AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 25, 1999
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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METROMEDIA FIBER NETWORK, INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 4813 11-3168327
(State or other jurisdiction (Primary Standard Industrial (IRS Employer
of Classification Code Number) Identification
incorporation or organization) No.)
ONE NORTH LEXINGTON AVENUE
WHITE PLAINS, NY 10601
914-421-6700
(Address, including zip code, and telephone number, including
area code, of Registrant's principal executive offices)
STEPHEN A. GAROFALO
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
METROMEDIA FIBER NETWORK, INC.
ONE NORTH LEXINGTON AVENUE
WHITE PLAINS, NY 10601
914-421-6700
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
Copies to:
DOUGLAS A. CIFU, ESQ.
JAMES M. DUBIN, ESQ.
PAUL, WEISS, RIFKIND, WHARTON & GARRISON
1285 AVENUE OF THE AMERICAS
NEW YORK, NEW YORK 10019-6064
212-373-3000
APPROXIMATE DATE OF PROPOSED SALE OF THE SECURITIES TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER UNIT PRICE (1) REGISTRATION FEE
10% Series B Senior Notes Due 2008.... $650,000,000 100% $650,000,000 $180,700
(1) Estimated solely for the purpose of calculating the registration fee in
accordance with Rule 457 of the Securities Act of 1933.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
SUBJECT TO COMPLETION, DATED JANUARY 25, 1999
PRELIMINARY PROSPECTUS
METROMEDIA FIBER NETWORK, INC.
OFFER TO EXCHANGE $650,000,000 OF ITS
10% SERIES B SENIOR NOTES DUE 2008
WHICH HAVE BEEN REGISTERED
UNDER THE SECURITIES ACT
FOR $650,000,000 OF ITS OUTSTANDING
10% SERIES A SENIOR NOTES DUE 2008
TERMS OF THE EXCHANGE OFFER
- -- It expires at 5:00 p.m., New York City time, on , 1999, unless
extended.
- -- It is subject to certain customary conditions, which we may waive.
- -- All outstanding notes that are validly tendered and not withdrawn will be
exchanged.
- -- Tenders of outstanding notes may be withdrawn at any time prior to the
expiration of the Exchange Offer.
- -- We will not receive any proceeds from the Exchange Offer.
- -- The terms of the exchange notes we will issue in the Exchange Offer are
substantially identical to those of the outstanding notes, except that
certain transfer restrictions and registration rights relating to the
outstanding notes will not apply to the exchange notes.
Each broker-dealer that receives exchange notes for its own account pursuant
to the Exchange Offer may be deemed to be an "underwriter" within the meaning of
the Securities Act of 1933, as amended (the "Securities Act"), and must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Broker-dealers may use this Prospectus in
connection with resales of exchange notes received in exchange for the
outstanding notes where the outstanding notes were acquired by such
broker-dealers as a result of market-making activities or other trading
activities. We have agreed that, for a period of 180 days after the consummation
of the Exchange Offer, we will make this Prospectus available to any
broker-dealer for use in connection with any such resale. Please refer to the
section in this Prospectus entitled "Plan of Distribution."
BEFORE PARTICIPATING IN THIS EXCHANGE OFFER PLEASE REFER TO THE SECTION IN THIS
PROSPECTUS ENTITLED "RISK FACTORS" COMMENCING ON PAGE 15.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE COMMISSION HAS
APPROVED THE NOTES TO BE DISTRIBUTED IN THE EXCHANGE OFFER, NOR HAVE ANY OF
THESE ORGANIZATIONS DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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The date of this Prospectus is , 1999.
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TABLE OF CONTENTS
PAGE
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SUMMARY.................................................................................................... 3
RISK FACTORS............................................................................................... 15
USE OF PROCEEDS............................................................................................ 29
CAPITALIZATION............................................................................................. 30
SELECTED CONSOLIDATED FINANCIAL DATA....................................................................... 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...................... 33
BUSINESS................................................................................................... 39
MANAGEMENT................................................................................................. 59
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................................. 66
SECURITY OWNERSHIP......................................................................................... 70
THE EXCHANGE OFFER......................................................................................... 72
DESCRIPTION OF THE EXCHANGE NOTES.......................................................................... 83
CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS........................................................... 118
PLAN OF DISTRIBUTION....................................................................................... 122
LEGAL MATTERS.............................................................................................. 122
EXPERTS.................................................................................................... 123
AVAILABLE INFORMATION...................................................................................... 123
DOCUMENTS INCORPORATED BY REFERENCE........................................................................ 124
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................................. F-1
GLOSSARY................................................................................................... A-1
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PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
BECAUSE IT IS A SUMMARY, IT DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU
SHOULD CONSIDER BEFORE PARTICIPATING IN THE EXCHANGE OFFER. YOU SHOULD READ THE
ENTIRE PROSPECTUS CAREFULLY, INCLUDING THE SECTION ENTITLED "RISK FACTORS" AND
THE FINANCIAL STATEMENTS AND THE RELATED NOTES TO THOSE STATEMENTS INCLUDED IN
THIS PROSPECTUS. EXCEPT AS OTHERWISE REQUIRED BY THE CONTEXT, REFERENCES IN THIS
PROSPECTUS TO "WE," "US," THE "ISSUER" OR THE "COMPANY" REFER TO THE COMBINED
BUSINESS OF METROMEDIA FIBER NETWORK, INC. AND ALL OF ITS SUBSIDIARIES. THE TERM
"YOU" REFERS TO PROSPECTIVE INVESTORS IN THE EXCHANGE NOTES (AS DEFINED). ALL
SHARE AND PER SHARE INFORMATION IN THIS PROSPECTUS GIVES RETROACTIVE EFFECT TO
THE TWO-FOR-ONE STOCK SPLITS THAT BECAME EFFECTIVE ON AUGUST 28, 1998 AND
DECEMBER 22, 1998, OF THE SHARES OF CLASS A AND CLASS B COMMON STOCK OF THE
COMPANY (AS DEFINED), UNLESS OTHERWISE INDICATED IN THIS PROSPECTUS.
THE EXCHANGE OFFER
On November 25, 1998, we completed the private offering of $650,000,000
aggregate principal amount of 10% Series A Senior Notes Due 2008 (the "Initial
Notes"). In connection with this private offering, we entered into a
registration rights agreement (the "Registration Rights Agreement") with the
initial purchasers of the Initial Notes in which we agreed, among other things,
to deliver this Prospectus to you and to complete an exchange offer for the
Initial Notes on or prior to June 23, 1999. Pursuant to the Registration Rights
Agreement, we are offering to exchange $650,000,000 aggregate principal amount
of our 10% Series B Senior Notes Due 2008, which have been registered under the
Securities Act (the "Exchange Notes"), for a like aggregate principal amount of
our Initial Notes (the "Exchange Offer"). You are entitled to exchange your
Initial Notes for Exchange Notes with substantially identical terms in the
Exchange Offer. You should read the discussions under the headings "The Exchange
Offer" and "Description of the Exchange Notes" for further information regarding
the Exchange Offer and the Exchange Notes.
THE COMPANY
GENERAL
We are a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate/government customers in the United States. We focus our
operations on domestic intracity fiber optic networks in clusters of Tier I
cities throughout the United States. We currently operate a high-bandwidth fiber
optic communications network in New York and within the next two quarters expect
to operate similar networks in Philadelphia and Washington, D.C. We have also
begun engineering and constructing networks in Chicago, San Francisco and Boston
and within the next two years, we also plan to complete an expansion into five
additional markets including Los Angeles, Seattle, Dallas, Houston and Atlanta.
We expect that our domestic intracity networks will ultimately encompass
approximately 810,000 fiber miles covering approximately 1,896 route miles.
We have also built or obtained intercity fiber optic capacity to link
certain of our intracity networks. We expect to have operational a 241 route
mile network from New York to Washington, D.C. during the first quarter of 1999,
and when finally complete, as currently planned, we expect that this network
will cover approximately 180,000 fiber miles. We have also obtained rights for
fiber optic capacity with other facilities-providers and obtained fiber optic
capacity linking certain of the metropolitan areas (New York--Chicago, New
York--Boston, Chicago--Seattle--Portland) in which we plan to construct
intracity networks, except in Portland.
In addition, we have entered into a joint venture with a U.K.
telecommunications company to connect our New York network to London and we have
announced that we intend to form a joint venture to construct a high-bandwidth
fiber optic network connecting 13 major cities in Germany and
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obtain certain additional fiber optic capacity in Western Europe. Please refer
to the sections in this Prospectus entitled "Business" and "Risk Factors--Risks
Associated with Growth Strategy; Management of Expansion."
We believe that the market for our services in these areas is characterized
by significant and growing demand for, and limited supply of, fiber optic
capacity. To meet our customers' demand, we tailor the amount of fiber capacity
leased to the needs of our customers. Generally, customers lease fiber optic
capacity from us and connect their own transmission equipment to the leased
fiber, thereby obtaining a high-bandwidth fixed-cost, secure communications
alternative to the metered communications services offered by traditional
providers. In addition, we believe that we have installation, operating and
maintenance cost advantages per fiber mile relative to our competitors because
we generally install 432 fibers and may install as many as 864 fibers per route
mile as compared to a generally lower number of fibers in existing competitive
networks.
We are focused on providing our broadband communications infrastructure to
two main customer groups located in selected Tier I markets: communications
carriers and corporate/government customers. Our targeted carrier customers
include a broad range of communications companies such as:
- incumbent local exchange carriers ("ILECs"),
- competitive local exchange carriers ("CLECs"),
- long distance companies/interexchange carriers ("IXCs"),
- paging, cellular and PCS companies,
- cable companies, and
- Internet service providers ("ISPs").
These communications carrier customers typically lease our fiber optic
capacity with which they develop their own communications networks as a low cost
alternative to building their own infrastructure or purchasing metered services
from ILECs or CLECs. Our corporate and government customers typically lease our
fiber optic infrastructure and other broadband services on a point-to-point
basis for high-bandwidth, secure voice and data networks. We believe that we are
well-positioned to penetrate the corporate and government markets since we plan
to continue to install most of our fiber in Tier I markets where these customers
are concentrated. Please refer to the section in this Prospectus entitled
"Business--Customers."
We have designed our networks to provide high levels of reliability,
security and flexibility. Our domestic intracity networks support a self-healing
SONET architecture that prevents interruption in service to our clients by
instantaneously rerouting traffic in the event of a fiber cut. Our advanced
network architecture is also capable of supporting state-of-the-art
technologies, including DWDM (dense wave division multiplexing) which
significantly increases the transmission capacity of a strand of fiber optic
cable. Because DWDM can boost transmission capacity significantly, it has
greater relevance on our intercity routes where we have, on average, fewer
strands of fiber installed than in our intracity markets. We install most of our
fiber inside high density polyethylene conduit to protect the cable and, where
practicable, we install additional unused conduits to cost effectively
accommodate future network expansion and eliminate the need for future
construction. We expect that once our network is completed as currently planned,
we will have approximately 2,800 duct miles of unused conduits throughout our
network and we will have the ability to lease more conduits along many of our
rights-of-way. In addition, we have the ability to pull additional fiber optic
strands through certain of our existing conduits that have not been completely
filled.
We intend to capitalize on the increasing demand for high-bandwidth
dedicated communications services and the limited supply of such transmission
capacity. Based on management experience and
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industry reports, we believe that demand for the broadband communications
infrastructure afforded by our network will continue to increase as a result of
the following factors:
- the rapid growth of communications traffic, such as data traffic, which
industry research indicates is growing by 35% annually,
- the large number of new carriers which will require significant
transmission capabilities in all sectors of the communications industry, due in
large part to industry deregulation facilitated by the Telecommunications Act of
1996 (the "1996 Telecom Act"),
- the fact that the Regional Bell Operating Companies (the "RBOCs") and
other major ILECs will likely need to upgrade to fiber optic networks with
infrastructure similar to ours, and
- the advent of new communications services requiring large amounts of
transmission capacity, such as Internet, intranet and video services.
According to an industry report, the total 1995 market for communications
services in the United States was approximately $183 billion and is expected to
grow to approximately $291 billion by the year 2001. In addition, we believe
that there will be increased demand for our infrastructure due to our ability to
offer fixed-cost pricing which is generally more economical for high volume
users than traditional usage-based pricing.
BUSINESS STRATEGY
Our objective is to become the preferred facilities-based provider of
broadband communications infrastructure to communications carriers, corporations
and government agencies, in our target markets. The following are the key
elements of our strategy to achieve this objective:
ESTABLISH THE COMPANY AS THE PREFERRED CARRIERS' CARRIER OF BROADBAND
COMMUNICATIONS INFRASTRUCTURE.
We lease broadband communications infrastructure on a fixed-cost basis to
various communications carriers, enabling them to compete in markets which were
previously difficult to penetrate due to limited and/or costly access to
high-bandwidth communications infrastructure. Specifically, we plan to lease
fiber infrastructure capacity within our target markets thereby enabling our
carrier customers to bypass the ILECs and facilities-based CLECs. We believe
that we are currently the only company whose principal business is providing
dark fiber on a fixed-cost basis in local Tier I local markets. Additionally, we
plan to lease capacity on our high-bandwidth, long-haul intercity network to
provide seamless connectivity between our various intracity networks. Our
fixed-cost, long-term contracts allow our carrier customers to access our Tier I
markets without incurring the high capital expenditures, many of the franchise
and licensing fees and long lead times usually associated with building their
own networks. We also believe that communications carriers may be more likely to
lease capacity from us rather than from a competitor since we currently have no
plans to offer communications infrastructure services on a metered basis,
choosing instead to position ourselves as a noncompeting provider of
infrastructure alternatives for IXCs, ILECs, CLECs, etc. Please refer to the
section in this Prospectus entitled "Business--Customers."
POSITION THE COMPANY AS THE PREFERRED PROVIDER OF BROADBAND COMMUNICATIONS
INFRASTRUCTURE TO CORPORATE AND GOVERNMENT CUSTOMERS.
Our fiber optic network is expected to serve Tier I markets in which there
are a large number of corporations and government agencies that we believe have
significant unmet demand for communications capacity. These customers typically
lease broadband communications infrastructure from us to connect two or more of
their locations, creating secure networks for voice, video or data
communications. Our primary target customers are those with significant
transmission needs or who require a high degree of security. However, customers
seeking lesser amounts of broadband transmission capacity will have the option
of leasing smaller amounts of capacity from us. By providing
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leased capacity on a fixed-cost rather than a metered basis, we believe our
network will be more economical for our corporate and government customers,
while also providing the ability to expand their usage for low marginal costs
and enhanced reliability and security. Please refer to the section in this
Prospectus entitled "Business--Customers."
REPLICATE SUCCESSFUL BUSINESS MODEL IN NEW MARKETS.
We seek to leverage the success we have begun to demonstrate in our existing
markets by replicating a similar network architecture in a number of additional
markets. Specifically we intend to:
- begin the engineering and construction of five additional intracity
networks bringing the number of our intracity networks to a total of
eleven, and
- replicate our successful domestic strategy in selected European markets.
We expect that our entire network when completed, as currently planned, will
ultimately consist of approximately 1.1 million fiber miles covering
approximately 8,930 route miles. Please refer to the section in this Prospectus
entitled "Risk Factors--Risks Associated with Growth Strategy; Management of
Expansion."
CREATE A LOW COST POSITION.
We believe that we have established a low cost position relative to other
communications carriers primarily for the following reasons:
- we generally install trunks of 432 fibers and may install up to as many as
864 fibers per route mile, which we believe is substantially more fiber
than many other communications carriers install, thereby reducing the per
fiber mile cost to construct and operate our networks,
- we will have a newly-constructed network with advanced fiber optic
technology which we believe offers operating and maintenance cost
advantages,
- we believe that certain of our rights-of-way permits and franchises are
valuable assets that will be costly and difficult for others to procure in
the future, and
- where practicable, we install spare conduit which will allow for expanded
fiber optic capacity at a cost significantly below the cost of new
construction.
Our low cost position should allow us to remain price competitive with other
providers of fiber optic infrastructure and to lease our fiber infrastructure at
a price which customers will find more attractive than the cost of constructing
their own networks.
LEVERAGE NETWORK ASSETS AND STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF
THE NETWORKS.
