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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
(AMENDMENT NO. 2)
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(
d) OF THE
SECURITIES EXCHANGE ACT OF 1934
SEPTEMBER 8, 1999
------------------------
(Date of earliest event reported)
METROMEDIA FIBER NETWORK, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 000-23269 11-3168327
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(State of Incorporation) (Commission File No.) (IRS Employer Identification
No.)
ONE NORTH LEXINGTON AVENUE,
WHITE PLAINS, NEW YORK 10601
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(Address of principal executive offices, including zip code)
(914) 421-6700
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(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name or former address, if changed since last report)
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On September 8, 1999, Metromedia Fiber Network, Inc. (the "Company")
completed its merger with AboveNet Communications Inc., a Delaware corporation
("AboveNet"), pursuant to the Agreement and Plan of Merger (the "Merger
Agreement") among the Company, Magellan Acquisition, Inc. and AboveNet, dated as
of June 22, 1999.
AboveNet is a leading provider of facilities-based, managed services for
customer-owned webservers and related equipment, known as co-location, and high
performance Internet connectivity solutions for electronic commerce and other
business critical Internet operations. AboveNet has developed a network
architecture based upon strategically located facilities. These facilities,
known as Internet service exchanges, allow Internet content providers direct
access to Internet service providers.
Pursuant to the Merger Agreement, the Company's wholly-owned subsidiary
Magellan Acquisition, Inc. was merged with and into AboveNet and each share of
AboveNet common stock was converted into the right to receive 1.175 shares of
the Company's Class A Common Stock. Following consummation of the merger,
AboveNet became a wholly-owned subsidiary of the Company. In connection with the
consummation of this transaction, the Company, AboveNet and Magellan
Acquisition, Inc. entered into an amendment and waiver to the Merger Agreement
pursuant to which the parties agreed to waive and amend certain provisions of
the Merger Agreement relating to certain filing obligations of the Company. A
copy of the amendment and waiver is attached as Exhibit 99.1 hereto and is
hereby incorporated by reference.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 1998 AND 1999
AND FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999
AND INDEPENDENT AUDITORS' REPORT
2
ABOVENET COMMUNICATIONS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
--------
Independent Auditors' Report................................ F-2
Consolidated Balance Sheets as of June 30, 1998 and 1999.... F-3
Consolidated Statements of Operations for the Years Ended
June 30, 1997, 1998 and 1999.............................. F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended
June 30, 1997, 1998 and 1999.............................. F-5
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1997, 1998 and 1999.............................. F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
AboveNet Communications Inc.:
We have audited the accompanying consolidated balance sheets of AboveNet
Communications Inc. as of June 30, 1998 and 1999 and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended June 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of AboveNet Communications Inc. as of
June 30, 1998 and 1999 and the results of its operations and its cash flows for
each of the three years in the period ended June 30, 1999 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
July 28, 1999
(September 8, 1999 as to Note 17)
F-2
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
--------------------------
1998 1999
----------- ------------
ASSETS
Current assets:
Cash and equivalents...................................... $ 8,141,200 $209,126,300
Short-term investments.................................... -- 11,744,200
Accounts receivable, net of reserve for doubtful accounts
of $60,000 and $388,300, respectively................... 357,000 3,355,000
Prepaid expenses and other current assets................. 269,600 3,850,400
----------- ------------
Total current assets.................................. 8,767,800 228,075,900
Property and equipment, net................................. 4,436,100 46,590,900
Rights to use fiber optic capacity.......................... -- 12,904,500
Intangible assets........................................... -- 69,474,100
Restricted cash............................................. 300,000 21,475,900
Deposits and other assets................................... 189,400 5,377,400
----------- ------------
Total assets................................................ $13,693,300 $383,898,700
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,301,300 $ 13,593,300
Remaining obligation for rights to use fiber optic
capacity................................................ -- 800,000
Accrued liabilities....................................... 619,900 1,322,600
Unearned revenue.......................................... 309,400 2,510,700
Current portion of long-term obligations.................. 476,000 5,984,800
----------- ------------
Total current liabilities............................. 3,706,600 24,211,400
Convertible notes payable and advances...................... 8,000,000 --
Unearned revenue............................................ -- 4,375,000
Other long-term obligations................................. 1,325,300 21,588,600
Commitments and contingencies (Notes 4, 5 and 12)
Stockholders' equity:
Preferred stock, $0.001 par value, 10,000,000 shares
authorized;
shares issued and outstanding--none..................... -- --
Convertible preferred stock, $0.001 par value:
Series A; shares issued and outstanding: 2,050,000 and
none, respectively.................................... 410,000 --
Series B; shares issued and outstanding: 3,263,792 and
none, respectively.................................... 2,323,100 --
Series C; shares issued and outstanding: 4,006,000 and
none, respectively.................................... 3,873,400 --
Series D; no shares issued and outstanding.............. -- --
Series E; no shares issued and outstanding.............. -- --
Common stock, $0.001 par value, 60,000,000 shares
authorized; shares issued and outstanding: 728,696 and
34,548,308, respectively................................ 38,900 363,218,000
Common stock options...................................... 1,861,500 4,413,800
Deferred stock compensation............................... (540,100) (47,800)
Accumulated deficit....................................... (7,305,400) (33,860,300)
----------- ------------
Total stockholders' equity............................ 661,400 333,723,700
----------- ------------
Total liabilities and stockholders' equity.................. $13,693,300 $383,898,700
=========== ============
See notes to consolidated financial statements.
F-3
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
Revenues.............................................. $ 551,600 $ 3,436,400 $ 13,967,800
----------- ----------- ------------
Costs and expenses:
Data communications and telecommunications.......... 558,600 2,199,800 12,649,700
Network operations.................................. 416,700 1,571,800 6,084,300
Sales and marketing................................. 382,600 1,618,700 11,251,300
General and administrative.......................... 433,700 1,621,500 6,610,900
Depreciation and amortization....................... 132,700 475,500 3,412,600
Stock-based compensation expense.................... -- 1,276,400 1,688,700
Joint venture termination fee....................... 431,100 -- --
----------- ----------- ------------
Total costs and expenses.......................... 2,355,400 8,763,700 41,697,500
Loss from operations.................................. (1,803,800) (5,327,300) (27,729,700)
Interest expense...................................... (7,400) (160,800) (1,573,100)
Interest and other income............................. 8,400 63,100 2,947,900
----------- ----------- ------------
Loss before equity interest in affiliates............. (1,802,800) (5,425,000) (26,354,900)
Equity interest in losses of affiliates............... -- -- (200,000)
----------- ----------- ------------
Net loss.............................................. $(1,802,800) $(5,425,000) $(26,554,900)
=========== =========== ============
Basic and diluted loss per share...................... $ (4.58) $ (10.34) $ (1.60)
=========== =========== ============
Shares used in basic and diluted loss per share....... 393,236 524,608 16,643,027
=========== =========== ============
See notes to consolidated financial statements.
F-4
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
PREFERRED STOCK COMMON STOCK COMMON DEFERRED
-------------------------- ------------------------- STOCK STOCK ACCUMULATED
SHARES AMOUNT SHARES AMOUNT OPTIONS COMPENSATION DEFICIT
----------- ------------ ---------- ------------ ---------- ------------ ------------
BALANCES, July 1, 1996.......... -- $ -- 250,000 $ 5,000 $ -- $ -- $ (77,600)
Issuance of common stock........ 125,000 2,500
Issuance of Series A convertible
preferred stock............... 2,050,000 410,000
Exercise of common stock
options....................... 31,250 600
Issuance of Series B convertible
preferred stock............... 1,000,000 600,000
Issuance of Series B convertible
preferred stock in conjunction
with acquisition of DSK, Inc.
