERNET SERVICE EXCHANGE
Our Internet service exchanges provide co-location services, Internet
connectivity services, network management services and tools. Our Internet
service exchanges are designed to provide customers with the high performance,
scalability, connectivity, security, reliability and expertise they need to
enhance their business critical Internet applications. We create solutions for
our customers based on their specific business and technical requirements,
modifying the services as each customer's needs evolve. Our Internet related
services are primarily delivered through centralized campuses located near MAE
West and MAE East. Our New York facility is connected to our facility located
near MAE East by high speed, high capacity fiber optic cable. This facility is
intended to facilitate access to European Internet traffic. Our management
services and tools enable us and our customers to continuously manage their
Internet operations jointly, proactively and remotely.
INTERNET CONNECTIVITY
Our Internet connectivity services are designed to meet the
requirements of high bandwidth, business critical Internet operations by
providing highly reliable, scalable, non-stop and uncongested operations. As of
December 31, 1999, AboveNet had peering relationships with more than 385 network
providers, covering over 1,000 peering points. Any failure by AboveNet to
maintain and increase peering relationships would have a material adverse effect
on our business, results of operations and financial condition.
Our network is designed to minimize the likelihood of service
interruptions. Each ISX has multiple physical fiber paths into the facility. We
maintain multiple network links from multiple vendors and regularly check that
our network traffic traverses physically separated paths. This network
architecture enhances the availability of a customer's site, even in the event
of a link failure. In addition, since our customers' Internet operations often
experience network traffic spikes due to promotions or events, we have a policy
of maintaining significant excess capacity. We might not be able to expand or
adapt our telecommunications infrastructure to meet additional demand or our
customers' changing requirements on a timely basis and at a commercially
reasonable cost, or at all.
Our Internet connectivity services are also designed to reduce latency
and to enhance network performance. Our engineering personnel continuously
monitor traffic patterns and congestion points throughout the Internet and
dynamically reroute traffic flows to improve end-user response times. We also
enhance network performance by maintaining what we believe is among the largest
number of direct public and private network peering
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interconnections in the industry. For customers seeking a direct communications
link to the site of another customer that is located at the same ISX, we offer
highly secure, fast and efficient cross-connections.
CO-LOCATION SERVICES
We provide co-location services designed to meet the demands of
sophisticated, multi-vendor business critical Internet operations. We support
most leading Internet hardware and software system vendor platforms, including
those from Ascend Communications, Inc., Nortel Networks, Cisco Systems, Inc.,
Compaq Computer Corporation, Dell Computer Corporation, EMC Corporation,
Hewlett-Packard Company, International Business Machines Corporation, Lucent
Technologies Inc., Microsoft Corporation, Apple Computer, Inc., Network
Appliance, Inc., Silicon Graphics Inc., Sun Microsystems Inc. and 3Com
Corporation. This multi-vendor compatibility enables our customers to retain
control over their choice of technical solution and to integrate their Internet
operations into our existing information technology architecture. Because
business critical Internet operations are dynamic and often require timely
hardware and software upgrades to maintain targeted service levels, customers
have twenty-four hours a day, seven days a week physical and remote access to
the ISX facilities. Additional space and electrical power can be added as needed
in order to provide our customers with access to additional server co-location
services. Customers install and manage their own hardware and software at our
facilities. We do not provide any Web hosting services.
MANAGEMENT SERVICES AND TOOLS
Our management services and tools support business critical Internet
operations by providing the customer with detailed monitoring, reporting and
management tools to control their hardware, network, software and application
environments. Through our network management services and tools, customers are
able to remotely manage their business critical Internet operations housed at
our ISX facilities. We believe that this provides an important advantage to
enterprises that seek to outsource a portion of their Internet operations and to
link the management of the outsourced operations with in-house operations. Our
proactive management services and tools enable us to identify and resolve
hardware, software, network and application problems, often before the customer
is aware that a problem exists.
TECHNOLOGY
Our networks consist of fiber optic communications networks which allow
for high speed, high quality transmission of voice, data and video. Fiber optic
systems use laser-generated light to transmit voice, data and video in digital
formats through ultra-thin strands of glass. Fiber optic systems are generally
characterized by large circuit capacity, good sound quality, resistance to
external signal interference and direct interface to digital switching equipment
or digital microwave systems. We plan to install backbone fiber optic cables
containing up to 864 fiber optic strands, which have significantly greater
bandwidth than traditional analog copper cables. Using current electronic
transmitting devices, a single pair of glass fibers used by our network can
transmit up to 8.6 gigabits of data per second or the equivalent of
approximately 129,000 simultaneous voice conversations, which is substantially
more than traditional analog copper cable installed in many current
communications networks. We believe that continuing developments in compression
technology and multiplexing equipment will increase the capacity of each fiber
optic strand, thereby providing more bandwidth carrying capacity at relatively
low incremental costs. Our network is capable of using the highest commercially
available capacity transmission (OC-192) and thereby can handle advanced,
capacity-intensive data applications such as voice over Internet Protocol, video
teleconferencing, Frame Relay, ATM, multimedia and Internet-related
applications. In our intra-city networks, we offer end-to-end fiber optic
capacity, capable of utilizing SONET capable ring architecture, which has the
ability to route customer traffic in either direction around its ring design
thereby assuring that fiber cuts do not interrupt service to customers on our
networks. Our networks are also capable of supporting DWDM. Currently, a
state-of-the-art network operating system continuously monitors and maintains
quality control of networks on a 24-hour basis, alerts us of any degradation or
loss of fiber capacity and pinpoints the location of such degradation. This
network operating system also enables us to repair or replace impaired fiber
without any loss of service. In addition, the monitoring system automatically
reroutes traffic in the event of a catastrophic break in the system, enabling us
to ensure that our customers obtain continuous service.
Our connectivity services utilize our proprietary ASAP technology to
enhance Internet connectivity by monitoring all of our direct and indirect
network connections for congestion. ASAP automatically monitors all of our major
providers' and peers' direct and indirect connections on a real-time 24-hour
basis to identify congestion. If packet loss and congestion is detected on any
of the links that directly affect customers' performance, our network
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engineers are able to dynamically reroute traffic temporarily away from the
problem link. This functionality is particularly important for emerging
applications such as audio and video streaming and voice over the Internet.
FRANCHISE, LICENSE AND RELATED AGREEMENTS
When we decide to build a fiber optic communications network, our
corporate development staff seeks to obtain the necessary rights-of-way and
governmental authorizations. In some jurisdictions, a construction permit is all
that is required. In other jurisdictions, a license agreement, permit or
franchise is also required. Such licenses, permits and franchises are generally
for a term of limited duration. Where possible, rights-of-way are leased under
multi-year agreements with renewal options and are generally non-exclusive. We
lease underground conduit and pole space and other rights-of-way from entities
such as ILECs, utilities, railroads, IXCs, state highway authorities, local
governments and transit authorities. We strive to obtain rights-of-way that
afford us the opportunity to expand our communications networks as business
develops.
SALES AND MARKETING
Our sales and marketing strategy includes:
- positioning ourselves as the preferred facilities based
provider of broadband communications infrastructure and
Internet connectivity services;
- focusing on high dollar volume corporate and government
customers;
- emphasizing the cost advantages that will allow us to lease
our fiber optic infrastructure at fixed prices which represent
potentially significant savings for our large volume carrier
and corporate customers relative to their present build or buy
alternatives;
- achieve broad market penetration and increase brand
recognition for our Internet connectivity services among
Internet service providers, Internet content providers and Web
hosting companies; and
- Identify opportunities to cross-sell our Internet connectivity
services to our complementary infrastructure customer base.
We also believe that communications carrier and corporate and
government customers will be attracted to our dark fiber product and our
unmetered pricing structure. Dark fiber is installed fiber optic cable which is
not otherwise carrying a signal originated by the service provider, such as our
company, but which will carry a signal generated by the customer. We intend
initially to centralize our sales and marketing efforts on carrier customers
through a national sales team and we are currently in the process of hiring
additional sales professionals to focus on these customers. As we have
constructed fiber optic networks in new cities, we have hired sales forces in
these areas to target regional corporate, government and to a lesser extent
carrier customers and we plan to continue this strategy.
For our Internet connectivity services, we have developed a two-tiered
sales strategy to target leading Internet service providers, Internet content
providers and Web hosting companies through direct sales and channel
relationships. We maintain a direct sales force of highly trained individuals in
San Jose, California, New York, New York and Vienna, Virginia. Our sales force
is supported by our sales engineers and, in many circumstances, by our senior
management. We are also seeking to develop relationships with potential channel
partners including hardware vendors, value added resellers, system integrators,
application hosting and Web hosting companies in order to leverage their sales
organizations.
COMPETITION
Fiber optic systems are currently under construction both locally and
nationally. In New York City, for example, several franchisees have been granted
the right to install and operate a telecommunications network within the city.
Development of fiber optic networks is also continuing on a national scale. The
construction of these networks enables their owners to lease access to their
networks to other communications carriers or large corporate or government
customers seeking high bandwidth capacity, without these customers having to
incur costly expenditures associated with building networks of their own.
Alternatively, some network owners may choose to use their infrastructure to
provide switched voice and data services, competing directly with ILECs and
IXCs. Currently, we do not provide such services or plan to provide such
services.
In the cities where we plan to deploy fiber optic communications
networks, we face significant competition from the ILECs, which currently
dominate their local communications markets. We also face competition from
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CLECs and other potential competitors in these markets and will face competition
in the cities in which we plan to build our networks. Many of our competitors
have financial, management and other resources substantially greater than ours,
as well as other competitive advantages over us, including established
reputations in the communications market.
Various communications carriers already own fiber optic cables as part
of their communications networks. Accordingly, each of these carriers could, and
some do, compete directly with us in the market for leasing fiber capacity. In
addition, although CLECs generally provide a wider array of services to their
customers than we presently provide to our customers, CLECs nevertheless
represent an alternative means by which our potential customer could obtain
direct access to an IXC POP or other site of the customer's choosing. Thus,
CLECs could compete with us. In November 1999, the Federal Communications
Commission (the "FCC") ordered ILECs to provide nondiscriminatory access to
their dark fiber to other telecommunications services providers. This will
compete with us.
Some communications carriers and local cable companies have extensive
networks in place that could be upgraded to fiber optic cable, as well as
numerous personnel and substantial resources to undertake the requisite
construction to so equip their networks. To the extent that communications
carriers and local cable companies decide to equip their networks with fiber
optic cable, they are potential direct competitors provided that these
competitors are willing to offer this capacity to all of their customers.
We believe that as competition in the local exchange market develops, a
fundamental division between the needs of corporate, governmental and
institutional end users and residential end users will drive the creation of
differentiated communications services and service providers. We believe that
the CLECs, IXCs, ISPs, wireless carriers and corporate and government customers
on which we focus will have distinct requirements, including maximum
reliability, consistent high quality transmissions, capacity for high-speed data
transmissions, diverse routing and responsive customer service. We believe that
we will be able to satisfy the needs of such customers.
Our Internet connectivity services business is intensely competitive.
There are few substantial barriers to entering the co-location service business,
and we expect that we will face additional competition from existing competitors
and new market entrants in the future. We believe that participants in this
market must grow rapidly and achieve a significant presence in the market in
order to compete effectively. We believe that the principal competitive factors
in this market are uncongested connectivity, quality of facilities, level of
customer service, price, the financial stability and credibility of the
provider, brand name and the availability of network management tools. AboveNet
might not have the resources or expertise to compete successfully in the future.
Our current and potential competitors in this market include:
- - providers of co-location services, such as Exodus Communications, Inc.,
Frontier Corporation, which was acquired by Global Crossing Ltd., Hiway
Technologies, Inc., which was acquired by Verio Inc., and Globix
Corporation;
- - national and regional ISPs, such as Concentric Network Corporation,
PSINet, Inc., MCI WorldCom and certain subsidiaries of GTE Corporation;
- - global, regional and local telecommunications companies, such as
Sprint, MCI WorldCom and Regional Bell Operating Companies, some of
whom supply capacity to AboveNet; and
- - large information technology outsourcing firms, such as International
Business Machines Corporation and Electronic Data Systems.
REGULATION
As a provider of communications facilities, we are subject to varying
degrees of regulation in each of the jurisdictions in which we operate. In the
United States, some aspects of our services are regulated by the FCC and various
state regulatory bodies. In some local jurisdictions, we must obtain approval to
operate or construct our networks. In other countries where we operate we may
also be subject to regulations by the agencies having jurisdiction over the
provision of telecommunications services.
FEDERAL
In the United States, federal telecommunications law directly shapes
the market in which we compete. We offer two types of services -- the leasing of
dark fiber and the provision of telecommunications transmission services
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- -- 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. We believe that we are not a "telecommunications carrier" or
"common carrier" with respect to our leasing of dark fiber facilities, and
therefore that our dark fiber activities are not subject to special legal
requirements applicable to such carriers. First, 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, we do not offer dark fiber facilities as a common carrier,
I.E., to all potential users on an indiscriminate basis. Instead, we enter into
individualized negotiations on a selective basis with prospective lessees of our
dark fiber facilities to determine whether and on what terms to serve each
potential lessee. Our dark fiber offerings should therefore not be subject to
the common carrier jurisdiction of the FCC or to the common carrier provisions
of the Communications Act.
If our offering of dark fiber facilities were deemed to constitute
"telecommunications," then our revenues from such leases to end users (but not
to other telecommunication carriers), whether or not provided on a common
carrier basis, would become subject to assessment for the FCC's Universal
Service Fund 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. We
cannot predict the effect of this ruling on the rate of assessment, or what
rates of assessment will apply in future years. We may also be liable for
assessments by state commissions for state universal service programs.
TRANSMISSION SERVICES. With respect to our offering of telecommunications
services, however, we will likely operate as a common carrier, offering such
transmission services to all potential users indiscriminately, and therefore
will be subject to the regulatory requirements applicable to common carriers and
to telecommunications carriers. For example, we will be required, with respect
to our transmission services, to (1) provide such services indiscriminately upon
any reasonable request; (2) charge rates and adopt practices, classifications
and regulations that are just and reasonable; and (3) avoid unreasonable
discrimination in charges, practices, regulations, facilities and services. We
may also be required to file tariffs setting forth the rates for our services.
Under current FCC policies, these regulatory requirements should not impose any
substantial burdens on us. The FCC has recently determined, for example, that
providers of "access" services (intracity transmission services used to
originate and/or terminate interstate and foreign communications) need not file
tariffs and may offer such services to customers on a private, contractual
basis. Our revenues from transmission services will also be subject to FCC
Universal Service Fund assessments as discussed above, to the extent that these
services are purchased by end users. Since the revenues of our competitors will
be subject to comparable assessments, this should not reduce our
competitiveness. Also, being regulated as a "telecommunications carrier" will
give us certain legal benefits. In particular, we will be entitled, like other
competitive local exchange carriers to insist upon access to the existing
telecommunications infrastructure by interconnecting our fiber-optic networks
with incumbent local exchange carriers central offices and other facilities.
Under the 1996 Telecom Act, ILECs must, among other things: (i) allow
interconnection at any technically feasible point and provide service equal in
quality to that provided to others, (ii) provide unbundled access to network
elements, and (iii) provide access to their poles, ducts, conduits and other
rights-of-way.
ILECs must also provide "physical collocation" for other
telecommunications carriers. Physical collocation is an offering by an ILEC that
enables another telecommunications carrier to enter the ILEC's premises to
install, maintain and repair its own equipment that is necessary for
interconnection or access to the ILEC's network elements. An ILEC is required to
allocate reasonable amounts of space to carriers on a first-come first-served
basis. If space limitations or practical or technical reasons prohibit physical
collocation, an ILEC must offer "virtual collocation," by which the other
carrier may specify ILEC equipment to be dedicated to its use and electronically
monitor and control communications terminating in such equipment. We intend, in
some instances, to collocate portions of our
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network on the premises of certain ILECs. Our ability to do this on a
cost-effective basis will depend on the rates, terms and conditions established
for collocation, which will be established by state regulators in arbitration
proceedings and therefore may vary from one state to the next.
The FCC has responsibility under the 1996 Telecom Act's interconnection
provisions to determine what elements of an ILEC's network must be provided to
competitors on an unbundled basis. The FCC declared dark fiber an unbundled
network element under these provisions. The FCC's requirements for unbundling
were overturned by the Supreme Court, which ordered the FCC to re-evaluate the
standard it uses to determine which network elements need to be unbundled. In
response, the FCC recently issued an order affirming all but one of the network
elements and also stating for the first time that ILECs must provide access to
dark fiber as a separate element. In addition, federal district courts in a
number of jurisdictions have interpreted the 1996 Telecom Act to include dark
fiber as a network element, which must be unbundled. The FCC decision to treat
dark fiber as an unbundled element, as well as these court rulings, could
decrease the demand for dark fiber provided by us because our potential
customers will be able to obtain dark fiber from ILECs at cost-based rates. In
addition, the FCC has announced that state commissions may decide to add network
elements to the FCC's list of elements that are required to be unbundled by
carriers.
ILECs, CLECs and inter-exchange carriers are subject to other
requirements under the Communications Act, the FCC regulations and additional
federal telecommunications laws. These requirements may affect our business by
virtue of the inter-relationships that exist among us and many of these
regulated telecommunications carriers. For example, the FCC recently issued an
order requiring, among other things, that access charges (fees charged by ILECs
to IXCs for use of local telephone facilities for the origination and
termination of long-distance calls) shift in part from being usage driven to a
fixed flat cost-based structure. The FCC recently issued an order granting ILECs
greater pricing flexibility for their access services (both switched and
non-switched), which may permit the ILECs to compete more effectively against
some of our service offerings. While it is not possible to predict the precise
effect the access charge changes will have on our business or financial
condition, the reforms will reduce access charges paid by IXCs, likely making
the use of ILEC facilities by IXCs more attractive, which could have a material
adverse effect on the use of our fiber optic telecommunications networks by
IXCs. Bell Atlantic's proposed investment could subject us to additional
regulation by the FCC. Bell Atlantic is an ILEC and pursuant to the
Communications Act may not provide long distance service within its geographic
region until certain conditions are met. Companies in which an ILEC owns greater
than a ten percent ownership interest are subject to the same prohibitions. If
such prohibitions applied to us it would have a material adverse effect on our
business. For that reason, our agreement with Bell Atlantic prohibits it from
owning more than ten percent of us until the long-distance prohibitions no
longer apply to Bell Atlantic and its affiliates.
STATE
The 1996 Telecom Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits, or has the effect
of prohibiting, any person from providing any interstate or intrastate
telecommunications service. Nonetheless, this provision of the 1996 Telecom Act
should enable us and our customers to provide telecommunications services in
states that previously prohibited competitive entry.
However, states retain jurisdiction, 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.
Each state (and the District of Columbia, which is treated as a state
for the purpose of regulation of telecommunications services) has its own
statutory scheme for regulating providers of telecommunications services of they
are "common carriers" or "public utilities". As with the federal regulatory
scheme, we believe that the offering of dark fiber facilities does not make us
of common carrier or public utility so we would not be subject to this type of
regulation in most jurisdictions in which we currently have or plan to construct
facilities. Our offering of transmission services (as distinct from dark fiber
capacity), however, will likely be subject to regulation in each of these
jurisdictions to the extent that these services are offered for intra-state use.
Even though our facilities will be physically located in individual states, we
anticipate that most customers will use our facilities and services for the
purpose of originating and/or terminating interstate and foreign communications.
Under current FCC policies, any
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dedicated transmission service or facility that is used more than 10% of the
time for the purpose of inter-state or foreign communication is subject to FCC
jurisdiction to the exclusion of any state regulation.
State regulation of the telecommunications industry is changing
rapidly, and the regulatory environment varies substantially from state to
state. Our subsidiaries are currently authorized to provide intrastate
telecommunications services in California, Colorado, Connecticut, Delaware,
District of Columbia, Florida, Georgia, Illinois, 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, we do
not anticipate that the regulatory requirements to which we will be subject in
the states in which we currently intend to operate will have any material
adverse effect on our operations. These regulations may require, among other
things, that we obtain certification to operate, and that we provide
notification of, or obtain authorization for, certain corporate transactions,
such as the transaction with Bell Atlantic. In any event, we will incur certain
costs to comply with these and other regulatory requirements such as the filing
of tariffs, submission of periodic financial and operational reports to
regulators, and payment of regulatory fees and assessments, including
contributions to state universal service programs. In some jurisdictions, our
pricing flexibility for intra-state services may be limited because of
regulation, although our direct competitors will be subject to similar
restrictions. However, we make no assurances that future regulatory, judicial,
or legislative action will not materially adversely affect us.
Bell Atlantic 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 us, Bell Atlantic became a
significant customer of ours.
LOCAL
In addition to federal and state laws, local governments exercise legal
authority that affects our business. For example, local governments, such as the
City of New York, typically retain the ability to manage public rights-of-way,
subject to the limitation that local governments may not prohibit persons from
providing telecommunications services and local governments may not treat
telecommunication service providers in a discriminatory manner. Because of the
need to obtain approvals, local authorities affect the timing and costs
associated with our use of public rights-of-way. In addition, some local
authorities must approve or be notified of certain corporate transactions, such
as the Bell Atlantic transaction. These regulations may have an adverse effect
on our business.
FEDERAL REGULATION OF INTERNATIONAL SERVICE
Various regulatory requirements and limitations also will influence our
business as we enter the market for international telecommunications service. We
have entered into a 50/50 joint venture, ION, with a subsidiary of Racal that
contemplates jointly acquiring and selling international, facilities-based
telecommunications capacity between the U.S. and the United Kingdom and possibly
between the U.S. and other markets. ION is a U.S. international common carrier
subject to U.S. regulation under Title II of the Communications Act, and, we are
also a U.S. international common carrier subject to the same regulations. Under
current FCC rules, international carriers that do not exercise market power and
that are not affiliated with dominant foreign carriers (carriers possessing
market power in their local markets) are subject to relatively relaxed U.S.
regulation as nondominant international carriers. As a non-dominant common
carrier, ION and we are subject to, among other policies, the common carrier
obligation of nondiscrimination. In addition, FCC rules prohibit U.S. carriers
from bargaining for special concessions from certain foreign partners. ION and
we are required, under Sections 214 and 203 of the Communications Act to obtain
authorization and file an international service tariff containing rates, terms
and conditions prior to initiating service. As a nondominant carrier, ION and we
are eligible to seek "global" authorization under Section 214 to operate as
facilities-based and/or resale carrier. International carriers are also subject
to certain annual fees and filing requirements, such as the requirement to file
contracts with other carriers, including foreign carrier agreements, and reports
setting forth international circuit, traffic and revenue data. Failure to obtain
an appropriate U.S. license for international service or the revocation of a
license could materially adversely affect our future operations.
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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 we will not have to comply with the
International Settlement Policy.
The FCC has also made significant changes to other aspects of its
international regulatory regime that facilitate our international operations.
For example, it has approved the provisions of switched services over private
lines ("ISR") interconnected with the public switched network between the United
States and 22 other countries, including the UK and Germany. Recently, the FCC
took steps to streamline the application process for authority to provide
international services, relaxing further the rules for almost all international
services to almost all countries (with China, Taiwan, Russia, Saudi Arabia, the
notable exceptions). The FCC continues to refine its international service rules
to promote competition, reflect and encourage liberalization in foreign
countries, and reduce accounting rates toward cost. We are unable to predict how
the FCC will resolve the various pending international policy issues and the
effect of such resolutions on us.