We have also obtained long haul fiber capacity between certain of our
intracity networks on a selective basis which we can provide to customers as a
value-added service. As a result, at little incremental cost, we have
successfully been able to expand the reach of our network. In addition, we plan
to continue to enter into strategic partnerships with other communications
providers. For example, we seek to establish additional relationships such as
the one we have established with Racal Telecommunications, Inc. ("Racal"). This
relationship established a 50/50 joint venture linking our U.S. network with
Racal's U.K. network to offer each of our customers seamless broadband
connectivity between New York and London.
INSTALL A TECHNOLOGICALLY ADVANCED NETWORK.
We have installed a technologically advanced network that we believe
provides the high levels of reliability, security and flexibility that our
target customers typically demand. Our domestic intracity
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networks support a self-healing SONET architecture that minimizes interruption
to service in the event of a fiber cut. We also continuously monitor and
maintain high quality control of our network on a 24-hour basis through our
network operations center. Our network is capable of using the highest
commercially available capacity transmission (OC192) and thereby can support
advanced, capacity-intensive data applications such as voice over Internet
Protocol, video teleconferencing, Frame Relay, ATM, multimedia and
Internet-related applications.
BUILD ON MANAGEMENT EXPERIENCE AND METROMEDIA COMPANY RELATIONSHIP.
Our management team and Board of Directors include individuals with
communications industry expertise and extensive experience in network design,
construction, operations and sales. Our Chief Executive Officer and founder,
Stephen A. Garofalo, has approximately 25 years of experience in the cable
installation business. Howard Finkelstein, our President and Chief Operating
Officer, served in various capacities in Metromedia Company over a period of 16
years, including 9 years as President of Metromedia Company's long distance
telephone company, until its merger in 1993 with what is now MCI/WorldCom, Inc..
We also benefit from the communications industry expertise and corporate
governance experience of John W. Kluge, Stuart Subotnick and David Rockefeller.
As the owner of all of the Company's shares of Class B Common Stock, Metromedia
Company and its general partners control the Board of Directors and all
stockholder decisions and, in general, determine the outcome of any corporate
transaction or other matters submitted to the stockholders for approval. Please
refer to the sections in this Prospectus entitled "Risk Factors--Concentration
of Voting Power and Control by Metromedia Company; Anti-takeover Effect of Two
Classes of Stock" and "Certain Relationships and Related Transactions."
The Company was founded in 1993 and is a Delaware corporation. Our principal
executive offices are located at One North Lexington Avenue, White Plains, New
York 10601. Our telephone number is (914) 421-6700.
7
SUMMARY OF THE EXCHANGE OFFER
Pursuant to the Registration Rights Agreement, we are offering to exchange
$650,000,000 aggregate principal amount of our Exchange Notes for a like
aggregate principal amount of our Initial Notes. In order to be exchanged, the
Initial Notes must be properly tendered and accepted. All outstanding Initial
Notes that are validly tendered and not validly withdrawn will be exchanged.
RESALE OF EXCHANGE NOTES
Based on certain no-action letters issued by the staff of the Securities and
Exchange Commission, we believe that the Exchange Notes may be offered for
resale, resold or otherwise transferred by you without compliance with the
registration and prospectus delivery provisions of the Securities Act provided
that:
- you are acquiring the Exchange Notes in the ordinary course of your
business,
- you are not participating, do not intend to participate, and have no
arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes within the meaning of the Securities
Act, and
- you are not an affiliate of the Company, within the meaning of Rule 405 of
the Securities Act.
If any of the foregoing are not true and you transfer any Exchange Note
without delivering a prospectus meeting the requirements of the Securities Act
or without an exemption from registration of your Exchange Notes under such Act,
you may incur liability under the Securities Act. We do not and will not assume
or indemnify you against such liability.
Each broker-dealer that receives Exchange Notes for its own account may be
deemed to be an "underwriter" within the meaning of the Securities Act and must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. The Letter
of Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. A broker-dealer may use this Prospectus for any
offer to resell, resale or other transfer of the Exchange Notes received in
exchange for Initial Notes which were acquired by such broker-dealer as a result
of market making or other trading activities. We have agreed that, for a period
of 180 days after the consummation of the Exchange Offer, we will make this
Prospectus available to any broker-dealer for use in connection with any such
offer to resell, resale or other transfer. Please refer to the section in this
Prospectus entitled "Plan of Distribution." Subject to certain limitations, we
will take steps to ensure that the issuance of the Exchange Notes will comply
with state securities or "blue sky" laws.
CONSEQUENCES OF FAILURE TO EXCHANGE INITIAL NOTES
If you do not exchange your Initial Notes for Exchange Notes, you will no
longer be able to obligate us to register the Initial Notes under the Securities
Act except in the limited circumstances provided under the Registration Rights
Agreement. In addition, you will not be able to resell, offer to resell or
otherwise transfer the Initial Notes unless they are registered under the
Securities Act, or unless you resell, offer to resell or otherwise transfer them
under an exemption from the registration requirements of, or in a transaction
not subject to, the Securities Act. Please refer to the section in this
Prospectus entitled "Risk Factors--The Failure to Participate in the Exchange
Offer Will Have Adverse Consequences."
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EXPIRATION DATE
The Exchange Offer will expire at 5:00 p.m., New York City time, on,
1999 (the "Expiration Date"), unless we decide to extend the
Expiration Date.
CONDITIONS TO THE EXCHANGE OFFER
The Exchange Offer is not subject to any condition other than certain
customary conditions, including that:
- no change in the laws and regulations impairs our ability to proceed with
the Exchange Offer,
- no change in the current interpretation of the staff of the Securities and
Exchange Commission has occurred and no stop order issued by the staff of
the Securities and Exchange Commission suspends the effectiveness of the
Registration Statement of which this Prospectus is a part,
- no litigation impairs our ability to proceed with the Exchange Offer,
- we obtain all the governmental approvals we deem necessary for the
Exchange Offer, and
- no change or development involving a prospective change in our business or
financial affairs has occurred which might materially impair our ability
to proceed with the Exchange Offer.
Please refer to the section in this Prospectus entitled "The Exchange
Offer--Terms of the Exchange Offer--Conditions."
PROCEDURES FOR TENDERING INITIAL NOTES
If you wish to participate in the Exchange Offer, you must complete, sign
and date the Letter of Transmittal, or a facsimile of the Letter of Transmittal,
and transmit it together with all other documents required by the Letter of
Transmittal (including the Initial Notes to be exchanged) to IBJ Whitehall Bank
& Trust Company, as exchange agent (the "Exchange Agent"), at the address
indicated on the cover page of the Letter of Transmittal. In the alternative,
you can tender your Initial Notes by following the procedures for book-entry
transfer described in this Prospectus. If your Initial Notes are registered in
the name of a broker, dealer, commercial bank, trust company or other nominee,
we urge you to contact such person promptly if you wish to tender your Initial
Notes in the Exchange Offer. For more information on tendering your Initial
Notes, please refer to the sections in this Prospectus entitled "The Exchange
Offer--Terms of the Exchange Offer--Procedures for Tendering" and "--Book Entry
Transfer."
GUARANTEED DELIVERY PROCEDURES
If you wish to tender your Initial Notes and you cannot get your required
documents to the Exchange Agent by the Expiration Date, you may tender your
Initial Notes according to the guaranteed delivery procedures described under
the section of this Prospectus entitled "The Exchange Offer-- Terms of the
Exchange Offer--Guaranteed Delivery Procedure."
WITHDRAWAL RIGHTS
You may withdraw the tender of your Initial Notes at any time prior to 5:00
p.m., New York City time, on the Expiration Date. To withdraw, you must send a
written or facsimile transmission notice of withdrawal to the Exchange Agent at
its address set forth under the "The Exchange Offer--Exchange Agent" prior to
5:00 p.m., New York City time, on the Expiration Date.
9
ACCEPTANCE OF INITIAL NOTES AND DELIVERY OF EXCHANGE NOTES
Subject to certain conditions, we will accept any and all Initial Notes that
are properly tendered in the Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. Any Initial Note not accepted for exchange for any
reason will be returned to you without expense as promptly as practicable after
the Expiration Date. We will deliver the Exchange Notes as promptly as
practicable after the Expiration Date and acceptance of the Initial Notes for
exchange. Please refer to the section in this Prospectus entitled "The Exchange
Offer--Terms of the Exchange Offer."
FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE EXCHANGE OFFER
The exchange of the Initial Notes for Exchange Notes will not be a taxable
event to holders for United States federal income tax purposes. Please refer to
the section of this Prospectus entitled "Certain United States Federal Tax
Considerations."
EXCHANGE AGENT
IBJ Whitehall Bank & Trust Company is serving as exchange agent in the
Exchange Offer (the "Exchange Agent").
FEES AND EXPENSES
We will bear all expenses related to consummating the Exchange Offer and
complying with the Registration Rights Agreement. Please refer to the section in
this Prospectus entitled "The Exchange Offer--Fees and Expenses."
USE OF PROCEEDS
We will not receive any proceeds from the issuance of the Exchange Notes.
The Exchange Offer is intended solely to satisfy certain of our obligations
under the Registration Rights Agreement. Please refer to the sections in this
Prospectus entitled "Use of Proceeds" and "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources" for a discussion of the use of the proceeds from the issuance of the
Initial Notes.
SUMMARY OF TERMS OF THE EXCHANGE NOTES
ISSUER
Metromedia Fiber Network, Inc.
NOTES OFFERED
$650,000,000 aggregate principal amount of 10% Series B Senior Notes Due
2008. The form and terms of the Exchange Notes are the same as the form and
terms of the Initial Notes except that the Exchange Notes will be registered
under the Securities Act and, therefore, will not bear legends restricting their
transfer and will not be entitled to registration rights under the Registration
Rights Agreement. The Exchange Notes will evidence the same debt as the Initial
Notes and both the Initial Notes and the Exchange Notes will be governed by the
same indenture (the "Indenture"). In this Prospectus, we use the term "Notes"
when describing provisions that govern or otherwise pertain to both the Initial
Notes and the Exchange Notes.
MATURITY DATE
November 15, 2008.
10
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will accrue interest at the rate of 10% per year from
either the most recent date on which interest has been paid on the Initial Notes
you exchanged, or if no interest has been paid on such Initial Notes, from
November 25, 1998. We will pay interest on the Exchange Notes semi-annually in
arrears on May 15 and November 15 of each year, commencing on May 15, 1999.
SINKING FUND
None.
OPTIONAL REDEMPTION
Except as described below and under "--Change of Control", we may not redeem
the Exchange Notes prior to November 15, 2003. After November 15, 2003, we may
redeem the Exchange Notes, in whole or in part, at any time, at the redemption
prices described in the Prospectus under the heading "Description of the
Exchange Notes," together with accrued and unpaid interest, if any, to the date
of redemption. In addition, at any time and from time to time prior to November
15, 2001, we may redeem up to 35% of the aggregate principal amount of the Notes
issued at a redemption price equal to 110% of the principal amount of the Notes
redeemed, plus accrued and unpaid interest, if any, through the date of
redemption, if:
- we use the net cash proceeds of any Public Equity Offerings (as defined)
resulting in gross proceeds of at least $100 million, and
- at least 65% of the aggregate principal amount of the Notes issued remains
outstanding immediately after giving effect to such redemption.
Please refer to the section in this Prospectus entitled "Description of the
Exchange Notes-- Optional Redemption."
CHANGE OF CONTROL
Upon a Change of Control (as defined), you as a holder of Exchange Notes
will have the right to require us to repurchase all of your Exchange Notes at a
repurchase price equal to 101% of the aggregate principal amount of such
Exchange Notes, together with accrued and unpaid interest, if any, to the date
of repurchase. Please refer to the section in this Prospectus entitled
"Description of the Exchange Notes--Change of Control."
RANKING
The Exchange Notes will:
- be general unsecured obligations,
- rank without preference with all our other existing and future unsecured
senior Indebtedness (as defined), and
- be effectively subordinated to all our existing and future secured
Indebtedness to the extent of the assets that secure such Indebtedness and
to all of our subsidiaries' existing or future Indebtedness, whether or
not secured.
RESTRICTIVE COVENANTS
The Indenture under which the Exchange Notes will be issued limits:
- the incurrence of additional indebtedness or preferred stock by us and our
subsidiaries,
11
- the payment of dividends on, and repurchase or redemption of, our capital
stock and our subsidiaries' capital stock and the repurchase or redemption
of our subordinated obligations,
- investments, sales of assets and subsidiary stock,
- transactions with affiliates, and
- the incurrence of additional liens.
In addition, the Indenture limits our ability to engage in consolidations,
mergers and transfers of substantially all of our assets and also contains
certain restrictions on distributions from our subsidiaries. All of these
limitations and prohibitions are subject to a number of important qualifications
and exceptions. Please refer to the sections in this Prospectus entitled "Risk
Factors-- Risk Factors Relating to the Notes" and "Description of the Exchange
Notes--Certain Covenants."
ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The Exchange Notes are new securities and there is currently no established
market for them. We cannot assure you as to the development or liquidity of any
market for the Exchange Notes. The Initial Notes are currently eligible for
trading in the Private Offerings, Resales and Trading through Automated Linkages
("PORTAL") market. Following commencement of the Exchange Offer, the Initial
Notes may continue to be traded in the PORTAL market. The Exchange Notes will
not be eligible for trading in the PORTAL market.
FORM OF EXCHANGE NOTES
The Exchange Notes will be represented by one or more permanent global
securities in bearer form deposited on behalf of The Depository Trust Company
("DTC") with IBJ Whitehall Bank & Trust Company, as custodian. You will not
receive Exchange Notes in registered form unless one of the events described in
the section of this Prospectus entitled "Description of the Exchange Notes--Book
Entry; Delivery and Form" occurs. Instead, beneficial interests in the Exchange
Notes will be shown on, and transfers of these will be effected only through,
records maintained in book-entry form by DTC with respect to its participants.
RISK FACTORS
You should consider carefully the information provided in the section in
this Prospectus entitled "Risk Factors" beginning on page 15 and all the other
information provided to you in this Prospectus in deciding whether to tender
your Initial Notes in the Exchange Offer.
12
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below as of and for the
periods ended December 31, 1995, 1996 and 1997 have been derived from our
Consolidated Financial Statements and the related notes included in this
Prospectus beginning on page F-1. Our Consolidated Financial Statements for the
year ended December 31, 1995 have been audited by M. R. Weiser & Co. LLP,
Certified Public Accountants. Our Consolidated Financial Statements as of and
for the years ended December 31, 1996 and 1997 have been audited by Ernst &
Young LLP, independent auditors. The summary consolidated financial data for the
nine months ended September 30, 1997 and the summary consolidated financial data
as of and for the nine months ended September 30, 1998 have been derived from
our unaudited Consolidated Financial Statements and the related notes included
in this Prospectus, which we believe include all adjustments necessary for a
fair presentation of the financial condition and results of operations of the
Company for such periods. The results of operations for interim periods are not
necessarily indicative of the results for a full year's operations. You should
read the following information in conjunction with "Capitalization,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business," the Consolidated Financial Statements of the Company
and the related notes and the other financial data appearing in this Prospectus.