(Note 11)..................... 1,000,000 600,000
Net loss........................ (1,802,800)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1997......... 4,050,000 1,610,000 406,250 8,100 -- -- (1,880,400)
Exercise of common stock
options....................... 322,446 30,800
Issuance of warrants in
connection with issuance of
debt.......................... 112,000 45,000
Issuance of Series B convertible
preferred stock............... 1,263,792 1,011,100
Issuance of Series C convertible
preferred stock............... 4,006,000 3,873,400
Compensatory stock
arrangements.................. 1,816,500 (1,816,500)
Amortization of deferred stock
compensation.................. 1,276,400
Net loss........................ (5,425,000)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1998......... 9,319,792 6,606,500 728,696 38,900 1,861,500 (540,100) (7,305,400)
Issuance of Series D convertible
preferred stock............... 4,230,756 10,771,000
Issuance of Series E convertible
preferred stock............... 817,550 3,846,400
Exercise of Series B warrants... 209,400 --
Conversion of convertible
preferred stock to common
stock......................... (14,577,498) (21,223,900) 14,577,498 21,223,900
Issuance of common stock upon
initial public offering....... 11,500,000 67,822,000
Issuance of common stock upon
public offering............... 6,850,356 273,421,500
Exercise of common stock options
and warrants.................. 842,440 439,200
Issuance of common stock under
employee stock purchase
plan.......................... 49,318 272,500
Issuance of warrants in
connection with issuance of
debt and leases............... 1,355,900
Compensatory stock
arrangements.................. 1,196,400 (1,196,400)
Amortization of deferred stock
compensation.................. 1,688,700
Net loss........................ (26,554,900)
----------- ------------ ---------- ------------ ---------- ----------- ------------
BALANCES, June 30, 1999......... -- $ -- 34,548,308 $363,218,000 $4,413,800 $ (47,800) $(33,860,300)
=========== ============ ========== ============ ========== =========== ============
SHAREHOLDERS'
EQUITY
-------------
BALANCES, July 1, 1996.......... $ (72,600)
Issuance of common stock........ 2,500
Issuance of Series A convertible
preferred stock............... 410,000
Exercise of common stock
options....................... 600
Issuance of Series B convertible
preferred stock............... 600,000
Issuance of Series B convertible
preferred stock in conjunction
with acquisition of DSK, Inc.
(Note 11)..................... 600,000
Net loss........................ (1,802,800)
------------
BALANCES, June 30, 1997......... (262,300)
Exercise of common stock
options....................... 30,800
Issuance of warrants in
connection with issuance of
debt.......................... 157,000
Issuance of Series B convertible
preferred stock............... 1,011,100
Issuance of Series C convertible
preferred stock............... 3,873,400
Compensatory stock
arrangements.................. --
Amortization of deferred stock
compensation.................. 1,276,400
Net loss........................ (5,425,000)
------------
BALANCES, June 30, 1998......... 661,400
Issuance of Series D convertible
preferred stock............... 10,771,000
Issuance of Series E convertible
preferred stock............... 3,846,400
Exercise of Series B warrants... --
Conversion of convertible
preferred stock to common
stock......................... --
Issuance of common stock upon
initial public offering....... 67,822,000
Issuance of common stock upon
public offering............... 273,421,500
Exercise of common stock options
and warrants.................. 439,200
Issuance of common stock under
employee stock purchase
plan.......................... 272,500
Issuance of warrants in
connection with issuance of
debt and leases............... 1,355,900
Compensatory stock
arrangements.................. --
Amortization of deferred stock
compensation.................. 1,688,700
Net loss........................ (26,554,900)
------------
BALANCES, June 30, 1999......... $333,723,700
============
See notes to consolidated financial statements.
F-5
ABOVENET COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
Cash flows from operating activities:
Net loss.................................................. $(1,802,800) $(5,425,000) $(26,554,900)
Adjustments to reconcile net loss to net cash used in
operating activities:
Equity interest in losses of affiliates................. -- -- 200,000
Depreciation and amortization........................... 132,700 475,500 3,412,600
Stock-based compensation expense........................ -- 1,276,400 1,688,700
Noncash interest expense................................ -- 133,200 117,000
Joint venture termination fee........................... 431,100 -- --
Changes in assets and liabilities:
Accounts receivable................................... (29,100) (315,900) (2,728,000)
Prepaid expenses and other current assets............. -- (269,600) (3,577,800)
Restricted cash....................................... -- (300,000) (21,175,900)
Accounts payable...................................... 298,900 1,989,300 11,292,000
Accrued liabilities................................... 109,700 510,200 702,700
Unearned revenue...................................... 85,000 224,400 1,313,300
Deferred rent......................................... 30,400 18,200 156,100
----------- ----------- ------------
Net cash used in operating activities............... (744,100) (1,683,300) (35,154,200)
----------- ----------- ------------
Cash flows from investing activities:
Purchase of short-term investments........................ -- -- (11,744,200)
Cash paid for rights to use fiber optic capacity.......... -- -- (7,480,000)
Purchase of property and equipment........................ (474,500) (3,666,000) (37,426,300)
Increase in deposits and other assets..................... (32,700) (111,700) (1,519,000)
Investments in affiliates................................. -- -- (2,630,100)
Cash paid for acquisition................................. -- -- (71,420,200)
----------- ----------- ------------
Net cash used in investing activities............... (507,200) (3,777,700) (132,219,800)
----------- ----------- ------------
Cash flows from financing activities:
Proceeds from notes payable and advances.................. 739,900 13,395,000 23,722,300
Debt repayments........................................... -- (70,000) (3,297,100)
Capital lease repayments.................................. (49,600) (84,700) (638,700)
Proceeds from issuance of common stock.................... 3,100 30,800 341,955,200
Proceeds from issuance of convertible preferred stock..... 800,000 -- 6,617,400
----------- ----------- ------------
Net cash provided by financing activities........... 1,493,400 13,271,100 368,359,100
----------- ----------- ------------
Net increase in cash and equivalents........................ 242,100 7,810,100 200,985,100
Cash and equivalents, beginning of period................... 89,000 331,100 8,141,200
----------- ----------- ------------
Cash and equivalents, end of period......................... $ 331,100 $ 8,141,200 $209,126,300
=========== =========== ============
Supplemental cash flow information--cash paid for
interest.................................................. $ 7,400 $ 27,600 $ 1,456,100
=========== =========== ============
Noncash investing and financing activities:
Remaining obligation for rights to use fiber optic
capacity................................................ $ -- $ -- $ 800,000
=========== =========== ============
Acquisition of equipment under capital lease.............. $ 206,200 $ 479,200 $ 5,829,500
=========== =========== ============
Acquisition of leasehold improvements in conjunction with
DSK, Inc. acquisition................................... $ 168,900 $ -- $ --
=========== =========== ============
Exchange of notes, advances, accrued interest and warrants
for convertible preferred stock......................... $ 210,000 $ 4,884,500 $ 8,000,000
=========== =========== ============
Conversion of preferred stock into common stock........... $ -- $ -- $ 21,223,900
=========== =========== ============
Issuance of warrants in connection with issuance of debt
and leases.............................................. $ -- $ 45,000 $ 1,355,900
=========== =========== ============
See notes to consolidated financial statements.
F-6
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION--AboveNet Communications Inc. (the "Company"), was formed on
March 8, 1996 (inception). The Company provides facilities-based, managed
services for customer-owned Web servers and related equipment, known as
co-location, and high performance Internet connectivity solutions for electronic
commerce and other business critical Internet operations.
PRINCIPLES OF CONSOLIDATION--The consolidated financial statements include
the Company and its subsidiaries. All significant intercompany transactions and
amounts are eliminated in consolidation. Minority investments in joint ventures
are accounted for under the equity method of accounting, under which the Company
records in income its proportionate share of the earnings or losses of the joint
ventures.
USE OF ESTIMATES--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to concentration of credit risk consist of trade receivables.