REGULATION OF INTERNATIONAL OPERATIONS
Our international services are also subject to regulation in other
countries where we operate. Such regulation, as well as policies and regulations
on the European Union level, may impose separate licensing, service and other
conditions on our international service operations, and these requirements may
have a material adverse effect on our ability to operate. In addition to our
joint venture, ION, we have entered into a joint venture with Carrier 1 and
Viatel to develop a fiber network linking Germany's main cities. We also have an
agreement with Viatel to use Viatel's network in France, Germany, the UK and the
Netherlands. The following discussion is intended to provide a general outline
of certain regulations and current regulatory posture in certain foreign
jurisdictions in which we currently operate or intend to operate, and is not
intended as a comprehensive discussion of such regulations or regulatory
posture. Local laws and regulations differ significantly among these
jurisdictions, and, within such jurisdictions, the interpretation and
enforcement of such laws and regulations can be unpredictable.
THE EUROPEAN UNION
The European Union (the "EU") was established by the Treaty of Rome and
subsequent treaties. EU member states are required to implement directives
issued by the European Commission (the "EC") and the European Council by passing
national legislation. The EC and European Council have issued a number of key
directives establishing basic principles for the liberalization of the EU
telecommunications market. This basic framework has been advanced by a series of
harmonization directives, which include the so-called Open Network Provision
directives and the Licensing Directive of April 1997 and the Interconnection
Directive of June 1997, which address the procedures for granting license
authorizations and conditions applicable to such licenses and the
interconnection of networks and the interoperability of services as well as the
achievement of universal service. The Licensing Directive sets out framework
rules for the procedures associated with the granting of national authorizations
for the provision of telecommunications services and for the establishment or
operation of any infrastructure for the provision of telecommunications
services. It distinguishes between "general authorizations," which should
normally be easier to obtain since they do not require an explicit decision by
the national regulatory authority, and "individual licenses." EU member states
may impose individual license requirements for the establishment and operation
of public telecommunications networks and for the provision of voice telephony,
among other things. Consequently, our operations in those EU member states
comprising our European Network and our proposed operations in general, require
our 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 we currently conduct our 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 EC 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 EC's
ongoing
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1999 review of telecommunications European legislation. The proposals, if
implemented, may make it easier for us to operate under general authorizations
rather than obtaining individual licenses in each of the EU member states
comprising our 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 or TKG) which came
into force on August 1, 1997 establishes the basic regulatory framework for the
telecommunications sector. It was enacted to prepare the market for the
abolition of the voice telephony monopoly and to fulfil Austria's obligations
under the relevant EU liberalisation and harmonisation directives.
The TKG 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 TKG 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-subsidisation.
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 licence for the provision of leased
lines. According to the TKG, 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 TKG 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 (the "Belgian
Act"), 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 or BIPT. 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 BIPT.
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
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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.
Our 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 BIPT 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 ("ART").
The regulation of telecommunication services is set out in article
L34-1 of the French Post and Telecommunications Code ("PTC"), 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 PTC. On October 7, 1999, Metromedia Fiber Network France
SAS ("MFN France") was granted an L 33-1 license to be a public
telecommunications network operator. This license enables MFN 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.
MFN 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. MFN 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, MFN 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. MFN France
will also benefit from statutory easements on private properties.
MFN 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.
17
<PAGE>
GERMANY
The German Telecommunications Act of July 25, 1996 (the "German
Telecommunications Act") liberalized all telecommunications activities. Under
the German Telecommunications Act, voice telephony was liberalized as of January
1, 1998. The German Telecommunications Act has been complemented by several
Ordinances. The most significant Ordinances concern license fees, rate
regulation, interconnection, universal service, frequencies and customer
protection. Under the German regulatory scheme, licenses can be granted within
four license classes. A license is required for operation of transmission lines
that extend beyond the limits of a property and that are used to provide
telecommunications services for the general public. The licenses required for
the operation of transmission lines are divided into 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 December 31,
1999). A nationwide territorial class 3 license costs DM 10,600,000
(approximately $5.5 million at December 31, 1999). 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
we do 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.
ITALY
Under Presidential Decree No. 318 of September 19, 1997 on the
"Regulation for the implementation of European Directives in the
telecommunications field" (the "Italian Telecommunications Act") and Ministerial
Decree of November 25, 1997 on individual licenses, an individual license is
required, inter alia, for (i) the provision of voice telephony services, (ii)
the establishment and provision of public telecommunications networks, and (iii)
the establishment of a public network in order to provide voice
18
<PAGE>
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. ("MFN
Italy") filed with the Italian Telecommunications Regulatory Authority (the
"ITRA") an individual license for the establishment and provision of public
telecommunications networks in the Milan area (the "Network License"). Once
granted, the Network Licence will entitle MFN 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 ITRA.
Telecommunications operators belonging to defined categories have the
right to negotiate interconnection with any telecommunications operator within
the same categories. Accordingly, once MFN 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 "Interconnection Decree"), 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 ITRA the scheme of the agreement, highlighting those parts on
which they were unable to find a mutually acceptable solution. The ITRA 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
ITRA 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 TA") 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 TA, 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 ("OPTA") is responsible, among other things, for performing
registrations, issuing numbers, regulating interconnection rights and
obligations, adjudicating interconnection disputes, and generally enforcing the
obligations under the Dutch TA in respect of registered parties. Both Metromedia
Fiber Network B.V. ("MFN BV") and Metromedia Fiber Network ICN B.V. ("MFN ICN
BV") have been registered with OPTA as providers of public telecommunications
networks as of July 1999. Under these registrations, MFN BV and MFN ICN BV are
authorized to construct and publicly offer telecommunications networks, which
include dark fiber. As registered parties, both MFN BV and MFN ICN BV 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.
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<PAGE>
UNITED KINGDOM
The Telecommunications Act of 1984 (the "U.K. Act") provides a
licensing and regulatory framework for telecommunications activities in the
United Kingdom. The Secretary of State for Trade and Industry at the Department
of Trade and Industry (the "Secretary of Trade") is responsible for granting
licenses under the U.K. Act and for overseeing telecommunications policy, while
the Director General of Telecommunications (the "Director General") and his
office (the Office of Telecommunications ("OFTEL")) are responsible, among other
things, for enforcing the terms of such licenses. Both ION and Metromedia Fiber
Network UK Limited ("MFN UK") have been granted Public Telecommunication
Operator ("PTO") licenses. The PTO 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.
MFN UK will be used as the operating company in the United Kingdom and
has been granted code powers, which gives it statutory rights of way over land,
which override private rights.
Any operator who appears on the Annex II list on the OFTEL web-site
(www.oftel.gov.uk) has the right to negotiate interconnection as well as a
corresponding obligation to negotiate interconnection with any other operator in
Annex II. The terms, conditions and charges to be applied to interconnection
between operators who do not have significant market power are not specifically
regulated and are therefore subject to commercial agreement. All Annex II
operators are eligible to benefit from the terms and conditions and charges
which fixed-line operators with significant market power are obliged to offer by
the Interconnection Directive. In the United Kingdom, British Telecommunications
and Kingston Communications have significant market power for the provision of
fixed networks and services and leased lines. ION is included in the Annex II
list of operators on OFTEL's web-site and therefore has a right coupled with a
corresponding obligation to negotiate interconnection with any other operator on
the Annex II list. MFN UK is not currently included in the Annex II list but may
apply to OFTEL to be included in the list.
OTHER COUNTRIES
In addition to our operations in the above countries, we are also in
the process of incorporating or have incorporated local subsidiaries and are
applying for licenses in The Czech Republic, Denmark, Hungary, Ireland, Israel,
Japan, Spain and Switzerland.
EMPLOYEES
As of December 31, 1999, we employed 608 people, including 350 in
engineering and construction, 163 in sales and marketing and 95 in
administration. Our employees are not represented by any labor union. We
consider our relationship with employees to be good.
ITEM 2. PROPERTIES
Our principal properties currently are the fiber optic cable in place
and its component assets. We own substantially all of the communications
equipment required for our business. Our installed fiber optic cable is laid
under the various rights-of-way held by us. Our other fixed assets are located
at various leased locations in the geographic areas that we serve. Our executive
and administrative offices are located at our principal office at One North
Lexington Avenue, White Plains, New York. We lease this space (currently
approximately 29,000 square feet) under an agreement that expires in March 2003.
We lease additional office or operation space in many of the markets we are
building out our 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. We lease this space (approximately
19,850 square feet) under an agreement that expires in February 2008. PAIX'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.
ITEM 3. 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). Mr. Contardi alleges a cause of action for, among other things,
breach of a finder's fee
20
<PAGE>
agreement entered into between Mr. Sahagen and Mr. Contardi on or about November
14, 1996 and breach of an implied covenant of good faith and fair dealing
contained in the finder's fee agreement. Mr. Contardi is seeking, among other
things, a number of shares of the Company which we cannot currently ascertain
but believe to be approximately 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 we cannot currently ascertain but believe
to be approximately $4.9 million (calculated as of the date on which the
complaint was filed) and all costs and expenses incurred by him in this action.
We have filed an answer to the complaint and have raised affirmative defenses.
We have moved for summary judgment on the complaint.
In January 2000, Herman Goldsmith and Arnold S. Schickler commenced an
action against us, 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.
We intend to vigorously defend both these actions because we believe
that we acted appropriately in connection with the matters at issue in these two
cases. However, we can make no assurances that we will not determine that the
advantages of entering into a settlement outweigh the risk and expense of
protracted litigation or that ultimately we will be successful in defending
against these allegations. If we are unsuccessful in defending against these
allegations, an award of the magnitude being sought in the Goldsmith Litigation
would have a material adverse effect on our financial condition or results of
operations.
On or about October 20, 1997, Vento & Company of New York (referred to
as "VCNY") commenced an action against us, Stephen A. Garofalo, Peter Silverman,
the law firm of Silverman, Collura, Chernis & Balzano, P.C., Peter Sahagen,
Sahagen Consulting Group of Florida (collectively, the "Sahagen Defendants") and
Robert Kramer, Birdie Capital Corp., Lawrence Black, Sterling Capital LLC,
Penrush Limited, Needham Capital Group, Arthur Asch, Michael Asch and Ronald
Kuzon (the "Kramer Defendants") in the United States District Court for the
Southern District of New York (No. 97 CIV 7751) (the "VCNY Litigation"). On or
about May 29, 1998, VCNY filed an amended complaint. On or about July 2, 1999,
VCNY filed a second amended complaint. In its complaint, as amended, VCNY
alleged seven causes of action in connection with its sale of 900,000 shares
(not adjusted for subsequent stock splits) of class A common stock to Peter
Sahagen and the Kramer Defendants on January 13, 1997. The seven causes of
action includes: (i) violation of Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 promulgated under such Act; (ii) fraud and fraudulent
concealment; (iii) breach of fiduciary duty; (iv) negligent misrepresentation
and omission; and (v) breach of contract. VCNY 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 our portion of the
settlement, we are 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 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
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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, we are subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, we
believe that none of such current claims, or proceedings, individually or in the
aggregate, including the Contardi litigation and the Goldsmith litigation, will
have a material adverse effect on our financial condition or results of
operations, although we can make no assurances in this regard.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of security holders during the
fourth fiscal quarter of the year ended December 31, 1999.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION. Since October 28, 1997, the Class A Common Stock
has been listed and traded on the Nasdaq National Market (the "Nasdaq") under
the symbol "MFNX." The following table shows the range of reported high and low
closing prices per share of Class A Common Stock for each quarter within the
Company's two most recent fiscal years:
<TABLE>
<CAPTION>
1999 HIGH ($) LOW ($)
- ---- -------- -------
<S> <C> <C>
First Quarter ................................... 14 8 3/8
Second Quarter .................................. 23 3/4 13 11/16
Third Quarter ................................... 20 1/8 11
Fourth Quarter .................................. 24 9/16 12 1/8
</TABLE>
<TABLE>
<CAPTION>
1998 HIGH ($) LOW ($)
- ---- -------- -------
<S> <C> <C>
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
</TABLE>
The above prices reflect the effect our two-for-one stock splits of our
Class A and Class B Common Stock in the form of 100 percent stock dividends to
all shareholders completed August 28, 1998, December 22, 1998 and May 19, 1999.
Such prices reflect the effect our two-for-one stock split of our Class A and
Class B Common Stock with a record date for stockholders of March 14, 2000,
which is to be completed on or about April 17, 2000.
HOLDERS. As of March 14, 2000, there were approximately 441 record
holders of Class A Common Stock and three record holders of Class B Common
Stock. The closing price for the Class A Common Stock on such date was $91.875
per share as reported on the Nasdaq. The Company is aware that it has a
substantial number of additional shareholders who hold their shares through The
Depository Trust Company.
On October 28, 1997, in connection with our initial public offering, we
approved two share exchanges pursuant to which 153,039,040 shares of the old
common stock, par value $.01 per share, were exchanged for the same number of
shares of Class A Common Stock and a total of 134,452 shares of our Series B
Convertible Preferred Stock, par value $.01 per share were exchanged for
68,167,776 shares of our Class B Common Stock. Immediately thereafter, two
shareholders converted an aggregate of 629,232 shares of Class B Common Stock
into an equivalent number of shares of Class A Common Stock. These exchanges
were exempt from registration under the Securities Act of 1933, as amended, by
virtue of Section 3(a)(9) thereof.
DIVIDENDS. We have never declared or paid any cash dividends on our
Class A Common Stock or our Class B Common Stock and do not expect to do so in
the foreseeable future. We anticipate that all future earnings, if any,
generated from operations will be retained to finance the expansion and
continued development of our business. In addition, the terms of the indentures
for our senior notes restrict our ability to pay dividends on our shares of
common stock. Any future determination with respect to the payment of dividends
will be within the sole discretion of our board of directors and will depend
upon, among other things, our earnings, capital requirements, the current terms
of the indenture governing our 10% senior notes or other then-existing
indebtedness, applicable
22
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requirements of the Delaware General Corporation Law, general economic
conditions and such other factors considered relevant by our board.
We are not currently, and do not expect to become, subject to the
registration requirements of the Investment Company Act of 1940.
23
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ITEM 6. SELECTED FINANCIAL DATA
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data set forth below for Metromedia Fiber
Network 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 herein. The selected
financial data set forth below for Metromedia Fiber Network for the years ended
December 31, 1996 and 1995 and as of December 31, 1996 and 1995 are derived from
our audited consolidated financial statements not included elsewhere herein. The
selected financial data set forth below should be read in conjunction with Item
7. "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Item 8. "Financial Statements and Supplementary Data" included
elsewhere herein
<TABLE>
<CAPTION>
FISCAL YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
1999(c) 1998 1997 1996 1995
(in 000's, except per share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue $ 75,247 $ 36,436 $ 2,524 $ 236 $ 56
Expenses:
Cost of sales 49,019 13,937 3,572 699 --
Selling, general and administrative 51,010 14,712 6,303 2,070 3,886
Consulting and employment incentives (a) 397 248 19,218 3,652 --
Settlement agreement 1,932 3,400
Depreciation and amortization 45,965 1,532 757 613 162
--------- --------- --------- --------- ---------
Income (loss) from operations (73,076) 2,607 (27,326) (6,798) (3,992)
Interest income (expense), net (40,256) 1,927 1,067 (3,561) (327)
(Loss) from joint venture (1,606) (146) -- -- --
Income taxes -- 3,402 -- -- --
--------- --------- --------- --------- ---------
Net income (loss) $(114,938) $ 986 $ (26,259) $ (10,359) $ (4,319)
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
Net income (loss) applicable to common
stockholders per share-basic $ (0.28) $ 0.00 $ (0.14) $ (0.07) $ (0.04)
Net income applicable to common
stockholders per share-diluted N/A $ 0.00 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
Number of shares of common stock
assumed outstanding-diluted (b) N/A 439,048 N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
----------------------------------------------------------------
(in 000's )
<S> <C> <C> <C> <C> <C>
SUMMARY BALANCE SHEET DATA
Current assets $1,377,465 $ 665,823 $ 140,557 $ 645 $ 254
Working capital (deficiency) 1,127,945 555,050 133,030 (12,887) (11,542)
Fiber optic transmission network and 796,684 244,276 24,934 6,369 5,885
related equipment, net
Property and equipment, net 9,215 2,716 759 525 468
Total assets 3,959,985 974,417 167,378 7,977 7,077
Long-term debt 1,699,314 672,675 -- -- --
Total liabilities 2,125,309 816,903 17,838 14,835 12,413
Stockholders' equity (deficiency) 1,834,676 157,514 149,540 (6,858) (5,336)
</TABLE>
- --------------------
(a) Represents value of common stock, warrants and options issued to
consultants and officers to provide services to Metromedia Fiber Network.
(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.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis relates to our financial
condition and our results of operations for the three years ended December 31,
1999. This information should be read in conjunction with the Item 6. "Selected
Consolidated Financial Data" and our consolidated Financial Statements and
related notes thereto beginning on page F-1.
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain statements in this section are "forward-looking statements."
You should read the information under Part I, "Special Note Regarding
Forward-Looking Statements" for more information about our presentation of
forward-looking information.
GENERAL
We provide dedicated fiber optic infrastructure and high-bandwidth
Internet connectivity for our communications intensive customers. We are a
facilities-based provider of technologically advanced, high-bandwidth, fiber
optic communications infrastructure to communications carriers and corporate and
government customers in the United States and Europe. Through our acquisition of
AboveNet, we also provide "one-hop" connectivity that enables mission-critical
Internet applications to thrive, as well as high-bandwidth infrastructure,
including managed co-location services.
We currently have operations in, or under construction in, eleven Tier
I cities throughout the United States and seven selected international markets.
We intend to expand our presence to include approximately 50 Tier I and Tier II
markets in the United States and 17 major international markets.
Our existing intra-city networks consist of approximately 514,000 fiber
miles covering in excess of 1,000 route miles in the first eleven Tier I cities.
We are currently working to expand our existing local intra-city networks in
these metropolitan areas, and to construct additional intra-city networks in
approximately 40 additional Tier I and Tier II markets in the United States.
Our inter-city network currently consists of approximately 132,000
fiber miles primarily covering the 255 route-mile network that we have built
between New York City and Washington, D.C. We have also built or contracted to
acquire, (primarily through fiber swaps) a nationwide dark fiber network linking
our intra-city networks.
In addition to our domestic networks, we intend to expand our
international presence to include approximately 17 major markets. In February
1999, we entered into an agreement with Viatel, Inc. and Carrier 1 Holdings,
Ltd. to jointly build a dark fiber inter-city network between selected cities
throughout Germany. Once completed, the German network will consist of
approximately 320,000 fiber miles covering in excess of 1,450 route miles
connecting 14 major cities. We have also swapped strands of fiber in the United
States for strands of fiber on the Circe network, which connects a number of
European markets. In addition to our inter-city networks, we are constructing 16
intra-city networks throughout Europe. Separately, we have also entered into
a contract to acquire rights to dark fiber network facilities in Toronto,
Canada.
On September 8, 1999, we completed the acquisition of AboveNet. The
holders of AboveNet common stock received 2.35 shares of our class A common
stock for each share of AboveNet common stock. AboveNet is a leading provider of
facilities-based, managed services for customer-owned Web servers and related
equipment, known as co-location, and high performance Internet connectivity
solutions for electronic commerce and other business critical Internet
operations. PAIX, AboveNet's wholly owned subsidiary, serves as a packet
switching center for ISPs. PAIX also offers secure, fault-tolerant co-location
services to ISPs. 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, we entered into a
securities purchase agreement with Bell Atlantic, under which Bell Atlantic
would agreed to purchase up to approximately 51.2 million newly issued shares of
our 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 our 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 our
outstanding shares. Bell Atlantic has also agreed to pay us $550 million over
the next three years in exchange for delivery of fiber optic facilities over the
next five years. The proceeds from these two transactions will be used to fund
the expansion of our network.
Most of our contracts for the provision of dark fiber are accounted
for as operating leases under which we recognize recurring monthly revenues.
For certain other contracts we recognize 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
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<PAGE>
equipment subsequent to June 30, 1999, be accounted for in accordance with real
estate accounting rules. We believe 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 us, 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 we deliver the fiber. As a
result, this change in accounting treatment reduces the revenue and income that
we recognize 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 we 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, we previously recorded average revenues of $20.0 million over the 5
years during which we delivered the dark fiber. By contrast, the real estate
accounting rules of FIN 43 would require us to recognize revenue of $4.0 million
per year over the 25 year term of the contract, even though we would receive a
cash payment of $100.0 million when the contract is signed.
We implemented this method of accounting for our 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 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.
STOCK SPLITS. On August 28, 1998, December 22, 1998, and May 19, 1999, we
completed two-for-one stock splits of our 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. 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
stock split will be effective on or about April 17, 2000.
All share and per share amounts presented herein give retroactive
effect to the three stock splits effected in 1998 and 1999, and to the pending
stock split. As of December 31, 1999, adjusted for the effect of the stock
dividends, we had 411,116,800 class A common shares outstanding and 67,538,544
class B common shares outstanding.
RESULTS OF OPERATIONS
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 our 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 our 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 the
Company's fiber optic network, as well as the higher fixed costs related to our
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 our 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. We 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 we 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. We 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 our 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 our 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 our 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 we
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. We 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 our 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 our 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 our network in
service and the allocated costs of the network related to revenue recognized for
grants of indefeasible rights of use to portions of our network and sales type
leases of portions of our dark fiber classified as capital leases. Costs of
sales, as percentages of revenue for 1998 and 1997 were 38% and 142%,
respectively, declining as a result of the significant increase in the number of
customers and revenues. 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 our network
expansion.
CONSULTING AND EMPLOYMENT INCENTIVES EXPENSE. Consulting and employment
incentives expense for 1998 were $0.2 million compared with $19.2 million for
1997. Consulting and employment incentives expense incurred in 1997 reflects the
value of stock options issued to key employees, officers and directors in order
to attract or retain their services. For 1998, the amount recorded reflects
amortization for the unvested component of options issued in 1997 to key
employees.
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SETTLEMENT AGREEMENT. We recorded $3.4 million for a settlement agreement in
1998. The amount was recorded in the first quarter of 1998 for the expense
associated with the issuance of stock options and payment of cash related to a
settlement agreement.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense for
1998 was $1.5 million or 88% greater than depreciation and amortization expense
of $800,000 during 1997. The increases in depreciation and amortization expense
resulted from increased investment in our completed fiber optic network and
property and equipment.
INTEREST INCOME (EXPENSE). Interest income for 1998 was $8.8 million or 389%
greater than interest income of $1.8 million during 1997. Interest income during
1998 was derived from investment of our excess cash received as proceeds from
our initial public offering in October 1997 and the additional cash received in
November 1998 from the proceeds of our $650 million note issuance. Interest
expense increased in 1998 to $6.9 million as compared to $0.7 million for 1997.
The increase in interest expense reflects interest accrued for the senior notes
issued in November 1998.
INCOME (LOSS) FROM JOINT VENTURE. We recorded a $100,000 loss from our 50% share
of the ION joint venture's loss for 1998. The loss primarily represents startup
costs and operating activities for the joint venture.
INCOME TAXES. We recorded a provision for income taxes for 1998 in the amount of
$3.4 million. This represents an estimated effective tax rate, for federal and
state taxes, of 77.5%.
NET INCOME (LOSS). Net income was $1.0 million for 1998, as compared to a net
loss of $26.3 million for 1997. For 1998, basic net income per share was $0.00
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 our initial public offering as
compared to net interest expense.
LIQUIDITY AND CAPITAL RESOURCES
Our 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 and expenses relating to such initial
public offering. In addition, on November 25, 1998, we issued and sold 10%
Senior Notes due 2008 which generated net proceeds of $630.0 million. Also, on
October 25, 1999, we issued and sold 10% Senior Notes due 2009 which generated
net proceeds of $974.2 million. On October 7, 1999, we entered into a securities
purchase agreement with Bell Atlantic, under which Bell Atlantic would purchase
shares of our class A common stock and a convertible subordinated note. The
agreement closed on March 6, 2000 and generated net proceeds of approximately
$1.7 billion. In addition, Bell Atlantic has agreed to purchase a minimum of
$550 million of fiber optic facilities payable over the next three years.