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------ -----------------------
1995 1996 1997 1997 1998
---------- ----------- ----------- ----------- ----------
STATEMENT OF OPERATIONS DATA:
Revenue............................................. $ 56,000 $ 236,000 $ 2,524,000 $ 1,745,000 $20,840,000
Expenses:
Cost of sales..................................... -- 699,000 3,572,000 2,647,000 9,499,000
Selling, general and administrative............... 3,886,000 2,070,000 6,303,000 3,722,000 9,811,000
Depreciation and amortization..................... 162,000 613,000 757,000 567,000 738,000
Settlement agreement.............................. -- -- -- -- 3,400,000
Consulting and employment incentives.............. -- 3,652,000 19,219,000 19,124,000 248,000
---------- ----------- ----------- ----------- ----------
Loss from operations................................ (3,992,000) (6,798,000) (27,327,000) (24,315,000) (2,856,000)
Interest income (expense), net...................... (327,000) (3,561,000) 1,067,000 (241,000) 5,012,000
(Loss) from joint venture........................... -- -- -- -- (264,000)
Income taxes........................................ -- -- -- -- 825,000
---------- ----------- ----------- ----------- ----------
Net (loss) income................................... $(4,319,000) $(10,359,000) $(26,260,000) $(24,556,000) $1,067,000
---------- ----------- ----------- ----------- ----------
---------- ----------- ----------- ----------- ----------
Net (loss) income applicable to common stockholders
per share......................................... $ (0.17) $ (0.29) $ (0.56) $ (0.64) $ .01
---------- ----------- ----------- ----------- ----------
---------- ----------- ----------- ----------- ----------
Weighted average number of shares outstanding....... 24,829,000 35,858,000 47,447,000 38,652,000 93,196,000
---------- ----------- ----------- ----------- ----------
---------- ----------- ----------- ----------- ----------
EBITDA(1)........................................... $(3,830,000) $(6,185,000) $(26,570,000) $(23,748,000) $(2,382,000)
Adjusted EBITDA(1).................................. $(3,830,000) $(2,533,000) $(7,351,000) $(4,624,000) $1,266,000
AS OF SEPTEMBER 30, 1998
--------------------------
AS
ACTUAL ADJUSTED(2)
----------- -------------
BALANCE SHEET DATA:
Cash................................................................................. $76,335,000 $614,835,000
Pledged Securities................................................................... -- 91,500,000
Property and equipment, net.......................................................... 150,311,000 150,311,000
Total assets......................................................................... 255,427,000 905,427,000
Long-term debt....................................................................... 19,687,000 669,687,000
Total liabilities.................................................................... 100,685,000 750,685,000
Stockholders' equity................................................................. $154,742,000 $154,742,000
- ------------------------------
(1) "EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense and all depreciation and amortization expense. "Adjusted
EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense, depreciation and amortization and noncash employment and
consulting incentives and settlements. You should not think of EBITDA and
Adjusted EBITDA as alternative measures of operating results or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles). We have included EBITDA and Adjusted EBITDA
because they are widely used financial measures of the potential capacity of
a company to incur and service debt. Our reported EBITDA and Adjusted EBITDA
may not be comparable to similarly titled measures used by other companies.
(2) Adjusted for the issuance of the Initial Notes and the application of the
proceeds thereof.
13
RATIO OF EARNINGS TO FIXED CHARGES
The following table contains our ratio of earnings to fixed charges for each
of the periods indicated:
PERIOD FROM NINE
APRIL 8, 1993 MONTHS
(DATE OF ENDED
INCEPTION) TO YEAR ENDED SEPTEMBER
DECEMBER 31, DECEMBER 31, 30,
--------------- ------------------------------------------ ---------
1993 1994 1995 1996 1997 1997
--------------- --------- --------- --------- --------- ---------
Ratio of Earnings to fixed charges (1).................. -- -- -- -- -- --
1998
---------
Ratio of Earnings to fixed charges (1).................. 9.45
- ------------------------------
(1) Earnings are insufficient to cover fixed charges. The deficiency was
$188,000, $874,000, $4,319,000, $10,359,000, $26,260,000 and $24,556,000,
for the periods ended December 31, 1993, 1994, 1995, 1996, and 1997 and for
the nine months ended September 30, 1997 respectively.
14
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE INFORMATION BELOW, AS WELL AS ALL OTHER
INFORMATION PROVIDED TO YOU IN THIS PROSPECTUS, BEFORE TENDERING THE INITIAL
NOTES IN THE EXCHANGE OFFER, INCLUDING INFORMATION IN THE SECTION OF THIS
PROSPECTUS ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS--SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS."
LIMITED HISTORY OF OPERATIONS; NET LOSSES AND NEGATIVE CASH FLOW FROM
OPERATIONS; EXPECTED FUTURE NET LOSSES AND NEGATIVE CASH FLOW FROM OPERATIONS
The Company was formed in April 1993 and has a limited operating history. We
currently have a limited number of customers and are still in the process of
building many of our networks. Accordingly, you will have limited historical
financial information upon which to base your evaluation of our performance and
an investment in the Notes. You must consider our prospects in light of the
risks, expenses and difficulties frequently encountered by companies in their
early stage of development.
In connection with the construction of our networks, we have incurred
substantial net losses and, prior to the nine-month period ended September 30,
1998, we had never generated positive cash flow from operations. We had net
losses of $26.3 million, $10.4 million and $4.3 million for the years ended
December 31, 1997, 1996 and 1995, respectively. We cannot assure you that we
will continue to generate net income or that we will sustain positive cash flow
in the future.
Losses will continue while we concentrate on the development and
construction of additional fiber optic networks and until our networks have
established a sufficient revenue-generating customer base. We will also incur
losses during the initial startup phases of any services that we may provide.
Accordingly, we expect to continue experiencing net operating losses and
negative cash flows for the foreseeable future. We cannot assure you that we
will succeed in establishing an adequate revenue base or that these services
will generate profitability or positive cash flow.
Continued losses and negative cash flow may prevent us from pursuing our
strategies for growth. In addition, if we cannot achieve profitability or
positive cash flows from operating activities, we will not be able to meet our
debt service obligations (including our obligations under the Notes), capital
expenditure requirements or working capital needs.
SUBSTANTIAL DEBT
LARGE AMOUNT OF DEBT
We have substantial debt and debt service requirements since the issuance of
the Initial Notes. As of September 30, 1998, after giving effect to the offering
of the Initial Notes, we would have had total debt of approximately $670
million. As the Indenture allows us to borrow additional amounts in certain
cases to finance the construction and improvement of our networks, we intend to
explore market conditions in order to obtain such additional financing,
including additional long-term fixed-rate financing or senior revolving credit
facilities.
CONSEQUENCES OF DEBT
Our substantial debt has important consequences, including:
- our ability to borrow additional amounts for working capital, capital
expenditures or other purposes is limited,
- a substantial portion of our cash flow from operations is required to make
debt service payments, and
15
- our leverage could limit our ability to capitalize on significant business
opportunities and our flexibility to react to changes in general economic
conditions, competitive pressures and adverse changes in government
regulation.
You should be aware that our ability to repay or refinance our current debt
depends on our successful financial and operating performance and on our ability
to successfully implement our business strategy. Unfortunately, we cannot assure
you that we will be successful in implementing our strategy or in realizing our
anticipated financial results. You should also be aware that our financial and
operational performance depends upon a number of factors, many of which are
beyond our control. These factors include:
- the economic and competitive conditions in the telecommunications network
industry,
- any operating difficulties, increased operating costs or pricing pressures
we may experience,
- the passage of legislation or other regulatory developments that may
adversely affect us,
- any delays in implementing any strategic projects,
- our ability to complete our networks on time and in a cost-effective
manner, and
- our ability to apply our business strategies in foreign cities.
We cannot assure you that our cash flow and capital resources will be
sufficient to repay the Notes and any indebtedness we may incur in the future,
or that we will be successful in obtaining alternative financing. In the event
that we are unable to repay our debts, we may be forced to reduce or delay the
completion or expansion of our networks, sell some of our assets, obtain
additional equity capital or refinance or restructure our debt. If we are unable
to meet our debt service obligations or comply with our covenants, a default
under our existing debt agreements would result. To avoid a default, we may need
waivers from third parties, which might not be granted. You should also read the
information we have included in this Prospectus in the sections entitled
"Description of the Exchange Notes" and "Business--Business Strategy."
RESTRICTIVE DEBT COVENANTS
The Indenture contains a number of significant covenants. These covenants
will limit our ability to, among other things:
- borrow additional money,
- make capital expenditures and other investments,
- pay dividends,
- merge, consolidate, or dispose of our assets, and
- enter into transactions with our affiliates.
Our failure to comply with these covenants would cause a default under the
Indenture. A default, if not waived, could result in acceleration of our
indebtedness, in which case the debt would become immediately due and payable.
If this occurs, we may not be able to repay our debt or borrow sufficient funds
to refinance it. Even if new financing is available, it may not be on terms that
are acceptable to us. Complying with these covenants may cause us to take
actions that we otherwise would not take or not take actions that we otherwise
would take. Please refer to the section in this Prospectus entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
16
RISKS ASSOCIATED WITH GROWTH STRATEGY; MANAGEMENT OF EXPANSION
Our future largely depends on our ability to implement our business strategy
and proposed expansion in order to create the new business and revenue
opportunities described in this Prospectus. In order to implement our proposed
business strategy (including the continued development of our networks within
the United States and in Europe), we must accomplish the following in a timely
manner at a reasonable cost to us and on conditions acceptable to us:
- obtain access to capital markets,
- design fiber network backbone routes,
- install facilities,
- acquire rights-of-way and building access,
- obtain required governmental authorizations and permits, and
- continue to implement and improve our operational, financial, and
accounting systems.
Successful implementation depends on numerous factors beyond our control,
including economic, competitive and other conditions and uncertainties, the
ability to obtain licenses, permits, franchises and rights-of-way on reasonable
terms and conditions and the ability to hire and retain qualified management
personnel. In addition, construction of future networks entails significant
risks, including management's ability to effectively control and manage these
projects, shortages of materials or skilled labor, unforeseen engineering,
environmental or geological problems, work stoppages, weather interference,
floods and unanticipated cost increases. We cannot assure you that the budgeted
costs of our current and future projects will not be exceeded or that these
projects will commence operations within the contemplated schedules, if at all.
The failure to obtain necessary licenses, permits and authorizations could
prevent or delay the completion of construction of all or part of our networks
or increase completion costs. In addition, we cannot assure you that we will be
successful in implementing our business strategy and in managing expansion
effectively, on time or at all.
We will need to strengthen our marketing efforts and increase our staff to
handle future marketing and sales requirements. If we fail to obtain
significant, widespread commercial and public acceptance of our networks and
access to sufficient buildings our visibility in the telecommunications market
could be jeopardized. We cannot assure you that we will be able to secure
customers for the commercial use of our proposed networks or access to such
buildings in each market.
Our ability to implement our business plan, to a significant degree, depends
upon our ability to secure a market for our leased fiber capacity and obtain and
maintain contractual and other relationships with communications carriers and
corporate and government customers. The practice of leasing dark fiber is not
widespread and we cannot assure you that the market will develop or that we will
be able to enter into contracts, comply with the terms of these contracts or
maintain relationships with communications carriers and corporate and government
customers, that these contracts or relationships will be on economically
favorable terms or that communications carriers and corporate and government
customers will not choose to compete against, rather than cooperate with us. If
we are unable to enter into contracts, comply with the terms of the contracts or
maintain relationships with these constituencies our operations would be
materially and adversely affected.
We cannot predict whether providing services to governments will evolve into
a significant market. Existing rights-of-way are typically controlled by
governments and are often used to create leverage in "shared resources projects"
whereby the government obtains communications capacity in exchange for providing
a private communications carrier access to government controlled rights-of-way
for fiber installation. In addition, governments often build their own
communications infrastructure because they
17
already control the necessary rights-of-way. Accordingly, we cannot assure you
that the market for government customers will significantly develop.
Certain of our current contracts to supply leased fiber capacity allow the
lessee to terminate the contracts and/or provide for liquidated damages if we do
not supply the stated fiber capacity by a specified time. Some of these
contracts can be terminated on this basis. Terminating any of these contracts
could adversely affect our operations.
We may expand the range of services that we offer. These services may
include assisting customers with the integration of their leased dark fiber with
appropriate electronic and optronic equipment by facilitating the involvement of
third party suppliers, vendors and contractors. We cannot assure you that a
market will develop for our new services, that implementing these services will
be technically or economically feasible, that we can successfully develop or
market them or that we can operate and maintain our new services profitably.
NEED FOR ADDITIONAL FINANCING
We may need significant amounts of additional capital to complete the
build-out of our planned fiber optic communications networks and meet our
long-term business strategies, including expanding our networks to additional
cities. Our ability to arrange financing and the cost of financing depend upon
many factors, including:
- general economic and capital markets conditions generally, and in
particular the non-investment grade debt market,
- conditions in the telecommunications market,
- regulatory developments,
- credit availability from banks or other lenders,
- investor confidence in the telecommunications industry and the Company,
- the success of our fiber optic communications networks, and
- provisions of tax and securities laws that are conducive to raising
capital.
If we need additional funds, our inability to raise them will have an adverse
effect on our operations. If we decide to raise additional funds through the
incurrence of debt, we may become subject to additional or more restrictive
financial covenants and ratios.
HIGHLY COMPETITIVE NATURE OF THE TELECOMMUNICATIONS INDUSTRY
The telecommunications industry is extremely competitive, particularly with
respect to price and service. We compete against ILECs, which currently dominate
their local telecommunications markets, and CLECs, many of which have greater
financial, research and development and other resources than we do. In addition
to ILECs and CLECs, several other potential competitors are capable of offering
services similar to those offered by us. These potential competitors include
facilities-based communications service providers, cable television companies,
electric utilities, microwave carriers, satellite carriers, wireless telephone
system operators and large end-users with private networks. A significant
increase in industry capacity or reduction in overall demand would adversely
affect our ability to maintain or increase prices. This would adversely affect
our results of operations.
Some of our principal competitors already own fiber optic cables as part of
their telecommunications networks. Accordingly, any of these carriers, some of
which already have franchise and other agreements with the City of New York and
other local and state governments and substantially greater resources and more
experience than us, could directly compete with us in the
18
market for leasing fiber capacity, if they are willing to offer this capacity to
their customers. Our franchise and other agreements with the City of New York
and other local and state governments are not exclusive. Potential competitors
with greater resources and more experience than us could enter into franchise
and other agreements with the City of New York and other local and state
governments and compete directly with us.
In addition, some communications carriers and local cable companies have
extensive networks in place that could be upgraded to fiber optic cable, as well
as numerous personnel and substantial resources to begin construction to equip
their networks. If communications carriers and local cable companies decide to
equip their networks with fiber optic cable, they could become significant
competitors of ours.
Other companies may choose to compete with us in our current or planned
markets, including Europe, by leasing fiber capacity (including dark fiber) to
our targeted customers. This additional competition could materially and
adversely affect our operations.
We are also particularly dependent on customers such as NextLink New York,
L.L.C., WinStar Communications, Inc. and certain other customers and are
therefore more susceptible to the impact of poor economic conditions than our
competitors with a more balanced mix of business. Please refer to the section in
this Prospectus entitled "Business--Customers."
EXTENSIVE REGULATION
Existing and future governmental regulations will greatly influence how we
operate our business, our business strategy and ultimately, our viability.
However, we cannot predict the future regulatory framework of our business.
FEDERAL
Federal telecommunications law directly shapes the telecommunications
market. Consequently, regulatory requirements and/or changes could adversely
affect our operations.
Federal telecommunications law imposes special legal requirements on "common
carriers" who engage in "interstate or foreign communication by wire or radio,"
and on "telecommunications carriers." Telecommunications carriers and common
carriers are essentially the same, and are companies that provide communications
services directly to the public, or to all potential users subject to
standardized rates, terms or conditions. We believe that we are not a
"telecommunications carrier" or "common carrier" with respect to our leasing of
dark fiber facilities, and therefore that we are not subject to special legal
requirements applicable to such carriers. However, with respect to offering of
telecommunications services, we will likely operate as a common carrier and
therefore will be subject to the regulatory requirements applicable to common
carriers and to telecommunications carriers. Please refer to the section in this
Prospectus entitled "Business--Regulation." These regulatory requirements may
have a material adverse impact on our business and results of operation.
Our revenues from the provision of telecommunications services to end-users
(but not to other common carriers) are subject to assessment by the FCC for its
Universal Service Fund, as well as other fees and assessments. If providing dark
fiber facilities were deemed to be a "telecommunications" service, then revenues
from facility leases to end-users would be subject to similar assessments. These
assessments could equal approximately 4% of our gross interstate end-user
revenues and 1% of our gross intrastate end-user revenues in 1999, and could
increase in subsequent years. To date, however, we have paid no FCC assessments
because we do not believe that dark fiber leases are a form of
"telecommunications," and because we have not yet provided any transmission
services to end-users.
ILECs, CLECs and IXCs are subject to various federal telecommunications
laws. These laws and FCC regulatory decisions may affect our business by virtue
of the interrelationships that exist among us
19
and many of these regulated telecommunications entities. For example, the FCC
has recently taken steps to reduce the access charges paid by IXCs to ILECs, and
to give the ILECs greater flexibility in setting these charges. While we cannot
predict the precise effect the access charge changes will have on our
operations, reduced access charges will likely make it more attractive for IXCs
to use ILEC facilities, which could have a material adverse effect on IXCs' use
of our fiber optic telecommunications network.