However, the Company's credit risk is mitigated by its credit evaluation process
and the reasonably short collection terms. The Company does not require
collateral or other security to support accounts receivable and maintains
reserves for potential credit losses.
CASH AND EQUIVALENTS--The Company considers all highly liquid investments
with maturities of ninety days or less when purchased by the Company to be cash
equivalents.
SHORT-TERM INVESTMENTS--Short term investments consist of treasury bills
with a maturity greater than 90 days but less than twelve months. The Company's
short-term investments are classified as available-for-sale. The investments are
carried at cost, which approximated fair value at June 30, 1999. Material
unrealized gains or losses would be reported as a separate component of
stockholders' equity. No investments were sold in the periods presented.
PROPERTY AND EQUIPMENT--Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements and assets acquired
under capital lease are amortized over the shorter of the lease term or the
useful lives of the improvement.
RIGHTS TO USE FIBER OPTIC CAPACITY--Indefeasible rights to use (IRU)
capacity on fiber optic cable systems are stated at cost. Amortization will be
recognized over the shorter of the term of the IRU or its useful life beginning
when such capacity becomes available to the Company.
INTANGIBLE ASSETS--Goodwill is amortized on a straight-line basis over its
estimated life of ten years.
RESTRICTED CASH--Restricted cash consists of certificates of deposit which
are restricted from use pursuant to certain lease agreements.
REVENUE RECOGNITION--Revenue consists primarily of service revenue which is
recognized in the period in which the services are provided. The services
primarily include bandwidth and space requirement charges which are recognized
monthly as well as installation fees which are recognized as
F-7
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
revenue in the period of installation. Unearned revenue consists of customer
advances and the value assigned to certain ongoing services to be rendered to
Compaq Computer Corporation in connection with the acquisition of the Palo Alto
Internet Exchange ("PAIX") (see Note 2). Unearned revenue is recognized in the
period in which the services are rendered.
INCOME TAXES--Deferred tax liabilities are recognized for future taxable
amounts, and deferred tax assets are recognized for future deductions, net of a
valuation allowance to reduce net deferred tax assets to amounts that are more
likely than not to be realized.
STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF--The
Company evaluates its long-lived assets and certain identifiable intangibles for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
NET INCOME (LOSS) PER SHARE--Basic income (loss) per share excludes dilution
and is computed by dividing net income (loss) by the weighted-average number of
common shares outstanding, less shares subject to repurchase by the Company, for
the period. Diluted income (loss) per share reflects the potential dilution that
could occur if securities or other contracts to issue common stock were
exercised or converted into common stock. Common share equivalents are excluded
from the computation in loss periods as their effect would be antidilutive.
RECLASSIFICATIONS--Certain prior period amounts have been reclassified to
conform to the current period presentation. Such reclassifications had no effect
on stockholders' equity (deficiency) or net loss.
RECENTLY ISSUED ACCOUNTING STANDARDS--In June 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS)
No. 130, REPORTING COMPREHENSIVE INCOME, which requires an enterprise to report,
by major components and as a single total, the change in the Company's net
assets during the period from nonowner sources. The Company adopted SFAS
No. 130 in fiscal 1999. For all periods presented, comprehensive loss was equal
to the Company's net loss.
Additionally, in June 1997, the FASB issued SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION, which establishes annual and
interim reporting standards for an enterprise's business segments and related
disclosures about the enterprise's products, services, geographic areas and
major customers. The Company adopted this statement in fiscal 1999. The Company
has determined that it operates in one reporting segment.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. SOP 98-1
provides guidance for an enterprise on accounting for the costs of computer
software developed or obtained for internal use. SOP 98-1 is effective for the
Company in
F-8
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
fiscal 2000. The Company anticipates that accounting for transactions under SOP
98-1 will not have a material impact on its financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which defines derivatives, requires that all
derivatives be carried at fair value, and provides for hedge accounting when
certain conditions are met. SFAS No. 133 is effective for the Company in fiscal
2001. Although the Company has not fully assessed the implications of SFAS
No. 133, the Company does not believe adoption of this statement will have a
material impact on its financial position or results of operations.
2. ACQUISITION OF PALO ALTO INTERNET EXCHANGE
On June 21, 1999, the Company consummated the acquisition of certain assets
and the assumption of certain liabilities of the Palo Alto Internet Exchange
("PAIX"), a business within the Technology and Corporate Development and
Operations Management Services business units of Compaq Computer Corporation
("Compaq"). The total purchase price of $76.4 million consisted of
$70.0 million in cash, certain future ongoing services to be provided by the
Company to Compaq, with a value currently estimated to be $5.0 million, and
acquisition-related costs of $1.4 million. PAIX is a high-level switching and
peering point for global and regional Internet service providers and content
providers.
The acquisition has been recorded using the purchase method of accounting.
The excess of the aggregate purchase price over the fair market value of net
assets acquired of $69.7 million was recognized as goodwill and is being
amortized over 10 years. Amortization of goodwill for fiscal 1999 was $190,000.
At June 30, 1999, the Company made a preliminary allocation of the purchase
price. The Company will record adjustments to the purchase price allocation as
deemed necessary.
The operating results of PAIX have been included in the Company's
consolidated financial statements since the date of acquisition. Had the
acquisition of PAIX occurred on July 1, 1997 the unaudited proforma revenue, net
loss applicable to common stockholders and related basic and diluted loss per
share for the years ended June 30, 1998 and 1999 would have been: $6.6 million
and $19.7 million; $23.8 million and $44.4 million, and $45.45 per share and
$2.66 per share, respectively. These results, which are based on various
assumptions, are not necessarily indicative of what would have occurred had the
acquisition been consummated on July 1, 1997.
A reconciliation of the cash and noncash aspects of the above transaction is
as follows:
Tangible and intangible assets acquired..................... $76,683,200
Liabilities assumed......................................... (263,000)
Liabilities incurred in connection with purchase............ (5,000,000)
-----------
Net cash paid for acquisition............................... $71,420,200
===========
F-9
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
3. PROPERTY AND EQUIPMENT, NET
Property and equipment at June 30 are comprised of the following:
1998 1999
---------- -----------
Property and equipment at cost:
Telecommunication equipment....................... $2,295,300 $10,255,500
Leasehold improvements (primarily
co-location facilities)......................... 224,700 20,385,900
Office equipment.................................. 186,500 1,262,000
Construction in progress.......................... 2,389,400 18,224,900
---------- -----------
Total............................................... 5,095,900 50,128,300
Less accumulated depreciation and amortization...... (659,800) (3,537,400)
---------- -----------
Property and equipment, net......................... $4,436,100 $46,590,900
========== ===========
Construction in progress primarily relates to costs incurred during the
expansion of the Company's facilities.
4. INDEFEASIBLE RIGHTS TO USE FIBER OPTIC CAPACITY
During fiscal 1999, the Company entered into a series of agreements
providing for the acquisition of an indefeasible right to use capacity on a
fiber optic cable system between the U.S. and the United Kingdom for
$8.3 million, $7.5 million of which has been paid as of June 30, 1999. The terms
of these agreements are 25 years.
In fiscal 1999, the Company entered into a series of agreements to lease
fiber optic cable systems between Washington D.C. and New York City. These
leases were initiated in the fourth quarter of fiscal 1999 and require annual
payments of $630,000 for 20 years. The leases are accounted for as capital
leases and had a net book value of $4.6 million at June 30, 1999.
5. JOINT VENTURES
In March 1999, as part of its international expansion strategy, the Company
entered into agreements to form joint ventures in Austria, Germany ("AboveNet
GmbH"), and the United Kingdom to provide managed co-location and Internet
connectivity solutions for mission critical Internet operations. The Company
invested a total of $2.4 million in fiscal 1999, which is included in deposits
and other assets at June 30, 1999. In addition, the Company has agreed to
provide up to $2 million of additional financing to certain of these joint
ventures, if required, and to arrange or provide for an additional $4.5 million
contingent upon the joint ventures raising an equivalent amount from third
parties. These joint ventures are accounted for under the equity method of
accounting.