For the year ended December 31, 1999, our 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, we 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 our 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, we 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. We anticipate
that we will continue to incur net operating losses as we expand and complete
our existing networks, construct additional networks and market our services to
an expanding customer base. We anticipate spending approximately $3.4 billion
through the year ending December 31, 2001 on the build-out of our fiber optic
networks and Internet service exchanges in 50 major markets in the United States
and in 17 major international markets. We believe that the net proceeds from the
investment by Bell Atlantic, the net proceeds from the senior notes, cash on
hand, certain vendor financing and cash generated by operations (including
advance customer payments), will enable us to fully fund the planned build-out
of our networks and our other working capital needs through the year ended
December 31, 2001. The indentures governing our debt obligations permit us to
incur additional indebtedness to finance the engineering, construction,
installation, acquisition, lease, development or improvement of
telecommunications assets. As a result, we may also consider from time to time
private or public sales of additional equity or debt securities, entering into
other credit facilities and financings,
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depending upon market conditions, in order to finance the continued build-out of
our network. We cannot assure you that we will be able to successfully
consummate any such financing on acceptable terms or at all.
We expect to continue to experience negative cash flows for the
foreseeable future. In addition, as part of our acquisition of AboveNet, we
recorded approximately $1.6 billion in goodwill and other intangible assets,
which we are amortizing over periods up to twenty years. Accordingly, we expect
to report further net operating losses for the foreseeable future.
YEAR 2000 SYSTEM MODIFICATIONS
Year 2000 has had no impact on our processing of date-sensitive
information and network systems. The potential for Year 2000 problems is the
result of computer programs being written using two digits (rather than four) to
define the year 2000, which could result in miscalculations or system failures
resulting from recognition of a date using "00" as the year 1900 rather than the
year 2000.
The Year 2000 effort has had a nominal cost impact. Such costs have
been expensed as incurred, except to the extent such costs have been incurred
for the purchase or lease of capital equipment.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the normal course of business, the financial position of the Company
is routinely subjected to a variety of risks. In addition to the market risk
associated with interest movements on the Company's outstanding debt, the
Company is subject to other types of risk such as the collectibility of its
accounts receivables. The Company'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 Bell
Atlantic in March 2000. The fair value of the long-term debt at December 31,
1999 was $1.65 billion. A 10% decrease and a 10% increase in the level of
interest rates would result in an increase in the fair value of the Company's
long term obligation by $112.6 million and a decrease in the fair value of the
Company's long term obligation by $94.3 million respectively.
The Company has also purchased a portfolio of U.S. government
securities, which mature at dates sufficient to provide for payment, in full, of
interest on the Company'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.
The Company had $1.2 billion in cash and cash and equivalents at
December 31, 1999. To the extent the Company's cash and cash equivalents exceed
its short-term funding requirements the Company 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this item is incorporated by reference to pages F-1
through F-29 and S-1 herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND FINANCIAL DISCLOSURE.
None.
PART III
The information called for by this Part III (Items 10, 11, 12 and 13)
is not set forth herein because the Company intends to file with the SEC not
later than 120 days after the end of the fiscal year ended December 31, 1999 the
Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders to be
held on May 16, 2000. Such information to be included in the Definitive Proxy
Statement is hereby incorporated into Items 10, 11, 12 and 13 by this reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
a) 1. Financial Statements:
See Index to Consolidated Financial Statements on Page F-1.
2. Financial Statement Schedules:
Schedule II Valuation and Qualifying Accounts
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All other schedules not listed above have been omitted since
they are either not applicable or the information is contained
elsewhere in the financial statements or the notes thereto, or the
amounts are insignificant or immaterial.
b) Current Reports on Form 8-K
1. On June 30, 1999 the Company filed a Form 8-K related to the
Company entering into an Agreement and Plan of Merger among the
Company, Magellan Acquisition, Inc. and AboveNet Communications
Inc dated June 22, 1999.
2. On September 10, 1999 the Company filed a Form 8-K announcing its
completion of its merger with AboveNet Communications Inc. on
September 8, 1999.
3. On October 14, 1999 the Company filed a Form 8-K/A in connection
with the acquisition or disposition of assets Company's in the
completion of its merger with AboveNet Communications Inc.
pursuant to the Agreement and Plan of Merger. 6.
4. On October 18, 1999 the Company filed a Form 8-K announcing that
Bell Atlantic Investments, Inc., a wholly owned subsidiary of Bell
Atlantic Corporation had entered into a Securities Purchase
Agreement on October 7, 1999 with the Company.
5. On October 26, 1999 the Company filed a Form 8-K/A Amendment No. 2
in connection with the conversion of AboveNet shares into the
Company shares in the completion of its merger with AboveNet
Communications Inc. pursuant to the Agreement and Plan of Merger.
6. On November 24, 1999 the Company filed a Form 8-K in connection
with its completion of its public underwritten registered
offerings of $750 million of it 10% Senior Notes due 2009.
As of the date of the filing of this Annual Report on Form 10-K no
proxy materials have been furnished to security holders. Copies of all
proxy materials will be sent to the Commission in compliance with its
rules.
c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.1 Form of Amended and Restated Certificate of Incorporation of
Metromedia Fiber Network, Inc. (incorporated by reference to
the Company's Registration Statement on Form S-1 (Registration
No. 333-33653)).
3.2 Form of Amended and Restated Bylaws of Metromedia Fiber
Network, Inc. (incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No.
333-33653)).
4.1 Specimen Class A Common Stock Certificate of Metromedia Fiber
Network, Inc. (incorporated by reference to the Company's
Registration Statement on Form S-1 (Registration No.
333-33653)).
4.2 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 the Company'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 the Company'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 the Company's
Amendment No. 1 to Registration Statement on Form S-4
(Registration No. 333-71129)).
</TABLE>
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<TABLE>
<S> <C>
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 the Company'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 the Company's
current Report on Form 8-K filed November 24, 1999.)
10.1 Form of Metromedia Fiber Network, Inc. 1997 Incentive Stock
Plan (incorporated by reference to the Company'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 the Company's Registration
Statement on Form S-1 (Registration No. 333-33653)).
10.3 Employment Agreement by and between National Fiber Network,
Inc. and Howard M. Finkelstein, dated as of April 30, 1997
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-33653)).
10.4 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 the Company's Registration
Statement on Form S-1 (Registration No. 333-33653)).
10.5 Franchise Agreement between the City of New York and National
Fiber Network, Inc., dated as of December 20, 1993
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-33653)).
10.6 Conduit Occupancy Agreement by and between New York Telephone
Company and National Fiber Network, Inc., dated as of May 1993
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-33653)).
10.7 Consulting Agreement between National Fiber Network and
Realprop Capital Corporation, dated as of February 1, 1996
(incorporated by reference to the Company's Registration
Statement on Form S-1 (Registration No. 333-33653)).
10.8 Letter Agreement from National Fiber Network, Inc. to Peter
Sahagen, dated February 11, 1997 (incorporated by reference to
the Company'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 Associates, dated as of March 19, 1997
(incorporated by reference to the Company'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 the Company'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 the Company'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 the Company's Registration
Statement on Form S-1 (Registration No. 333-33653)).
</TABLE>
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<TABLE>
<S> <C>
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 the Company's 1997
Annual Report on Form 10-K (File No.000-23269)).
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 the Company's 1997 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 the
Company's 1997 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 the Company'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 the Company'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 Whitehall Bank & Trust
Company (incorporated by reference to the Company'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 the Company's Amendment No. 1 to
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 the Company's Amendment No. 1 to
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 the Company's Amendment No. 1 to
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.
21.1* List of Subsidiaries of Metromedia Fiber Network, Inc.
23.1* Consent of Ernst & Young LLP.
24.1 Power of Attorney from officers and directors.
27.1* Financial Data Schedule.
</TABLE>
- -----------------------
* Filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, as amended, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
METROMEDIA FIBER NETWORK, INC.
By: /s/ STEPHEN A. GAROFALO
-----------------------------------
Stephen A. Garofalo
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Dated: March 17, 2000
We, the undersigned officers and directors of Metromedia Fiber Network,
Inc., hereby severally constitute Arnold L. Wadler, Howard M. Finkelstein and
Gerard Benedetto, and each of them singly, our true and lawful attorneys with
full power to them, and each of them singly, to sign for us and in our names in
the capacities indicated below, any and all reports (including any amendments
thereto), with all exhibits thereto and any and all documents in connection
therewith, and generally do all such things in our name and on our behalf in
such capacities to enable Metromedia Fiber Network, Inc. to comply with the
applicable provisions of the Securities Exchange Act of 1934, as amended, and
all requirements of the Securities and Exchange Commission, and we hereby ratify
and confirm our signatures as they may be signed by our said attorneys, or
either of them, to any and all such reports (including any amendments thereto)
and other documents in connection therewith.
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange of 1934, as amended, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE OR CAPACITIES DATE
---------- ------------------- ----
<S> <C> <C>
/s/ STEPHEN A. GAROFALO Chairman of the Board and March 17, 2000
- ----------------------------------- Chief Executive Officer
Stephen A. Garofalo
/s/ HOWARD M. FINKELSTEIN Vice Chairman of the Board and March 17, 2000
- ----------------------------------- Director
Howard M. Finkelstein
/s/ NICHOLAS M. TANZI President and Chief Operating March 17, 2000
- ----------------------------------- Officer
Nicholas M. Tanzi
/s/ GERARD BENEDETTO Senior Vice President, March 17, 2000
- ----------------------------------- Chief Financial Officer and
Gerard Benedetto Chief Accounting Officer
/s/ SILVIA KESSEL Executive Vice President and March 17, 2000
- ----------------------------------- Director
Silvia Kessel
/s/ ARNOLD L. WADLER Executive Vice President, March 17, 2000
- ----------------------------------- General Counsel,
Arnold L. Wadler Secretary and Director
/s/ SHERMAN TUAN Chief Executive Office of March 17, 2000
- ----------------------------------- AboveNet and Director
Sherman Tuan
</TABLE>
33
<PAGE>
<TABLE>
<S> <C> <C>
/s/ DAVID RAND Chief Technology Officer and March 17, 2000
- ----------------------------------- Director
David Rand
/s/ VINCENT A. GALLUCCIO Senior Vice President and March 17, 2000
- ----------------------------------- Director
Vincent A. Galluccio
/s/ JOHN W. KLUGE Director March 17, 2000
- -----------------------------------
John W. Kluge
/s/ STUART SUBOTNICK Director March 17, 2000
- -----------------------------------
Stuart Subotnick
/s/ DAVID ROCKEFELLER Director March 17, 2000
- -----------------------------------
David Rockefeller
/s/ LEONARD WHITE Director March 17, 2000
- -----------------------------------
Leonard White
</TABLE>
34
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Auditors . . . . . . . . . . . . . . . . . . . . . . . . . F - 2
Consolidated Balance Sheets as of December 31, 1999 and 1998 . . . . . . . . . . F - 3
Consolidated Statements of Operations for the years ended December 31, 1999, F - 4
1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows for the years ended December 31, 1999, F - 5
1998 and 1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for F - 6
the years ended December 31, 1999, 1998 and 1997 . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . F - 8
Schedule II, Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . S - 1
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Metromedia Fiber Network, Inc.
We have audited the accompanying consolidated balance sheets of
Metromedia Fiber Network, Inc. and Subsidiaries (the "Company") as of December
31, 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. Our audits also included the financial
statement schedule listed in the index at Item 14(a). These consolidated
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with 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. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
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-2
<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-3
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------
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-4
<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 ........................................................... $ 649,441 $ 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-5
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
($000'S)
<TABLE>
<CAPTION>
SERIES A & B CLASS A CLASS B
PREFERRED 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
-------- -------- -------- -------- -------- -------- -------- --------
<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 ......................... 133,421 -- -- 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
-------- -------- -------- --------
</TABLE>
F-6
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
(CONTINUED)
($000'S)
<TABLE>
<CAPTION>
SERIES A & B CLASS A CLASS B
PREFERRED STOCK COMMON STOCK COMMON STOCK COMMON STOCK
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------ ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of options to employees ......... -- -- -- -- -- -- -- --
Issuance of warrants in
connection with settlement
agreement ............................... -- -- -- -- -- -- -- --
Issuance of common stock in
connection with the exercise
of warrants ............................. -- -- -- -- 8,636 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 ................... -- -- -- -- 310,424 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 ........................ -- -- -- -- 14,482 144 -- --
Warrant exercises ........................ -- -- -- -- 2,874 29 -- --
Consulting fees .......................... -- -- -- -- 30 -- -- --
Net loss for the year .................... -- -- -- -- -- -- -- --
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>
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 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
Comprehensive loss --
Net loss ............................... (114,938) -- (114,938)
Foreign currency translation adjustment. -- -- (8,677) (8,677)
Comprehensive loss........................ -- -- -- (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 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
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)
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.
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.
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)
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 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.
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)
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
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 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
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)
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
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
F-12
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2: BUSINESS ACQUISITIONS (CONTINUED)
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 ..................... $ (.49) $ (0.20)
</TABLE>
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.
F-13
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
F-14
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6: INVESTMENTS IN AND ADVANCES TO JOINT VENTURES (CONTINUED)
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.
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
F-15
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11: SETTLEMENT AGREEMENTS (CONTINUED)
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.
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.
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.
F-16
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: EQUITY TRANSACTIONS (CONTINUED)
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 51.2 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.
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
F-17
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: EQUITY TRANSACTIONS (CONTINUED)
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.
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.
F-18
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13: EQUITY TRANSACTIONS (CONTINUED)
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
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-19
<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
Ranges of Number Average Average Number Average
Exercise Outstanding at Remaining Exercise Exercisable Exercise
Prices 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-20
<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>
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-21
<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 Code. All full-time
employees are eligible to participate in the Plan at the beginning of the
quarter following three months
F-22
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16: 401(K) PLAN (CONTINUED)
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-23
<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
F-24
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
York, No. 98 CIV 4140(JGK). Mr. Contardi alleges a cause of action for, among
other things, breach of a finder's fee agreement entered into between Mr.
Sahagen and Mr. Contardi on or about November 14, 1996 and breach of an implied
covenant of good faith and fair dealing contained in the finder's fee agreement.
Mr. Contardi is seeking, among other things, a number of 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 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.
F-25
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18: COMMITMENTS AND CONTINGENCIES (CONTINUED)
Four other complaints, which are virtually identical to the complaint
in KAUFMAN V. TUAN, have also been filed in the Delaware Court of the Chancery.
None of these four complaints have been served. The four actions are captioned
BROSIOUS V. TUAN, et al, Del. Ch. C.A. No. 17271NC, CHONG V. TUAN, et al, Del.
Ch. C.A. No. 17281NC, EHLERT V. TUAN, et al, Del. Ch. C.A. No. 17284NC, HORN V.
TUAN, et al, Del. Ch. C.A. No. 17300NC.
In addition, the Company is subject to various claims and proceedings
in the ordinary course of business. Based on information currently available,
the Company believes that none of such current claims, or proceedings,
individually, or in the aggregate, including the 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-26
<PAGE>
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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-1
<PAGE>
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AMENDED AND RESTATED
FRANCHISE AGREEMENT
Between
THE CITY OF NEW YORK
and
METROMEDIA FIBER NETWORK NYC, INC.
Franchise for Local High-Capacity
Telecommunications Services
Dated February 28, 2000
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
Page
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SECTION 1 -- DEFINED TERMS ............................................... 2
SECTION 2 -- GRANT OF AUTHORITY .......................................... 7
2.1 Term ......................................................... 7
2.2 Conditions to Execution ...................................... 7
2.2.1 Certain Actions by the Company Before Execution ........ 7
2.2.2 Vendox ................................................. 7
2.3 Nature of Franchise, Effect of Termination and Renewal ....... 7
2.3.1 Nature of Franchise .................................... 7
2.3.2 Effect of Termination .................................. 8
2.3.3 Renewal ................................................ 8
2.4 Conditions and Limitations on Franchise ...................... 8
2.4.1 Not Exclusive .......................................... 8
2.4.2 Construction of System ................................. 9
2.4.3 Public Works and Improvements .......................... 9
2.4.4 No Waiver .............................................. 10
2.4.5 No Release ............................................. 10
2.5 Renegotiation of Agreement ................................... 10
SECTION 3 -- SERVICE ..................................................... 11
3.1 No Interference .............................................. 11
3.2 No Monopoly .................................................. 11
3.3 No Discrimination ............................................ 11
3.4 Service ...................................................... 11
SECTION 4 -- TARIFF FILINGS .............................................. 1l
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4.1 Tariffs ....................................................... 11
SECTION 5 -- CONSTRUCTION AND TECHNICAL REQUIREMENTS ...................... 12
5.1 General Requirement ........................................... 12
5.2 Quality ....................................................... 12
5.3 Licenses and Permits .......................................... 12
5.4 Relocation of the System ...................................... 12
5.4.1 New Grades or Lines...................................... 12
5.4.2 City Authority to Move Wires ............................ 12
5.4.3 Company Required to Move Wires .......................... 13
5.5 Protect Structures ............................................ 13
5.6 No Obstruction ................................................ 13
5.7 Safety Precautions ............................................ 13
5.8.1 General Requirement ..................................... 13
5.8.2 Indemnification ......................................... 14
5.8.3 Other Purposes .......................................... 14
1.1.4 Withdrawals from the Performance Bond/Security Fund ..... 15
5.8.5 Notice of Withdrawals ................................... 15
5.8.6 Replenishment ........................................... 15
5.8.7 Not a Limit on Liability ................................ 16
5.8.8 Form .................................................... 16
SECTION 6--EMPLOYMENT AND PURCHASING ...................................... 16
6.1 Right to Bargain Collectively ........................... 16
6.2 Local Preference ........................................ 16
6.3 City Vendors ............................................ 17
6.4 Equal Employment Opportunity ............................ 17
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6.5 Local Law 33 ............................................ 17
6.6 Enforcement ............................................. 17
SECTION 7 -- COMPENSATION AND OTHER PAYMENTS .............................. 18
7.1 Compensation ............................................ 18
7.1.1 Compensation ............................................ 18
7.1.2 Timing .................................................. 19
7.1.3 Records and Audits ...................................... 19
7.1.4 Reservation of Rights ................................... 19
7.1.5 Ordinary Business Expense ............................... 19
7.2 Other Payments .......................................... 20
7.2.1 Franchising Costs ....................................... 20
7.2.2 Future Costs ............................................ 20
7.3 No Credits or Deductions ................................ 20
7.4 Interest on Late Payments ..................................... 21
7.5 Method of Payment ............................................. 21
7.6 Continuing obligation and Holdover ............................ 22
SECTION 8 -- OVERSIGHT AND REGULATION ..................................... 22
8.1 Protection From Disclosure .................................... 22
8.2 Oversight ..................................................... 22
8.3 Notification to City .......................................... 22
8.4 Regulation by City ............................................ 23
8.5 Reports ....................................................... 23
8.5.1 Status Reports .......................................... 23
8.5.2 Financial Reports ....................................... 23
8.5.3 Ownership Reports ....................................... 24
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Page
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8.5.4 Additional Reports ...................................... 24
8.5.5 Additional Information and Reports ...................... 24
8.6 Additional Filings ...................................... 24
8.7 Books and Records/Audit ................................. 24
8.7.1 Books and Records ....................................... 24
8.7.2 Right of Inspection ..................................... 25
8.8 Compliance With "Investigations Clause" ....................... 25
SECTION 9 -- RESTRICTIONS AGAINST ASSIGNMENT AND OTHER TRANSFERS .......... 26
9.1 Transfer of Interest .......................................... 26
9.2 Transfer of Control or Stock .................................. 26
9.3 Petition ...................................................... 26
9.4 Consideration of the Petition ................................. 27
9.5 Conditions .................................................... 27
9.6 Permitted Encumbrances ........................................ 27
9.7 Consent Not a Waiver .......................................... 28
9.8 Petitions From Persons Other Than the Company
Seeking Control Over the Company .............................. 28
SECTION 10 -- LIABILITY AND INSURANCE ..................................... 28
10.1 Liability and Indemnity ....................................... 28
10.1.1 Company ................................................ 28
10.1.2 No Liability For Public Work, etc ...................... 29
10.1.3 No Liability for Damages ............................... 29
10.1.4 Defense of Claim, etc .................................. 29
1.2 Insurance ..................................................... 30
10.2.1 Specifications ......................................... 30
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10.2.2 Maintenance ............................................ 30
10.2.3 Adjusted Insurance Coverage ............................ 30
10.2.4 Liability Not Limited .................................. 31
SECTION 11 -- SPECIFIC RIGHTS AND REMEDIES ................................ 31
11.2 Default ....................................................... 31
11.2.1 Events of Default ...................................... 31
11.2.2 Cure Procedures ........................................ 32
11.2.3 Remedies of the City ................................... 32
11.3 Termination ................................................... 33
11.3.1 Termination Events ..................................... 33
11.3.2 Rights Upon Termination ................................ 34
11.3.3 Price .................................................. 34
11.3.4 Company's Obligations .................................. 35
11.4 Removal ....................................................... 36
11.4.1 Discretion of DoITT .................................... 36
11.4.2 Failure to Commence Removal ............................ 37
11.4.3 No Condemnation ........................................ 37
11.6 Other Provisions .............................................. 38
SECTION 12 -- SUBSEQUENT ACTION ........................................... 38
12.1 Compensation .................................................. 38
12.2 Procedure for Subsequent Invalidity ........................... 39
12.2.1 Declaration of Invalidity or Injunction ................ 39
1.1.2 Continued Compliance .................................... 39
12.2.3 Negotiations to Amend Agreement ........................ 39
SECTION 13 -- MISCELLANEOUS ............................................... 40
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Page
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13.1 Appendices .................................................... 40
13.2 Action Taken by City .......................................... 40
13.3 Entire Agreement .............................................. 40
13.4 Delays and Failures Beyond Control of Company ................. 40
13.5 Notices ....................................................... 41
13.6 General Representations, Warranties and
Covenants of the Company ...................................... 41
13.6.1 Organization, Standing, Power and Ownership ............ 41
13.6.2 Authorization; Non-Contravention ....................... 41
1.1.3 Consent ................................................. 42
13.6.4 Compliance with Law .................................... 42
13.6.5 Litigation; Investigations ............................. 42
13.6.6 Fees ................................................... 43
13.6.7 Criminal Acts .......................................... 43
13.6.8 Misrepresentation ...................................... 43
13.7 Additional Covenants .......................................... 44
13.7.1 Compliance with Laws; Licenses and Permit .............. 44
13.7.2 Criminal Acts .......................................... 44
13.7.3 Maintain Existence ..................................... 45
13.7.4 Condition of System .................................... 45
13.8 Binding Effect ................................................ 45
13.9 No Waiver; Cumulative Remedies ................................ 45
13.10 No Opposition ................................................. 46
13.11 Partial Invalidity ............................................ 46
13.12 Headings ...................................................... 46
13.13 No Agency ..................................................... 46
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Page
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13.14 Governing Law ................................................. 47
13.15 Survival of Representations and Warranties .................... 47
13.16 Delegation of City Rights ..................................... 47
13.17 Claims Under Agreement ........................................ 47
13.18 Modification .................................................. 48
13.19 Maintain Office ............................................... 48
13.20 Service of Process ............................................ 48
13.21 Compliance With Certain City Requirements ..................... 48
13.22 Matching Provision ............................................ 48
13.23 Joint Services ................................................ 49
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<PAGE>
APPENDICES
Appendix A ..... Franchise Area
Appendix B ..... Construction Terms, Schedule, and Sequence
Appendix C ..... Initial Backbone
Appendix D ..... Telecommunications Services the franchisee intends (as of
the Effective Date) to offer and additional Telecommunications
Services authorized to be offered by the franchise
Appendix E ..... Service to he provided to the City, and related obligations
Appendix F ..... Investigations Clause
Appendix G ..... Ownership and Control of franchisee as of the Effective Date
and any approved mortgages, pledges and leases
Appendix H ..... MacBride Principles
Appendix I ..... Local Law 33
Appendix J ..... Resolution of the Franchise and Concession Review Committee
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<PAGE>
THIS AGREEMENT, dated as of 28th day of February, 2000 (the "Effective
Date"), is by and between THE CITY OF NEW YORK (as defined in Section 1 hereof,
the "City") and METROMEDIA FIBER NETWORK NYC, INC., whose principal place of
business is located 1 North Lexington Avenue, White Plains New York 10601 (as
defined in Section 1 hereof, the "Company"), (each, a "party" and collectively,
the "parties").