Under the 1996 Telecom Act's interconnection provisions, the FCC is
responsible for determining what elements of an ILEC's network must be provided
to competitors on an unbundled basis. Under these provisions, the FCC has
decided not to declare dark fiber an unbundled network element, but has allowed
state regulators to do so. This decision is currently subject to petitions for
reconsideration before the FCC, and is being challenged in the Supreme Court. A
federal district court in North Carolina has found dark fiber to be a network
element under the 1996 Telecom Act. To date, state commissions in several states
(including New York) have either refused to require the ILECs to offer dark
fiber to competitors or have stated that the issue would be addressed at a later
time. On the other hand, other state commissions have found dark fiber to be a
network element and required the ILECs to offer it on an unbundled basis to
CLECs. Decisions by either the FCC or additional states to require unbundling of
ILEC dark fiber or geographic extension of the ruling of the federal district
court in North Carolina could decrease the demand for our dark fiber, and
thereby have an adverse effect on the results of our operations.
STATE
Each state (and the District of Columbia, which is treated as a state for
the purpose of regulation of telecommunications services) has its own laws for
regulating providers of certain telecommunications-related services as "common
carriers," as "public utilities," or under similar rubrics. We believe that
offering dark fiber facilities is not subject to this type of regulation in most
jurisdictions in which we plan to construct facilities. However, our offering of
transmission services (as distinct from dark fiber capacity) likely will be
subject to regulation in each of these jurisdictions to the extent that these
services are offered for intrastate use, and such regulation may have an adverse
effect on the results of our operations.
Regulation of the telecommunications industry is changing rapidly, and the
regulatory environment varies substantially from state to state. In particular,
state regulators have the authority to determine both the rates we will pay to
ILECs for certain interconnection arrangements such as physical collocation, and
the prices that ILECs will be able to charge our potential customers for
services and facilities that compete with ours. We will also incur certain costs
to comply with regulatory requirements such as the filing of tariffs, submission
of periodic financial and operational reports to regulators, and payment of
regulatory fees and assessments. In some jurisdictions, our pricing flexibility
for intrastate services may be limited because of regulation, although our
direct competitors will be subject to similar restrictions. We cannot assure you
that these, as well as future regulatory, judicial, or legislative action will
not have a material adverse effect on us.
LOCAL
In addition to federal and state laws, local governments exercise legal
authority that may impact our business. For example, local governments, such as
the City of New York, typically retain the ability to license public
rights-of-way, subject to the limitation that local governments may not prohibit
persons from providing telecommunications services. Local authorities affect the
timing and costs associated with our use of public rights-of-way. These
regulations may have an adverse effect on our business.
20
REGULATION OF INTERNATIONAL SERVICE
Various regulatory requirements and limitations also will influence our
business as we attempt to enter international markets.
Although we have not fully determined our international business strategy,
we have entered into a 50/50 joint venture named International Optical Network,
LLC ("ION") with Racal that contemplates jointly acquiring and selling
international, facilities-based telecommunications capacity between the U.S. and
the United Kingdom and possibly between the U.S. and other markets. ION is a
U.S. international common carrier subject to U.S. regulation under Title II of
the Communications Act, and, depending on our specific business plans, it is
possible that we may also become a U.S. international common carrier subject to
such regulation. Under current FCC rules, international carriers that do not
exercise market power and that are not affiliated with dominant foreign carriers
(those exercising market power in their local markets), are subject to
relatively relaxed U.S. regulation as non-dominant international carriers. ION
is and we would also be required, under Sections 214 and 203 of the
Communications Act, respectively, to obtain authorization and file an
international service tariff containing rates, terms and conditions prior to
initiating service. International carriers are also subject to certain annual
fees and filing requirements such as the requirement to file contracts with
other carriers, including foreign carrier agreements, and reports setting forth
international circuit, traffic and revenue data service. A failure to obtain an
appropriate U.S. license for international service, the revocation of a license
or a finding that one of our affiliates or we are a dominant carrier could have
a material adverse effect on our future operations.
To the extent that ION and we operate as international common carriers, ION
and we will also be required to comply with FCC's rules regarding the
International Settlements Policy (the "ISP"), 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 ISP
generally provides that, absent a waiver, U.S. carriers may only enter into
foreign carrier agreements for the exchange of switched traffic that contain the
same accounting rate and settlement rate (typically one-half of the accounting
rate) offered to all other U.S. carriers. The ISP also requires U.S. carriers to
adhere to the principle of proportionate return so that competing U.S. carriers
have comparable opportunities to receive the return traffic that reduces the
marginal cost of providing international service.
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. Indeed, the FCC has established reduced
"benchmark" rates at which U.S. carriers will be allowed to pay foreign carriers
for terminating U.S.-originated traffic. For example, as of January 1, 1999,
U.S. carriers must ensure that the rate paid to terminate traffic in the U.K.
does not exceed $0.15/minute. Different rates would apply in different countries
by different deadlines depending on the country's income level.
Regulation of the international telecommunications industry is changing
rapidly. We are unable to predict how the FCC will resolve the various pending
international policy issues and the effect of such resolutions on us.
ION's international services are and our future international services may
also be subject to regulation in the United Kingdom and other European
jurisdictions in which we may operate. National regulations of relevant European
countries, as well as policies and regulations on the European Union level,
impose separate licensing, service and other conditions on ION's and our
international service operations, and these requirements may have a material
adverse impact on us.
RISK OF CANCELLATION OR NON-RENEWAL OF FRANCHISES, LICENSES OR PERMITS
We operate our New York network based on a franchise agreement entered into
between us and the City of New York. Both the City of New York and we have the
right, at any time after December 2000, upon six months notice, to renegotiate
in good faith certain terms of this franchise
21
agreement, including the annual franchise fee paid by us, based on changes in
technological, regulatory or market conditions which may occur after the
effective date of the agreement. If we cannot reach an agreement after
renegotiation, the franchise agreement will be subject to early termination on a
date which would be one half of the number of days between the date of the
notice to renegotiate and January 1, 2009. Termination of this franchise would
have a material adverse effect on our business, results of operations and
financial condition. Please refer to the section in this Prospectus entitled
"Business--Franchise, License and Related Agreements--New York." We will also
need to obtain additional franchises, licenses and permits for our planned
intracity networks, intercity networks and international networks. We cannot
assure that we will be able to maintain our existing franchises, licenses or
permits or to obtain and maintain the other franchises, licenses or permits
needed to implement our strategy on acceptable terms.
NEED TO OBTAIN AND MAINTAIN RIGHTS-OF-WAY
We must obtain additional rights-of-way and other permits from railroads,
utilities, state highway authorities, local governments and transit authorities
to install underground conduit(s) for the expansion of our intracity networks,
intercity networks and international networks. We cannot assure that we will be
successful in obtaining and maintaining these right-of-way agreements or
obtaining these agreements on acceptable terms. Some of these agreements may be
short-term or revocable at will, and we cannot assure you that we will continue
to have access to existing rights-of-way after they have expired or terminated.
If any of these agreements were terminated or could not be renewed and we were
forced to remove our fiber optic cable from under the streets or abandon our
networks, the termination would have a material adverse effect on our
operations.
More specifically, our New York network relies upon, and our planned
expansions into Long Island and Westchester County will rely upon, right-of-way
agreements with Bell Atlantic Corporation and its subsidiary, Empire City Subway
Company (Ltd.) ("ECS"). The current agreements may be terminated at any time
without cause with three months notice. In case of termination, we may be
required to remove our fiber optic cable from the conduits or poles of Bell
Atlantic Corporation. This termination would have a material adverse effect on
our operations.
RAPID TECHNOLOGICAL CHANGE
The telecommunications industry is subject to rapid and significant changes
in technology that could materially affect the continued use of fiber optic
cable. We cannot predict the effect of technological changes on our business. We
also cannot assure you that technological changes in the communications industry
will not have a material adverse effect on our operations.
RISKS ASSOCIATED WITH INTERNATIONAL OPERATIONS
Our strategy includes expanding our services to provide fiber optic cable in
Europe, particularly, Germany and London, England. The following are certain
risks inherent in doing business on an international level:
- regulatory limitations restricting or prohibiting us from providing our
services,
- unexpected changes in regulatory requirements, tariffs, customs, duties
and other trade barriers,
- difficulties in staffing and managing foreign operations,
- longer payment cycles,
- problems in collecting accounts receivable,
- political risks,
- fluctuations in the European currency exchange,
- delays from customs brokers or government agencies, and
22
- potentially adverse consequences resulting from operating in multiple
European countries with different laws and regulations, including tax laws
and industry related regulations.
Furthermore, the international rates customers are charged are likely to
decrease in the future for many reasons, including increased competition between
existing carriers, increased competition with new carriers in the European
market and additional strategic alliances or joint ventures among large
international carriers that facilitate targeted pricing and cost reductions. We
cannot assure you that we will be successful in overcoming these risks or any
other problems arising because of expansion into Europe.
RISKS ASSOCIATED WITH ACQUISITIONS, INVESTMENTS AND STRATEGIC ALLIANCES
In the future, we may acquire or try to acquire customer bases and
businesses from, make investments in, or enter into strategic alliances with,
companies which have customer bases, switching capabilities or existing networks
in our current markets or in areas into which we intend to expand our networks.
We are currently evaluating several potential strategic opportunities but,
except as described in this Prospectus, do not have any present definitive
commitment or agreement with respect to any material acquisition, investment,
strategic alliance or related effort. Any future acquisitions, investments,
strategic alliances or related efforts will be accompanied by risks such as:
- the difficulty of identifying appropriate acquisition candidates,
- the difficulty of assimilating the operations of the respective entities,
- the potential disruption of our ongoing business,
- the inability of management to capitalize on the opportunities presented
by acquisitions,
- investments, strategic alliances or related efforts,
- the failure to successfully incorporate licensed or acquired technology
and rights into our services,
- the inability to maintain uniform standards,
- controls, procedures and policies, and
- the impairment of relationships with employees and customers as a result
of changes in management.
We cannot assure you that we would be successful in overcoming these risks
or any other problems encountered with such acquisitions, investments, strategic
alliances or related efforts. Please refer to the sections in this Prospectus
entitled "--Risks Associated with Growth Strategy; Management of Expansion" and
"Business--Business Strategy."
PRICING PRESSURES AND INDUSTRY CAPACITY
We believe that, in the last several years, increasing demand has resulted
in a shortage of capacity and slowed the decline in prices. However, we
anticipate that prices for our services specifically, and transmission services
in general, will continue to decline over the next several years due primarily
to the following:
- price competition as various network providers continue to install
networks that might compete with our networks,
- recent technological advances that permit substantial increases in the
transmission capacity of both new and existing fiber, and
- strategic alliances or similar transactions, such as long distance
capacity purchasing alliances among certain RBOCs, that increase the
parties' purchasing power. Please refer to the section in this Prospectus
entitled "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
23
RELIANCE ON KEY PERSONNEL
We believe that the success of our business strategy and our ability to
operate profitably depend on the continued employment of our senior management
team led by Stephen A. Garofalo, Chief Executive Officer and Chairman of the
Board of Directors. Our business is managed by a small number of key management
and operating personnel. Our business and financial results could be materially
affected if Mr. Garofalo or other members of our senior management team became
unable or unwilling to continue in their present positions. Certain of our key
executives, Mr. Garofalo, Howard M. Finkelstein, President and Chief Operating
Officer, Vincent A. Galluccio, Senior Vice President, Gerard Benedetto, Vice
President and Chief Financial Officer, and Nicholas M. Tanzi, Vice President--
Sales, are presently party to an employment or non-competition agreement.
CONCENTRATION OF VOTING POWER AND CONTROL BY METROMEDIA COMPANY; ANTI-TAKEOVER
EFFECT OF TWO CLASSES OF STOCK
The holders of Class A Common Stock, par value $.01 per share, of the
Company (the "Class A Common Stock"), are entitled to one vote per share. The
holders of Class B Common Stock, par value $.01 per share of the Company (the
"Class B Common Stock"), are entitled to ten votes per share and vote as a
separate class to elect at least 75% of the members of the Board of Directors.
Each share of Class B Common Stock is convertible at any time into one share of
Class A Common Stock, and with limited exceptions, converts automatically upon
any transfer of the stock. Stephen A. Garofalo currently controls approximately
26% of the outstanding shares of Class A Common Stock. Metromedia Company and
certain of its affiliates currently own 100% of the Class B Common Stock, and
represent approximately 66% of the Company's total voting power. Accordingly,
Metromedia Company is able to control the Board of Directors and all
stockholders' decisions and, in general, to determine (without the consent of
the Company's other stockholders) the outcome of any corporate transaction or
other matter submitted to the stockholders for approval, including mergers,
consolidations and the sale of all or substantially all of the Company's assets.
In addition, Metromedia Company has the power to prevent or cause a change in
control of the Company. Please refer to the sections in this Prospectus entitled
"Security Ownership" and "Certain Relationships and Related Transactions."
LITIGATIONS AGAINST THE COMPANY
On or about October 20, 1997, Vento & Company of New York, LLC ("VCNY")
commenced an action against the Company, Stephen A. Garofalo and several other
defendants in the United States District Court for the Southern District of New
York (No. 97 CIV 7751). In its complaint, as amended, VCNY alleges four causes
of action in connection with its sale of 900,000 shares (not adjusted for
subsequent stock splits) of Class A Common Stock to certain defendants on
January 13, 1997 (the "VCNY Sale"). The four causes of action include: (i)
violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated under such Act; (ii) fraud and fraudulent concealment; (iii) breach
of fiduciary duty; and (iv) negligent misrepresentation and omission. On the
first and second causes of action, VCNY is seeking, among other things, the
rescission of the VCNY Sale, or alternatively, damages in an amount which we
cannot currently ascertain but believe to be in excess of $36.0 million,
together with interest. On the third and fourth causes of action, VCNY is
seeking damages in an amount which we cannot currently ascertain but believe to
be in excess of $36.0 million, together with interest. VCNY is also seeking
punitive damages in the amount of $50.0 million, reasonable legal fees and the
cost of this action. All the defendants, including Mr. Garofalo and the Company,
have moved to dismiss VCNY's complaint.
On or about June 12, 1998, Claudio E. Contardi commenced an action against
Peter Sahagen, Sahagen Consulting Group of Florida and the Company in the United
States District Court for the Southern District of New York (No. 98 CIV 4140).
Mr. Contardi alleges a cause of action for, among other things, breach of a
finder's fee agreement entered into between Mr. Sahagen and Mr. Contardi
24
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) 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 intend to vigorously defend both these actions because we believe that we
acted appropriately in connection with the matters at issue in these two cases.
However, we can make no assurances that we will not determine that the
advantages of entering into a settlement outweigh the risk and expense of
protracted litigation or that ultimately we will be successful in defending
against these allegations. If we are unsuccessful in defending against these
allegations, an award of the magnitude being sought in the VCNY litigation would
have a material adverse effect on our financial condition and results of
operations.
LIMITED NATURE OF OUR SERVICES
We provide fiber optic communications infrastructure and are not currently
engaged in the transmission of voice, data or video services. We do not provide
switched voice and data services unlike other telecommunications companies.
Accordingly, we receive no revenues from providing such services. Instead, we
derive substantially all of our revenue from the leasing of fiber optic capacity
to our customers, many of whom transmit voice, data and/or video information or
provide switched voice and data services. While we may later decide to provide
those services, the limited nature of our current services could limit potential
revenues and result in our having lower revenues than competitors which provide
a wider array of services. Please refer to the sections in this Prospectus
entitled "Business--Customers" and "Business--Competition."
INVESTMENT COMPANY ACT REGULATION
Following the offering of the Initial Notes, we have substantial cash, cash
equivalents and short-term investments. We invested approximately $91.5 million
of the net proceeds of the offering of Initial Notes in a portfolio of U.S.
government securities that were pledged to secure the payment in full of the
interest on the Notes through May 15, 2000. We have invested the balance of such
proceeds in short-term instruments with prudent cash management and not
primarily for the purpose of achieving investment returns. Investment in
securities primarily for the purpose of achieving investment returns could
result in the Company being treated as an "investment company" under the
Investment Company Act of 1940. A company is considered an "investment company"
under the Investment Company Act if it holds itself out as primarily in the
business of investing, reinvesting or trading in securities. A company can also
be considered an "investment company" if it fails certain numerical tests as to
the composition of its assets and the sources of its income, even if it is
primarily engaged in a business other than investing, reinvesting, owning,
holding or trading in securities. The Investment Company Act of 1940 requires
investment companies to register with the Securities and Exchange Commission and
imposes various substantive restrictions on investment companies with respect to
matters such as their capital structure, management, operations and transactions
with affiliated persons.