In July 1999, the Company agreed to enter into two additional joint ventures
in Germany. The first joint venture will own real property in Frankfurt,
Germany. For an equity contribution of approximately $2 million, the Company
will own 45% and AboveNet GmbH will own 5% of this joint venture. The second
joint venture will lease the real property from the aforementioned joint
venture. It will complete improvements to the property and will manage the
property. This entity will lease managed co-location space to AboveNet GmbH and
provide leased space to other third parties. The Company will own 87.42% of this
second joint venture in exchange for equity contributions which will total
F-10
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
approximately $23 million, of which approximately $8 million will be paid as an
initial equity contribution, with the remainder to be contributed over the
following 18 to 24 months.
6. CONVERTIBLE NOTES PAYABLE AND ADVANCES
In June 1997, the Company received $739,900 in cash advances from certain
individuals, including stockholders and employees. In July and August 1997, the
Company received an additional $250,000 in cash advances. In August 1997, the
advances were converted into notes payable of $989,900 and warrants to acquire
989,906 shares of Series B convertible preferred stock at $1.00 per share. The
notes generally bore an annual interest rate of 10%. The related warrants were
valued at $112,000, or $0.12 per share, and were recorded as noncash interest
expense in fiscal 1998.
On December 31, 1997, the Company entered into exchange agreements with the
note holders. Pursuant to the exchange agreements, the above notes, accrued
interest of $21,200 and the related warrants were exchanged for (i) 1,263,792
shares of Series B convertible preferred stock and (ii) warrants to acquire
247,472 shares of Series B convertible preferred stock at $1.00 per share.
During fiscal 1998, the Company received $3,873,400 of cash advances from
certain potential investors. In May 1998, these advances were converted into
4,006,000 shares of Series C convertible preferred stock.
On June 30, 1998, in anticipation of the Company's pending sale of preferred
stock, the Company received $8 million in cash, of which $1 million represented
a noninterest-bearing cash advance and $7 million represented convertible notes
payable. The notes bore interest at 6%, were due on July 15, 1998 and were
convertible into Series D convertible preferred stock at $2.60 per share. On
July 15, 1998, the convertible notes and advance were converted into Series D
convertible preferred stock (see Note 9).
F-11
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
7. OTHER LONG-TERM OBLIGATIONS
Long-term obligations at June 30 consist of:
1998 1999
---------- -----------
Credit facility..................................... $1,201,600 $21,626,800
Capital lease facility.............................. 551,100 5,741,900
Deferred rent....................................... 48,600 204,700
---------- -----------
Total obligations................................... 1,801,300 27,573,400
Less current portion of long-term obligations....... (476,000) (5,984,800)
---------- -----------
Long-term obligations............................... $1,325,300 $21,588,600
========== ===========
CREDIT FACILITY
At June 30, 1999, the Company had $21.6 million outstanding under its credit
facility (the "Credit Facility"), with no additional borrowings available as of
June 30, 1999. Borrowings outstanding under the Credit Facility are payable in
42 monthly installments, bear interest at rates ranging from 13.3% to 15.1% and
are collateralized by the equipment and leasehold improvements purchased with
the proceeds of the borrowing. At June 30, 1999, the outstanding borrowings on
the Credit Facility are due as follows: fiscal 2000, $5,480,000; fiscal 2001,
$6,286,600; fiscal 2002, $6,874,200; and fiscal 2003, $2,986,000.
CAPITAL LEASE FACILITY
At June 30, 1999, the Company had $820,000 available on a $2.5 million
facility under which the Company leases certain equipment under capital leases.
Leases outstanding at June 30, 1999 expire on various dates through fiscal 2019
(see Note 12).
8. INCOME TAXES
The Company's deferred income tax assets at June 30 are comprised of the
following:
1998 1999
----------- ------------
Net deferred tax assets:
Net operating loss carryforwards................ $ 1,871,700 $ 10,755,900
Stock compensation expense on nonqualified stock
options....................................... 485,300 1,067,000
Accruals deductible in different periods........ 114,700 935,200
Depreciation and amortization................... (65,200) (231,600)
----------- ------------
2,406,500 12,526,500
Valuation allowance............................... (2,406,500) (12,526,500)
----------- ------------
Total............................................. $ -- $ --
=========== ============
F-12
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
The Company's effective rate differs from the federal statutory tax rate for
the years ended June 30, 1997, 1998 and 1999 as follows:
1997 1998 1999
-------- -------- --------
Federal statutory tax rate.............................. 35.0% 35.0% 35.0%
State taxes, net of federal benefit..................... 3.0 3.0 2.9
Joint venture termination fee........................... (9.1) -- --
Other................................................... (0.1) (0.3) (0.4)
Valuation allowance..................................... (28.8) (37.7) (37.5)
----- ----- -----
Effective tax rate...................................... --% --% --%
===== ===== =====
The Company has no income tax provision due to its history of operating
losses. Due to the uncertainty surrounding the realization of the benefits of
its favorable tax attributes in future tax returns, the Company has fully
reserved its net deferred tax assets as of June 30, 1997,1998 and 1999.
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $28.4 million for federal and $14.2 million for state income tax
purposes. These carryforwards begin to expire in 2003 for state and 2010 for
federal purposes. Additionally, Section 382 of the Internal Revenue Code and the
applicable California law impose annual limitations on the use of net operating
loss carryforwards if there is a change in ownership, as defined, within any
three-year period. The utilization of certain net operating loss carryforwards
may be limited due to the Company's capital stock transactions.
9. STOCKHOLDERS' EQUITY
STOCK SPLITS
During November 1998, the Company reincorporated in the State of Delaware
and effected a stock exchange of one share of common stock and preferred stock
for every two and one-half shares of common stock and preferred stock,
respectively, of its California predecessor entity. The Company also effected
another reverse stock split during November 1998 whereby one share of common and
preferred stock was issued for every 1.6 shares of common stock and preferred
stock. All share and per share amounts in these financial statements have been
adjusted to give effect to these reverse stock splits.
On May 7, 1999, the Company distributed a two-for-one stock split effected
as a stock dividend. All share or per share amounts in the consolidated
financial statements have been adjusted to give effect to this stock split.
INITIAL PUBLIC OFFERING
On December 10, 1998, the Company sold 10,000,000 shares of common stock in
an underwritten public offering and on December 30, 1998 sold an additional
1,500,000 shares through the exercise of the underwriters' over-allotment option
for net proceeds of approximately $67,822,000.
STOCK OFFERING
On April 30, 1999, the Company sold 5,650,356 shares of its common stock in
an underwritten public offering at a price of $42.50 per share and on May 5,
1999 sold an additional 1,200,000 shares
F-13
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
through the exercise of the underwriters' overallotment option for net proceeds
to the Company of approximately $273,421,500.
CONVERTIBLE PREFERRED STOCK AND WARRANTS
In fiscal 1997, the Company issued 2,050,000 shares of Series A convertible
preferred stock for cash of $200,000 and the conversion of advances of $210,000.
Also in fiscal 1997, the Company issued 1,000,000 shares of Series B convertible
preferred stock in connection with the acquisition of DSK, Inc. (see Note 11)
and issued 1,000,000 shares of Series B convertible preferred stock for cash of
$600,000. In fiscal 1998, the Company issued 1,263,792 shares of Series B
convertible preferred stock and 4,006,000 shares of Series C convertible
preferred stock upon conversions of notes, advances, and accrued interest of
$1,011,100 and $3,873,400, respectively (see Note 6). In fiscal 1999, the
Company issued 4,230,756 shares of Series D convertible preferred stock for cash
of $2,771,000 (net of costs of $229,000) and the conversion of notes and
advances of $8,000,000. During the same period, the Company issued 817,550
shares of Series E convertible preferred stock for cash of $3,846,400 (net of
costs of $223,600).