WITNESSETH
WHEREAS the City and National Fiber Network, Inc. ("NFN") previously
entered into a franchise agreement (as amended, the "Original Agreement") dated
as of the 20th day of December, 1993 (the "Original Agreement Date") pursuant to
which NFN was granted a franchise to install cable, wire, fiber optic
telecommunications cable or other transmission medium that may be used in lieu
of cable, wire or fiber optic telecommunications cable for the same purposes and
related equipment and facilities on, over, and under the City's Inalienable
Property to be used in providing Telecommunications Services:
WHEREAS NFN transferred the Original Agreement to the Company as permitted
by resolution passed by the New York City Franchise and Concession Review
Committee (as defined in Section 1 hereof, the "FCRC") on September 10, 1997
(Cal. No. 3);
WHEREAS, the City and Company wish to amend and restate the Original
Agreement to reflect certain additional developments and to incorporate the
parties' understanding with respect to the System and the Services, and to
replace the Original Agreement with this Agreement;
WHEREAS, the New York City Department of Information Technology and
Telecommunication (as defined in Section 1 hereof, "DoITT"), on behalf of the
City, has the authority to grant franchises involving the occupation or use of
the Inalienable Property (as defined in Section 1 hereof) of the City in
connection with the provision of Telecommunications Services (as defined in
Section 1 hereof including renewals thereof; and
WHEREAS, the Company had submitted to DoITT its proposal in response to a
Request for Proposals issued by DoITT pursuant to Resolution No. 404 (adopted by
the New York City Council on March 26, 1992); and
WHEREAS, on February 7, 2000 the FCRC held a public hearing on the
Company's petition for an amended and restated franchise to install cable, wire,
fiber optic telecommunications cable or other transmission medium that may be
used in lieu of cable, wire or fiber optic telecommunications cable for the same
purposes and related equipment and facilities on, over, and under the City's
Inalienable Property to be used in providing Telecommunications Services, which
was a full public proceeding affording due process in compliance with the
requirements of Chapter 14 of the City Charter; and
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<PAGE>
WHEREAS, at said hearing, the FCRC reviewed the Company's financial, legal
and technical ability to carry out its obligations pursuant to this Agreement;
reviewed the Company's plan for constructing, operating, maintaining and
upgrading the System (as defined in Section 1 hereof); and determined that this
Agreement granting the Company a nonexclusive franchise complies with all
applicable City Laws and regulations; and
WHEREAS, DoITT has reviewed the proposed action under the New York State
Environmental Quality Act ("SEQRA") (Section 8-010 et. seq.) of the New York
State Environmental Conservations Law), the SEQRA regulations set forth at Part
617 of Title 6 of the New York Code of Rules and Regulations, and the City
Environmental Quality Review ("CEQR") process (Chapter 5 of Title 62 and Chapter
6 of Title 42 of the Rules of the City of New York) and determined that this
action is properly classified as "Type II" action thereunder; and
WHEREAS, the New York City Department of City Planning determined, as
evidenced in its letter dated April 23, 1992, that the proposed franchise would
have no land use impacts and that review pursuant to Section 197c of the New
York City Charter (the "City Charter") would not be necessary; and
WHEREAS, the City intends to exercise the full scope of its municipal
powers, including both its police power and contracting authority, to promote
the public interest, to enhance the health, welfare and safety of the public,
and to stimulate commerce by assuring the widespread availability of reliable
high-capacity telecommunications services; and, in pursuit of these goals among
other purposes, desires to maximize the availability of such Telecommunications
Services and to develop innovative uses by the City and its institutions of such
Services.
NOW, THEREFORE, in consideration of the foregoing clauses, which clauses
are hereby made a part of this Agreement, the mutual covenants and agreements
herein contained, and other good and valuable consideration, the parties hereby
covenant and agree as follows:
SECTION 1 -- DEFINED TERMS
For purposes of this Agreement, the following terms, phrases, words, and
their derivatives shall have the meanings set forth in this Section, unless the
context clearly indicates that another meaning is intended.
1.1. "Affiliated Person" means each Person who falls into one or more of
the following categories. (i) each Person having, directly or indirectly, a
Controlling Interest in the Company; (ii) each Person in which the Company has,
directly or indirectly, a Controlling Interest; (iii) each officer, director,
general partner, limited partner holding an interest of ten percent (10%) or
more, joint venturer or joint venture partner of the Company; and (iv) each
Person, directly or indirectly, controlling, controlled by or under common
Control with the Company; provided that "Affiliated Person" shall in no event
mean the City, any limited partner holding an interest of less than ten percent
(10%) of the Company or any creditor of the Company solely by virtue of its
status as a creditor and which is not otherwise an Affiliated Person.
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1.2 "Agreement" means this agreement, together with the Appendices
attached hereto and all amendments, modifications or renewals hereof or thereof.
1.3 "City" means the City of New York or, as appropriate in the case of
specific provisions of this Agreement, any board, bureau, authority, agency,
commission, department or any other entity of the City of New York, or any
authorized officer, official, employee or agent thereof, or any successor
thereto.
1.4 "Commissioner" means the Commissioner of DoITT, or his or her
designee, or any successor in function to the Commissioner.
1.5 "Company" means METROMEDIA FIBER NETWORK NYC, INC., a corporation
organized and existing under the laws of the State of Delaware and authorized to
do business as a corporation in the State of New York, whose principal place of
business is located at 1 North Lexington Avenue, White Plains New York 10601.
1.6 "Comptroller" means the Comptroller" means the Comptroller of the
City, the Comptroller's designee, or any successor in function to the
Comptroller.
1.7 "Control" or of "Controlling Interest" in a Person means actual
working control whatever manner exercised, including, without limitation,
working control through ownership, management, debt instruments or negative
control, as the case may be, of such Person. A rebuttable presumption of the
existence of Control of or a Controlling Interest in a Person shall arise from
the beneficial ownership, directly or indirectly, by any Person, or group of
Persons acting in concert, of more than ten percent (10%) of such Person (which
Person or group of Persons is hereinafter referred to as "Controlling Person").
"Control" or "Controlling Interest" as used herein may be held simultaneously by
more than one Person or group of Persons.
1.8 "Customer" means any Person lawfully receiving any Service provided by
the Company by means of the System.
1.9 "DoITT" means the Department of Information Technology and
Telecommunications of the City of New York, or any successor thereto(1).
1.10 "Effective Date" means the date this Agreement is fully executed and
delivered by the City and the Company.
1.11 "FCC" means the Federal Communications Commission, or any successor
thereto.
1.12 "FCRC" means the Franchise and Concession Review Committee of the
City of New York, or any successor thereto.
- ----------
(1) Formerly the Department of Telecommunications and Energy ("DTE").
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<PAGE>
1.13 "Fiber" means fiber optic telecommunications cable or other
transmission medium that may be used in lieu thereof for the same purposes.
1.14 "Franchise Area" means the City of New York, unless a smaller area is
depicted in Appendix A to this Agreement.
1.15 "Gross Revenue" shall include all revenue, as determined in
accordance with the generally accepted accounting principles, that is received
directly or indirectly by the Company or by any Affiliated Person from or in
connection with any Telecommunications Services provided in accordance with this
Agreement which originate in and/or terminate in the City (which shall include a
proportional allocation, which allocation shall be fair and equitable, of
revenues received by, or that should have been received by, the Company, any
Affiliated Person or any other Person for Service utilizing any part of the
System, provided, however, that such proportional allocation shall in no case be
less than the fair market value for such Service). The Company shall, within two
years following the Effective Date, submit to the City for the City's review and
approval the method by which such allocation is to be made, and such approval by
the City shall not be unreasonably withheld. If the City's decision become
subject to court review, the court shall undertake its review consistent with
the standards established in this Section 1.15. The revenues described in this
paragraph shall include, without limitation, the value of any free Services
provided by the Company (provided, however, that the value of any free Service
provided hereunder to the City pursuant to Section 7.1.1(b) or Appendix E or to
any other governmental entity shall not constitute Gross Revenue); the fair
market value of any nonmonetary transactions between the Company and any Person
other than an Affiliated Person, but not less than the customary prices paid in
connection with equivalent transactions, viewing all components of the
transactions taken as a whole, the fair market value of any nonmonetary
transactions between the Company and any Affiliated but not less than the
customary prices paid in connection with equivalent transactions, considering
the entirety of all transactions taken as a whole, conducted with Persons who
are not Affiliated Persons; and any revenue received by the Company or by any
Affiliated Person, as reasonably determined from time to time by the City,
through any means which is intended to have the effect of evading the payment of
compensation that would otherwise be paid to the City for the franchise granted
herein. Gross Revenue shall also include revenue derived from the sale or lease
of equipment and/or facilities provided by the Company or any Affiliated Person
if such facilities and/or equipment are required for and integrated with the
Services provided by the Company within the Franchise Area, except that Gross
Revenue shall not include revenue from the sale of customer equipment that is
readily available for sale in the consumer retail market. Gross Revenue shall
not include (i) actual payments received from interconnecting telecommunications
services providers outside the boundaries of New York City, for services
provided outside the boundaries of New York City; (ii) taxes collected to pay to
legitimate taxing authorities; (iii) any revenues that are already included in
the calculation of franchise fees payable to the City under any other franchise
agreement between (a) the City and (b) the Company or any Affiliated Person
provided that any services other than a "cable system" as defined in the Cable
Communications Policy Act of 1984 as amended 47 U.S.C ss. 522 et. seq., and/or
"mobile telecommunications services" as defined in the authorizing resolution
adopted by the Council on August 11, 1999 (Resolution 957) shall be considered
to be provided under the franchise granted herein; (iv) any free Services
required by this Agreement; (v) the revenue of any Person (including, without
limitation, a supplier of services) to the extent that such revenue is also
included in Gross Revenue of the Company; (vi)
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the revenue of the Company of any Affiliated Person received directly from the
sale of any merchandise, goods or other non-Telecommunications Services that are
sold through any Service distributed over the System (other than that portion of
such revenue which represents or can be attributed to a customer fee or other
payment for the use of the System for the sale of such merchandise, goods or
non-Telecommunications Services, which portion shall be included in Gross
Revenue), provided, however, that the foregoing exclusion from Gross Revenue
shall in no way be deemed to exclude from Gross Revenue any revenue derived from
the sale or lease of equipment and/or facilities provided by the Company or any
Affiliated Person if such facilities and/or equipment are required for and
integrated with the Services provided by the Company; (vii) investment income;
(viii) the revenue of any Affiliated Person which represents standard and
reasonable amounts paid by the Company to the Affiliated Person for ordinary and
necessary business expenses of the Company, including, without imitation,
professional service fees and insurance or bond premiums; (ix) advertising
commissions deducted by advertising agencies before advertising revenues are
paid over to the Company; (x) any amount billed to customers and collected by
the Company or any Affiliated Person on behalf of any non-Affiliated Person who
is a telecommunications provider for services provided by such provider to such
customers where such amount is passed through in its entirety by the Company or
Affiliated Person to such provider; (xi) the value of any use of the System by
the Company or Affiliated Person for wholly owned internal administrative
purposes, including the distribution of cable programming from one Affiliated
Person to another Affiliated Person, provided that such Affiliated Persons are
substantially owned by the Company or its parent; (xii) to the extent consistent
with generally accepted accounting principles, consistently applied, bad debt
write-offs; and (xiii) the value of short-term promotional Services. With
respect to the Gross Revenue from customers receiving "resold" service (as
opposed to "facilities-based" service), Gross Revenue shall be reduced by the
amounts paid by the Company to the independent third party owner of the facility
(or facilities) through which such customers are being served, for such
facilities, services and equipment as are necessary to provide the resold
services to such customers (such amounts paid may include (if applicable under
the circumstances) for example, and without limitation, monthly service charges,
non-recurring charges, local and itemized call charges, enhanced service fees,
directory assistance fees and surcharges. For purposes of this Agreement "resold
services" shall include the sale of services by the Company using the fiber or
other transmission facilities of any independent third party.
1.16 "Inalienable Property" means the rights of the City in and to its
waterfront, ferries, wharf property, bridges, land under water, public landings,
wharves, docks, streets, avenues, highways, parks, waters, waterways and all
other public places.
1.17 "Initial Backbone" means the backbone depicted in Appendix O to this
Agreement.
1.18 "Mayor" means the chief executive officer of the City, the Mayor's
designee, or any successor to the executive powers of the present Mayor.
1.19 "Original Agreement" and "Original Agreement Date" have the meanings
set forth in the first paragraph of the preamble to this Agreement.
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1.20 "Person" means any natural person or any association, firm,
partnership, joint venture, corporation, or other legally recognized entity,
whether for profit or not for profit, but shall not mean the City.
1.21 "PSC" means the New York State Public Service Commission, or any
successor thereto.
1.22 (a) "Service" or "Telecommunications Service(s)" means any
telecommunications services provided by the Company within the Franchise Area
which the Company is authorized to provide under applicable federal, state and
local law, and any equipment and/or facilities required for and integrated with
the Services provided by the Company within the Franchise Area except as
excluded in paragraphs (b) or (c)(i) below.
(b) "Service" or "Telecommunications service(s)" do not include (i)
a "cable service" as defined in Cable Communications Policy Act of 1984, (47
U.S.C. ss.522 et. seq.) (ii) "mobile telecommunication services" as defined in
the authorizing resolution adopted by the New York City Council on July 19, 1994
(Resolution No. 438), and (iii) the installation or operation of public pay
telephones as defined in the authorizing resolution adopted by the New York City
Council on March 25, 1997 (Resolution No. 2248), (iv) other telecommunications
activities requiring the installation or operation of street furniture or (v)
open video service as described in 47 U.S.C. ss. 573.
(c) (i) "Service" or "Telecommunications service(s)" shall not
include the providing or leasing of Fiber capacity by the Company to either (x)
any related entity providing "mobile telecommunications services" or (y) any
related or unrelated entity providing "cable service" (as defined in 47 U.S.C.
ss.522) unless such entity has a franchise from the City for the provision of
"mobile telecommunications services", "cable service" or an agreement to provide
an open video system (as described in 47 U.S.C. and in the rules and regulations
promulgated thereunder).
(ii) "Service" or "Telecommunications Service(s)" shall
include the providing or leasing of Fiber capacity by the Company to any
unrelated entity providing "mobile telecommunications services".
(d) For purposes of this definition, a related entity is an entity
(i) which, directly or indirectly, owns a beneficial interest of 10% or more in
the Company, or (ii) in which the Company, directly or indirectly, a common
owner of a beneficial interest of 10% or more in each, or (iv) which is an
Affiliated Person, or (v) which is otherwise related to the Company in a manner
similar, or to an extent comparable, to the relationships described in the
proceeding clauses (i) through (iv).
(e) For the purposes of this definition, an unrelated entity means
an entity which is not a related entity.
1.23 "Signal" means any transmission of electronic, electrical or radio
frequency energy or optical information.
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1.24 "System" or "Telecommunications System" means the telecommunications
system which is to constructed, operated and maintained by the Company pursuant
to this Agreement, including, without limitation, all real property and
interests in real property, all tangible and intangible personal property,
buildings, offices, furniture, Customer lists, cables, wires, optical fibers,
amplifiers and all other electronic devices, equipment and facilities used in
connection therewith, and all rights, contracts and understandings with regard
to any matter related thereto.
SECTION 2 -- GRANT OF AUTHORITY
2.1 Term
This Agreement, and the franchise granted hereunder, shall commence
upon the Effective Date, and shall continue for a period of fifteen (15) years
from the Original Agreement Date, unless this Agreement is earlier terminated
upon the earliest to occur of: (a) a revocation of the franchise, as provided by
Section 11.3 hereof, or (b) the expiration of the term of the franchise by
acceleration, or otherwise. The period of time that this Agreement remains in
effect is herein referred to as the "Term".
2.2 Conditions to Execution
2.2.1 Certain Actions by the Company Before Execution
Prior to the execution of this Agreement, the Company has
satisfied certain conditions to the City's execution of this Agreement by
delivering to DoITT the following: (a) evidence that it has deposited with the
Comptroller the Performance Bond/Security Fund required pursuant to Section 5.8
hereof; (b) a certificate of liability insurance, pursuant to Section 10.2
hereof, with a copy to the Comptroller; (c) an opinion of the Company's counsel
dated as of the Effective Date opining that this Agreement has been duly
authorized, executed and delivered by the Company and is a binding obligation of
the Company and opining as to such other matters as the City has requested; (d)
the questionnaires required in connection with the City's Vendor Information
Exchange System ("VENDEX"); (e) evidence that the Company has paid the initial
portion of its pro rata share of the City's franchising cost pursuant to Section
7.2.1 herein; and (f) certified copies of the Company's organizational and
governing documents, as amended to date, pursuant to Section 13.6[ILLEGIBLE]
herein.
2.2.2 Vendex
Favorable completion of the City's appropriate review in
connection with Vendex shall be a condition to the City's execution of this
Agreement.
2.3 Nature of Franchise, Effect of Termination and Renewal
2.3.1 Nature of Franchise
(a) The City hereby grants the Company, subject to the terms
and conditions of this Agreement, a nonexclusive franchise providing the right
and consent to
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install, operate, repair, maintain, remove and replace cable, wire, Fiber
or other transmission medium that may be used in lieu of cable, wire or
Fiber for the same purposes and related equipment and facilities on, over
and under the Inalienable Property of the City in order to provide
Telecommunications Services which originate and/or terminate in or transit
the Franchise Area.
(b) The Telecommunications Services the Company intends (as of
the Effective Date) to offer and the Telecommunications Systems the
Company intends (as of the Effective Date) to construct, operate and
maintain, are set forth on Appendix D to this Agreement.
(c) Before offering or providing any Telecommunications
Services pursuant to this franchise, the Company shall obtain any and all
regulatory approvals, permits, authorizations or licenses for the offering
or provision of such Telecommunications Services from the appropriate
federal, state and local authorities, if required, and shall submit to
DoITT upon the written request of the City evidence of all such approvals,
permits, authorizations or licenses.
2.3.2 Effect of Termination
Upon termination of this Agreement, the franchise shall
expire; all rights of the Company in the franchise shall cease, with no value
allocable to the franchise itself; and the rights of the City and the Company to
the System, or any part thereof, shall be determined as provided in Sections
11.3 through 11.6 hereof. The termination of this Agreement and the franchise
granted hereunder shall not, for any reason, operate as a waiver or release of
any obligation of the Company or any other Person, as applicable, for any
liability (i) pursuant to Section 10.1 hereof, which arose or arises out of any
act or failure to act required hereunder prior to the termination; (ii) which
exists pursuant to Sections 7, "Compensation," 8.7.2, "Right of Inspection,"
11.3 through 11.6, "Termination," 13.14, "Governing Law," and 13.17, "Claims
under Agreement," hereof; and (iii) to maintain in full force and effect the
Performance Bond/Security Fund and coverage under the liability insurance
policies required under and in accordance with Sections 5.8 and 10.2 hereof.
2.3.3 Renewal
This Agreement does not grant to the Company any right to
renewal of this Agreement or the franchise granted hereunder, and there shall be
no such right. The Company may submit a written petition to the City to renew
this Agreement and the franchise granted hereunder not later than twelve (12)
months nor more than eighteen (18) months before the expiration of the Term.
Nonetheless, the City shall not be obligated to renew this Agreement or the
franchise granted hereunder.
2.4 Conditions and Limitations on Franchise
2.4.1 Not Exclusive
Nothing in this Agreement shall affect the right of the City
to grant to any Person a franchise, consent or right to occupy and use
Inalienable Property of the City, or any
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part thereof, for the construction, operation and/or maintenance of a system to
provide telecommunications services in the City for any purpose, or the right of
the City to construct, operate and/or maintain a system to provide
telecommunications services in the City or to acquire and operate the System
pursuant to this Agreement, except that the City shall not use any Services,
equipment, cable, wire, Fiber or other transmission medium provided by the
Company pursuant to this Agreement to sell to non-governmental entities in
competition with the Company.
2.4.2 Construction of System.
(a) The Company is authorized to install the System, including
cable, wire, Fiber or other transmission medium that may be used in lieu
of cable, wire or Fiber for the same purposes, or related equipment and
facilities at any location on, over or under the Inalienable Property of
the City within the Franchise Area at any time during the Term, without
further approval of DoITT, subject to the terms and conditions of this
Agreement. The Company shall use its best efforts to coordinate its
construction schedule with the appropriate City agencies, including,
without limitation, the appropriate Borough Engineer and the Office of
Construction, to minimize unnecessary disruption.
(b) The Company agrees to commence construction of the Initial
Backbone as soon as feasible after the Original Agreement Date and in any
event no later than six (6) months after the Original Agreement Date,
subject to the timely issuance of necessary permits and licenses, which
will be diligently pursued by the Company. The Company agrees to
substantially complete the installation of the Initial Backbone within
twenty-four (24) months after the date of commencement of construction of
the Initial Backbone, subject to the timely issuance of necessary permits
and licenses, which will be diligently pursued by the Company.
(c) The Company shall obtain all construction, building or
other permits or approvals necessary before installing such cable, wire,
Fiber or other transmission medium that may be used in lieu of cable, wire
or Fiber for the same purposes, or related equipment and facilities. The
Company shall provide copies of any such permits and approvals to DoITT
upon request.
2.4.3 Public Works and Improvements
Nothing in this Agreement shall abrogate the right of the City
to perform any public works or public improvements of any description. In the
event that the System interferes with the construction, operation, maintenance,
repair or removal of such public work or public improvements, the Company shall,
at its own cost and expense (unless, dedicated funds have been provided to the
City specifically for such purpose), upon reasonable notice from the City,
promptly protect or alter or relocate the System, or any part thereof, as
directed by the City. In the event that the Company refuses or neglects to so
protect, alter or relocate all or part of the System, the City shall have the
right, upon notice by the City, to break through, remove, alter, relocate all or
any part of the System without any liability to the Company, and the Company
shall pay to the City the costs incurred in connection with such breaking
through, removal, alteration, or relocation.
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2.4.4 No Waiver
Nothing in this Agreement shall be construed as a waiver of
any codes, ordinances or regulations of the City or of the City's right to
require the Company or Persons utilizing the System to secure the appropriate
permits or authorizations for such use, provided that no fee or charge may be
imposed upon the Company for any such permit or authorization, other than the
standard fees or charges generally applicable to all Persons for such permits or
authorizations. Any such standard fee or charge shall not be an offset against
the compensation the Company is required to pay to the City pursuant to Section
7 of this Agreement.
2.4.5 No Release
Nothing in this Agreement shall be construed as a waiver or
release of the rights of the City in and to the Inalienable Property of the
City. In the event that all or part of the Inalienable Property within the
Franchise Area is eliminated, discontinued, closed or demapped, all rights and
privileges granted pursuant to this Agreement with respect to said Inalienable
Property, or any part thereof so eliminated, discontinued, closed or demapped,
shall cease upon the effective date of such elimination, discontinuance, closing
or demapping. If said elimination, discontinuance, closing or demapping is
undertaken for the benefit of any private Person, the City shall make reasonable
efforts to condition its consent to said elimination, discontinuance, closing or
demapping on the agreement of said private Person to (i) grant the Company the
right to continue to occupy and use said Inalienable Property or (ii) reimburse
the Company for the reasonable costs of relocating the affected part of the
System.