We believe that we will not be considered to be engaged in investing,
reinvesting, owning, holding or trading securities, and therefore, will not be
regarded as an investment company within the meaning of the Investment Company
Act. However, application of such Act to us would materially adversely affect
our business, financial condition and results of operations.
25
RISK FACTORS ASSOCIATED WITH THE "YEAR 2000 PROBLEM"
Many computer systems and software products will not function properly in
the year 2000 and beyond due to a once-common programming standard that
represents years using two digits. This problem is often referred to as the
"Year 2000" problem. We are currently working to evaluate and resolve the
potential impact of the Year 2000 on our processing of date-sensitive
information and network systems. We plan to contact all our significant
suppliers, contractors and major systems developers to determine our
vulnerability to their Year 2000 situations. We presently believe that the Year
2000 problem will only have a minimal cost impact. However, we cannot assure you
that other companies will convert their systems on a timely basis and that their
failure will not have an adverse effect on our systems. If our customers,
suppliers, contractors, and major systems developers are unable to address their
Year 2000 issues in a timely manner, a material adverse effect on our results of
operations and financial condition could result. Please refer to the section in
this Prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Year 2000 System Modifications."
RISK FACTORS RELATING TO THE NOTES
COMPANY STRUCTURE
We are a holding company with few direct operations and few assets of
significance other than the stock of our subsidiaries. As such, we will be
dependent on the cash flows of our subsidiaries to meet our obligations,
including the payment of principal and interest on the Notes. Our subsidiaries
are separate legal entities that will have no obligation to pay any amounts due
under the Notes or to make any funds available therefor, whether by dividends,
loans or other payments. Our subsidiaries will not guarantee the payment of the
Notes. The Notes will therefore be effectively subordinated to the claims of the
creditors of our subsidiaries (including trade creditors and holders of
indebtedness of such subsidiaries). We expect that our current and future
subsidiaries will incur significant amounts of equipment financing and other
indebtedness in connection with the development of our networks. Please refer to
the sections in this Prospectus entitled "Management's Discussion and Analysis
of Financial Condition and Results of Operations--Liquidity and Capital
Resources," "Business" and "Description of the Exchange Notes."
PRIORITY OF SECURED AND SUBSIDIARIES' DEBT OVER THE NOTES
The Notes are unsecured and therefore will be effectively subordinated to
all our existing and future secured indebtedness to the extent of the value of
the assets securing such indebtedness and to all of our subsidiaries' existing
or future Indebtedness, whether or not secured. The Indenture permits us and our
subsidiaries to incur an unlimited amount of secured indebtedness to finance the
acquisition of equipment, inventory, construction, installation, lease,
development or improvement of network assets. Please refer to the section of
this Prospectus entitled "Description of the Exchange Notes." Consequently, in
the event of a bankruptcy, liquidation, dissolution, reorganization or similar
proceeding of the Company, the assets of the Company will be available to
satisfy obligations of such secured debt before any payment may be made on the
Notes. In addition, to the extent such assets cannot satisfy in full the secured
indebtedness, the holders of such indebtedness would have a claim for any
shortfall that would rank equally in right of payment (or effectively senior if
the indebtedness were issued by a subsidiary) with the Notes. Accordingly, there
might only be a limited amount of assets available to satisfy your claims as a
holder of the Notes upon an acceleration of the maturity of the Notes.
26
FRAUDULENT CONVEYANCE STATUTES
An unpaid creditor or representative of creditors, such as a trustee in
bankruptcy or the Company as a debtor-in-possession in a bankruptcy proceeding,
could file a lawsuit claiming that the issuance of the Notes constituted a
"fraudulent conveyance." To make such a determination, a court would have to
find that:
- we did not receive fair consideration or reasonably equivalent value for
the Notes, and that,
- at the time the Notes were issued, we were insolvent or rendered insolvent
by the issuance of the Notes; were engaged in a business or transaction
for which our remaining assets constituted unreasonably small capital; or
intended to incur, or believed that we would incur, debts beyond our
ability to pay such debts as they matured.
If the court were to make such a finding, it could:
- void our obligations under the Notes,
- subordinate the Notes to other indebtedness, or
- take other actions detrimental to you as a holder of the Notes.
The measure of insolvency for these purposes will vary depending upon the
law of the jurisdiction being applied. Generally, however, a company will be
considered insolvent for these purposes if the sum of that company's debts is
greater than the fair value of all of that company's property, or if the present
fair saleable value of that company's assets is less than the amount that will
be required to pay its probable liability on its existing debts as they mature.
Moreover, regardless of solvency, a court could void an incurrence of
indebtedness, including the Notes, if it determined that the transaction was
made with intent to hinder, delay or defraud creditors, or a court could
subordinate the indebtedness, including the Notes, to the claims of all existing
and future creditors on similar grounds. We cannot determine in advance what
standard a court would apply to determine whether we were "insolvent" in
connection with the issuance of the Notes. The measure of insolvency for
purposes of determining whether a fraudulent conveyance has occurred will vary
depending upon the laws of the relevant jurisdiction and upon the valuation
assumptions and methodology applied by the court.
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Initial Notes were not registered under the Securities Act or under the
securities laws of any state and may not be resold unless they are subsequently
registered or resold pursuant to an exemption from the registration requirements
of the Securities Act and applicable state securities laws. The Exchange Notes
will be registered under the Securities Act but will constitute a new issue of
securities with no established trading market, and there can be no assurance as
to:
- the development of any market for the Exchange Notes,
- the liquidity of any such market that may develop,
- the ability of holders of Exchange Notes to sell their Exchange Notes, or
- the price at which the holders of the Exchange Notes would be able to sell
their Exchange Notes.
The Initial Notes are designated for trading among qualified institutional
investors in the PORTAL market. The Company has been advised by the Initial
Purchasers that they presently intend to make a market in the Exchange Notes.
However, they are not obligated to do so and may discontinue any such
market-making activity with respect to the Exchange Notes at any time without
notice. Following commencement of the Exchange Offer, the Initial Notes may
continue to be traded in the PORTAL market. The Exchange Notes will not be
eligible for trading in the PORTAL market. Accordingly, we
27
cannot assure you that an active trading market will exist for the Exchange
Notes or that such trading market will be liquid. If such a market were to
exist, the Exchange Notes could trade at prices that may be higher or lower than
their principal amount or purchase price, depending on many factors, including
prevailing interest rates, the market for similar debentures and the financial
performance of the Company. Historically, the market for non-investment grade
debt has been subject to disruptions that have caused substantial volatility in
the prices of securities similar to the Exchange Notes. We cannot assure you
that the market for the Exchange Notes, if any, will not be subject to similar
disruptions. Any such disruptions may adversely affect you as a holder of the
Exchange Notes.
THE ISSUANCE OF THE EXCHANGE NOTES MAY ADVERSELY AFFECT THE MARKET FOR THE
INITIAL NOTES
To the extent that Initial Notes are tendered for exchange and accepted in
the Exchange Offer, the trading market for the untendered and tendered but
unaccepted Initial Notes could be adversely affected. Please refer to the
section in this Prospectus entitled "--The Failure to Participate in the
Exchange Offer Will Have Adverse Consequences."
THE FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE CONSEQUENCES
The Initial Notes were not registered under the Securities Act or under the
securities laws of any state and may not be resold, offered for resale or
otherwise transferred unless they are subsequently registered or resold pursuant
to an exemption from the registration requirements of the Securities Act and
applicable state securities laws. If you do not exchange your Initial Notes for
Exchange Notes pursuant to the Exchange Offer, you will not be able to resell,
offer to resell or otherwise transfer the Initial Notes unless they are
registered under the Securities Act or unless you resell them, offer to resell
or otherwise transfer them under an exemption from the registration requirements
of, or in a transaction not subject to, the Securities Act. In addition, you
will no longer be able to obligate us to register the Initial Notes under the
Securities Act except in the limited circumstances provided under the
Registration Rights Agreement. In addition, if you want to exchange your Initial
Notes in the Exchange Offer for the purpose of participating in a distribution
of the Exchange Notes, you may be deemed to have received restricted securities,
and, if so, will be required to comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction.
AFFILIATES AND BROKER-DEALERS WHO PARTICIPATE IN THE EXCHANGE OFFER MUST DELIVER
A PROSPECTUS IN CONNECTION WITH RESALES OF THE EXCHANGE NOTES
Based on certain no-action letters issued by the staff of the Securities and
Exchange Commission, we believe that the Exchange Notes may be offered for
resale, resold or otherwise transferred by you without compliance with the
registration and prospectus delivery requirements of the Securities Act provided
that:
- you are acquiring the Exchange Notes in the ordinary course of your
business,
- you are not participating, do not intend to participate, and have no
arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes within the meaning of the Securities
Act, and
- you are not an affiliate of the Company within the meaning of Rule 405 of
the Securities Act.
If any of the foregoing are not true and you transfer any Exchange Note
without delivering a prospectus meeting the requirements of the Securities Act
or without an exemption from registration of your Exchange Notes under such Act,
you may incur liability under the Securities Act. We do not and will not assume
or indemnify you against such liability.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Initial Notes which were acquired by such broker-dealer as a result
of market making or other trading activities may
28
be deemed to be an "underwriter" within the meaning of the Securities Act and
must acknowledge that it will deliver a prospectus meeting the requirements of
the Securities Act in connection with any resale of such Exchange Notes. The
letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. A broker-dealer may use
this Prospectus for any offer to resell, resale or other transfer of the
Exchange Notes. We have agreed that, for a period of 180 days after the
consummation of the Exchange Offer, we will make this Prospectus available to
any broker-dealer for use in connection with any such offer to resell, resale or
other transfer. Please refer to the section of this Prospectus entitled "Plan of
Distribution." Subject to certain limitations, we will take steps to ensure that
the issuance of the Exchange Notes will comply with state securities or "blue
sky" laws.
THE FAILURE TO ADHERE TO EXCHANGE OFFER PROCEDURES WILL HAVE ADVERSE
CONSEQUENCES
We will issue you the Exchange Notes pursuant to the Exchange Offer only
after the timely receipt of your Initial Notes, a properly completed and duly
executed Letter of Transmittal and all other required documents. Therefore, if
you want to tender your Initial Notes, please allow sufficient time to ensure
timely delivery. We are under no duty to give notification of defects or
irregularities with respect to the tenders of Initial Notes for exchange.
Initial Notes that are not tendered or are tendered but not accepted will,
following the consummation of the Exchange Offer, continue to be subject to the
existing restrictions upon transfer thereof, and, upon consummation of the
Exchange Offer, certain registration rights with respect to the Initial Notes
under the Registration Rights Agreement will terminate. Please refer to the
section in this Prospectus entitled "--The Failure to Participate in the
Exchange Offer Will Have Adverse Consequences."
USE OF PROCEEDS
We will not receive any cash proceeds from the issuance of the Exchange
Notes in exchange for the outstanding Initial Notes. The Exchange Offer is
intended solely to satisfy certain of our obligations under the Registration
Rights Agreement. In consideration for issuing the Exchange Notes, we will
receive Initial Notes in like aggregate principal amount.
The net proceeds to the Company from the original issuance of the Initial
Notes, after deducting discounts, commissions and expenses were approximately
$630 million. We invested approximately $91.5 million of the net proceeds in a
portfolio of U.S. government securities, which were then pledged as security for
the payment in full of interest on the Notes through May 15, 2000. We intend to
use the balance of such net proceeds for the build-out of our intra-city and
inter-city networks in the United States and Europe and for other capital
expenditures, working capital and general corporate purposes, including possible
acquisitions of other companies or assets. We currently intend to allocate
substantial proceeds to each of these uses. However, the precise allocation of
funds among these uses will depend on future technological, regulatory and other
developments in or affecting our business, the competitive climate in which we
operate and the emergence of future opportunities.
We have invested such proceeds in U.S. government securities or other
short-term, interest bearing, investment grade securities. We are not currently
and do not expect as a result to become subject to the registration requirements
of the Investment Company Act of 1940, as amended. Please refer to the section
in this Prospectus entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
29
CAPITALIZATION
The following table shows our capitalization as of September 30, 1998 and as
adjusted to reflect the issuance of the Initial Notes and the application of the
net proceeds therefrom. You should read this table together with the
Consolidated Financial Statements and related notes included in this Prospectus
beginning on page F-1 and the information in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
AS OF
SEPTEMBER 30, 1998
----------------------------------
ACTUAL AS ADJUSTED
------------- -------------------
(IN THOUSANDS)
Cash and cash equivalents........................................... $ 76,335 $ 614,835
------------- --------
------------- --------
Pledged Securities: (1)............................................. $ -- $ 91,500
------------- --------
------------- --------
Debt:
Capital lease obligations less current portion.................... $ 19,687 $ 19,687
10% Series A Senior Notes due 2008................................ -- 650,000
------------- --------
Total debt........................................................ 19,687 669,687
------------- --------
Stockholders' equity
Class A Common Stock, $.01 par value, 180,000,000 shares
authorized; 77,460,452 shares issued and outstanding............ 774 774
Class B Common Stock, $.01 par value; 20,000,000 shares
authorized; 16,884,636 shares issued and outstanding............ 169 169
Additional paid-in capital.......................................... 195,955 195,955
Accumulated deficit................................................. (42,156) (42,156)
------------- --------
Total stockholders' equity........................................ 154,742 154,742
------------- --------
Total capitalization................................................ $ 174,429 $ 824,429
------------- --------
------------- --------
- ------------------------
(1) Represents amounts deposited with the Security Agent pursuant to the
Security Agreement (as defined) to make payments of interest on the Notes
through May 15, 2000.
30
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below as of and for the
years ended December 31, 1995, 1996 and 1997 have been derived from our
Consolidated Financial Statements and the related notes included in this
Prospectus beginning on page F-1. Our Consolidated Financial Statements for the
year ended December 31, 1995 have been audited by M. R. Weiser & Co. LLP,
Certified Public Accountants. Our Consolidated Financial Statements as of and
for the years ended December 31, 1996 and 1997 have been audited by Ernst &
Young LLP, independent auditors. The selected financial data presented below for
the period ended December 31, 1993 have been derived from our unaudited
financial statements which we believe include all adjustments necessary for a
fair presentation of the financial condition and results of operations of the
Company for such period. The selected consolidated financial data and balance
sheet data as of and for the nine months ended September 30, 1998 and the
selected consolidated financial data for the nine months ended September 30,
1997 have been derived from our unaudited Consolidated Financial Statements and
the related notes included in this Prospectus, which we believe include all
adjustments necessary for a fair presentation of the financial condition and
results of operations of the Company for such periods. The results of operations
for interim periods are not necessarily indicative of the results for a full
year's operations. You should read the following information in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Business," the Consolidated Financial Statements of
the Company and the related notes and the other financial data appearing in this
Prospectus.