As discussed in Note 6, pursuant to certain exchange agreements entered into
on December 31, 1997, the Company issued warrants to acquire 247,472 shares of
Series B convertible preferred stock at $1.00 per share. Also, during fiscal
1998, the Company issued a warrant to purchase 2,500 shares of Series D
convertible preferred stock at an exercise price of $2.00 per share in
connection with a revolving line of credit from a bank that expired in
May 1999.
Simultaneously with the closing of the initial public offering, all
14,368,098 shares of the Company's preferred stock were converted into common
stock on a share for share basis. Additionally, all of the holders of warrants
to purchase 247,472 shares of Series B convertible preferred stock exercised
such warrants through a net issuance provision and were issued 209,400 shares of
common stock. Also in connection with the initial public offering, the warrant
to acquire 2,500 shares of Series D convertible preferred stock was converted
into a warrant to purchase an equivalent number of common shares at an exercise
price of $2.00 per share.
COMMON STOCK RESERVED FOR FUTURE ISSUANCE
At June 30, 1999, the Company has reserved the following shares of common
stock for issuance in connection with:
Warrants issued and outstanding............................. 350,036
Options issued and outstanding.............................. 5,057,606
Options available under stock option plans.................. 1,108,547
Shares available under 1998 Purchase Plan................... 263,182
---------
Total....................................................... 6,779,371
=========
COMMON STOCK SUBJECT TO REPURCHASE
Upon the exercise of certain unvested employee stock options, the Company
issued to the employees common stock which is subject to repurchase by the
Company at the original exercise price of the stock option. This right lapses
over the original vesting period. At June 30, 1999, 66,661 shares were subject
to repurchase.
F-14
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
STOCK OPTION PLANS
Under the Company's stock option plans (collectively, the "Plans") a total
of 5,656,712 nonstatutory and incentive common stock options are authorized for
issuance. Nonstatutory stock options may be granted to employees, outside
directors and consultants, and incentive stock options may only be granted to
employees. The Plans provide for the granting of incentive stock options at not
less than 100% of the fair market value of the underlying stock at the grant
date. Nonstatutory stock options may be granted at not less than 85% of the fair
market value of the underlying stock at the date of grant. Options granted to
employees generally vest over four years and expire ten years from the date of
the grant. In addition, upon change in control, all options granted under
certain plans shall immediately vest.
The plans provide that each nonemployee director who is elected to the
Company's board of directors will automatically be granted a nonstatutory stock
option to purchase 18,750 shares of common stock at an exercise price equal to
the fair value of the common stock on the grant date. These grants vest ratably
over three years. An additional option to purchase 6,250 shares of common stock
will be granted to the nonemployee director each year thereafter with an
exercise price equal to the fair market value of the common stock on that date.
These grants vest after one year of service.
EMPLOYEE STOCK PURCHASE PLAN
On December 10, 1998, the Company adopted the 1998 Employee Stock Purchase
Plan (the "1998 Purchase Plan"). Under the 1998 Purchase Plan, eligible
employees are allowed to have salary withholdings of up to 15% of their base
compensation to purchase shares of common stock at a price equal to 85% of the
lower of the market value of the stock at the beginning or end of defined
purchase periods. The initial purchase period commenced on December 10, 1998.
The Company has reserved 312,500 shares of common stock for issuance under this
plan. As of June 30, 1999, 49,318 shares have been issued under the 1998
Purchase Plan.
NONPLAN OPTION GRANT
In connection with its hiring of the Company's President and Chief Operating
Officer in November 1997, the Company granted to this officer options to
purchase 350,000 shares of common stock with an exercise price of $0.20 per
share. The option was immediately exercisable with respect to 20% of the option
shares with the balance exercisable in equal monthly installments over the next
36 months of employment with the Company. However, vesting accelerated upon the
closing of the Company's underwritten public offering. In addition, the option
grant contained an antidilution clause which guaranteed that, prior to any
underwritten initial public offering of the Company's common stock, the number
of shares under the option grant would always be equal to 5% of its outstanding
common stock on a fully diluted basis less 36,666 shares. As a result of various
sales of equity securities and option grants since the initial grant in
November 1997, the officer was issued options to purchase an additional 638,850
shares of common stock at an exercise price of $0.20 per share during fiscal
1999. In connection with this award, the Company recognized $362,100 and
$1,087,200 in stock-based compensation expense during fiscal 1998 and 1999,
respectively.
OPTIONS AND WARRANTS GRANTED TO NONEMPLOYEES
The Company has granted options and warrants to nonemployees for services
performed and to be performed after the date of grant. In connection with these
awards, the Company recognized $310,100
F-15
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
and $601,500 in stock-based compensation expense during fiscal 1998 and 1999,
respectively. At June 30, 1999, options to purchase 85,000 shares of common
stock at an exercise price of $42.53 were unearned by certain nonemployees.
These options vest over three years and have a term of three years. At June 30,
1999, all services relating to all other nonemployee awards have been rendered
and the related options and warrants were fully exercisable.
In connection with the Company's formation of its European joint ventures in
March 1999, the Company agreed that it will grant options to purchase up to
600,000 shares of common stock to employees of the joint ventures upon the joint
ventures meeting certain performance criteria of over the next four years. The
exercise price for these options would be based on the fair market value of the
Company's common stock at the date of grant.
In connection with the Credit Facility (see Note 7), in fiscal 1998, the
Company issued warrants to purchase 45,000 shares of common stock at a
weighted-average exercise price of $2.31 per share. The fair value of these
warrants is being recognized as interest expense through June 30, 1999. During
fiscal 1999, in connection with an amendment to the Credit Facility, the Company
issued warrants to purchase 67,032 shares of common stock which have a
weighted-average exercise price of $18.72 per share and a term of five years.
The estimated fair value of these warrants of $787,600 is included in deposits
and other assets at June 30, 1999 and is being amortized to interest expense
over the repayment period.
In connection with the signing of a new facility lease (see Note 12) in
fiscal 1999, the Company issued the lessor a warrant to purchase 200,000 shares
of its common stock at $5.00 per share. The estimated fair value of this warrant
of $609,100 is included in deposits and other assets at June 30, 1999 and will
be amortized to expense over the lease period.
At June 30, 1998, warrants to purchase 64,686 shares of common stock at a
weighted-average exercise price of $2.10 per share were outstanding; such
warrants expire in 2003. All of these warrants were issued during the year ended
June 30, 1998 and had an estimated weighted-average fair value of $1.23 per
share at the date of grant. During fiscal 1999, warrants to purchase 302,662
shares of common stock at a weighted-average exercise price of $7.99 were issued
and had an estimated weighted-average fair value of $4.72 per share at date of
grant. At June 30, 1999, warrants to purchase 350,036 shares of common stock at
a weighted-average exercise price of $7.17 per share were outstanding.
OPTION REPRICING
On December 1, 1998, the Company repriced 928,850 options previously granted
at $6.00 to $8.00 per share to fair value at that date of $5.00 per share.