2.5 Renegotiation of Agreement
(a) Each party shall have the right, any one time following
the date seven (7) years after the Original Agreement Date and upon six
(6) months notice to the other party, to require the renegotiation of the
terms of Sections 7 and 8 hereof based on changes in technological, legal,
regulatory or market conditions that have occurred since the Effective
Date, provided, however, that any renegotiated terms shall apply only
prospectively to any contracts entered into by the Company with customers
following the effective date of the renegotiated terms. The parties shall,
during renegotiation of said Sections under this Section 2.5, negotiate in
good faith.
(b) If, despite such good faith negotiations, the parties fail
to reach an agreement that is reasonably acceptable to both parties within
a reasonable period, then either party shall have the right, by notice to
the other, that the term of this Agreement and the franchise granted
hereunder shall be accelerated and shall terminate on the date which is
one half of the number of days between the date of such notice and the
fifteenth anniversary of the Original Agreement Date.
(c) The parties' rights pursuant to this Section 2.5 shall be
cumulative and shall be in addition to and not in derogation of all other
rights reserved under other provisions of this Agreement.
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SECTION 3 -- SERVICE
3.1 No Interference
In the operation of the System, the Company shall not interfere with
the technical operation of any other telecommunications system in the City.
3.2 No Monopoly
If, at any time during the Term, it is finally determined by a court
of competent jurisdiction (not subject to further appeal) that the distribution
or provision of any Service in the Franchise Area by the Company or any
Affiliated Person, or any other action in connection with the operation of the
System, has tended to create or has created a monopoly or a restraint of trade
in violation of law, such determination shall be deemed to be an Event of
Default under this Agreement. In such event, in addition to pursuing any of the
actions set forth in Section 11.2 hereof, DoITT may issue a directive to correct
such conditions, consistent with this Agreement and the determination of the
court, without following the procedural requirements of Sections 11.2.2 and
11.2.3 hereof.
3.3 No Discrimination
The Company shall not discriminate in the provision of Services on
the basis of race, creed, color, national origin, sex, age, handicap, marital
status, or real or perceived sexual orientation.
3.4 Service
The Company agrees to market its Services on the System throughout
the Term. In the event the Company, with the consent of the City, sells or
otherwise transfers the System Control thereof to any Person, the City or the
City's assignee, or in the event the franchise terminates, the Company shall
transfer the System in an orderly manner in order to maintain continuity of
Service to the City and to other Customers.
SECTION 4 - TARIFF FILINGS
4.1 Tariffs
The Company shall from time to time at the reasonable request of the
City provide the City with a copy of any tariff filed by the Company with
respect to any services offered in the Franchise Area and provide a reasonable
response to any City request for an explanation of the nature or applicability
of such tariff.
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SECTION 5 -- CONSTRUCTION AND TECHNICAL REQUIREMENTS
5.1 General Requirement
The Company agrees to comply with each of the terms set forth in
this Section governing construction and technical requirements for its System,
in addition to any other requirements or procedures specified by the
Commissioner and which are not inconsistent with any express provision of this
Agreement.
5.2 Quality
All work involved in the construction, operation, maintenance,
repair, upgrade and removal of the System shall be performed in a safe, thorough
and reliable manner using materials of good and durable quality. If, at any
time, it is reasonably determined by the City or any other agency or authority
of competent jurisdiction that nay part of the System, including, without
limitation, any means used to distribute Signals over or within the System, is
harmful to the public health or safety, then the Company shall, at its own cost
and expense, take all steps necessary to correct all such conditions.
5.3 Licenses and Permits
The Company shall have the sole responsibility for diligently
obtaining, at its own cost and expense, all permits, licenses or other forms of
approval or authorization necessary to construct, operate, maintain, upgrade or
repair the System, including but not limited to any necessary approvals from
Persons to use private property, easements, poles and conduits. The Company
shall obtain any required permit, license, approval or authorization prior to
the commencement of the activity for which the permit, license, approval or
authorization is required.
5.4 Relocation of the System
5.4.1 New Grades or Lines
If the grades or lines of any Inalienable Property within the
Franchise Area are changed at any time during the Term in a manner affecting the
System, then the Company shall, at its own cost and expense, and upon reasonable
notice by the City, promptly protect or promptly alter or relocate the System,
or part thereof, so as to conform with such new grades or lines. In the event
that the Company unreasonably refuses or neglects to so protect, alter or
relocate all or part of the System, the City shall have the right to break
through, remove, alter or relocate such part of the System without any liability
to the Company, and the Company shall pay to the City the costs incurred in
connection with such breaking through, removal, alteration or relocation.
5.4.2 City Authority to Move Wires
The City may, at any time, in case of fire, disaster or other
emergency, as determined by the City in its reasonable discretion, cut or move
any other optical fibers, wires, cable, amplifiers, appliances or other parts of
the System on, over or under the Inalienable
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Property of the City, in which event the City shall not be liable therefor to
the Company. The City shall notify the Company in writing prior to, if
practicable, but in any event as soon as possible and in no case later than the
next business day following any action taken under this Section 5.4.2.
5.4.3 Company Required to Move Wires
The Company shall, upon prior written notice by the City or
any Person holding a permit to move any structure, and within the time that is
reasonable under the circumstances, temporarily move its wires to permit the
moving of said structure. The Company may impose a reasonable charge on any
Person other than the City for any such movement of its wires.
5.5 Protect Structures
In connection with the construction, operation, maintenance, repair,
upgrade or removal of the System, the Company shall, at its own cost and
expense, protect any and all existing structures belonging to the City and all
designated landmarks, as well as all other structures within any designated
landmark district. The Company shall obtain the prior approval of the City
before altering any water main, sewerage or drainage system, or any other
municipal structure on, over or under the Inalienable Property of the City
required because of the presence of the System. Any such alteration shall be
made by the Company, at its own cost and expense and in a manner prescribed by
the City. The Company agrees that it shall be liable, at its own cost and
expense, to replace or repair and restore to its prior condition in a manner as
may be reasonably specified by the City, any municipal structure or any other
Inalienable Property of the City involved in the construction, operation,
maintenance, repair, upgrade or removal of the System that may become disturbed
or damaged as a result of any work thereon by or on behalf of the Company
pursuant to this Agreement.
5.6 No Obstruction
In connection with the construction, operation, maintenance,
upgrade, repair or removal of the System, the Company shall not unreasonably
obstruct the inalienable Property of the City, subways, railways, passenger
travel, river navigation, or other traffic to, from or within the Franchise Area
without the prior consent of the appropriate authorities..
5.7 Safety Precautions
The Company shall, at its own cost and expense, undertake all
necessary and appropriate efforts to prevent accidents at its work sites,
including the placing and maintenance of proper guards, fences, barricades,
security personnel and suitable and sufficient lighting.
5.8 Performance Bond/Security Fund
5.8.1 General Requirements
Prior to the execution of this Agreement, the Company shall
have deposited with the Comptroller an irrevocable, unconditional letter of
credit and surety bond
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which together total two million dollars ($2,000,000). Such $2,000,000
constitutes the Company's Performance Bond/Security Fund. A minimum of one
million dollars ($1,000,000) of this amount shall be in the form of a surety
bond, and the Company may, at it discretion, further increase the proportion of
the Performance Bond/Security Fund that is in the form of a surety bond so long
as at least two hundred fifty thousand dollars ($250,000) of the Performance
Bond/Security fund remains in the form of a letter of credit. The total amount
of the Performance Bond/Security Fund may be reduced to one million dollars
($1,000,000), which must consist of at least a two hundred fifty thousand dollar
($250,000) letter of credit, following the date 30 days after completion by the
Company of the Initial Backbone. Throughout the Term, and for one hundred twenty
(120) days thereafter, unless the City notifies the Company that a reasonable
longer period shall apply, the company shall maintain the Performance
Bond/Security Fund in the amount specified in this Section 5.8. At any time
during the Term, the City may, acting reasonably, require the Company to
increase the amount of the Performance Bond/Security Fund if it finds that new
risk factors exist, such as an increase in the amount of compensation payments
to be made pursuant to Section 7.1 hereof or the failure of the Company to
perform any of its obligations pursuant to Section 7.1 hereof or the failure of
the Company to perform any of its obligations pursuant to this Agreement, which
reasonably necessitate an increase in the amount of the Performance
Bond/Security Fund.
5.8.2 Indemnification
The Performance Bond/Security Fund shall indemnify the City,
up to the full face amount of the Performance Bond/Security Fund, for: (i) the
cost to continue any construction of the portion of the System being constructed
for the City pursuant to Section 7.1.1(b) herein and Appendix E hereof; (ii) the
cost of maintaining operation of the System following a termination of this
Agreement as a result of a default by the Company, pursuant to Section 11.3
hereof, in excess of all net revenue actually received through the continued
operation of the System during said period; (iii) any loss or damage to any
municipal structure or other Inalienable Property of the City during the course
of any construction of the System; (iv) any other costs, or loss or damage
actually incurred by the City as a result of the Company's failure to perform
its obligations pursuant to this Agreement; and (v) the removal of all or any
part of the System from the Inalienable Property of the City, as authorized by
this Agreement.
5.8.3 Other Purposes
The Performance Bond/Security Fund shall also serve as
security for:
(a) the faithful performance by the Company of all terms,
conditions and obligations of this Agreement;
(b) any expenditure, damage, or loss incurred by the City
occasioned by the Company's failure to comply with all rules, regulations,
orders, permits and other directives of the City and the Commissioner
issued pursuant to this Agreement;
(c) payment of compensation set forth in Section 7 hereof;
(d) the payment of premiums for the liability insurance
required pursuant to Section 10 hereof;
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(e) the removal of the System from the Inalienable Property of
the City at the termination of the Agreement; at the election of the City,
pursuant to Section 11.4 hereof;
(f) the Payment to the City of any amounts for which the
Company is liable pursuant to Section 10.1.1 hereof which are not paid by
the Company's insurance;
(g) the payment of any other amounts which become due to the
City pursuant to this Agreement or law;
(h) the timely renewal of the letter of credit that
constitutes the Performance Bond/Security Fund; and
(i) any costs, losses or damages incurred by the City as a
result of a default of the Company's obligations under this Agreement.
1.1.4 Withdrawals from the Performance Bond/Security Fund
In accordance with the procedures set forth in Sections 5.8.5,
11.2 and 11.3, the Comptroller, upon the direction of the Commissioner, may make
withdrawals from the Performance Bond/Security Fund and pay to the City such
amount for the satisfaction of obligations under Section 5.8.2 hereof, or for
the purposes specified in Section 5.8.3 hereof. Withdrawals from the Performance
Bond/Security Fund shall not be deemed a cure of the default(s) that led to such
withdrawals. The City may not seek recourse against the Performance
Bond/Security Fund for any costs or damages for which the City has previously
been compensated through a withdrawal from the Performance Bond/Security Fund or
otherwise by the Company.
5.85 Notice of Withdrawals
Within one (1) week after any withdrawals from the Performance
Bond/Security Fund, the Comptroller shall notify the Company of the date and
amount thereof, provided, however, that the City shall not make any withdrawals
by reason of any breach for which the company has not been given notice. The
withdrawal of amounts from the Performance Bond/Security Fund shall constitute a
credit against the amount of the applicable liability of the Company to the City
but only to the extent of said withdrawal.
5.86 Replenishment
Within thirty (30) days after receipt of notice from the
Comptroller that any amount has been withdrawn from the Performance
Bond/Security Fund letter of credit, as provided in Section 5.8 hereof, the
Company shall restore the Performance Bond/Security Fund to the amount specified
in Section 5.8.1 hereof, provided that, if a court finally determines that said
withdrawal by the City was improper, the City shall refund the improperly
withdrawn amount to the Performance Bond/Security Fund or to the Company such
that the balance in the Performance Bond/Security Fund shall not exceed the
amount specified in Section 5.8.1 hereof. In case of such an improper
withdrawal, the Company shall receive any interest accrued on the amount
improperly withdrawn from the time of withdrawal to the time of refund to the
Fund. If
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the Company has not made the required restoration to the Performance
Bond/Security Fund within such thirty (30) day period, interest on said amount
shall accrue at the rate specified in Section 7.4 hereof, to commence at the
completion of such 30-day period. The Comptroller may withdraw from the
Performance Bond/Security Fund and pay to the City such interest periodically up
to the date on which the Company makes the required principal payment, provided
that the Company shall not be obligated to pay such interest with such principal
payment to the extent such interest has been already withdrawn by the
Comptroller.
5.8.7 Not a Limit on Liability
The obligation to perform and the liability of the Company
pursuant to this Agreement shall not be limited by the acceptance of the
Performance Bond/Security Fund required by this Section 5.8.
5.8.8 Form
The Performance Bond/Security Fund does, and any replacement
bond shall, contain the following endorsement: "It is hereby understood and
agreed that this bond may not be cancelled or not renewed by the surety nor the
intention to cancel or not to renew be stated by the surety until ninety (90)
days after completion of construction of the Initial Backbone and
notwithstanding the foregoing, shall in no case be cancelled or not renewed by
the surety until at least ninety (90) days' written notice is given to the City
of surety's intention to cancel or not renew this bond." Notwithstanding the
preceding, the letter of credit portion of the Performance Bond/Security Fund
shall not be cancelled or not renewed by the issuer until at least sixty (60)
days' notice to the City of the issuer's intention to cancel or not renew the
letter of credit.
SECTION 6 -- EMPLOYMENT AND PURCHASING
6.1 Right to Bargain collectively
The Company agrees to recognize the right of its employees to
bargain collectively through representatives of their own choosing in accordance
with applicable law. The Company shall recognize and deal with the
representatives duly designated or selected by a majority of its employees for
the purpose of collective bargaining with respect to rates of pay, wages, hours
of employment or any other terms, conditions or privileges of employment. The
Company shall not dominate, interface with, participate in the management or
control of, or give financial support to any union or association of its
employees.
6.2 Local Preference
The company shall, at its own cost and expense, develop and maintain
a plan for the recruitment, education, training and employment of residents of
the City, for the opportunities to be created by the construction, operation,
marketing and maintenance of the System. Such recruitment activities shall
include provisions for the posting of employment and training opportunities at
appropriate City agencies responsible for encouraging employment of City
residents. Such plan shall be designed so as to ensure the promotion of equal
employment opportunity for all qualified Persons employed by, or seeking
employment with, the Company.
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Such plan shall be updated from time to time as the City deems reasonably
necessary. The Company shall, throughout the Term, implement such plan at its
own cost and expense, by ensuring, to the maximum feasible extent, the
recruitment, education, training, and employment of City residents.
6.3 City Vendors
To the maximum feasible extent, after taking into account price and
quality considerations, the Company shall utilize vendors located in the City in
connection with the construction, operation, marketing and maintenance of the
System. The Company shall, after taking into account price and quality
considerations, in the purchase of comparable materials, equipment, services or
supplies of any nature, give effect to a preference for such items which are
assembled, manufactured, or otherwise produced, in whole or in part, within the
City.
6.4 Equal Employment Opportunity
The Company agrees to comply in all respects with the provisions of
the Mayor's Executive Order No. 50 (April 25, 1980) (codified at Title 10
Sections 1-14 of the Rules of the City of New York) and City Administrative Code
6-108.1 (1984) and all rules and regulations promulgated thereunder
collectively, the "EEO Requirements"), as such EEO Requirements may be amended,
modified or superseded throughout the Term. Notwithstanding that the EEO
Requirements may not apply on their face to the Company as a franchisee of the
City, the Company shall comply in all respects with the provisions of such EEO
Requirements and successor and replacement laws, orders and regulations adopted
following the Effective Date. As required by said Executive Order No. 50, the
provisions of Sections 50.30 and 50.31 of the Final Rule implementing said Order
are incorporated herein by this reference. The Company agrees to make a
reasonable inquiry and to engage in reasonable compliance monitoring efforts
with all unions to ensure that all contractors and subcontractors comply with
the required contractual language in Section 6.5. The Company shall not contract
with and shall discontinue any contract entered into after the Effective Date
with any union, contractor or subcontractor that refuses to agree to or fails to
comply with the contractual language in Section 6.5.
6.5 Local law 33
The Company agrees to comply in all respects with the provisions of
the Local Law 33 of 1997 and all rules or regulations promulgated thereunder, as
such law and all rules or regulations may be amended, modified or succeeded
throughout the term. Notwithstanding that Local Law 33 may not apply on its face
to the company as a franchisee of the City, the Company shall comply in all
respects with the provisions of such Law and rules or regulations and successor
and replacement laws, and rules or regulations adopted following the Effective
Date.
6.6 Enforcement
The Company shall take steps to ensure that the requirements of
Section 6.4 hereof are adhered to by each union with which the company deals,
each officer, employee, agent, contractor or subcontractor of the Company, and
each Person performing work pursuant to this Agreement with respect to the
System for, on behalf of, or at the discretion of the Company.
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The requirements of Section 6.4 hereof shall apply to every contract relating to
the System between the Company and: (i) any union; (ii) any contractor; (iii)
any subcontractor; or (iv) any Person with which any of the foregoing Persons
has a relationship in connection with any aspect of the System. To comply with
the obligations of this Section 6.6, the Company shall include, in all contracts
described in the foregoing sentence which are entered into following the
Effective Date (which shall include any renewals, amendments and modifications
of existing contracts), the following language, stating that such party: "has
received a copy of Section 6 of a certain agreement by and between the City of
New York and the Company dated as of _______, 2000, granting to the Company a
nonexclusive franchise providing the right and consent to install cable, wire,
Fiber or other transmission medium that may be used in lieu of cable, wire or
Fiber for the same purposes and related equipment and facilities on, over and
under the Inalienable Property of the City within the Franchise Area to provide
Telecommunications Services and agrees to comply with each term, condition and
requirement of Section 6 of such agreement, which terms, conditions and
requirements are deemed to be incorporated herein by this reference."
SECTION 7 -- COMPENSATION AND OTHER PAYMENTS
7.1 Compensation
7.1.1 Compensation
As compensation for the franchise, the Company shall have the
following obligations:
(a) Franchise Fee. The Company's obligation to pay franchise
fees shall commence on the Completion Date. For purposes of this Section
7.1, the Completion Date shall be the earlier of the date of completion of
the Initial Backbone or the second anniversary of the Original Agreement
Date. Commencing on the Completion Date, the Company shall pay to the City
five percent (5%) of Gross Revenue each year during the Term.
During each year of the Term following the Completion
Date, the Company's compensation payments pursuant to this Section
7.1.1(a) shall not be less than $200,000.00 (two hundred thousand dollars)
per annum. Such minimum payment, however, shall be prorated if necessary
to reflect a partial first or last year of the franchise. To the extent
that the sum of all payments pursuant to this Section 7.1.1(a) with
respect to any year is less than said minimum payment, then the Company's
compensation payment to be made within forty-five (45) days of the last
day of December of said year pursuant to Section 7.1.2 shall include an
amount which brings the total amount paid with respect to said year up to
said minimum payment.
(b) Services to City. The Company shall provide Services to
the City, and observe its other obligations, as specified in Appendix E to
this Agreement. The Company expressly acknowledges and agrees that neither
the provision of Services to the City nor the satisfaction of other
obligations specified in Appendix E to this Agreement
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shall be chargeable against the franchisee fees to be paid to the City by the
Company pursuant to Section 7.1.1(a) hereof.
7.1.2 Timing
(a) All payments made pursuant to Section 7.1.1(a) hereof
shall be made on a quarterly basis within forty-five (45) days of the
close of each calendar quarter. The Company shall in good faith estimate
each quarterly payment based on anticipated revenues for that quarter.
(b) Within sixty (60) days following the end of the calendar
year, the Company shall calculate the exact fee due to the City pursuant
to section 7.1.1(a) hereof for said calendar year. Should the total
calculated franchise fee for the year exceed the estimated quarterly
payments made by the Company for the year, the Company shall, within the
60-day period following the end of the calendar year, remit to the City
any balance due. Should the estimated quarterly payments made by the
Company for the year exceed the total calculated franchise fee for the
year, the City will remit the overpayment within thirty (30) days
following notice form the Company of the balance due.
(c) In no case shall the estimated quarterly payments to be
paid pursuant to paragraph (a) of this Section 7.1.2 be less than
one-forth (1/4) of the total calculated franchise fee based on Section
7.1.1(a) thereof for the preceding calendar year.
7.1.3 Records and Audits
The Company shall keep comprehensive itemized records of all
revenues received and of all Services provided, in sufficient detail to enable
the City to determine whether all compensation owed to the City pursuant to
Section 7.1 is being paid to the City.
7.1.4 Reservation of Rights
No acceptance of any compensation payment by the City shall be
construed as an accord and satisfaction that the amount paid is in fact the
correct amount, nor shall such acceptance of any payment be construed as a
release of any claim that the City may have for further or additional sums
payable under the provisions of this Agreement. All amounts paid shall be
subject to audit and recomputation by the City.
7.15 Ordinary Business Expense
Nothing contained in this section 7.1 or elsewhere in this
Agreement is intended to prevent the company from treating the compensation and
other payments that it may pay pursuant to this Agreement as an ordinary expense
of doing business and, accordingly, form deducting said payments from gross
income in any City, state, or federal income tax return.
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7.2 Other Payments
7.2.1 Franchising Costs
The company has, prior to the execution of this Agreement,
paid a portion of the Company's pro rata share of costs incurred by the City for
the services of third parties (including, without limitation, attorneys and
other consultants) in connection with the award of this franchise. Within thirty
(30) days after receipt of an itemized and detailed invoice for services
rendered, the Company shall pay to DoITT, or at the direction of the
Commissioner to third party, the company's pro rata share of all remaining
reasonable costs and expenses incurred by the City for the services of third
parties (including, without limitation, attorneys and other consultants) in
connection with the award of this franchise. The company expressly agrees that
the payments referred to in this Section 7.2.1 are in addition to and not in
lieu of, and shall not be offset against, the compensation to be paid to the
City by the Company pursuant to Section 7.1 hereof.
7.2.2 Future Costs
7.2.3 The Company shall pay to the City or to third parties,
at the direction of the commissioner, an amount equal to the reasonable costs
and expenses which the City incurs for the services of third parties (including
but not limited to attorneys and other consultants) in connection with any
renewal or Company-initiated renegotiation, transfer, amendment or other
modification of this Agreement or the franchise, provided, however, that in the
case of renewal only, the parties shall agree upon a reasonable financial cap at
the outset of negotiations. The Commissioner shall review the contested charges
and the services rendered and shall reasonably determine whether such charges
are reasonable for the services rendered. The Company expressly agrees that the
payments made pursuant to this Section 7.2 are in addition to and not in lieu
of, and shall not be offset against, the compensation to be paid to the City by
the Company pursuant to Section 7.1 hereof.
7.3 No Credits or Deductions
(a) The Company expressly acknowledges and agrees that:
(i) The compensation and other payments to be made or
Services to be provided pursuant to this Section 7 shall not be
deemed to be in the nature of a tax, and shall be in addition to any
and all taxes or other fees or charges which the Company or any
Affiliated Person shall be required to pay to the City or to any
state or federal agency or authority, all of which shall be separate
and distinct obligations of the Company; and
(ii) The Company expressly relinquishes and waives its
rights and the rights of any Affiliated Person to a deduction or
other credit pursuant to Section 626 of the New York State Real
Property Tax Law and any successor or amendment thereto, and to any
subsequent law, rule, regulation, or order which would purport to
permit any of the acts prohibited by this Section 7.3; and
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(iii) Except as might be permitted by Section 7.1.5, the
Company shall not, and shall not otherwise support any attempt by an
Affiliated Person to make any claim for any deduction or other
credit of all or any part of the amount of the compensation or other
payments to be made or Services to be provided pursuant to this
Agreement from or against any City or other governmental taxes of
general applicability or other fees or charges which the Company or
any Affiliated Person is required to pay to the City or other
governmental agency; and
(iv) Except as might be permitted by Section 7.1.5, the
Company shall not, and shall not otherwise support any attempt by an
Affiliated Person to apply or seek to apply all or any part of the
amount of the compensation or other payments to be made or Services
to be provided pursuant to this Agreement as a deduction or other
credit from or against any City or other government taxes of general
applicability (other than income taxes) or other fees or charges,
each of which shall be deemed to be separate and distinct
obligations of the Company and the Affiliated Persons.