31
PERIOD FROM
APRIL 8,
1993
(DATE OF NINE MONTHS
INCEPTION) YEAR ENDED ENDED
TO DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, -------------------------------------------------------- -------------
1993 1994 1995 1996 1997 1997
------------ ------------ ------------ ------------- ------------- -------------
STATEMENT OF OPERATIONS DATA:
Revenue.......................... $ -- $ -- $ 56,000 $ 236,000 $ 2,524,000 $ 1,745,000
Expenses:
Cost of sales.................. -- -- -- 699,000 3,572,000 2,647,000
Selling, general and
administrative................. 188,000 874,000 3,886,000 2,070,000 6,303,000 3,722,000
Depreciation and
amortization................. -- -- 162,000 613,000 757,000 567,000
Settlement agreement........... -- -- -- -- -- --
Consulting and employment
incentives..................... -- -- -- 3,652,000 19,219,000 19,124,000
------------ ------------ ------------ ------------- ------------- -------------
Loss from operations............. (188,000) (874,000) (3,992,000) (6,798,000) (27,327,000) (24,315,000)
Interest income (expense), net... -- -- (327,000) (3,561,000) 1,067,000 (241,000)
(Loss) from joint venture........ -- -- -- -- --
Income taxes..................... -- -- -- -- -- --
------------ ------------ ------------ ------------- ------------- -------------
Net (loss) income................ (188,000) 874,000 (4,319,000) (10,359,000) (26,260,000) (24,556,000)
------------ ------------ ------------ ------------- ------------- -------------
------------ ------------ ------------ ------------- ------------- -------------
Net (loss) income applicable to
common stockholders per
share.......................... $ (0.03) $ (0.04) $ (0.17) $ (0.29) $ (0.56) $ (0.64)
------------ ------------ ------------ ------------- ------------- -------------
------------ ------------ ------------ ------------- ------------- -------------
Weighted average number of shares
outstanding.................... 6,084,000 23,336,000 24,829,000 35,858,000 47,447,000 38,652,000
------------ ------------ ------------ ------------- ------------- -------------
------------ ------------ ------------ ------------- ------------- -------------
Ratio of Earnings to fixed
charges(1)..................... -- -- -- -- -- --
EBITDA(2)........................ $ (188,000) $ (874,000) $ (3,830,000) $ 6,185,000 $ (26,570,000) $ (23,748,000)
Adjusted EBITDA (2).............. $ (188,000) $ (874,000) $ (3,830,000) $ (2,533,000) $ (7,351,000) $ (4,624,000)
1998
------------
STATEMENT OF OPERATIONS DATA:
Revenue.......................... $ 20,840,000
Expenses:
Cost of sales.................. 9,499,000
Selling, general and
administrative................. 9,811,000
Depreciation and
amortization................. 738,000
Settlement agreement........... 3,400,000
Consulting and employment
incentives..................... 248,000
------------
Loss from operations............. (2,856,000)
Interest income (expense), net... 5,012,000
(Loss) from joint venture........ (264,000)
Income taxes..................... 825,000
------------
Net (loss) income................ 1,067,000
------------
------------
Net (loss) income applicable to
common stockholders per
share.......................... $ 0.01
------------
------------
Weighted average number of shares
outstanding.................... 93,196,000
------------
------------
Ratio of Earnings to fixed
charges(1)..................... 9.45
EBITDA(2)........................ $ (2,382,000)
Adjusted EBITDA (2).............. $ 1,266,000
AS OF SEPTEMBER 30, 1998
----------------------------
AS
ACTUAL ADJUSTED(3)
------------- -------------
BALANCE SHEET DATA
Cash............................................................................................. $ 76,335,000 $ 614,835,000
Pledged Securities............................................................................... -- $ 91,500,000
Property and equipment, net...................................................................... 150,311,000 150,311,000
Total assets..................................................................................... 255,427,000 905,427,000
Long-term debt................................................................................... 19,687,000 669,687,000
Total liabilities................................................................................ 100,685,000 750,685,000
Stockholders' equity............................................................................. $ 154,742,000 $ 154,742,000
- ------------------------
(1) Earnings are insufficient to cover fixed charges. The deficiency was
$188,000, $874,000, $4,319,000, $10,359,000, $26,260,000 and $24,556,000,
for the periods ended December 31, 1993, 1994, 1995, 1996, and 1997 and for
the nine months ended September 30, 1997 respectively.
(2) "EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense and all depreciation and amortization expense. "Adjusted
EBITDA" consists of earnings (loss) before income taxes plus all net
interest expense, depreciation and amortization and non cash employment and
consulting incentives and settlements. You should not think of EBITDA and
Adjusted EBITDA as alternative measures of operating results or cash flows
from operating activities (as determined in accordance with generally
accepted accounting principles). We have included EBITDA and Adjusted EBITDA
because they are widely used financial measures of the potential capacity of
a company to incur and service debt. Our reported EBITDA and Adjusted EBITDA
may not be comparable to similarly titled measures used by other companies.
(3) Adjusted to reflect the issuance of the Initial Notes and the use of the
proceeds therefrom.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING INFORMATION TOGETHER WITH OUR CONSOLIDATED
FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED IN THIS PROSPECTUS BEGINNING
ON PAGE F-1. CERTAIN STATEMENTS IN THIS SECTION ARE "FORWARD-LOOKING
STATEMENTS." YOU SHOULD READ THE INFORMATION UNDER "SPECIAL NOTE REGARDING
FORWARD-LOOKING STATEMENTS" LATER IN THIS SECTION FOR SPECIAL INFORMATION ABOUT
OUR PRESENTATION OF FORWARD-LOOKING INFORMATION.
GENERAL
We are a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate/government customers in the United States. We focus our
operations on domestic intracity fiber optic networks in clusters of Tier I
cities throughout the United States. We currently operate high-bandwidth fiber
optic communications networks in New York and within the next two quarters
expect to be operating similar networks in Philadelphia and Washington, D.C. We
have also begun engineering and constructing networks in Chicago, San Francisco
and Boston and within the next two years, we plan to complete an expansion into
five additional markets including Los Angeles, Seattle, Dallas, Houston and
Atlanta. We expect that our domestic intracity networks will ultimately
encompass approximately 810,000 fiber miles covering approximately 1,896 route
miles.
We have also obtained intercity fiber optic capacity that links certain of
our intracity networks. We expect to complete a 180,000 fiber mile or 241 route
mile network from New York to Washington, D.C. during the first quarter of 1999.
We have also obtained rights for fiber optic capacity with other
facilities-providers and obtained fiber optic capacity linking certain of the
metropolitan areas (New York--Chicago, New York--Boston,
Chicago--Seattle--Portland) in which we plan to construct intracity networks,
except in Portland.
In addition, we have entered into a joint venture with a U.K.
telecommunications company to connect our New York network to London and we have
announced that we intend to form a joint venture to construct a high-bandwidth
fiber optic network connecting 13 major cities in Germany and obtain certain
additional fiber optic capacity in Western Europe. Please refer to the sections
in this Prospectus entitled "Business" and "Risk Factors--Risks Associated with
Growth Strategy; Management of Expansion."
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1997:
REVENUES for the nine months ending September 30, 1998 were $20.8 million or
1,124% greater than revenues of $1.7 million for the nine months of 1997. The
increase in revenue for the nine months ended September 30, 1998 versus the nine
months ended September 30, 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.
COST OF SALES were $9.5 million in the nine months ending September 30,
1998, a 265% increase over cost of sales of $2.6 million for the first nine
months of 1997. Cost of sales increased for the nine months ended September 30,
1998 as compared to the same period in 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. Costs of sales as percentages of revenue for the first
nine months of 1998 and 1997 were 46% and 153%, respectively, declining as a
result of the significant increase in the number of customers and revenues.
33
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased to $9.8 million
during the first nine months of 1998, from $3.7 million during the first nine
months of 1997, an increase of $6.1 million, or 165%. The increase in selling,
general and administrative expenses for the nine-month period ended September
30, 1998 as compared to the nine-month period ended September 30, 1997 resulted
primarily from increased overhead to accommodate our network expansion.
CONSULTING AND EMPLOYMENT INCENTIVES EXPENSE for the nine months ended
September 30, 1998 were $0.2 million compared with $19.1 million for the nine
months ended September 30, 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 the
nine months ended September 30, 1998, the amount recorded reflects amortization
for the unvested component of options issued in 1997 to key employees.
SETTLEMENT AGREEMENT. We recorded $3.4 million for a settlement agreement
in the nine months ended September 30, 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 the settlement agreement.
DEPRECIATION AND AMORTIZATION EXPENSE was $0.7 million during the nine
months ended September 30, 1998, as compared to $0.6 million during the nine
months ended September 30, 1997, an increase of $0.1 million, or 17%. The
increases in depreciation and amortization expense resulted from increased
investment in our completed fiber optic network and property and equipment.
INTEREST INCOME was $5.0 million during the nine months ended September 30,
1998 as compared to $0.5 million during the comparable 1997 period, an increase
of $4.5 million, or 900%. Interest income during 1998 was derived from
investment of our excess cash received as proceeds from the Initial Public
Offering (as defined) in October 1997.
INTEREST EXPENSE decreased in the nine months ended September 30, 1998 to
$16,000 as compared to $732,000 for the nine months ended September 30, 1997.
The decrease in interest expense reflects the repayment of all of our debt in
1997 with the proceeds from the Metromedia Investment (as defined) in the second
quarter.
INCOME (LOSS) FROM JOINT VENTURE. We recorded a $264,000 loss from our 50%
share of the ION joint venture's loss for the nine-month period, ending
September 30, 1998. The loss primarily represents startup costs and operating
activities for the joint venture.
INCOME TAXES. We recorded a provision for income taxes for the nine-month
periods ended September 30, 1998 in the amount of $825,000. This represents an
estimated effective tax rate, for federal and state taxes, of 43.6%.
NET INCOME was $1.1 million for the nine months ended September 30, 1998, as
compared to a net loss of $24.6 million for the comparable period of 1997. For
the nine months ended September 30, 1998, basic net income per share was $0.01
as compared to a basic net loss per share of $.64 for the nine months ended
September 30, 1997. On a diluted basis, net income per share for the nine months
ended September 30, 1998 was $0.01.
The improvements in results for the nine-month period 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 as compared to net
interest expense related to the Metromedia Investment and the funds raised
through the Initial Public Offering.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996:
REVENUES for 1997 were $2,524,311, a 969% increase as compared to 1996
revenues of $236,082. The revenue increase was generated by one time revenues
associated with commencement of services
34
to customers as well as increased recurring lease revenues which reflects the
growth in the number of our customers.
COST OF SALES for 1997 were $3,572,005, an increase of 411% as compared to
the $698,793 which was recorded as cost of sales in 1996. The increase in cost
of sales was associated with the increased revenues. Cost of sales as a
percentage of revenues improved to 142% in 1997 from 296% in 1996. The
improvement in cost of sales as a percentage of revenues reflects the increases
in revenue outdistancing the increases in cost, as the components of cost were
mostly of a fixed nature.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES increased to $6,303,041 in 1997
from $2,070,345 in 1996, a 204% increase. This increase resulted primarily from
increased legal expenses as a result of our increased business activities and
the increased staffing to accommodate our anticipated growth.
CONSULTING AND EMPLOYMENT INCENTIVES EXPENSE of $19,218,591 was recorded in
1997 as compared to $3,652,101 in 1996. The 1997 expense represents the value of
stock options issued to key employees, officers, directors and consultants in
order to attract or retain their services. The amount recorded in 1996 reflects
the expense associated with issuance of stock and warrants to consultants in
consideration for services rendered.
DEPRECIATION AND AMORTIZATION EXPENSE was $757,133 in 1997 as compared to
$612,530 in 1996. The increase in depreciation and amortization expense resulted
from increased investment in our fiber optic network.
INTEREST INCOME of $1,808,007 was recorded in 1997 as compared to no
interest income during 1996. The interest income in 1997 arose from the
investment of our excess cash during the year. In 1996, we had no excess cash to
invest and, accordingly, earned no interest income.
INTEREST EXPENSE (INCLUDING FINANCING COSTS) decreased in 1997 to $740,786
from $3,561,010 in 1996. The decrease in interest expense reflects the repayment
of all of our debt during the year with the proceeds of the Metromedia
Investment, as well as lower financing costs. Please refer to the section in
this Prospectus entitled "Certain Relationships and Related Transactions."
NET LOSS. We recorded a net loss of $26,259,238 in 1997 as compared to a
net loss of $10,358,697 in 1996. The increase in the net loss was primarily
attributable to costs associated with organizing to meet our growth objectives.
In particular, such costs include the consulting and employment incentive,
described above, to attract and retain key employees, officers and directors, as
well as increased overhead to meet our growth objectives.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995:
During the year ended December 31, 1995, we were in our early development
stage and did not generate our first revenues until the last three months of
1995 when customers began using our facilities.
TOTAL REVENUES increased to $236,082 for the year ended December 31, 1996
from $56,149 for the year ended December 31, 1995, representing an increase of
$179,933. The increase in revenue was due primarily to an increase in the number
of our customers.
COST OF SALES was $698,793 for the year ended December 31, 1996. We did not
record any cost of sales for the year ended December 31, 1995. The increase was
primarily attributable to the inclusion of franchise fees and easement costs in
cost of sales for 1996. In prior years such fees were classified as selling,
general and administrative expense.
35
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES decreased to $2,070,345 for the
year ended December 31, 1996 from $3,886,568 for the year ended December 31,
1995, representing a decrease of $1,816,223.
CONSULTING AND EMPLOYMENT INCENTIVES were $3,652,101 for the year ended
December 31, 1996 as compared to none in 1995, reflecting our issuance of equity
instruments for consulting services.
DEPRECIATION AND AMORTIZATION increased to $612,530 for the year ended
December 31, 1996 from $161,576 for the year ended December 31, 1995,
representing an increase of $450,954. We recognize certain components of
depreciation and amortization upon commencement of service to customers, which
did not occur until late 1995. As a result, depreciation and amortization in
1996 was larger than it was in 1995 due to the inclusion of a full year of
depreciation and amortization for such customers.
INTEREST EXPENSE (INCLUDING FINANCING COSTS) increased to $3,561,010 for the
year ended December 31, 1996 from $327,106 for the year ended December 31, 1995,
representing an increase of $3,233,904. This increase was a result of additional
debt incurred in 1996 to finance construction of our New York network and to
fund our operations.
NET LOSS increased to $10,358,697 for the year ended December 31, 1996 from
$4,319,101 for the year ended December 31, 1995, representing an increase of
$6,039,596. The increase in net loss is attributable to the factors discussed
above.
LIQUIDITY AND CAPITAL RESOURCES
On November 3, 1997, our initial public offering of 36,432,000 shares of
Class A Common Stock (the "Initial Public Offering") generated net proceeds of
$133.9 million, after deducting the underwriters' commission and expenses
relating to the Initial Public Offering.
During 1997, we utilized $2.2 million for operating activities primarily to
prepay a long term, nonexclusive right-of-way in order to build-out a portion of
our network and also to meet our growth objectives. A portion of the operating
activities was funded by advance payments received from customers. In addition,
we utilized $19.7 million in 1997 for investing activities, primarily to
build-out our network. In 1997, $155.9 million of cash flows were provided by
financing activities reflecting the net proceeds of the Initial Public Offering,
as discussed above, and by the equity investment in the Company of $32.5 million
made by Metromedia Company and certain of its affiliates on April 30, 1997, a
portion of which was utilized to repay all our outstanding debt and purchase all
of the Company's Series A preferred stock outstanding at April 30, 1997.
Cash used in operating activities during 1996 was $2.8 million as compared
to $1.3 million in 1995. Cash was utilized in both years to support the
operations through our startup phase. Cash flows used in investing activities
were $1.1 million in 1996 and $4.2 million in 1995. The investing activities
cash outflows in both years were primarily used for the building of our New York
network. Financing activities provided cash flows of $4.3 million in 1996 and
$5.2 million in 1995 with the issuance of equity in 1996 and the issuance of
debt in both 1996 and 1995. The cash flows from financing activities in both
1996 and 1995 were utilized to fund our operating and investing activities.
For the nine months ended September 30, 1998, our operating activities
generated $16.9 million of cash, compared with a use of $3.9 million during the
comparable nine-month period of 1997. The increase in cash provided by
operations was primarily due to the increase in advance payments received from
customers as well as the improvement in net income as a result of increases in
revenues and interest income in the nine months ended September 30, 1998 as
compared to the nine months ended September 30, 1997. For the nine months ended
September 30, 1998, we used $80.3 million of cash for investing activities as
compared to $1.7 million for the comparable period in 1997. This increase was
due primarily to investments in the expansion of our networks and related
construction in progress as
36
well as capital contributions to our ION joint venture and a deposit on the
German Network build. For the nine months ended September 30, 1998, we received
$0.9 million of net cash from financing activities, compared to $21.9 million
for the same period in 1997. The cash from financing activities in 1998 came
from the issuance of common stock from exercises of warrants and options, while
the 1997 amount related to the sale of securities of the Company net of the
repayment of certain of our indebtedness.
We anticipate that we will continue to incur net operating losses as we
expand and complete our existing networks, construct additional networks and
market our services to an expanding customer base. We anticipate spending
approximately $300 million for the year ending December 31, 1999 and
approximately $200 million for the year ending December 31, 2000 on the
build-out of our fiber optic networks in 10 Tier I cities and our planned
international networks. We believe that the net proceeds of the offering of the
Initial Notes, certain vendor financing, cash on hand as of September 30, 1998
and cash generated in 1999 and 2000 (including advance customer payments), will
be sufficient to fund the planned build-out of our fiber optic networks and our
other working capital needs through the year ended December 31, 2000. The
Indenture permits us to incur additional indebtedness to finance the
construction of our networks. As a result, we may also consider from time to
time private or public sales of additional equity or debt securities, entering
into senior credit facilities and other financings, depending upon market
conditions, in order to finance the continued build-out of our network. We
cannot assure you that we will be able to successfully consummate any such
financing at all, or on acceptable terms. Accordingly, we expect to continue
experiencing net operating losses and negative cash flows for the foreseeable
future.