F-16
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
Stock option activity is summarized as follows:
OUTSTANDING OPTIONS
---------------------
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- --------
Balance, July 1, 1996 (137,500 shares vested at a
weighted average exercise price of $0.02 per share)... 1,140,000 $ 0.02
Granted................................................. 450,000 0.07
Exercised............................................... (31,250) 0.02
Canceled................................................ (388,750) 0.02
----------
Balance, June 30, 1997 (219,374 shares vested at a
weighted average exercise price of $0.02 per share)... 1,170,000 0.03
Granted................................................. 1,142,612 0.59
Exercised............................................... (322,446) 0.10
Canceled................................................ (32,334) 0.31
----------
Balance, June 30, 1998 (734,270 shares vested at a
weighted average exercise price of $0.19 per share)... 1,957,832 0.34
Granted................................................. 5,058,100 15.61
Exercised............................................... (822,908) 0.50
Canceled................................................ (1,135,418) 6.35
----------
Balance, June 30, 1999.................................. 5,057,606 $14.24
==========
The following table summarizes information as of June 30, 1999 concerning
currently outstanding and vested options:
OPTIONS OUTSTANDING OPTIONS VESTED
----------------------------------- --------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICES OF SHARES LIFE (YEARS) PRICE OF SHARES PRICE
- ----------------------- --------- ------------ -------- --------- --------
$ 0.02 - $ 0.60 1,621,374 8.3 $ 0.17 1,185,423 $ 0.19
2.00 - 2.60 276,628 8.5 2.29 45,397 2.12
4.00 - 6.50 1,337,654 9.2 5.17 337,103 5.36
12.25 - 41.06 1,595,550 9.7 33.34 690,668 36.47
42.53 - $75.13 226,400 9.5 48.55 7,500 46.63
--------- --- -------- --------- --------
5,057,606 9.1 $ 14.24 2,266,091 $ 12.21
========= === ======== ========= ========
At June 30, 1999, 1,108,547 shares remained available for future grant.
F-17
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999
ADDITIONAL STOCK PLAN INFORMATION
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and its related
interpretations.
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the
disclosure of pro forma net income (loss) and net income (loss) per share had
the Company adopted the fair value method since the Company's inception. Under
SFAS No. 123, the fair value of stock-based awards to employees is calculated
through the use of option pricing models, even though such models were developed
to estimate the fair value of freely tradable, fully transferable options
without vesting restrictions, which significantly differ from the Company's
stock option awards. These models also require subjective assumptions, including
future stock price volatility and expected time to exercise, which greatly
affect the calculated values.
The Company's calculations for employee grants were made using the minimum
value method for grants prior to September 8, 1998 and the fair value method for
grants after that date with the following weighted average assumptions: expected
life, one year following vesting; risk free interest rate of 6%; and no
dividends during the expected term. In addition, volatility of 70% was used for
grants valued under the fair value method. The Company's calculations are based
on a multiple award valuation approach and forfeitures are recognized as they
occur. If the computed values of the Company's stock-based awards to employees
had been amortized to expense over the vesting period of the awards as specified
under SFAS No. 123, net loss would have been $1,803,800 ($4.59 per basic and
diluted share), $5,111,000 ($9.75 per basic and diluted share) and $37,202,000
($2.24 per basic and diluted share) for the years ended June 30, 1997, 1998 and
1999, respectively.
The number and estimated weighted-average grant date value per option for
employee and nonemployee awards during the year are as follows:
1997 1998 1999
-------- ---------- ----------
Employee options:
Number of shares......................... -- 1,003,250 4,957,600
Estimated weighted average value......... $ -- $ 0.10 $ 5.98
Nonemployee options:
Number of shares......................... 450,000 139,362 100,500
Estimated weighted average value......... $ 0.02 $ 0.08 $ 20.43
F-18
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
10. NET LOSS PER SHARE
The following is a reconciliation of the numerators and denominators used in
computing basic and diluted net loss per share at June 30:
1997 1998 1999
----------- ----------- ------------
Net loss (numerator), basic and
diluted............................. $(1,802,800) $(5,425,000) $(26,554,900)
=========== =========== ============
Shares (denominator):
Weighted average common shares
Outstanding....................... 393,236 530,224 16,675,822
Weighted average common shares
Outstanding subject to
repurchase........................ -- (5,616) (32,795)
----------- ----------- ------------
Shares used in computation, basic and
diluted............................. 393,236 524,608 16,643,027
=========== =========== ============
Net loss per share, basic and
diluted............................. $ (4.58) $ (10.34) $ (1.60)
=========== =========== ============
For the above mentioned periods, the Company had securities outstanding
which could potentially dilute basic net income per share in the future, but
were excluded in the computation of diluted net loss per share in the periods
presented, as their effect would have been antidilutive. At June 30, 1999,
outstanding potentially dilutive securities consist of 66,661 outstanding shares
of common stock subject to repurchase, and options and warrants to purchase
5,407,642 shares of common stock.
11. JOINT VENTURE TERMINATION FEE
In fiscal 1996, the Company entered into a joint venture agreement (the
"Agreement") with DSK, Inc. ("DSK") to cooperatively market and develop the
Company's services. The Company paid $33,700 to DSK during the year ended
June 30, 1997 related to the Agreement.
In April 1997, the Company terminated the Agreement and hired the majority
stockholders of DSK as either employees or consultants by issuing 1,000,000
fully vested shares of the Series B preferred stock with a fair value of $0.60
per share, or $600,000, for the outstanding shares of common stock of DSK. The
Company recorded the transaction by allocating the value of the shares issued to
property and equipment (at DSK's net book value of $168,900, which approximated
fair value), with the balance of $431,100 reflected as a joint venture
termination fee.
Additionally, in April 1997, the Company granted to certain of the former
owners of DSK options to purchase a total of 250,000 shares of its common stock
at $0.06 per share for real estate consulting services to be performed. In
June 1998, the Company accelerated the vesting of all the DSK options awarded.
In conjunction with this award, the Company recognized $604,200 of stock-based
compensation expense during fiscal 1998.
F-19
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
12. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases its facilities under noncancelable operating leases.
These leases expire on various dates through fiscal 2002. Minimum future lease
payments under noncancelable operating and capital leases as of June 30, 1999
are summarized as follows:
YEARS ENDING CAPITAL OPERATING
JUNE 30, LEASES LEASES
- ------------ ----------- -----------
2000...................................................... $ 1,320,600 $ 3,903,200
2001...................................................... 1,282,100 4,108,000
2002...................................................... 921,500 4,215,100
2003...................................................... 630,000 4,305,600
2004...................................................... 630,000 4,341,700
Thereafter.................................................. 9,060,000 47,604,800
----------- -----------
Total minimum lease payments................................ $13,844,200 $68,478,400
===========
Less amount representing interest at rates ranging from
13.253% to 14.68%......................................... (8,102,300)
-----------
Present value of minimum lease payments..................... 5,741,900
Less current portion........................................ (569,200)
-----------
Long-term portion........................................... $ 5,172,700
===========
Rent expense under operating leases for the years ended June 30, 1997, 1998
and 1999 was $444,900, $917,000 and $1.4 million, respectively.
Effective in fiscal 2000, the Company has committed to lease additional
facilities. The lease is for a minimum term of 20 years with annual rental
payments increasing from approximately $3 million to $4 million over the lease
term.
On June 29, 1999, the Company entered into an agreement to purchase
approximately nine acres of land in Fairfax County, Virginia, for $7,750,000
which is expected to close in fiscal 2000. The Company intends to open a
facility on the site in fiscal 2001.
See Note 4 regarding the Company's agreements to lease fiber optic cable
systems.
PURCHASE COMMITMENTS
The Company has entered into noncancelable commitments to purchase property
and equipment related to the expansion of its operations facilities. As of
June 30, 1999, approximately $48 million was committed for purchases under these
agreements through fiscal 2000.
TELECOMMUNICATIONS AND PEERING ARRANGEMENTS
The Company has guaranteed to pay certain monthly usage levels or fees with
various communications or interconnect providers. Minimum payments under these
agreements at June 30, 1999 are approximately $24.8 million in fiscal 2000;
$24.7 million in fiscal 2001; $23.1 million in fiscal 2002; $14.4 million in
fiscal 2003; $13.7 million in fiscal 2004; and $8.6 million in fiscal 2005.
F-20
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
The Company is a party to numerous peering agreements with other internet
providers to allow for the exchange of internet traffic. These agreements do not
have fee commitments and generally have a one year term with automatic renewals.