(b) In any situation where the Company believes the effect of
this Section 7.3 is unduly harming, in a manner inconsistent with the
intent of this Section 7.3, an Affiliated Person of the Company, the
Company may petition the City for relief, and such relief shall not be
unreasonably withheld.
7.4 Interest on Late Payments
In the event that any payment required by this Agreement is not
actually received by the City on or before the applicable date fixed in this
Agreement, interest thereon shall accrue from such date until received at a rate
equal to the rate of interest then in effect charged by the City for late
payments of real estate taxes.
7.5 Method of Payment
Except as provided elsewhere in this Agreement, all payments made by
the Company to the City pursuant to this Agreement shall be made to the City's
Department of Finance, with a copy to DoITT.
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7.6 Continuing Obligation and Holdover
(a) In the even the Company continues to operate all or any
part of the System after the Term, then the Company shall continue to
comply with all applicable provisions of this Agreement, including,
without limitation, all compensation and other payment provisions of this
Agreement, throughout the period of such continued operation, provided
that any such continued operation shall in no way be construed as a
renewal or other extension of this Agreement or the franchise granted
pursuant to this Agreement, nor as a limitation on the remedies, if any,
available to the City as a result of such continued operation after the
Term, including, but not limited to, damages and restitution.
(b) In the event this Agreement terminates for any reason
whatsoever and the Company fails to cease providing Service over the
System, the City, in addition to all other remedies available to it under
this Agreement or by law, shall be entitled to receive all payments it is
entitled to receive under this Agreement including, but not limited to,
the compensation set forth in Section 7.
SECTION 8 -- OVERSIGHT AND REGULATION
8.1 Protection from Disclosure
To the extent permissible under applicable law, the City shall
protect from disclosure any confidential, proprietary information submitted to
the City under this Agreement or made available to the City pursuant to Sections
8.5, 8.7.1 and 8.7.2, provided that the Company notifies the City of, and
clearly labels, the information which the Company deems to be confidential,
proprietary information. Such notification and labeling shall be the sole
responsibility of the Company.
8.2 Oversight
The City shall have the right to oversee, regulate and inspect
periodically the construction, maintenance, operation and upgrade of the System,
and any part thereof, in accordance with the provisions of this Agreement and
applicable law. The Company shall establish and maintain managerial and
operational records, standards, procedures and controls to enable the Company to
prove, in reasonable detail, to the satisfaction of the City at all times
throughout the Term, that the Company is in compliance with this Agreement. The
Company shall retain such records for not less than six (6) years following
their creation, and for such additional period as DoITT may direct.
8.3 Notification to City
(a) The Company shall, upon the request of the Commissioner,
but no more frequently than once a year, provide DoITT with a report
describing the Services offered and classes of customers served by the
Company during the previous twelve months. Further, such report shall
describe the Company's plans for the coming twelve months with regard to
new Services that the Company reasonably anticipates might be
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offered or new classes of customers that the Company reasonably
anticipates might be served. Notwithstanding the requirements of this
Section 8.3(a), the Company shall provide to the City, upon the City's
request, any additional information that the City reasonably deems
necessary during the Term.
(b) The Company shall also, on an annual basis, provide DoITT
with a report describing any construction or installation of cable, wire,
Fiber or other transmission medium that may be used in lieu of cable, wire
or Fiber for the same purposes, or related equipment and facilities, in
any areas outside of the Initial Backbone, that has occurred during the
previous twelve months. Such report shall also describe the Company's
reasonably anticipated plans for such construction and installation for
the coming twelve months. Notwithstanding the requirements of this Section
8.3(b), the Company shall provide to the City, upon the City's request,
any additional information that the City reasonably deems necessary during
the Term. It is not anticipated that confidential information will be
required under this Section 8.3(b).
8.4 Regulation by City
To the full extent permitted by applicable law either now or in the
future, the City reserves the right to adopt or issue such rules, regulations,
orders, or other directives governing telecommunications that are consistent
with the terms of this Agreement and that it finds necessary or appropriate in
the lawful exercise of its police powers, and the Company expressly agrees to
comply with all such lawful rules, regulations, orders, or other directives.
8.5 Reports
8.5.1 Status Reports
The Company shall submit to DoITT reports describing, in
detail, the status of the construction of the Initial Backbone every six (6)
months from the Effective Date until its substantial completion. The Company
shall, upon substantial completion of the Initial Backbone, notify the
Commissioner in writing.
8.5.2 Financial Reports
The Company shall submit to the Comptroller and DoITT not
later than three (3) months after the end of each annual fiscal period, a copy
of the Company's annual financial statements for such period which statements
shall be signed by the Chief Financial Officer of the Company, provided,
however, that the Comptroller may also require such statements to be audited and
certified by an independent certified public accountant in accordance with
generally accepted accounting principles. Such statements shall be accurate and
complete. The Company shall be permitted to provide consolidated financial
statements in satisfaction of this Section 8.5.2.
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8.5.3 Ownership Reports
The Company shall promptly report to the City any change in
ownership of the Company which is inconsistent with the description of
ownership set forth in Appendix G hereof.
8.5.4 Additional Reports
The Company shall submit to DoITT, upon the request of the
Commissioner, but no more frequently than once a year, a report describing
the Company's compliance with its obligations under Sections 6.2 and 6.3
hereof. Such report shall be accurate and complete.
8.5.5 Additional Information and Reports
Upon the request of the Commissioner, the Company shall
promptly submit to DoITT any information or report reasonably related to the
Company's obligations under this Agree, its business and operations, or those
of any Affiliated Person, with respect to the System or its operation, or any
Service distributed over the System, in such form and containing such
information as the Commissioner shall specify. such information or report
shall be accurate and complete.
8.6 Additional Filings
The Company shall provide upon the request of the
Commissioner, but no more frequently than once a year, to DoITT a list of any
and all material communications, public reports, petitions or other filings,
either received from or submitted to any municipal, county, state or federal
agency or official (and any response thereto submitted by or received by the
Company), which materially affects the operation of the System or any Service
or the Company's representations and warranties set forth herein, but not
including tax returns or other filings which are confidential. Upon the
request of DoITT, the Company shall promptly, but in no case later than ten
(10) business days following the request, deliver to DoITT a complete copy of
any item on said list.
8.7 Books and Records/Audit
8.7.1 Books and Records
Throughout the Term, the Company shall maintain complete
and accurate books of account and records of the business, ownership, and
operations of the Company with respect to the System in a manner that allows
the City at all times to determine whether the Company is in compliance with
the Agreement. Should the City reasonably determine that the records are not
being maintained in such a manner, the Company shall alter the manner in
which the books and/or records are maintained so that the Company comes into
compliance with this Section. All financial books and records which are
maintained in accordance with the regulations of the PSC and generally
accepted accounting principles shall be deemed to be acceptable under this
Section. The Company shall also maintain and provide such additional
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books and records as the Comptroller or the Commissioner deem reasonably
necessary to ensure proper accounting of all payments due the City.
8.7.2 Right of Inspection
The Commissioner and the Comptroller, or their designated
representatives, shall had the right to inspect, examine or audit during
normal business hours and upon reasonable notice to the Company under the
circumstances, all documents, orecords or other information which pertain to
the Company or any Affiliated Person with respect to the System, its
operation, its employment and purchasing practices, Services distributed over
the System, and with respect to the Company's obligations pursuant to this
Agreement. All such documents shall be made available within New York City or
in such other place that the City may agree upon in writing in order to
facilitate said inspection, examination, or audit, provided, however, that is
such documents are located outside of the City, then, upon notice to the
Company, the Company shall pay the reasonable expenses incurred by the
Commissioner, the Comptroller or their designated representatives in
travelling to such location. All of such documents shall be retained by the
Company for a minimum of six (6) years following termination of this
Agreement. Access by the City to any of the documents covered by this Section
8.7.2 shall not be denied by the Company on grounds that such documents are
alleged by the Company to contain confidential, proprietary or privileged
information, provided that this requirement shall not be deemed to constitute
a waiver of the Company's right to assert that confidential, proprietary or
privileged information contained in such documents should not be disclosed,
subject to Section 8.1 hereof. In order to determine the validity of such
assertion and withholding by the Company, the City agrees to review the
alleged proprietary information, and/or a log of the documents believed by
the Company to be privileged reflecting sufficient information to establish
the privilege claimed, at the Company's premises and, in connection with such
review, to limit access to the alleged proprietary information to those
individuals who require the information in the exercise of the City's rights
under this Agreement. If the Corporation Counsel of the City concurs with the
Company's assertion regarding the proprietary nature of such information, the
City will hold such information in confidence to the extent authorized by and
in accordance with applicable law and will not remove from the Company's
premises the proprietary portion of any document or other intangible thing
that contains such proprietary information. If the Corporation counsel of the
City concurs with the Company's assertion regarding the privileged nature of
such information, then the Company will not be required to disclose such
information. If the Corporation Counsel of the City does not concur with such
assertions, then the Company shall promptly provide such documents, including
the alleged proprietary or privileged portion thereof, to the City, provided
that the Company shall not be required to provide the proprietary or
privileged portion thereof during the pendency of any court challenge to such
provision.
8.8 Compliance with "Investigations Clause"
The Company agrees to comply in all respects with the City's
"Investigations Clause," a copy of which is attached at Appendix F hereto.
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SECTION 9 - RESTRICTIONS AGAINST ASSIGNMENT AND OTHER TRANSFERS
9.1 Transfer of Interest
Except as provided in Section 96 hereof and Appendix G hereto,
and excepting conveyances and leases of real or personal property in the
ordinary course of the operation of the System (but not excepting leases
which by their size or nature are the functional equivalent of transfers of
the System), neither the franchise granted herein nor any rights or
obligations of the Company in the System or pursuant to this Agreement shall
be encumbered, assigned, sold, transferred, pledged, leased, sublet, or
mortgaged in any manner, in whole or in part, to any Person, nor shall title
therein, either legal or equitable, or any right or interest therein, pass to
or vest in any Person, either by act of the Company, by act of any Person
holding Control of or any interest in the Company or the System or the
franchise granted herein, by operation of law, or otherwise, without the
prior written consent of the City pursuant to the procedures set forth in
this Section 9, provided that the City shall consider any such action in
accordance with its usual procedural rules.
9.2 Transfer of Control or Stock
Notwithstanding any other provision of this Agreement, except as
provided in Section 9.6 hereof or as set forth in on Appendix G, no change in
Control of the Company, the System or the franchise granted herein shall
occur after the Effective Date, by act of the Company, by act of any Person
holding Control of the Company, the System or the franchise granted herein,
by operation of law, or otherwise, without the prior written consent of the
City granted pursuant to the procedures set forth in this Section 9. The
requirements of Section 9.3 hereof shall also apply whenever any change is
proposed of ten percent (10%) or more of the ownership or Control of the
Company, the System, the franchise granted herein or of any Person holding
Control of the Company or in the System or in the franchise (but nothing
herein shall be construed as suggesting that a proposed change of less than
ten percent (10%) does not require consent of the City (acting pursuant to
the procedures set forth in this Section 9) if it would in face result in a
change in Control of the Company, the system or the franchise granted
herein), and any other event which could result in a change in ownership or
Control of the Company, regardless of the manner in which such ownership or
Control is evidenced (e.g., stock, bonds, debt instruments or other indicia
of ownership or Control).
9.3 Petition
The Company shall promptly notify the Commissioner of any
proposed action requiring the consent of the City pursuant to Sections 9.1 or
9.2 hereof or to which this Section 9.3 applies by submitting to the
Commissioner, with a copy of the Corporation Counsel, a petition requesting
the submission by the Commissioner of such petition to the FCRC and approval
thereof by the FCRC or requesting a determination that no such submission and
approval is required and its argument why such submission and approval is not
required. Each petition shall fully describe the proposed action and shall be
accompanied by a justification for the action and, if applicable, the
Company's argument as to why such action would not involve a change in
Control of the Company, the System or the franchise, and such additional
supporting information as the Commissioner and/or the FCRC may reasonably
require in order to review
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and evaluate the proposed action. The Commissioner shall expeditiously review
the petition and shall (a) notify the Company in writing if the Commissioner
determines that the submission by the Commissioner and the approval of the
FCRC is not required or (b) if the Commissioner determines that such
submission and approval is required, either (i) notify the Company that the
Commissioner does not approve the proposed action and therefore will not
submit the petition to the FCRC, or (ii) submit the petition to the FCRC for
its approval.
9.4 Consideration of the Petition
DoITT and the FCRC, as the case may be, may take such actions as
it deems appropriate in considering the petition and determining whether
consent is needed or should be granted. In considering the petition, DoITT
and the FCRC, as the case may be, may inquire into: (i) the qualifications of
each Person involved in the proposed action, (ii) all matters relevant to
whether the relevant Person(s) will adhere to all applicable provisions of
this Agreement, (iii) the effect of the proposed action on competition; and
(iv) all other matters it deems relevant in evaluating the petition,
including whether the Company executed this Agreement under a good faith
belief that it would itself carry out the obligations of the Company
hereunder. After receipt of a petition, the FCRC may, as it deems necessary
or appropriate, schedule a public hearing on the petition. Further DoITT and
the FCRC may review the Company's performance under the terms and conditions
of this Agreement. The Company shall provide all requested assistance to
DoITT and the FCRC in connection with any such inquiry and, as appropriate,
shall secure the cooperation and assistance of all Persons involved in said
action.
9.5 Conditions
As a condition to the granting of any consent required by this
Section 9, the Commissioner and/or the FCRC may: (i) upon a determination
that the Company did not execute this Agreement under a good faith belief
that it would itself carry out the obligations of the Company pursuant to
this Agreement, require the Company of any Affiliated Person to pay to the
City part or all of the profits earned or to be earned by such Person in
connection with, upon the completion of, or as a result of, any of the
actions described in Sections 9.1 or 9.2 hereof with respect to any of such
actions which occur within the four (4) years after the Effective Date; and
(ii) require that each Person involved in any action described in Sections
9.1 or 9.2 hereof shall execute an agreement, in a form and containing such
conditions as may be specified by the City, providing that such Person
assumes and agrees to be bound by all applicable provisions of this Agreement
and such other conditions which the City deems necessary or appropriate in
the circumstances. The execution of such agreement by such Person(s) shall in
no way relieve the Company or any other transferor involved in any action
described in Sections 9.1 or 9.2 hereof, of its obligations pursuant to this
Agreement.
9.6 Permitted Encumbrances
Nothing in this Section 9 shall be deemed to prohibit any
assignment, pledge, lease, sublease, mortgage, or other transfer of all or
any part of the System, or any right or interest therein, for financing or
refinancing purposes, provided that each such assignment, pledge, lease,
sublease, mortgage, or other transfer shall be subject to the rights of the
City pursuant to this Agreement and applicable law. The consent of the City
shall not be required
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with respect to any transfer to, or taking of possession by, any banking or
lending institution which is s secured creditor of the Company or all or any
part of the System pursuant to the rights or such secured creditor under
Article 9 of the Uniform Commercial Code, as in effect in the State of New
York, and, to the extent that the collateral consists of real property, under
the New York Real Property Law; provided, further that, the City's rights are
in no way adversely affected or diminished.
9.7 Consent Not a Waiver
The grant or waiver of any one or more of such consents shall not
render unnecessary any subsequent consent, nor shall the grant of any such
consent constitute a waiver of any other rights of the City, as required in
this Section 9.
9.8 Petitions From Persons Other Than the Company
Seeking Control Over the Company
Notwithstanding the foregoing, DoITT reserves the right, on a
case-by-case basis, to accept, hear and/or grant petitions for the transfer
of Control of the Company, the System or the franchise granted herein from
Persons seeking to obtain Control of the Company. Notwithstanding the
foregoing, the City shall provide the Company with reasonable notice of any
such petitions and the Company shall be afforded the opportunity to respond
to any such petitions before the City grants any approval with respect to
such petitions, including but not limited to, the hearing or granting of such
petitions. The City, its officers, employees, agents, attorneys, consultants
and independent contractors shall not be liable to the Company or any other
Person for exercising its rights herein. The Company shall be entitled to
rely upon publicly filed reports to which it has access in connection with
its determination of the applicability of this Section 9.8, except to the
extent the Company knows or has reason to believe that any such report is or
may be incorrect, or is aware of the information which is the subject of this
Section otherwise than as a result of publicly filed reports.
SECTION 10 - LIABILITY AND INSURANCE
10.1 Liability and Indemnity
10.1.1 Company
The Company shall be liable for, and the Company and each
Affiliated Person (not including a limited partner or an individual
shareholder) shall indemnify, defend and hold the City, its officers, agents,
servants, employees, attorneys, consultants and independent contractors (the
"Indemnitees") harmless from, any and all liabilities, suits, obligations,
fines, damages, penalties, claims, costs, charges and expenses (including,
without limitation, reasonable attorneys' fees and disbursements), that may
be imposed upon or incurred by or asserted against any of the Indemnitees
arising out of the construction, operation, maintenance, upgrade, repair or
removal of the System or otherwise arising out of or related to this
Agreement; provided, however, that the foregoing liability and indemnity
obligation of the Company pursuant to this Section 10.1 shall not apply to
any willful misconduct or gross negligence of the City, its officers,
employees, servants, agents, attorneys, consultants or independent
contractors.
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Further, it is a condition of this Agreement that the City assumes no liability
for liabilities, suits, obligations, fines, damages, penalties, claims, costs,
charges and expenses (including, without limitation, reasonable attorneys' fees
and disbursements) to either Persons or property on account of the same, except
as expressly provided herein.
10.1.2 No Liability for Public Work, etc.
None of the City, its officers, agents, servants, employees,
attorneys, consultants or independent contractors shall have any liability to
the Company for any damage as a result of or in connection with the protection,
breaking through, movement, removal, alteration or relocation of any part of the
System by or on behalf of the Company or the City in connection with any
emergency, public work, public improvement, alteration of any municipal
structure, any change in the grade or line of any Inalienable Property of the
City, or the elimination, discontinuation, closing or demapping of any
Inalienable Property of the City, as provided in Sections 2.4.5 and 5.4 hereof.
When reasonably possible, the Company shall be consulted prior to any such
activity and shall be given the opportunity to perform such work itself, but the
City shall have no liability to the Company in the event it does not so consult
the Company. All costs to repair or replace the System, or parts thereof,
damaged or removed as a result of such activity shall be borne by the Company;
provided, however, that the foregoing obligations of the Company pursuant to
this Section 10.1.2 shall not apply to any willful misconduct or gross
negligence of the City, its officers, employees, servants, agents, attorneys,
consultants or independent contractors.
10.1.3 No Liability for Damages
None of the City, its officers, agents, servants, employees,
attorneys, consultants and independent contractors shall have any liability to
the Company for any special, incidental, consequential, punitive, or other
damages as a result of the proper and lawful exercise of any right of the City
pursuant to this Agreement or applicable law, including, without limitation, the
rights of the City to terminate, amend, or otherwise modify all or any part of
this Agreement or the franchise granted herein; provided, however, that the
foregoing limitation on liability pursuant to this Section 10.1.3 shall not
apply to any willful misconduct or gross negligence of the City, its officers,
employees, servants, agents, attorneys, consultants or independent contractors.
10.1.4 Defense of Claim, etc.
If any claim, action or proceeding is made or brought against
any of the Indemnitees by reason of any event to which reference is made in
Section 10.1.1 hereof, then upon demand by the City, the Company shall either
resist, defend or satisfy such claim, action or proceeding in such Indemnitee's
name, by the attorneys for, or approved by, the Company's insurance carrier (if
such claim, action or proceeding is covered by insurance) or by the Company's
attorneys. The foregoing notwithstanding, upon a showing that the Indemnitee
reasonably requires additional representation, such Indemnitee may engage its
own attorneys to defend such Indemnitee, or to assist such Indemnitee in such
Indemnitee's defense of such claim, action or proceeding, as the case may be,
and the Company shall pay the reasonable fees and disbursements of such
attorneys of such Indemnitee.
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1.2 Insurance
10.2.1 Specifications
Prior to the execution of this Agreement, the Company has, at
its own cost and expense, obtained and furnished to DoITT, with a copy to the
Comptroller, a liability or umbrella insurance policy taking effect no later
than the Original Agreement Date, insuring the Company and the City, its
officers, agents, servants, employees, attorneys, consultants and independent
contractors against each and every form of liability referred to in Section 10.1
herein, in the minimum combined amount of fifty million dollars ($50,000,000),
covering bodily injury, including death, personal injury and property damage.
Such policy or policies have been issued by companies duly licensed to do
business in the State of New York and acceptable to the Comptroller, carrying a
rating by Best's of not less than A. The foregoing minimum coverage shall not
prohibit the Company from obtaining a liability insurance policy or policies
with coverage in excess of such minimum, provided that the City shall be named
as an additional insured to the full extent of any limitation contained in any
such policy or policies obtained by the Company. The Company shall be permitted
to provide evidence of a blanket policy in satisfaction of this Section 10.2.1.
10.2.2 Maintenance
(a) The Company shall continuously maintain one or more
liability insurance policies meeting the requirements in Section 10.2.1
hereof throughout the Term and thereafter until completion of removal of
the System over, under or on the Inalienable Property of the City to the
extent such removal is required pursuant to this Agreement.
(b) Each such liability insurance policy shall contain the
following endorsement: "It is hereby understood and agreed that this
policy may not be canceled nor the intention not to renew be stated until
ninety (90) days after receipt by the City, by registered mail, of a
written notice of such intent to cancel or not to renew." Within sixty
(60) days after receipt by the City of any said notice, and in no event
later than thirty (30) days prior to any said cancellation, the Company
shall obtain and furnish to DoITT, with a copy to the Comptroller,
replacement insurance policies in a form reasonably acceptable to DoITT
and the Comptroller together with evidence demonstrating that the premiums
for such insurance have been paid.
10.2.3 Adjusted Insurance Coverage
The Company agrees to adjust the minimum coverage of the
liability insurance policy or policies required by Section 10.2.1 within three
(3) months of notice from the City that the City has reasonably determined that
additional amounts or types of insurance are being commonly carried with respect
to systems of a size and nature similar to the System or other circumstances
have arisen which make it reasonably prudent to obtain such additional amounts
or types of insurance.
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10.2.4 Liability Not Limited
The liability of the Company and any Affiliated Person (not
including a limited partner or an individual shareholder) to the City or any
Person for any of the matters which are the subject of the liability insurance
policy or policies required by this Section 10.2 shall not be limited by said
insurance policy or policies nor by the recovery of any amounts thereunder;
provided, however, that the City shall in no case be entitled to duplicative
recoveries from different sources.
SECTION 11 - SPECIFIC RIGHTS AND REMEDIES
11.1 Not Exclusive
The Company agrees that the City shall have the specific rights and
remedies set forth in this Section 11. These rights and remedies are in addition
to and cumulative of any and all other rights or remedies, existing or implied,
now or hereafter available to the City at law or in equity in order to enforce
the provisions of this Agreement. Such rights and remedies shall not be
exclusive, but each and every right and remedy specifically provided or
otherwise existing or given may be exercised from time to time and as often and
in such order as may be deemed expedient by the City, except as provided herein.