YEAR 2000 SYSTEM MODIFICATIONS
We are currently working to evaluate and resolve the potential impact of the
Year 2000 on our processing of date-sensitive information and network systems.
The Year 2000 problem is the result of computer programs being written using two
digits (rather than four) to define the Year 2000, which could result in
miscalculations or system failures resulting from recognition of a date using
"00" as the year 1900 rather than the year 2000.
We have delegated responsibility to a group of executives, to coordinate the
identification, evaluation and implementation of changes to computer systems and
applications necessary to achieve our goal of a Year 2000 date conversion which
would minimize the effect on our customers and avoid disruption to business
operations. We are also focusing on hardware and software tools, programming and
outside forces that may affect our operations, including our vendors, banks and
utility companies. Our analysis of the Year 2000 threat is ongoing and will be
continuously updated throughout 1998 and 1999 as necessary.
We have completed a questionnaire and project plan to our systems and
operating personnel to identify all business and computer applications so that
we can identify potential compliance problems. We plan to initiate
communications with all of our significant customers, suppliers, contractors and
major systems developers to determine their plans to remedy any Year 2000 issues
that arise in their business with us. We plan to compile a database of
information based upon these responses, which is expected to be completed during
the first quarter of 1999. To the extent problems are identified, we will
implement corrective procedures where necessary, then test the applications for
Year 2000 compliance. We expect to complete this project prior to January 1,
2000.
Based on preliminary data, our estimate is that the Year 2000 effort will
have a nominal cost impact, although we can make no assurances as to the
ultimate cost of the Year 2000 effort or the total cost of information systems.
Such costs will be expensed as incurred, except to the extent such costs are
incurred for the purchase or lease of capital equipment. We expect to make some
of the necessary modifications through our ongoing investment in system
upgrades. We believe that our exposure to this
37
issue, based on our internal systems, is somewhat limited by the fact that
substantially all of our existing systems have been purchased or replaced since
1996.
As of January 1, 1999, we had incurred nominal consulting costs in respect
of our Year 2000 conversion effort. We have not deferred any other information
systems projects due to the Year 2000 efforts. We expect that the source of
funds for Year 2000 costs will be cash on hand. Accordingly, we plan to devote
the necessary resources to resolve all significant Year 2000 issues.
If our customers, suppliers, contractors or major systems developers are
unable to resolve Year 2000 processing issues in a timely manner, a material
adverse effect on our results of operations and financial condition could
result.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Any statements in this Prospectus about our expectations, beliefs, plans,
objectives, assumptions or future events or performance are not historical facts
and are forward-looking statements. These statements are often, but not always,
made through the use of words or phrases such as "will likely result," "expect,"
"will continue," "anticipate," "estimate," "intend," "plan," "projection,"
"would" and "outlook." Accordingly, these statements involve estimates,
assumptions and uncertainties which could cause actual results to differ
materially from those expressed in them. Any forward-looking statements are
qualified in their entirety by reference to the factors discussed throughout
this Prospectus. The following cautionary statements identify important factors
that could cause our actual results to differ materially from those projected in
the forward-looking statements made in this Prospectus. Among the key factors
that have a direct bearing on our results of operation are:
- general economic and business conditions; the existence or absence of
adverse publicity; changes in, or failure to comply with, government
regulations; changes in marketing and technology; changes in political,
social and economic conditions;
- competition in the telecommunications industry; industry capacity; general
risks of the telecommunications industries;
- success of acquisitions and operating initiatives; changes in business
strategy or development plans; management of growth;
- availability, terms and deployment of capital;
- construction schedules; costs and other effects of legal and
administrative proceedings;
- dependence on senior management; business abilities and judgment of
personnel; availability of qualified personnel; labor and employee benefit
costs,
- development risks; risks relating to the availability of financing; and
- other factors referenced in this Prospectus.
These and other factors are discussed in "Risk Factors" and elsewhere in this
Prospectus.
Because the risk factors referred to above could cause actual results or
outcomes to differ materially from those expressed in any forward-looking
statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only
as of the date on which it is made and we undertake no obligation to update any
forward-looking statement or statements to reflect events or circumstances after
the date on which such statement is made or to reflect the occurrence of
unanticipated events. New factors emerge from time to time, and it is not
possible for us to predict which will arise. In addition, we cannot assess the
impact of each factor on our business or the extent to which any factor, or
combination of factors, may cause actual results to differ materially from those
contained in any forward-looking statements.
38
BUSINESS
THE COMPANY
We are a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to carrier and
corporate/government customers in the United States and Europe.
THE INTRACITY NETWORKS. We have installed local intracity networks that as
of January 1, 1999, consisted of approximately 160,000 fiber miles covering
approximately 400 route miles in four major metropolitan areas (New York,
Philadelphia, Washington, D.C. and Chicago) that constitute key Tier I
telecommunications markets. We currently operate a high bandwidth fiber optic
communications network in the New York metropolitan area and within the next two
quarters will be operating such networks in the Philadelphia and Washington,
D.C. metropolitan areas.
We are currently planning to expand our existing local intracity networks in
these metropolitan areas, which will bring our total infrastructure in these
markets to approximately 357,000 fiber miles covering approximately 846 route
miles. We have also begun engineering and constructing networks in the San
Francisco and Boston metropolitan areas.
Within the next two years, we plan to complete an expansion into five
additional markets: Los Angeles, Seattle, Dallas, Houston and Atlanta. We
anticipate that our total intracity network infrastructure will encompass
ultimately approximately 810,000 fiber miles covering approximately 1,896 route
miles in the aggregate. We are currently in the planning process for
construction of these networks.
THE INTERCITY NETWORKS. In addition to intracity networks in these 11 major
metropolitan areas, we are expanding the capacity of our intercity network
between the New York and Washington, D.C. metropolitan areas to a total of
approximately 180,000 fiber miles covering approximately 241 route miles. We
have also obtained, through exchanges of fiber capacity or "fiber swaps" with
other carriers and in certain instances, the payment of certain additional
consideration, the right to use fiber optic strands linking New York--Chicago,
Chicago--Seattle--Portland and New York--Boston. These intercity networks give
us the ability to offer our customers not only capacity within the 11 major
metropolitan areas where we will operate networks within the United States but
also between many of these same markets.
TRANSATLANTIC CONNECTIVITY. We have entered into a 50/50 joint venture,
called ION, with Racal, a United Kingdom manufacturer of electronics and other
equipment and a provider of telecommunications services. Through this joint
venture, we are able to offer our customers seamless broadband connectivity
between our New York and other U.S. networks and London.
THE EUROPEAN NETWORKS. We also plan to offer our customers an expanded
presence in Europe through:
- a proposed joint venture with Carrier 1 Holdings, Ltd. ("Carrier 1") and
Viatel, Inc. ("Viatel") that will develop a 1,350 route miles fiber optic
telecommunications network in Germany connecting to 13 of its largest
cities, including Hamburg, Berlin, Munich, Frankfurt and Dusseldorf (the
"German Network"), and
- a proposed fiber swap with Viatel under which we would receive the right
to use approximately 3,880 fiber miles covering approximately 970 route
miles of a broadband fiber optic network that will travel between Germany,
France, The Netherlands and the United Kingdom (the "European Network").
We cannot assure you that we will be able to build or use these networks
because we have not entered into final agreements with Carrier 1 and Viatel.
39
GENERAL. We focus on leasing or otherwise making available for use our
broadband communications infrastructure to two main customer groups:
communications carriers and corporate/ government customers located in selected
Tier I markets. Our target carrier customers include a broad range of
communications companies such as:
- ILECs,
- CLECs,
- long distance companies/IXCs,
- paging, cellular and PCS companies,
- cable companies, and
- ISPs.
These carrier customers typically lease fiber optic capacity with which they
develop their own communications networks as a lowcost alternative to building
their own infrastructure or purchasing metered services from ILECs or
facilities-based CLECs. Our corporate and government customers typically lease
fiber optic infrastructure and other broadband services on a point-to-point
basis for high-bandwidth, secure voice and data networks. We believe that we are
well-positioned to penetrate the corporate and government markets since we plan
to continue to install most of our fiber in Tier I markets. Please refer to the
section in this Prospectus entitled "--Customers."
The fiber communications infrastructure leased to our customers provides
high-bandwidth capacity for customers that seek to establish secure
communications networks for the transmission of large amounts of voice, data and
video. For example, a pair of our fiber optic strands can transmit up to 8.6
gigabits of data per second or the equivalent of approximately 129,000
simultaneous voice conversations.
We tailor the amounts of capacity leased to the needs of our customers.
Certain customers that lease fiber optic capacity from us connect their own
transmission equipment to the leased fiber, and therefore obtain a fixed-cost,
secure telecommunications alternative to the metered communications services
offered by traditional providers. Other customers that require lesser amounts of
transmission capacity will have the option to lease a much smaller broadband
capacity on our network, as we are able to divide a single strand of fiber into
multiple smaller communications channels. We believe that we have installation,
operating, and maintenance cost advantages per fiber mile relative to our
competitors because we generally install our networks with 432 fibers and may
install as many as 864 fibers per route mile as compared to a generally lower
number of fibers in existing competitive networks.
Our intracity networks support a self-healing SONET architecture that
minimizes the risk of downtime in the event of a fiber cut and provides our
customers with high security and reliability. We install most of our fiber
inside high density polyethylene conduit to protect the cable and, where
practicable, we install additional unused conduits to accommodate future network
expansion.
We benefit from the support of our controlling stockholder Metromedia
Company. On April 30, 1997, Metromedia Company and certain of its affiliates
made a substantial equity investment in the Company (the "Metromedia
Investment"). Metromedia Company and its partners own all of the outstanding
shares of Class B Common Stock. The Class B Common Stock is entitled to 10 votes
per share and to vote separately to elect at least 75% of the members of the
Board of Directors. As a result, Metromedia Company and its partners own and
control approximately 64% of the outstanding voting power (on a fully diluted
basis) of the Company. On October 28, 1997, we successfully completed the
Initial Public Offering generating proceeds to the Company of $135.5 million
(after deducting underwriting discounts but not deducting offering expenses).
The Company was founded in 1993 and is a Delaware corporation.
40
BUSINESS STRATEGY
Our objective is to become the preferred facilities-based provider of
broadband communications infrastructure to communications carriers, corporations
and government agencies, in our target markets. The following are the key
elements of our strategy to achieve this objective:
ESTABLISH THE COMPANY AS THE PREFERRED CARRIERS' CARRIER OF BROADBAND
COMMUNICATIONS INFRASTRUCTURE.
We lease broadband communications infrastructure on a fixed-cost basis to
various communications carriers, enabling them to compete in markets which were
previously difficult to penetrate due to limited and/or costly access to
high-bandwidth communications infrastructure. Specifically, we plan to lease
fiber infrastructure capacity within our target markets thereby enabling our
carrier customers to bypass the ILECs and facilities-based CLECs. We believe
that we are currently the only company whose principal business is providing
dark fiber on a fixed-cost basis in local Tier I markets. Additionally, we plan
to lease capacity on our high-bandwidth, long-haul intercity network to provide
seamless connectivity between our various intracity networks. Our fixed-cost,
long-term contracts allow our carrier customers to access our Tier I markets
without incurring the high capital expenditures, many of the franchise and
licensing fees and long lead times usually associated with building their own
networks. We also believe that communications carriers may be more likely to
lease capacity from us rather than from a competitor since we currently have no
plans to offer communications infrastructure services on a metered basis,
choosing instead to position ourselves as a noncompeting provider of
infrastructure alternatives for IXCs, ILECs, CLECs, etc. Please refer to the
section in this Prospectus entitled "--Customers."
POSITION THE COMPANY AS THE PREFERRED PROVIDER OF BROADBAND COMMUNICATIONS
INFRASTRUCTURE TO CORPORATE AND GOVERNMENT CUSTOMERS.
Our fiber optic network is expected to serve Tier I markets in which there
are a large number of corporations and government agencies that we believe have
significant unmet demand for communications capacity. These customers typically
lease broadband communications infrastructure from us connecting two or more of
their locations, creating secure networks for voice, video or data
communications. Our primary target customers are those with significant
transmission needs or who require a high degree of security. However, customers
seeking lesser amounts of broadband transmission capacity will have the option
of leasing smaller amounts of capacity from us. By providing leased capacity on
a fixed-cost rather than a metered basis, we believe our network will be more
economical for our corporate and government customers, while also providing the
ability to expand their usage for low marginal costs and enhanced reliability
and security. Please refer to the section in this Prospectus entitled
"--Customers."
REPLICATE SUCCESSFUL BUSINESS MODEL IN NEW MARKETS.
We seek to leverage the success we have begun to demonstrate in our existing
markets by replicating a similar network architecture in a number of additional
markets. Specifically we intend to:
- begin the engineering and construction of five additional intracity
networks bringing the number of our intracity networks to a total of
eleven, and
- replicate our successful domestic strategy in selected European markets.
We expect that our entire network when completed, as currently planned, will
ultimately consist of approximately 1.1 million fiber miles covering
approximately 8,930 route miles. Please refer to the section in this Prospectus
entitled "Risk Factors--Risks Associated with Growth Strategy; Management of
Expansion."
41
CREATE A LOW COST POSITION.
We believe that we have established a low cost position relative to other
communications carriers primarily for the following reasons:
- we generally install trunks of 432 fibers and may install up to as many as
864 fibers per route mile, which we believe is substantially more fiber
than many other communications carriers install, thereby reducing the per
fiber mile cost to construct and operate our networks,
- we will have a newly-constructed network with advanced fiber optic
technology which we believe offers operating and maintenance cost
advantages,
- we believe that certain of our rights-of-way and franchises are valuable
assets that will be costly and difficult for others to procure in the
future, and
- where practicable, we install spare conduit which will allow for expanded
fiber optic capacity at a cost significantly below the cost of new
construction.
Our low cost position should allow us to remain price competitive with other
providers of fiber optic infrastructure and to lease our fiber infrastructure at
a price which customers will find more attractive than the cost of constructing
their own networks.
LEVERAGE NETWORK ASSETS AND STRATEGIC RELATIONSHIPS TO EXPAND THE REACH OF
THE NETWORKS.
We have also obtained long haul fiber capacity between certain of our
intracity networks on a selective basis which we can provide to customers as a
value-added service. As a result, at little incremental cost, we have
successfully been able to expand the reach of our network. In addition, we plan
to continue to enter into strategic partnerships with other communications
providers. For example, we seek to establish additional relationships such as
the one we have established with Racal. This relationship established a 50/50
joint venture to link our U.S. network to Racal's U.K. network to offer each of
our customers seamless broadband connectivity between New York and London.
INSTALL A TECHNOLOGICALLY ADVANCED NETWORK.
We have installed a technologically advanced network that we believe
provides the high levels of reliability, security and flexibility that our
target customers typically demand. Our domestic intracity networks support a
self-healing SONET architecture that minimizes interruption to service in the
event of a fiber cut. We also continuously monitor and maintain high quality
control of our network on a 24-hour basis through our network operations center.
Our network is capable of using the highest commercially available capacity
transmission (OC192) and thereby can support advanced, capacity-intensive data
applications such as Frame Relay, ATM, multimedia and Internet-related
applications.
BUILD ON MANAGEMENT EXPERIENCE AND METROMEDIA COMPANY RELATIONSHIP.
Our management team and Board of Directors include individuals with
communications industry expertise and extensive experience in network design,
construction, operations and sales. Our Chief Executive Officer and founder,
Stephen A. Garofalo, has approximately 25 years of experience in the cable
installation business. Howard Finkelstein, our President and Chief Operating
Officer, served in various capacities in Metromedia Company over a period of 16
years, including 9 years as President of Metromedia Company's long distance
telephone company, until its merger in 1993 with what is now MCI/WorldCom, Inc..
We also benefit from the communications industry expertise and corporate
governance experience of John W. Kluge, Stuart Subotnick and David Rockefeller.
As the owner of all of the Company's shares of Class B Common Stock, Metromedia
Company and its general partners control the Board of Directors and all
stockholder decisions and, in general, determine the outcome of any corporate
transaction or other matters submitted to the stockholders for approval. Please
refer to the sections in this Prospectus entitled "Risk Factors--Concentration
of Voting Power and Control by
42
Metromedia Company; Anti-takeover Effect of Two Classes of Stock" and "Certain
Relationships and Related Transactions."