The Company does not record any revenue or expense associated with these
non-cash transactions as such transactions do not represent the culmination of
the earnings process and the fair value of such transactions are not reasonably
determinable.
LEGAL MATTERS
On June 29, 1999, an alleged stockholder of AboveNet filed a lawsuit in the
Court of Chancery of the State of Delaware. The plaintiff, who purports to
represent a class of all AboveNet stockholders, challenges the terms of the
merger between AboveNet and Metromedia Fiber Network, Inc. ("Metromedia") (see
Note 17). Four other virtually identical complaints, have also been filed in the
Delaware Court of Chancery. None of these four complaints has been served.
AboveNet believes these lawsuits are without merit and intends to defend itself
vigorously, and accordingly, management does not expect that the outcome of
these cases will have a material effect on the Company's financial position or
results of operations.
13. RELATED PARTY TRANSACTIONS
A member of the Board of Directors is the president of an entity which is
the co-manager of the Company's primary facilities. Rent expense in fiscal 1997,
1998 and 1999 for these facilities was $16,400, $265,200 and $1,073,200,
respectively. The Company believes that its lease arrangements were on an arm's
length basis.
During fiscal 1999, the same entity was granted a warrant to purchase
200,000 shares of common stock in connection with the signing of a new facility
lease (see Note 9). The estimated fair value of the warrant when granted was
$609,100.
14. MAJOR CUSTOMERS
For the year ended June 30, 1999, no one customer accounted for more than
10% of revenues. One customer accounted for 14% and 12% of revenues in fiscal
1998 and 1997, respectively.
At June 30, 1999, one customer accounted for approximately 10% of trade
receivables. At June 30, 1998, two customers accounted for approximately 22% and
13% of trade receivables.
15. GEOGRAPHIC DATA
During the year ended June 30, 1999, the Company generated approximately 14%
of its revenues from customers domiciled in countries other than the United
States, primarily in Asia. For the years ended June 30, 1998 and 1997,
substantially all of the Company's revenues were derived from domestic
customers.
16. 401(K) PLAN
In May 1998, the Company began a 401(k) plan (the Plan) that covers all
employees who meet the Plan's eligibility requirements. Eligible employees can
contribute up to 15% of their salary, subject to certain IRS limitations. The
Company's contributions related to fiscal 1998 and 1999 were zero and $168,100,
respectively.
F-21
ABOVENET COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED JUNE 30, 1997, 1998 AND 1999.
17. SUBSEQUENT EVENTS
In August 1999, the Company entered into an additional agreement for the
acquisition of an indefeasible right to use additional capacity on a fiber optic
cable system between the U.S. and the United Kingdom for a 25-year period. The
agreement commits the Company to pay approximately $15.8 million in a series of
installments through October 1999.
On September 8, 1999, the Company completed a merger with Metromedia Fiber
Network, Inc. ("MFN"). Under the terms of the agreement, AboveNet stockholders
received 1.175 shares of MFN Class A common stock for each AboveNet share owned.
Additionally, upon completion of the merger, all outstanding stock options
granted prior to June 18, 1999 became immediately vested.
F-22
The financial statements of the Palo Alto Internet Exchange have been
presented in AboveNet's Registration Statement on Form S-4 filed on August 4,
1999 (file no. 333-84541).
(b) Pro Forma Financial Information.
METROMEDIA FIBER NETWORK, INC.
UNAUDITED PRO FORMA CONDENSED COMBINING FINANCIAL INFORMATION
The following unaudited pro forma condensed combining financial information
illustrates the effect of the merger of AboveNet Communications, Inc.
("AboveNet") with a wholly-owned subsidiary of Metromedia Fiber Network, Inc.
("Metromedia") under the terms of the Merger Agreement. Under the terms of the
Merger Agreement, the holders of AboveNet common stock received 1.175 shares of
Metromedia class A common stock for each share of AboveNet common stock. The
share price used to determine the acquisition cost was derived from taking the
average of the closing price of Metromedia class A common stock for the two days
prior to and subsequent to the announcement of the proposed merger, which was
June 23, 1999.
On June 21, 1999, AboveNet acquired the assets and assumed obligations
related to the Palo Alto Internet Exchange ("PAIX") from Compaq Computer
Corporation ("Compaq") for approximately $76.5 million, consisting of
$70 million in cash, an obligation to provide various services to Compaq with a
value currently estimated to be approximately $5 million and expenses of
approximately $1.5 million.
The unaudited pro forma condensed combining financial information presented
herein gives effect to Metromedia's acquisition of AboveNet and AboveNet's
acquisition of PAIX. The unaudited pro forma condensed combining financial
information is based on the historical financial statements of Metromedia,
AboveNet and PAIX.
AboveNet has a fiscal year end of June 30. The unaudited historical
financial information for AboveNet for the year ended December 31, 1998 consists
of the period from January 1, 1998 to June 30, 1998 combined with the period
from July 1, 1998 to December 31, 1998 derived from AboveNet's historical
unaudited financial statements.
The unaudited pro forma condensed combining statements of operations for the
six months ended June 30, 1999 and for the year ended December 31, 1998 give
effect to the above transactions as if they had been consummated on January 1,
1998. The unaudited Pro forma condensed combining balance sheets, as of
June 30, 1999, give effect to Metromedia's acquisition of AboveNet as if it had
been consummated on June 30, 1999.
ACCOUNTING TREATMENT
Metromedia plans to record the acquisition of AboveNet using the purchase
method of accounting. Accordingly, the assets acquired and liabilities assumed
will be recorded at their estimated fair values, which are subject to further
adjustment based upon appraisals and other analyses.
AboveNet recorded the acquisition of PAIX using the purchase method of
accounting. Accordingly, the assets acquired and obligations assumed have been
recorded at their estimated fair values, which are subject to further
adjustments based upon appraisals and other analyses.
The pro forma adjustments are based upon available information and
assumptions that we believe are reasonable at the time made. The unaudited pro
forma condensed combining financial statements do not purport to present our
financial position or results of operations had the acquisitions occurred on the
dates specified, nor are they necessarily indicative of the financial position
or results of operations that may be achieved in the future. The unaudited pro
forma condensed combining statements of operations do not reflect any
adjustments for synergies that we expect to realize following consummation of
the acquisitions. No assurances can be made as to the amount of cost savings or
revenue enhancements, if any, that may be realized.
The unaudited pro forma condensed combining financial statements should be
read in conjunction with the consolidated financial statements and notes of
Metromedia, AboveNet and PAIX.