The exercise of one or more rights or remedies shall not be deemed a waiver of
the right to exercise at the same time or thereafter any other right or remedy
nor shall any such delay or omission be construed to be a waiver of or
acquiescence to any default. The exercise of any such right or remedy by the
City shall not release the Company from its obligations or any liability under
this Agreement, provided, however, that the City shall in no case be entitled to
duplicate recoveries from different sources.
11.2 Default
11.2.1 Events of Default
In addition to any other Event of Default specified herein,
any of the following shall constitute an Event of Default:
(a) any breach of a provision of the Agreement requiring the
Company (i) to replenish the Performance Bond/Security Fund (Section
5.8.6); (ii) to maintain the Performance Bond/Security Fund (Section 5.8);
(iii) to make any payments to the City; (iv) to maintain a liability
insurance policy (Section 10.2); or (v) to provide or furnish information
to the City, that is not cured within thirty (30) days after notice
pursuant to Section 11.2.2;
(b) any substantial breach of a material provision of this
Agreement by the Company that is not cured within thirty (30) days after
notice pursuant to Section 11.2.2; or
(c) any persistent failure by the Company to comply with any
of the provisions, terms or conditions of this Agreement or with any
rules, regulations, orders or other directives of the City after having
received notice of a failure to comply.
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11.2.3 Cure Procedures
(a) The Commissioner shall notify the Company, in writing,
of any breach under this Agreement, in accordance with Section 13.5 hereof.
The notice shall specify the alleged breach(es) with reasonable
particularity. The Company shall either (i) within the number of days set
forth in the applicable paragraph of Section 11.2.1 hereof, or such longer
period of time as the Commissioner may specify in such notice, cure such
alleged breach(es); or (ii) in a written response submitted to the
Commissioner within fifteen (15) days after the notice of breach, present
facts and arguments in refutation or excuse of such alleged failure. The
submission of such a response shall toll the running of the applicable cure
period as provided in Section 11.2.1 hereof. Notwithstanding the preceding,
no Event of Default shall exist if a breach is curable but work to be
performed, acts to be done, or conditions to be removed which cannot, by
their nature, reasonably be performed, done or removed within the cure period
provided, so long as the Company shall have commenced curing the same within
the cure period provided and shall diligently and continuously prosecute the
same promptly to completion.
(b) If the Company fails to cure the breach within the
applicable cure period, and fails to submit a response to the Commissioner
pursuant to subparagraph (a) hereof within the period provided herein for
submitting such response, an Event of Default will be deemed to have occurred.
(c) If, after the Company makes a response to the
Commissioner, the Commissioner determines, in his or her reasonable
discretion, that a breach under this Agreement has occurred, the Company
shall cure such breach within the balance of the time period to cure that
remained when the submission was made. If the Company is not able to cure
within the remaining time, the breach will be deemed to be an Event of
Default provided, however, that no Event of Default shall exist if a breach
is curable but work to be performed, acts to be done, or conditions to be
removed which cannot, by their nature, reasonably be performed, done or
removed within the cure period remaining, so long as the Company shall have
commenced curing the same within the cure period provided and shall
diligently and continuously prosecute the same promptly to completion.
(d) If, as a result of a failure or alleged failure to
comply with a material provision of this Agreement, the Company is unable to
comply with any other material provision(s) which necessarily and directly
arise(s) out of said failure or alleged failure as delineated in said
subsections, such inability to comply with such other provision(s) shall not
be deemed to be an independent failure to comply with a material provision of
this Agreement.
11.2.3 Remedies of the City
(a) Upon an Event of Default, DoITT may:
(i) cause a withdrawal from the Performance Bond/
Security Fund for any specified amount due the City under this
Agreement;
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(ii) assess money damages from the Company as
compensation for such Event of Default;
(iii) revoke the franchise granted pursuant to this
Agreement by termination of this Agreement;
(iv) accelerate the expiration of the Term by decreasing
the term of the franchise provided in Section 2.1 hereof, provided
that the remaining term of the franchise as accelerated pursuant to
this Section 11.2.3(a)(iv) shall not be less than twelve (12)
months;
(v) restrain by injunction, the default or reasonably
anticipated default by the Company of any provision of this
Agreement; and
(vi) invoke any other available remedy that would be
permitted by law.
(b) DoITT shall give the Company notice in writing when it
determines to pursue one or more remedies, but nothing herein shall
prevent DoITT from electing more than one remedy, simultaneously or
consecutively, for any default, provided, however, that the City shall in
no case be entitled to duplicate recoveries from different sources.
11.3 Termination
11.3.1 Termination Events
(a) The occurrence of any of the following shall result in
termination of the Agreement:
(i) the occurrence of any event relating to the
financial status of the Company which may reasonably lead to the
foreclosure or other judicial or nonjudicial sale of all or any
material part of the System, and the Company fails to demonstrate to
the reasonable satisfaction of the Commissioner within thirty (30)
days after notice that such event will not lead to such foreclosure
or other judicial or nonjudicial sale;
(ii) the condemnation by public authority, other than
the City or sale or dedication under threat or in lieu of
condemnation, of all or substantially all of the System, the effect
of which would materially frustrate or impede the ability of the
Company to carry out its obligations and the purposes this Agreement
and the Company fails to demonstrate to the reasonable satisfaction
of the Commissioner, within thirty (30) days after notice that such
condemnation, sale or dedication would not materially frustrate or
impede such ability of the Company;
(iii) except as otherwise provided in Section 9.6, if:
(A) the Company shall make an assignment of the Company or
substantially all of the
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System for the benefit of creditors, shall become and be adjudicated
insolvent, shall petition or apply to any tribunal for, or consent
to, the appointment of , or taking possession by, a receiver,
custodian, liquidator or trustee or similar official pursuant to
state or local laws, ordinances or regulations of or for it or any
substantial part of its property or assets, including all or any
part of the System; (B) a writ or warranty of attachment, execution,
distraint, levy, possession or any similar process shall be issued
by any tribunal against all or any material part of the Company's
property or assets; (C) any creditor of the Company petitions or
applies to any tribunal for the appointment of, or taking possession
by, a trustee, receiver, custodian, liquidator or similar official
for the Company or of any material parts of the property or assets
of the Company under the law of any jurisdiction, whether now or
hereinafter in effect, and a final order, judgment or decree is
entered appointing any such trustee, receiver, custodian, liquidator
or similar official, or approving the petition in any such
proceeding or (D) any final order, judgment or decree is entered in
any proceedings against the Company decreeing the voluntary or
involuntary dissolution of the Company; or
(iv) if there shall occur any denial, forfeiture or
revocation by any federal, state or local governmental authority
having regulatory jurisdiction over the Company of an authorization
required by law or the expiration without renewal of any such
authorization, and such events, either individually or in the
aggregate, materially jeopardize the System or its operation, and
the Company fails to take steps to obtain or restore such
authorization within thirty (30) days after notice.
(b) In addition, an Event of Default under Section 11.2 herein
may result in termination of the Agreement.
11.3.2 Rights Upon Termination
In the event of any termination of this Agreement, whether
pursuant to Section 11.3.1 hereof, by the expiration of the Term or by
revocation of the franchise by DoITT, the Company, at the City's election, shall
(a) sell to the City or to the City's designee the portions of the System on,
over or under the Inalienable Property of the City and all equipment necessary
for the functioning of such portions of the System; and/or (b) remove the
System, of portions of the System, installed on, over or under the Inalienable
Property of the City at the Company's own cost and expense, pursuant to Section
11.4 hereof.
11.3.3 Price
(a) The price to be paid to the Company upon an acquisition
pursuant to Section 11.3.2 herein shall be fair value (or, in case of
termination by revocation, an equitable price, determined with due regard
to the inquiry to the City and its residents), with no value allocable to
the franchise itself, which price shall be the fair value as provided in
Section 33(h)(S) of the City Charter, as may be amended, or under any
successor provision. Subject to the limitations found in the next
sentence, to the extent the City effects an acquisition pursuant to
Section 11.3.2 herein and subsequently sell
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that portion of the System acquired to a third party, and the amount
received by the City from such sale exceeds the price paid by the City to
the Company pursuant to this Section 11.3.3, the City shall pay such
excess amount to the Company after deducting all reasonable expenses
incurred by the City in connection with such acquisition and sale. The
preceding sentence shall apply only in cases where the Agreement has
terminated by reason of the expiration of the full Term or by reason of
the occurrence of an event in Section 11.3.1 (a) hereof, and shall not
apply in any case where the Agreement has been terminated for cause. In
cases where the Agreement has been terminated for cause and the City
effects an acquisition or transfer of the System for any reason, and the
party acquiring the System acquires it directly from the Company, then The
City shall be entitled to receive from such party any amount in excess of
the price which the City could have received if it had purchase the System
from the Company and subsequently sold the System to such third party.
(b) The date of valuation for purposes of Section 11.3.2
hereof shall be the date of termination of the Agreement. For the purpose
of determining such valuation, the parties shall select a mutually
agreeable independent appraiser to compute the purchase price in
accordance with industry practice and the aforementioned standards. If
they cannot agree on an appraiser in ten (10) days, the parties will seek
an appraiser from the American Arbitration Association. The appraiser
shall be instructed to make the appraisal as expeditiously as possible,
but in no more than sixty (60) days and shall submit to both parties a
written appraisal. The appraiser shall be afforded access to the Company's
books and records, as necessary to make the appraisal. Not withstanding
the provisions of Section 7.2.2 hereof, the parties shall share equally
the costs and expenses of the appraiser.
(c) The City will notify the company, within thirty (30) days
after receipt of the appraisal, of its election of rights pursuant to
Section 11.3.2 hereof. If it elects to make the purchase permitted under
Section 11.3.2 hereof. If it elects make the purchase permitted under
Section 11.3.2 hereof, it will purchase the same at closing to occur
within a reasonable time after its election.
(d) The Company agrees, at the request of the City, (i) to
operate the System on behalf of the City pursuant to the provisions of
this Agreement and such additional terms and conditions as are equitable
to the City and the Company for a period of up to four (4) months after
the termination of this Agreement, until the City either elects not to
purchase any portion of the System, or closes on such a purchase, or (ii)
to cease all construction and operational activities in a prompt and
workmanlike manner.
11.3.4 Company's Obligations
In the event of any acquisition of the System by the City or
the City's designee pursuant to Section 11.3.2 hereof, the Company shall:
(a) cooperate with the City to effectuate an orderly transfer
of all records and information concerning the System to the City;
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(b) promptly execute all appropriate documents to transfer to
the City subject to any liabilities, title to the System as well as all
contracts, leases, licenses, permits, rights-of-way, and any other rights,
contracts or understanding necessary to maintain and operate the System,
as appropriate; provided, that such transfers shall be made subject to the
rights, under Article 9 of the Uniform Commercial code as in effect in the
State of New York and, to the extent that any collateral consists of real
property under the New York Real Property Law, of banking or any other
lending institutions which are secured creditors or mortgagees of the
Company at the time of such transfers; and provided, that, with respect to
such creditors and mortgagees, the City shall have no obligation following
said transfers to pay, pledge, or otherwise commit in any way any general
or any other revenues or funds of the City, other than the gross operating
revenues received by the City from its operation of the System, in order
to repay any amounts outstanding on any debts secured by the System which
remain owing to such creditors or mortgagees; and provided, finally, that
the total of such payments by the City to such creditors and mortgages,
from the gross operating revenues received by the City from its operation
of the System, shall in no event exceed the lesser of: (i) the fair market
value of the System on the date of the transfer of title to the City or
(ii) the outstanding debt owed to such creditors and mortgagees on said
date. Nothing in this Section 11.3. shall be construed to limit the rights
of any such secured creditors to exercise it or their rights as secured
creditors or mortgagees at any time prior to the payment of all amounts
due pursuant to the applicable debt instruments; and
(c) promptly supply the Commissioner with all necessary
records (i) to reflect the City's ownership of the System; and (ii) to
operate and maintain the System including, without limitation, all
Customer records and plant and equipment layout documents.
11.4 Removal
11.4.1 Discretion of DoITT
Upon any termination of this agreement, DoITT, in its sole
discretion may, but shall not be obligated to, direct the Company to remove, at
the Company's sole cost and expense, all, or any portion designated by DoITT, of
the System installed by the Company from the Inalienable Property of the City in
accordance with all applicable requirements of the City and subject to the
following:
(a) this provision shall not apply to buried portions of the
System which, in the opinion of DoITT, cannot be removed;
(b) in removing the System, or part thereof, the Company shall
refill and compact, at its own cost and expense, any excavation that shall
be made by it and shall leave, in all material aspects, all Inalienable
Property and other property in as good condition as that prevailing prior
to the Company's removal of the System from Inalienable Property of the
City and without affecting, altering or disturbing in any way any
electric, telephone or other cables, wires, structures or attachments;
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(c) the City shall have the right to inspect and approve the
condition of such Inalienable Property after removal and, to the extent
that the City determines that said Inalienable Property and other property
have not been left in materially as good condition, as that prevailing
prior to the Company's removal of the System, the Company shall be liable
to the City for the cost or restoring the Inalienable Property and other
property to said condition;
(d) the Performance Bond/Security Fund, liability insurance
and indemnity provisions of this Agreement shall remain in full force and
effect during the entire period of removal and associated repair of all
Inalienable Property of the City, and for not less that one hundred twenty
(120) days thereafter; and
(e) removal shall be commenced within thirty (30) days of the
removal order by DoITT and shall be substantially completed within twelve
(12) months thereafter including all reasonably associated repair of the
Inalienable Property of the City.
11.4.2 Failure to Commence Removal
If, in the reasonable judgment of the Commissioner, the
Company fails to commence removal of the System as designated by DoITT, within
thirty (30) days after DoITT's removal order, or if the Company fails to
substantially complete such removal, including all associated repair of the
Inalienable Property of the City, within twelve (12) months thereafter, then, to
the extent not inconsistent with applicable law, the City shall have the right
to:
(a) declare that all rights, title and interest to the System
belong to the City with all rights of ownership including, but not limited
to, the right to connect and use the System or to effect a transfer of all
right, title and interest in the System to another Person for operation;
or
(b) authorize removal of the System installed by the Company
on, over or under the Inalienable Property of the City at the Company's
cost and expense, by another Person; and
(c) to the extent consistent with applicable law, and portion
of the Company's System on, over or under the Inalienable Property of the
City designated by DoITT for removal and not timely removed by the Company
shall belong to and become the property of the City without payment to the
Company notwithstanding the provisions of Section 11.3.2 hereof, and the
Company shall execute and deliver such documents, the Commissioner shall
request, in form and substance acceptable to the Commissioner, to evidence
such ownership by the City.
11.4.3 No Condemnation
None of the declaration, connection, use, transfer or other
actions by the City or the Commissioner under Section 11.4.2 shall constitute a
condemnation by the City or a sale or dedication under threat or in lieu of
condemnation.
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11.5 Return of Performance Bond/Security Fund
Upon the later of the date one hundred and twenty (12)) days after
the termination of this Agreement for any reason or the date of the completion
of removal of the System from and associated repair of the Inalienable Property
of the City pursuant to Section 11.4.1 hereof, the Company shall be entitled to
the return of the Performance Bond/Security Fund deposited pursuant to Section
5.8 hereof, or such portion thereof as remains on deposit with the Comptroller
at said termination, provided that all offsets necessary (a) to compensate the
City pursuant to Section 5.8.2 and/or 5.8.3 hereof, (b) to cover any costs, loss
or damage incurred by the City as a result of any Event of Default, in the event
of termination of this Agreement by the City pursuant to Section 11.3 hereof,
and (c) to reimburse the City for the cost of removal of the System from the
Inalienable Property of the City pursuant to Section 11.4.2 hereof have been
taken by the City.
11.6 Other Provisions
The City and the Company shall negotiate in good faith all other
terms and conditions of any such acquisition or transfer, except that the
Company hereby waives its rights, if any to relocation costs arising out of the
termination of this Agreement pursuant to this Section 11 that may be provided
by law and except that, in the event of any acquisition of the System by the
City: (i) the City shall not be required to assume any of the obligations of any
collective bargaining agreements or any other employment contracts held by the
Company or any other obligation of the Company or its officers, employees, or
agents including, without limitation, any pension or other retirement, or any
insurance obligations; and (ii) the City may lease, sell, operate, or otherwise
dispose of all or any part of the System in any manner.
SECTION 12-SUBSEQUENT ACTION
12.1 Compensation
In the event that, after the Effective Date any court, agency,
commission, legislative body, or other authority of competent jurisdiction takes
any action or enters any judgment which has a materially adverse effect, with
respect to the City or the Company, on the compensation or other payments to be
made by the Company pursuant to Section 7 of this Agreement, then the Company
and DoITT shall enter into negotiations to amend this Agreement in a manner not
inconsistent with any such action or judgment so as to establish a fair and
equitable relationship between the parties. In the event that either party fails
to negotiate in good faith to produce an agreement which is reasonably
acceptable to both parties within a reasonable period, then either party shall
have the right, by notice to the other, to accelerate the term of this Agreement
and the franchise granted hereunder such that the term and the franchise shall
terminate on the date which is one half of the number of days between the date
of such notice and the fifteenth anniversary of the Original Agreement Date, but
in no event shall the City be permitted to reduce the Term of this franchise by
virtue of this Section 12.1 such that the Term of this franchise is less than 10
years.
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12.2 Procedure for subsequent Invalidity
12.2.1 Declaration of Invalidity or Injunction
Except as provided in Section 12.1 hereof, in the event that,
after the Effective Date, any court, agency, commission, legislative body, or
other authority of competent jurisdiction:
(a) declares this Agreement invalid, in whole or in part, or
(b) requires the City or the Company either to: (i) perform
any act which is inconsistent with any provision of this Agreement or (ii)
cease performing any act required by any provision of this Agreement, then
the Company or the City, as the case may be, shall promptly notify the
other party in writing of such fact.
1.1.2 Continued Compliance
After the occurrence of the events described in Section 12.2.1
hereof, the Company and the City shall continue to comply with all provisions of
this Agreement, including the affected provision, until the validity of the
declaration or requirements has been finally adjudicated or a court orders the
Company or the City to comply with such declaration or order, provided that
either party may comply with any court order which is not stayed during the
pendency of any appeal leading to said final adjudication.
12.2.3 Negotiations to Amend Agreement
Except as provided in Section 12.1 hereof, to the extent that
any statute, rule, regulation, ordinance or any other law is enacted, adopted,
repealed, amended, modified, changed or interpreted in any way during the term
of this Agreement so as to (a) declare the Agreement invalid, in whole or in
part, or (b) require the Company or City either to: (i) perform any act which is
inconsistent with any provision of this Agreement, or (ii) cease performing any
act required by any provision of this Agreement, the Company and City shall
enter into good faith negotiations so as to modify this Agreement and /or
regulate the System, as applicable, to reflect such enactment, adoption, repeal,
amendment, modification, change or interpretation and the Company agrees to
comply with any such modifications or regulations arising out of such
negotiations. In the event that either party fails to negotiate in good faith to
produce an agreement which is reasonably acceptable to both parties within a
reasonable period, then either party shall have the right, by notice to the
other, to accelerate the term of this Agreement and the franchise granted
hereunder such that the term and the franchise shall terminate on the date which
is one half of the number of days between the date of such notice and the
fifteenth anniversary of the Original Agreement Date but in no event shall the
City be permitted to reduce the Term of this franchise by virtue of this Section
12.2.3 such that the Term of this franchise is less than 10 years.
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SECTION 13-MISCELLANEOUS
13.1 Appendices
The Appendices to this Agreement, attached hereto, and all portions
thereof and exhibits thereto, are, except as otherwise specified in said
appendices, incorporated herein by reference and expressly made a part of this
Agreement. The procedures for approval of any subsequent amendment or
modification to said Appendices shall be the same as those applicable to any
amendment or modification hereof.
13.2 Action Taken by City
Any action to be taken by DoITT pursuant to this Agreement shall be
taken in accordance with the applicable provisions of the City Charter as said
Charter may be amended or modified throughout the Term. Whenever, pursuant to
the provisions of this Agreement, the City, the Company, or any other Person is
required or permitted to take any action, including, without limitation, the
making of any request or the granting of any consent, approval, or
authorization, the propriety of said action shall be measured against the
standard of reasonableness such that each such action shall be undertaken in a
reasonable manner, unless this Agreement authorizes the City, the Company, or
other Person to take such action in its sole discretion.
13.3 Entire Agreement
This Agreement, including all Appendices hereto, embodies the entire
understanding and agreement of the City and the Company with respect to the
subject matter hereof and merges and supersedes all prior representations,
agreements and understandings, whether oral or written, between the City and the
Company with respect to the subject matter hereof, including, without
limitation, all prior drafts of this Agreement and any Appendix to this
Agreement and any and all written or oral statements or representations by any
official, employee, agent, attorney, consultant or independent contractor of the
City or the Company.
13.4 Delays and Failures Beyond Control of Company
Notwithstanding any other provision of this Agreement, the Company
shall not be liable for delay in the performance of, or failure to perform, in
whole or in part, its obligation pursuant to this Agreement due to strike, war
or act of war (whether an actual declaration of war is made or not),
insurrection, riot, act of public enemy, accident, fire, flood or other act of
God, technical failure where the Company has exercised all due care in the
prevention thereof, or other causes or events, to the extent that such any such
causes or events are beyond the control of the Company. In the event that any
such delay in performance or failure to perform affects only part of the
Company's capacity to perform, the Company shall perform to the maximum extent
it is able to do so and shall take all steps within its power to correct said
cause(s), it shall take all reasonable steps to do so in as expeditious a manner
as possible. The company shall notify DoITT in writing of the occurrence of any
event covered by this Section 13.4 within five (5) business days of the date
upon which the Company learns or should have learned of its occurrence.
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13.5 Notices
Every notice, order, petition, document, or other direction or
communication to be served upon the City or the Company shall be in writing and
shall be sufficiently given if sent by registered or certified mail, return
receipt requested. Every such communication to the Company shall be sent to its
office located at c/o General Counsel, Metromedia Fiber Network, Inc. 1
Meadowlands Plaza, East Rutherford, New Jersey 07073 or to such other location
in New York City as the Company may designate, from time to time. Every
communication from the Company shall be sent to the individual, agency or
department designated in the applicable section of this Agreement, unless it is
to "the City," in which case such communication shall be sent to the
Commissioner of DoITT at 75 Park Place, 6th Floor, New York, New York 10007. A
required copy of each communication from the Company shall be sent to
Corporation Counsel New York City Law Department, 100 Church Street, New York,
New York 10007, Attention: Chief, Economic Development Division. Except as
otherwise provided herein, the mailing of such notice, direction, or order shall
be equivalent to direct personal notice and shall be deemed to have been given
when mailed. Any notice the Commissioner is required to give to the Company
pursuant to Section 11.2 hereof for which a cure period is ten (10) days or less
must be served by personal delivery, overnight mail service or facsimile
transmission.
13.6 General Representations, Warranties and Covenants of the Company
In addition to the representations, warranties, and covenants of the
Company to the City set forth elsewhere herein, the Company represents and
warrants to the City and covenants and agrees (which representations,
warranties, covenants and agreements shall not be affected or waived by any
inspection or examination made by or on behalf of the City), that, as of the
Effective Date:
13.6.1 Organization, Standing, Power and Ownership
The Company is a limited liability company duly organized, validly
existing and in good standing under the laws of the State of Delaware and is
duly authorized to do business in the State of New York, The Company has all
requisite power and authority to own or lease its properties and assets, to
conduct its business as currently conducted and to execute, delivery and perform
this Agreement and all other agreements entered into or delivered in connection
with or as contemplated hereby. Certified copies of the Company's organizational
and governing documents, as amended to date, have been delivered to the
Commissioner, and are completed and correct. The Company is qualified to do
business and is in good standing in the State of New York. The description of
the ownership of the Company n Appendix G attached hereto is accurate and
complete.
13.6.2 Authorization; Non-Contravention
The execution, delivery and performance of this Agreement and
all other agreements, if any, entered into in connection with the transaction
contemplated hereby have been duly, legally and validly authorized by all
necessary action on the part of the Company and the Company has furnished the
City with a certified copy of authorizations for the execution and delivery of
this Agreement. This Agreement and all other agreements, if any, entered into in
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connection with the transactions contemplated hereby have been duly executed and
delivered by the Company and constitute (or upon execution and delivery by the
Company and the City will constitute) the valid and binding obligations of the
Company, and are enforceable (or upon execution and delivery will be
enforceable) in accordance with their respective terms. The Company has
obtained, or is in the process of obtaining, the requisite authority to
authorize, execute and deliver this Agreement and to consummate the transactions
contemplated hereby and no other proceedings or other actions are necessary on
the part of the Company to authorize the execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby. Neither
the execution and delivery of this Agreement by the Company nor the performance
of its obligations contemplated hereby will:
(a) conflict with, result in a materiel breach of or
constitute a material default under (or with notice or lapse of time or
both result in a material breach of or constitute a material default
under) (i) any governing document of the Company or to the Company's
knowledge, any agreement among the owners of the Company, or (ii) any
statute, regulation, agreement, judgment, decree, court or administrative
order or process or any commitment to which the Company is a party or by
which it (or any of its properties or assets) is subject or bound;
(b) result in the creation of, or give any part the right to
create, any material lien, charge, encumbrance or security interest upon
the property and assets of the Company; or
(c) terminate, modify or accelerate, or give any third party
the right to terminate, modify or accelerate, any provision or term of any
contract, arrangement, agreement, license agreement or commitments, except
for any event specified in (a) or (b) above which individually or in the
aggregate would not have a material and adverse effect on the business,
properties or financial condition of the Company or the System.
1.1.3 Consent
No consent, approval or authorization of, or declaration or
filing with, any public, governmental or other authority is required for the
valid execution and delivery of this Agreement or any other agreement or
instrument, if any, executed or delivered in connection herewith.
13.6.4 Compliance with Law
The Company certifies that, to the best of its knowledge after
diligent inquiry, it is in compliance with all laws, ordinances, decrees and
governmental rules and regulations applicable to the System and has filed, has
obtained or will file for all government licenses, permits, and authorizations
necessary for the operation, marketing and maintenance of the System.
13.6.5 Litigation; Investigations
To the best of the Company's knowledge, after diligent
inquiry, except to the extent otherwise disclosed to the City: (a) there is no
civil, criminal, administrative,
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arbitration or other proceeding, investigation or claim (including, without
limitation, proceedings with respect to unfair labor practice matters or labor
organization activity matters), pending or threatened against the Company or any
Affiliated Person, at law or in equity, or before any foreign, federal, state,
municipal or other governmental department, commission, board, bureau agency or
instrumentality (including without limitation any matter involving the granting
of a temporary or permanent injunction against the Company or any Affiliated
Person) that is reasonably likely to have a material adverse effect on the
business, operation, properties, assets or financial condition of the Company or
the System, or which questions the validity or prospective validity of this
Agreement, or of any essential element upon which this Agreement depends, or of
any action to be taken by the Company or any Affiliated Person; (b) no
investigation or review by any governmental entity with respect to the Company
or any Affiliated Person, relating to the System or any of the transactions
contemplated hereby is pending or is threatened against the Company or any
Affiliated Person, nor has any governmental entity indicated to the Company or
any Affiliated Person an intention to conduct the same; and (c) neither the
Company nor any Affiliated Person is subject to any outstanding order, writ,
injunction or decree which materially and adversely affects the business,
operations, properties, assets or financial condition of the System.
13.6.6 Fees
The Company has paid all franchise, license or other fees and
charges which have become due pursuant to any franchise or permit to which it is
a party and has made adequate provisions for any such fees and charges which
have accrued, except where contested in good faith and by appropriate
proceedings.
13.6.7 Criminal Acts
Neither the Company, or any Person holding a Controlling
Interest in the Company, nor any director or officer of the Company nor any
employee or agent of the Company nor any Controlling Person, acting pursuant to
the express direction, or with the actual consent of the foregoing, has been
convicted (where such conviction is a final, nonappealable judgment) or has
entered a guilty plea with respect to: (a) any criminal offense, excluding Class
B misdemeanors, violations, and traffic infractions as designated in the New
York State Penal Law or their equivalents in other jurisdictions; or (b) any
criminal offense, including, without limitation, bribery or fraud, arising out
of or in connection with (i) this Agreement, (ii) the award of the franchise
granted pursuant to this Agreement, or (iii) any act to be taken following the
Effective Date, pursuant to this Agreement the City, its officers, employees, or
agents.
13.6.8 Misrepresentation
No material misrepresentation has been made, either oral or
written, intentionally or negligently, by or on behalf of the Company in this
Agreement, in connection with any submission to DoITT or the Commissioner,
including the Proposal, in connection with the negotiation of this Agreement.
For the purpose of this Section, Proposal means the response to the City's
Request for Proposals for Local High Capacity Telecommunications Services r
submitted to the City by the Company, and any amendments thereto.
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<PAGE>
13.7 Additional Covenants
Until the termination of this Agreement and the satisfaction in full
by the Company of its obligation under this Agreement, in consideration of the
franchise granted herein, the Company agrees that it will comply with the
following affirmative covenants, unless the City otherwise consents in writing:
13.7.1 Compliance with Laws; Licenses and Permits
The Company shall comply with: (a) all applicable laws, rules,
regulations, orders, writs, decrees and judgments (including, but not limited to
those of the PSC and the FCC and any other federal or state agency or authority
of competent jurisdiction) affecting this Agreement, the franchise, and the
System; and (b) all local laws and all rules, regulations, orders, or other
directives of the City, DoITT, and the Commissioner issued pursuant to and in
accordance with this Agreement or otherwise.
The Company shall have the sole responsibility for obtaining
or causing to be obtained all permits, licenses and other forms of approval or
authorization necessary to construct, operate, maintain, upgrade, repair or
remove the System, or any part thereof. The Company will, prior to any
construction, operation, maintenance, upgrade, repair or removal of the System,
secure all necessary permits, license and authorizations in connection with the
construction, operation, maintenance, upgrade, repair or removal of the System,
or any part thereof, and will file all required registrations, applications,
reports and other documents with the FCC, the PSC and other entities exercising
jurisdiction over the provision of telecommunications services or the
construction of delivery systems therefor, except those which cannot be obtained
prior to the date hereof, which the Company will promptly seek to obtain. The
Company will promptly seek to obtain all leases, easements and equipment rental
or other agreements necessary for the maintenance and operation of the System.
The Company shall not permit to occur, or shall promptly take
corrective action if there shall occur, any event which (a) could result in the
revocation or termination of any such license or authorization, (b) could
materially and adversely affect any rights of the Company, or (c) permits or,
after notice or lapse of time or both, would permit, revocation or termination
of any such license or which materially and adversely affects or reasonably can
be expected to materially and adversely affect the System or any part thereof.
137.2 Criminal Acts
The Company shall not permit any of the convictions or guilty
pleas of the types listed in Section 13.6.7 to occur during the term of this
Agreement, arising out of or in connection with (i) this Agreement, (ii) the
award of the franchise granted pursuant to this Agreement, or (iii) any act to
be taken following the Effective Date, pursuant to this Agreement by the City,
its officers, employees, or agents, and it shall be an Event of Default if any
such convictions or guilty pleas shall occur during the term of its Agreement,
provided that the City's right to take enforcement action under this Agreement
in the event of said conviction or guilty pleas shall arise only with respect to
any of the foregoing convictions or guilty pleas of the Company itself or, with
respect to any of the foregoing convictions or guilty pleas of any of the
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<PAGE>
other Persons specified in Section 13.6.7, if the Company shall have failed to
disassociate itself from, or terminate the employment of, said Person or Persons
within thirty (30) days after the Commissioner orders such disassociation.
13.7.3 Maintain Existence
The Company will preserve and maintain its existence, its
business, and all of its rights and privileges necessary or desirable in the
normal conduct of said business in the Franchise Area, unless any such change
shall not have a material and adverse impact on the Company's ability to
construct, operate, maintain and upgrade the System as provided herein fulfill
the obligation of the Company hereunder. The Company shall maintain its good
standing in its state of organization and continue to qualify to do business and
remain in good standing in the State of New York. The Company shall conduct
business in accordance with its organizational and governing documents, and
shall comply with the material terms of all mortgages, indentures, leases,
contracts and other agreements and instruments binding upon it except where
contested in good faith and by appropriate proceedings.
13.7.4 Condition of System
All of the properties, assets and equipment used as part of
the System will be maintained in good repair, working order and good condition.
13.8 Binding Effect
This Agreement shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted transferees and
assigns. All of the provisions of this Agreement shall apply to the Company, its
successors, and assigns.
13.9 No Waiver; Cumulative Remedies
No failure on the part of the City to exercise, and no delay in
exercising, any right hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any such right preclude any other right, except as
provided herein, subject to the conditions and limitations established in this
Agreement. The rights and remedies provided herein are cumulative and not
exclusive of any remedies provided by law, and nothing contained in this
Agreement shall impair any of the rights of the City under applicable law,
subject in each case to the terms and conditions of this Agreement. A waiver of
any right or remedy by the City at any one time shall not affect the exercise of
such right or remedy or any other right or other remedy by the City at any other
time. In order for any waiver of the City to be effective, it must be in
writing. The failure of the City to take any action regarding a default or any
Event of Default by the Company shall not be deemed or construed to constitute a
waiver of or otherwise affect the right of the City to take any action permitted
by this Agreement at any other time regarding such default or Event of Default
which has not been cured, or with respect to any other default or Event of
Default by the Company.
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<PAGE>
13.10 No Opposition
The Company agrees that it shall not oppose the intervention by the
City in any suit, action, or proceeding involving the Company with respect to
the System or its construction, operation, maintenance, repair or removal, or to
any provision of this Agreement, Prior to the fifth anniversary of the Effective
Date, the Company agrees that it will not, at any time, set up against the City
any claim nor institute against the City any proceeding alleging that, pursuant
to any law, rule or regulation in effect on the Effective Date, a condition or
term of this Agreement is unreasonable, arbitrary, void, or otherwise
unenforceable, or that the City had no power or authority to make such term or
condition. By execution of this Agreement, the Company accepts the validity of
the terms and conditions of this Agreement in their entirety and hereby waives
and relinquishes, to the maximum extent permitted by applicable law, any and all
rights it has, in law or in equity, to assert in any manner at any time or in
any forum that this Agreement, the franchise granted pursuant to this Agreement,
the terms and conditions of this Agreement or the processes and procedures
pursuant to which this Agreement was entered into and the franchise was granted
are not consistent with applicable law in effect on the Effective Date.
13.11 Partial Invalidity
If any section, subsection, sentence, clause, phrase or other portion of
this Agreement is, for any reason, declared invalid, in whole or in part, by any
court, agency, commission, legislative body, or other authority of competent
jurisdiction, such portion shall be deemed a separate, distinct, and independent
portion. Except as provided in Section 12 hereof such declaration shall not
affect the validity of the remaining portions hereof, which other portions hall
continue in full force and effect.
13.12 Headings
The headings contained in this Agreement are to facilitate reference only,
do not form a part of this Agreement, and shall not in any way affect the
construction or interpretation hereof. Terms such as "hereby," "herein,"
"hereof," "hereinafter," "hereunder," and "hereto" refer to this Agreement as a
whole and not to the particular sentence or paragraph where they appear, unless
the context otherwise requires. The term "may" is permissive; the terms "shall"
and "will" are mandatory, not merely directive. All references to any gender
shall be deemed to include both the male and female, and any reference by number
shall be deemed to include both the singular and plural, as the context may
require. Terms used in the plural include the singular, and vice versa, unless
the context otherwise requires.
13.13 No Agency
The Company shall conduct the work to be performed pursuant to this
Agreement as an independent contractor and not as an agent of the City.
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<PAGE>
13.14 Governing Law
This Agreement shall be deemed to be executed in the City of New
York, State of New York, and shall be governed in all respects, including
validity, interpretation and effect, and construed in accordance with the laws
of the State of New York, as applicable to contracts entered into and to be
performed entirely within that State.
13.15 Survival of Representation and Warranties
All representations and warranties contained in this Agreement shall
survive the Term.
13.16 Delegation of City Rights
The City reserves the right to delegate and redelegate, from time to
time and to the extent permitted by law, any of its rights or obligations under
this Agreement to any governmental body or organization, or official of any
other governmental body or organization and to revoke any such delegation or
redelegation. Any such delegation or redelegation by the City shall be effective
upon written notice by the City to the Company of such delegation or
redelegation. Upon receipt of such notice by the Company, the Company shall be
bound by all terms and conditions of the delegation or redelegation not in
conflict with this Agreement. Any such delegation, revocation or redelegation,
no matter how often made, shall not be deemed an amendment to this Agreement or
require the Company's consent.
13.17 Claims Under Agreement
The City and the Company agree that, except to the extent
inconsistent with applicable law, any and all claims asserted by or against the
City arising under this Agreement or related thereto shall be heard and
determined either in a court of the United States located in New York City
("Federal Court") or in a court of the State of New York located in the City and
County of New York ("New York State Court"). To effect this Agreement and
intent, the Company agrees that:
(a) If the City initiates any action against the Company in
Federal Court or in New York State Court, service of process may be made
on the Company as provided in Section 13.20 hereof;
(b) With respect to any action between the City and the
Company in New York State Court, the Company hereby expressly waives and
relinquishes any rights it might otherwise have (i) to move or dismiss on
grounds of forum non conveniens: (ii) to remove to Federal Court outside
of the City of New York; and (iii) to move for a change of venue to a
court of the State of New York outside New York County;
(c) With respect to any action between the City and the
Company in Federal Court, the Company expressly waives and relinquishes
any right it might otherwise have to move to transfer the action to a
United States Court outside the City of New York; and
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<PAGE>
(d) If the Company commences any action against the City in a
court located other than in the City and State of New York, then, upon
request of the City, the Company shall either consent to a transfer of the
action to a court of competent jurisdiction located in the City and State
of New York or, if the court where the action is initially brought will
not or cannot transfer the action, the Company shall consent to dismiss
such action without prejudice and may thereafter reinstitute the action in
a court of competent jurisdiction in the City of New York. When the
Company either gives such consent or dismisses such action, to allow for
such reinstitution, the City agrees, where it is able, to waive any statue
of limitation, provided the Company has brought such action at least three
(3) months prior to the expiration of the statute of limitation and has
provided the City with notice pursuant to the Agreement.
13.18 Modification
Except as otherwise provided in this Agreement, any Appendix to this
Agreement or applicable law, no provision of this Agreement nor any Appendix to
this Agreement shall be amended or otherwise modified, in whole or in part,
except by a written instrument, duly executed by the City and the Company, and
approved as required by applicable law.
13.19 Maintain Office
The Company agrees to maintain an office in the City of New York
throughout the Term of this Agreement. Such office is currently located at: 810
7th Avenue, 29th Floor, New York, New York 10019.
13.20 Service of Process
Process may be served either in person, wherever the Company may be
found, by registered mail addressed to the Company at its office in the City, or
as set forth in Section 13.5 of this Agreement, to such other location as the
Company may provide to the City in writing, or to the Secretary of State of the
State of New York.
13.21 Compliance With Certain City Requirements
The Company agrees to comply in all respects with the City's
"MacBride Principles', a copy of which is attached at Appendix H hereto. The
Company agrees to comply in all respects with the Local Law 33 of 1997, a copy
of which is attached at Appendix I hereto. The Company agrees to comply in all
respects with the City's Vendor Information Exchange System, as the same may be
amended from time to time.
13.22 Matching Provision
(a) In the event that the City grants, renews or renegotiates
one or more franchise(s), agreement(s) or similar authorization(s), for
the provision of local, high-capacity telecommunications services or
similar services in the Franchise Area, and such franchise(s),
agreement(s) or authorization(s) contain provisions imposing lesser
obligations on the grantee(s) thereof than are imposed by the provisions
of this
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<PAGE>
Agreement, the Company may at any time petition the City for a
modification of this Agreement.
(b) The City shall consider any petition for modification
pursuant to Section 13.22(a) hereof, and shall grant such prospective
modification(s) to the extent that the City reasonably determines that
such modification(s) must be granted in order to ensure fair and equal
treatment among the Company and other franchises, provided that the
Company establishes by a preponderance of the evidence each of the
following:
(i) that the Company is in compliance with this
Agreement and the other franchise(s), agreement(s) or
authorization(s) were not granted as a result of the Company's
failure to comply, on a timely basis, with the provision of this
Agreement;
(ii) that the other franchise(s), agreement(s) or
authorization(s) allow substantially similar services to those
offered by the Company under this Agreement;
(iii) that the obligations imposed on the Company under
this Agreement, taken as a whole, place the Company at a substantial
competitive disadvantage in relation to the obligations imposed on
the grantee(s) holders of the other franchise(s), agreement(s) or
authorization(s), taken as a whole; and
(iv) that the reason for the City's imposition of or
failure to act with respect to a lesser obligation under the other
franchise(s), agreement(s) or authorization(s) is not due to the
differing nature of the City's regulatory authority with respect to
the other communications systems or justified by the relative
benefits, in whatever form, received by the City due to the
operation of other communications systems.
(c) For the purposes of this Section 13.22, in order to
promote fair comparison, to the extent possible all benefits and burdens
shall be quantified monetarily.
13.23 Joint Services
Notwithstanding any other provision of this Agreement, in the event
the Company provides any Telecommunications Services in conjunction with, in a
joint venture with or in any other arrangement with (the "Joint Services") any
one or more entities that the City has also authorized to provide local
high-capacity telecommunications services (the "Other Franchisees"):
(a) no revenues with respect to Telecommunications Services
being provided by such Other Franchisees, other than Joint Services, shall
be included in the Company's Gross Revenue, so long as the revenues
distributed to or otherwise retained by the Other Franchisees with respect
to Joint Services are subject to the terms of such other Franchisees' own
agreements with the City; and
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<PAGE>
(b) only those revenues received by the Company with respect
to Joint Services and not distributed to or otherwise retained by the
Other Franchisees shall be included in the Company's Gross Revenue, so
long as the revenues distributed to or otherwise retained by the Other
Franchisees with respect to Joint Services are subject to the terms of
such other Franchisees' own agreements with the City.
-- end of page --
[signatures appear on next page]
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<PAGE>
IN WITNESS WHEREOF, the party of the first part, by its Deputy Mayor, duly
authorized by the Charter of the City of New York, has caused the corporate name
of said City to be hereunto signed and the corporate seal of said City to be
hereunto affixed and the party of the second part, by its officers thereunto
duly authorized, has caused its name to be hereunto signed and its seal to be
hereunto affixed as of the date and year first above written.
THE CITY OF NEW YORK
By: /s/ Joseph Lhota
-----------------------------
Deputy Mayor
2-29-00
---------------------------------
Date
Approved as to form:
Corporation Counsel
/s/ [illegible]
- ------------------------------------
Acting Corporation Counsel
METROMEDIA FIBER NETWORK NYC, INC.
By: /s/ Nick Tanzi
-----------------------------
Name: Nick Tanzi
Title: President
(Seal)
--------------
Attest: /s/ [illegible] APPROVED AS TO
-------------------------------- /s/ [ILLEGIBLE]
City Clerk FORM
--------------
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<PAGE>
CITY OF NEW YORK )
) ss:
STATE OF NEW YORK )
I , Debra Samuelson a Notary Public in and for the State of New York,
residing therein, duly commissioned and sworn, do hereby certify that Joseph
Lhota, Deputy Mayor of the City of New York, party to the above instrument,
personally appeared before me in said State on the 29 day of February , 2000,
the said Joseph Lhota being personally well known to me and who executed the
foregoing instrument and acknowledged to me that he executed the same as his
free act and deed in his capacity as Deputy Mayor of the City of New York.
Given under my hand and seal, this 29 day of February , 2000.
/s/ Debra Samuelson
Notary Public
My Commission Expires: 2-10-07
CITY OF NEW YORK )
) ss:
STATE OF NEW YORK )
I, Yvette Kitrosser a Notary Public in and for the State of New York,
residing therein, duly commissioned and sworn, do hereby certify that Nick
Tanzi, party to the above instrument, personally appeared before me in said
State on the 16 day of February, 2000, the said President being personally well
known to me and who executed the foregoing instrument and acknowledged to me
that he executed the same as his free act and deed.
Given under my hand and seal, this 16 day of February, 2000.
/s/ Yvette Kitrosser
Notary Public
YVETTE KITROSSER
Notary Public State of New York
My Commission Expires: No. 31-5008842
Qualified in New York County
Commission Expires Mar. 1, 2001
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<PAGE>
EXHIBIT 21.1
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES AS OF MARCH 17, 2000
<TABLE>
<CAPTION>
NAME JURISDICTION D/B/A
---- ------------ -----
<S> <C> <C>
Metromedia Fiber Network, Inc. DE
Metromedia Fiber Network Services, Inc. DE
Metromedia Fiber Network of Illinois, Inc. DE
Metromedia Fiber Network of New Jersey, Inc. DE
Metromedia Fiber Network of NYC, Inc. DE
International Optical Network, L.L.C. DE ION
(f/k/a MFNRAC, L.L.C.)
MFN of VA, L.L.C. VA
MFN Purchasing, Inc. DE
MFN International, Inc. DE
MFN Holdings GmbH Germany
Metromedia Fiber Network GmbH Germany
Metromedia Fiber Network Services GmbH Germany
Metromedia Fiber Network B.V. Netherlands
Abovenet Communications, Inc. DE
Paix Net, Inc. DE
Communications Systems Development, Inc. DE
Metromedia Fiber Network Europe Finance, Inc. DE
</TABLE>
<PAGE>
EXHIBIT 23.1
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
AS OF MARCH 17, 2000
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statements
(Form S-3) pertaining to (i) the AboveNet Warrants and (ii) the Company's
Secondary and Debt Offering and (Form S-8) pertaining to the (i) Metromedia
Fiber Network, Inc. 1998 Incentive Stock Plan and (ii) Metromedia Fiber
Network, Inc. 1997 Incentive Stock Plan and (iii) the AboveNet Communications
Inc. 1998 Stock Incentive Plan, the AboveNet Communications Inc. 1997 Stock
Plan and the AboveNet Communications Inc. 1996 Stock Option Plan and
employment and consulting agreements of our report dated March 8, 2000 with
respect to the consolidated financial statements and schedule of Metromedia
Fiber Network, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1999.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
New York, New York
March 17, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<CIK> 0001043533
<NAME> METROMEDIA FIBER NETWORK INC. & SUBSIDIARIES
<MULTIPLIER> 1,000
<CURRENCY> 1.00
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1.00
<CASH> 1,262,391
<SECURITIES> 0
<RECEIVABLES> 72,166
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,377,465
<PP&E> 835,691
<DEPRECIATION> (29,792)
<TOTAL-ASSETS> 3,959,985
<CURRENT-LIABILITIES> 249,520
<BONDS> 1,660,900
0
0
<COMMON> 4,790
<OTHER-SE> 1,829,886
<TOTAL-LIABILITY-AND-EQUITY> 3,959,985
<SALES> 75,247
<TOTAL-REVENUES> 75,247
<CGS> 49,019
<TOTAL-COSTS> 49,019
<OTHER-EXPENSES> 97,698
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 40,256
<INCOME-PRETAX> (114,938)
<INCOME-TAX> 0
<INCOME-CONTINUING> (114,938)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (114,938)
<EPS-BASIC> (0.28)
<EPS-DILUTED> 0
</TABLE>