3
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
FOR
ABOVENET PAIX ACQUIRED METROMEDIA METROMEDIA
HISTORICAL HISTORICAL ADJUSTMENTS ENTITIES HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- --------- ---------- ----------- ----------
Revenue................. $ 9,522 $3,171 $ -- $ 12,693 $ 38,673 $ -- $ 51,366
Expenses:
Cost of sales........... 13,882 2,013 -- 15,895 14,819 -- 30,714
Selling, general and
administrative........ 12,309 301 -- 12,610 13,786 -- 26,396
Consulting and
employment
incentives............ 519 -- -- 519 -- -- 519
3,485 (1) (3,485)(2)
Depreciation and
amortization.......... 2,209 1,696 (1,696)(1) 5,694 5,058 38,335 (3) 45,602
-------- ------ ------- -------- -------- -------- --------
Income (loss) from
operations............ (19,397) (839) (1,789) (22,025) 5,010 (34,850) (51,865)
Other income (expense):
Interest income......... 2,665 -- -- 2,665 13,512 -- 16,177
Interest expense........ (1,080) -- -- (1,080) (30,407) -- (31,487)
Loss in joint venture... (200) -- -- (200) (393) -- (593)
-------- ------ ------- -------- -------- -------- --------
Net loss before income
taxes................. (18,012) (839) (1,789) (20,640) (12,278) (34,850) (67,768)
Income taxes............ -- -- -- -- -- -- --
-------- ------ ------- -------- -------- -------- --------
Net loss................ $(18,012) $ (839) $(1,789) $(20,640) $(12,278) $(34,850) $(67,768)
======== ====== ======= ======== ======== ======== ========
Net loss per
share--basic.......... $ (0.06) $ (0.29)
======== ========
Net loss per share--
diluted............... n/a n/a
======== ========
Weighted average number
of shares
outstanding--basic
(4)................... 189,098 230,692
======== ========
Weighted average number
of shares
outstanding--
diluted............... n/a n/a
======== ========
See accompanying notes to unaudited pro forma condensed combining financial
statements
4
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
PRO FORMA
FOR
ABOVENET PAIX ACQUIRED METROMEDIA METROMEDIA
HISTORICAL HISTORICAL ADJUSTMENTS ENTITIES HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ---------- ----------- ----------- -----------
Revenue........................... $ 6,777 $ 4,362 $ -- $ 11,139 $36,436 -- 47,575
Expenses:
Cost of sales..................... 7,551 2,583 -- 10,134 13,937 $ -- $ 24,071
Selling, general and
administrative.................. 7,843 450 -- 8,293 14,712 -- 23,005
Consulting and employment
incentives...................... 2,396 -- -- 2,396 3,648 -- 6,044
(1,944)(1) (6,970)(2)
Depreciation and amortization..... 1,497 2,349 6,970 (1) 8,872 1,532 76,671 (3) 80,105
-------- ------- ------- -------- ------- -------- --------
Income (loss) from operations..... (12,510) (1,020) (5,026) (18,556) 2,607 (69,701) (85,650)
Other income (expense):
Interest income................... 337 -- -- 337 8,788 -- 9,125
Interest expense.................. (529) -- -- (529) (6,861) -- (7,390)
Loss in joint venture............. -- -- -- -- (146) -- (146)
-------- ------- ------- -------- ------- -------- --------
Net income (loss) before income
taxes........................... (12,702) (1,020) (5,026) (18,748) 4,388 (69,701) (84,061)
Income taxes...................... -- -- -- -- 3,402 (3,402)(5) --
-------- ------- ------- -------- ------- -------- --------
Net income (loss)................. $(12,702) $(1,020) $(5,026) $(18,748) $ 986 $(66,299) $(84,061)
======== ======= ======= ======== ======= ======== ========
Net loss per share -- basic....... $ 0.01 $ (0.37)
======= ========
Net loss per share -- diluted..... 0.00 n/a
======= ========
Weighted average number of shares
outstanding -- basic(4)......... 186,990 228,584
======= ========
Weighted average number of shares
outstanding -- diluted.......... 219,524 n/a
======= ========
See accompanying notes to unaudited pro forma condensed combining financial
statements
5
METROMEDIA FIBER NETWORK, INC.
PRO FORMA CONDENSED COMBINING BALANCE SHEETS
(UNAUDITED)
JUNE 30, 1999
(IN THOUSANDS)
ABOVENET METROMEDIA METROMEDIA
HISTORICAL HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------
ASSETS
Current assets:
Cash and cash equivalents.................. $220,871 $ 341,897 $ (25,000)(2) $ 537,768
Short-term investments..................... -- 19,716 -- 19,716
Pledged securities......................... -- 63,142 -- 63,142
Accounts receivable........................ 3,355 86,258 -- 89,613
Other current assets....................... 3,850 2,761 -- 6,611
-------- ---------- ---------- ----------
Total current assets......................... 228,076 513,774 (25,000) 716,850
Fiber optic transmission network and related
equipment, net............................. 12,905 417,803 -- 430,708
Property and equipment, net.................. 46,591 3,909 -- 50,500
Restricted cash.............................. 21,476 51,920 25,000 (2) 98,396
Other assets................................. 5,377 47,288 -- 52,665
Intangible assets............................ 69,474 -- (69,474)(2) 1,533,414
1,533,414 (2)
-------- ---------- ---------- ----------
Total assets................................. $383,899 $1,034,694 $1,463,940 $2,882,533
======== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................... $ 13,593 $ 7,276 $ -- $ 20,869
Accrued expenses........................... 2,122 134,736 20,000(2) 156,858
Current portion of deferred revenue........ 2,511 8,106 -- 10,617
Current portion of long-term obligations... 5,985 55 -- 6,040
-------- ---------- ---------- ----------
Total current liabilities.................... 24,211 150,173 20,000 194,384
Notes payable................................ -- 650,000 -- 650,000
Capital lease obligation, net of current
portion.................................... 5,173 23,202 -- 28,375
Deferred revenue............................. 4,375 68,530 -- 72,905
Long-term obligations........................ 16,416 -- -- 16,416
Total stockholders' equity................... 333,724 142,789 1,443,940 (2) 1,920,453
-------- ---------- ---------- ----------
Total liabilities and stockholders' equity... $383,899 $1,034,694 $1,463,940 $2,882,533
======== ========== ========== ==========
See accompanying notes to unaudited pro forma condensed combining financial
statements
6
METROMEDIA FIBER NETWORK, INC.
NOTES TO UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
(1) Reflects adjustments related to the acquisition by AboveNet of PAIX at
January 1, 1998 for the income statements as follows:
(i) the elimination of PAIX historical intangible asset amortization; and
(ii) the addition of amortization of the excess of cost over net tangible
assets acquired of PAIX ($69.7 million) over 10 years.
(2) Reflects the acquisition by Metromedia of AboveNet at June 30, 1999 for the
balance sheet and January 1, 1998 for the income statements as follows:
(i) the issuance of approximately 41.6 million shares of Metromedia class A
common stock in exchange for shares of AboveNet common stock at a ratio
of 1.175;
(ii) the placement of cash into a restricted account to secure AboveNet's
renegotiated credit facility;
(iii) the elimination of AboveNet's historical net tangible assets acquired;
and
(iv) issuance of shares of Metromedia class A common stock:
Number of shares issued to acquire AboveNet..... 41,594,140
Per share price of stock........................ $ 40.36
----------
Value of shares issued.......................... $1,678,739,000
Value of Metromedia options and warrants issued
in exchange for AboveNet's options and
warrants....................................... 98,925,000
Transaction costs............................... 20,000,000
--------------
Total acquisition cost.......................... 1,797,664,000
AboveNet's net tangible assets acquired......... 264,250,000
--------------
Excess of cost over net tangible assets
acquired....................................... $1,533,414,000
==============
Metromedia has made a preliminary allocation to intangible assets of excess
cost over estimated net tangible assets acquired as AboveNet's tangible
assets and liabilities are estimated to approximate fair value. However,
there can be no assurance that the actual allocation will not differ
significantly from the pro forma allocation.
(3) Reflects amortization of the excess of cost over net tangible assets
acquired in the merger by use of the straight-line method over 20 years.
(4) The average common shares outstanding used in calculating pro forma loss per
common share are calculated assuming that the estimated number of shares of
Metromedia class A common stock to be issued in the merger were outstanding
from the beginning of the periods presented.
(5) Reflects the adjustment of the tax provision.
7
(c) Exhibits
23.1 Consent of Deloitte & Touche LLP.
99.1 Amendment and Waiver, dated as of September 8, 1999, among the Company,
AboveNet and Magellan Acquisition, Inc.
8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
METROMEDIA FIBER NETWORK, INC.
By: /s/ SILVIA KESSEL
-----------------------------------------
Name: Silvia Kessel
Title: Executive Vice President
Date: October 26, 1999
9
EXHIBIT INDEX
PAGE IN SEQUENTIAL
EXHIBIT NO. NUMBERING SYSTEM
- ----------- ------------------
23.1 Consent of Deloitte & Touche LLP............................
99.1 Amendment and Waiver, dated as of September 8, 1999, among
the Company, AboveNet and Magellan Acquisition, Inc.........