BUILD-OUT OF NETWORKS
We have concentrated on developing and constructing our networks. As we
discuss in more detail below we have either obtained or are currently pursuing
the acquisition of necessary licenses, franchises and rights-of-way to construct
these networks. In constructing our fiber optic networks, we seek to create
strategic alliances with the engineering and construction management firms that
have been engaged to develop routes and easements and manage deployment plans.
Firms with whom we are allied in this regard have deployed local loop network
infrastructure for RBOCs 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.
We intend to finance the build-out of our networks with the net proceeds we
received from the issuance of the Initial Notes, cash on hand, and revenues
generated from the sale of capacity on our networks, including substantial up
front payments for certain long term leases and rights to use agreements.
THE NEW YORK NETWORK. When complete, our intracity network in the New
York/New Jersey metropolitan area (the "NY Network") as currently planned will
be approximately 169,400 fiber miles covering approximately 440 route miles. As
expanded, the entire NY Network will create a SONET capable fiber ring focused
in Manhattan and extending into each of the other four boroughs, as well as east
to Brookhaven, Long Island, north to Stamford, Connecticut, and west to Northern
and Central New Jersey.
THE PHILADELPHIA NETWORK. When complete, our network in the Philadelphia
metropolitan area (the "Philadelphia Network") as currently planned will be
approximately 29,000 fiber miles covering approximately 67 route miles. As
completed, the entire Philadelphia Network will create a SONET capable fiber
ring throughout downtown Philadelphia as well as the surrounding areas of
Bala-Cynwyd, Bryn Mawr, Radnor, Berwyn, Paoli, Malvern and King of Prussia.
THE WASHINGTON, D.C. NETWORK. When complete, our network in the Washington,
D.C. metropolitan area (the "Washington Network") as currently planned will be
approximately 55,000 fiber miles covering approximately 127 route miles. As
completed, the entire Washington Network will create a SONET capable fiber ring
throughout Washington, D.C. and will extend to vital government and business
centers in Arlington, Fairfax, the Dulles airport area, Bethesda, Rockville,
Silver Spring and other locations in northern Virginia and suburban Maryland.
THE CHICAGO NETWORK. When complete, our network in the Chicago metropolitan
area (the "Chicago Network") as currently planned will be approximately 104,000
fiber miles covering approximately 212 route miles. As completed, the entire
Chicago Network will create a SONET capable fiber ring throughout Chicago and
will extend to Oak Brook, Downers Grove, Franklin Park, Arlington Heights, Des
Plaines, Rosemont, Schaumburg and O'Hare Airport.
THE OTHER INTRACITY NETWORKS. Subject to the receipt of the necessary
franchises, licenses and rights-of-way, we plan to construct additional fiber
optic communications networks in San Francisco, Boston, Los Angeles, Seattle,
Dallas, Houston and Atlanta. Although we cannot assure you that we will obtain
the necessary franchises, licenses and rights-of-way in these cities or that
these franchises, licenses and rights-of-way will provide all of the rights
needed to implement our strategy on acceptable terms, we plan to construct our
networks in these cities in a manner similar to our existing networks.
Construction is under way in the San Francisco and the Boston metropolitan
areas. When complete,
43
our network in the San Francisco metropolitan area (the "San Francisco Network")
as currently planned will be approximately 65,000 fiber miles covering
approximately 150 route miles. As completed, the San Francisco Network will
create a SONET capable fiber ring through San Francisco, San Mateo and San Jose.
When complete, our network in the Boston metropolitan area (the "Boston
Network") as currently planned will be approximately 32,000 fiber miles covering
approximately 75 route miles. As completed, the Boston Network will create a
SONET capable fiber ring through Cambridge, Newton, Wellesley, Bedford and
Redford. We are currently in the planning process for the construction of the
other intracity networks. In January 1999, we entered into an agreement to
acquire a provider of dark fiber that is constructing an intracity network in
Dallas. Consummation of this transaction is pending and subject to customary
conditions.
THE INTERCITY NETWORKS. We are in the process of completing the
construction of our intercity network between New York City and Washington, D.C.
When we complete its construction, this intercity network will cover
approximately 180,000 fiber miles over approximately 241 route miles. When
completed, this network will extend from New York to Washington, D.C. and will
pass through Philadelphia, Pennsylvania, Wilmington, Delaware, and Baltimore,
Maryland. We have obtained all of the necessary rights-of-way for this network.
We have also obtained, through exchanges of fiber capacity or "fiber swaps"
with other carriers and the payment of certain other consideration, the right to
use fiber optic strands linking New York and Chicago, Chicago and Seattle,
Seattle and Portland and New York and Boston. As a result of these transactions,
we have obtained approximately 33,000 fiber miles covering approximately 4,474
route miles of broadband fiber optic capacity. We believe we have the ability to
lease broadband capacity between our intracity networks that will enhance our
ability to market our intracity networks to both our carrier and corporate
customers. These intercity network agreements will give us the ability to offer
our customers not only capacity within 11 major metropolitan areas within the
United States but also seamless connectivity from coast to coast.
THE INTERNATIONAL NETWORKS. We have entered into a forty year agreement
with a subsidiary of Racal, a United Kingdom manufacturer of electronics and
other equipment and a provider of telecommunications services, to create ION, a
joint venture in which we hold a 50% equity interest. ION has obtained
transatlantic fiber optic cable rights on Gemini and AC-1 which link our New
York network to London, England. Through ION, we are able to offer our customers
seamless broadband transatlantic communications services between New York and
London. Under the ION joint venture agreement, each party may contribute
additional capital as agreed by the parties. As of September 30, 1998, we had
made capital contributions of approximately $2.8 million to ION. In May 1998,
ION was awarded a 25 year term contract in excess of $25 million from a leading
provider of undersea cable capacity to provide inland capacity services from
such provider's undersea cable landing stations in the U.K. and the U.S.
We have entered into a letter of intent with Carrier 1 and Viatel to develop
jointly the German Network of approximately 64,800 fiber miles covering
approximately 1,350 route miles. The German Network will include 13 of Germany's
largest cities such as Hamburg, Berlin, Munich, Frankfurt and Dusseldorf. We
have also entered into a letter of intent for an exchange of fiber optic
capacity with Viatel. Under this second letter of intent, we would receive the
right to use approximately 3,880 fiber miles covering approximately 970 route
miles on the European Network that will travel between France, Germany, The
Netherlands and the United Kingdom. We anticipate that both the German Network
and the European Network will be high-capacity broadband networks capable of
supporting high-quality voice, video, internet protocol and data traffic and
built using a self-healing SONET architecture. Initially, we would develop the
German Network jointly with Viatel and Carrier 1. Viatel would own just over
half of the development entity. Following completion of the German Network, our
joint venture with Carrier 1 and Viatel would dissolve and we would end up
owning our own conduit of fiber infrastructure in Germany. We cannot assure you
that we will be able to obtain either or both of
44
these networks because we have not entered into final agreements with Carrier 1
and Viatel. Assuming we are able to finalize and execute binding agreements with
Carrier 1 and Viatel, we believe that the German Network will be completed in
stages with the first segment available by the second or third quarter of 1999.
TECHNOLOGY
Our networks consist of fiber optic communications networks which allow for
high speed, high quality transmission of voice, data and video. Fiber optic
systems use laser-generated light to transmit voice, data and video in digital
formats through ultrathin strands of glass. Fiber optic systems are generally
characterized by large circuit capacity, good sound quality, resistance to
external signal interference and direct interface to digital switching equipment
or digital microwave systems.
We plan to install backbone fiber optic cables containing up to 864 fiber
optic strands, which have significantly greater bandwidth than traditional
analog copper cables. 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 (OC192) 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 intracity 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 (dense wave division multiplexing).
Currently, a state-of-the-art network operating system continuously monitors and
maintains quality control of networks on a 24-hour basis, alerts us of any
degradation or loss of fiber capacity and pinpoints the location of such
degradation. This network operating system also enables us to repair or replace
impaired fiber without any loss of service. In addition, the monitoring system
automatically reroutes traffic in the event of a catastrophic break in the
system, enabling us to ensure that our customers obtain continuous service.
FRANCHISE, LICENSE AND RELATED AGREEMENTS
When we decide to build a fiber optic communications network, our corporate
development staff seeks to obtain the necessary rights-of-way and governmental
authorizations. In some jurisdictions, a construction permit is all that is
required. In other jurisdictions, a license agreement, permit or franchise is
also required. 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 nonexclusive. 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. We
currently have all rights-of-way and other authorizations necessary for our
intracity networks in the New York, Philadelphia, and Chicago metropolitan
areas.
NEW YORK. We have entered into a 15-year nonexclusive franchise agreement
(the "NYC Franchise Agreement") with New York City to 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 on, over and under the
inalienable property of New York City in order to provide telecommunications
services which
45
originate and/or terminate in or transit New York City. This agreement expires
in December 2008 and provides that we may submit a written petition to New York
City to renew the term of the franchise at least 12 months (but not more than 18
months) before the expiration of the 15 year term. However, New York City has no
obligation to renew this agreement. The City of New York has granted only seven
franchises to date. However, we are not aware of any limit on the number of
franchises that the City of New York may grant and believe that the City of New
York has begun the process that will result in the awarding of additional
licenses.
This agreement requires us to provide New York City with certain
telecommunications infrastructure and, by November 1999, to complete
construction of our initial network as described in the agreement. We believe
that we are on schedule to complete such construction. On December 21, 1998,
this agreement was amended to extend the period of time to June 30, 2001 to
complete construction of the Initial Backbone to the borough of Staten Island.
Both New York City and we have the right, at any one time after December 20,
2000, upon six months notice, to renegotiate in good faith certain terms of this
agreement, including the annual compensation payable to New York City, based on
changes in technological, regulatory or market conditions which may occur after
the effective date of the agreement. If we cannot reach an agreement upon any
such renegotiation, the agreement will be subject to early termination on a date
which would be one half of the number of days between the date of the notice to
renegotiate and January 1, 2009.
Under the agreement, we are obligated to pay New York City an annual
franchise fee at a rate of 5% of Gross Revenues for each year of the franchise.
All revenues received directly or indirectly by us or any of our affiliates from
or in connection with telecommunications services which originate in, terminate
in, or transit New York City constitute "Gross Revenues" for purposes of the
agreement. Revenues that are generated from transmissions which transit New York
City, but also include transmission through other areas, are to be prorated. We
are obligated to pay a minimum franchise fee to the City of New York of $200,000
per year.
The agreement requires that we obtain the consent of New York City for any
acquisition of 5% or more of the shares of the Company by any person other than
Mr. Stephen A. Garofalo, Metromedia Company, Mr. Howard M. Finkelstein, Mr.
Peter Sahagen or any other 5% stockholder on the date of the consummation of our
Initial Public Offering.
We entered into a nonexclusive conduit occupancy agreement (the "Conduit
Occupancy Agreement") with Bell Atlantic Corporation in May 1993. This agreement
authorizes us to install our cable facilities in Bell Atlantic's conduit system
in New York. We are required to pay Bell Atlantic Corporation certain rates and
charges pursuant to the terms of this agreement. The Conduit Occupancy Agreement
is terminable without cause by either party upon three months' written notice.
Under certain circumstances, a petition may be brought to the Public Services
Commission requesting that it decide a dispute arising over termination prior to
the termination of the Conduit Occupancy Agreement.
On June 16, 1998, we entered into a nonexclusive franchise agreement with
the City of White Plains, New York, that grants us the necessary rights for our
expanded New York/New Jersey network in the White Plains area. Under this
agreement, we are obligated to pay the City of White Plains an annual franchise
fee at the rate of 5% of gross revenues generated from the network within the
White Plains area for fifteen years, renewable once. We do not anticipate that
this fee will result in a material cost to us. Upon termination of this
agreement, ownership of the telecommunications network in the White Plains area
will revert to the City of White Plains at fair market value.
PHILADELPHIA. In the Philadelphia area, we have obtained all necessary
rights-of-way and authorizations for the Philadelphia Network in the
Philadelphia metropolitan area under an ordinance from the City of Philadelphia.
The ordinance allows us, subject to certain conditions to be set forth under a
license agreement being currently negotiated with the City of Philadelphia, to
construct,
46
maintain and operate, replace and remove a telecommunications system in, under
and across the public rights-of-way and city streets and/or to place such
telecommunications system within the existing facilities owned by Bell Atlantic
Corporation, PECO Energy Company, Southeastern Pennsylvania Transportation
Authority, Consolidated Rail Corporation or any other entity holding a grant by
way of ordinances from the City of Philadelphia within the Philadelphia
metropolitan area.
CHICAGO. In Chicago, we have also obtained the required franchises,
licenses, permits and other agreements needed to complete our Chicago Network.
In addition, we have entered into agreements with various entities, which
provide us with infrastructure of approximately 4,300 fiber miles along
approximately 40 route miles on key routes within our Chicago market, in
addition to the necessary easements and rights-of-way for the Chicago Network.
WASHINGTON D.C. In Washington, D.C., we have obtained rights-of-way and
authorizations for the Washington Network in the District of Columbia under a
Certificate of Public Convenience and are in the process of obtaining all
necessary permits for the network in the downtown area. We do not anticipate any
difficulty in obtaining such permits. We are currently negotiating the necessary
franchise agreements with certain municipalities that make up part of the
expanded Washington Network.
We are currently pursuing our efforts to obtain all rights-of-way and
authorizations for the build-out of our networks in Los Angeles, San Francisco,
Boston, Seattle, Dallas, Houston and Atlanta. We have recently signed a conduit
agreement within the Bay Area Rapid Transit right-of-way for a portion of the
network in the San Francisco area, and have obtained the necessary permits for
our intracity network in the downtown San Francisco area. In January 1999, we
entered into an agreement to acquire a provider of dark fiber that is
constructing an intracity network in Dallas. Consummation of this transaction is
pending and subject to customary conditions.
SALES AND MARKETING
Our sales and marketing strategy includes:
- positioning ourselves as the preferred carriers' carrier of broadband
communications infrastructure,
- focusing on high dollar volume corporate and government customers, and
- emphasizing the cost advantages which will allow us to lease our fiber
optic infrastructure at fixed prices which represent potentially
significant savings for our large volume carrier and corporate customers
relative to their present build or buy alternatives.
We also believe that communications carriers and corporate and government
customers will be attracted to our dark fiber product and our unmetered pricing
structure. Dark fiber is installed fiber optic cable which is not otherwise
carrying a signal originated by the service provider (i.e., the 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.
CUSTOMERS
CARRIERS. We expect that communications carriers will account for a
majority of our business. We currently target the major carriers, such as
resellers, data services, RBOCs, IXCs, CLECs, ISPs, wireless providers, and
major information service providers. We believe that we can compete effectively
with other providers due to our rapid deployment, pricing, reliability, customer
service and the capacity of our networks. We traditionally lease dark fiber to
communications carriers, providing them with point-to-point and IXC point of
presence ("POP") to end user non-switched access, which connects their customers
to our network. This enables them to eliminate or reduce costly access charges.
47
We have entered into contracts with approximately 19 communications
carriers, including providers of wireless, cellular, internet, interexchange and
competitive local exchange services, as of January 1, 1999. In addition, we are
currently in the process of negotiating agreements with certain other major
communications carriers and will continue to target such carriers in the future.
NEXTLINK AGREEMENTS. In June 1997 and February 1998, we entered into two
major agreements with NextLink New York, L.L.C., a CLEC, or its affiliates
(collectively, "NextLink") which provide NextLink with certain exclusive
long-term rights to certain fiber strands and innerducts on specified intracity
routes.
Pursuant to the agreements, we received $11.0 million in scheduled up-front
payments and will receive an additional $92.0 million in additional payments
from NextLink. Of the $92.0 million, $11.75 million was paid up-front and $80.25
million has been placed in escrow and will be released to us periodically as
delivery of the fibers and innerducts are completed during 1998 and 1999 in
accordance with the agreement. We have also entered into a third agreement with
NextLink that provides for the sharing of certain construction costs in
connection with the build-out of our Chicago network.
WINSTAR AGREEMENTS. We are a party to agreements with WinStar
Communications, Inc., a national CLEC ("WinStar"), for long term leases of
high-capacity fiber optic infrastructure on our intracity networks in the New
York, Washington, D.C., Philadelphia, Chicago and San Francisco areas and on our
intercity network from New York to Washington, D.C. Pursuant to the agreements,
we will receive in excess of $40.0 million in payments from WinStar.
CORPORATE/GOVERNMENT CUSTOMERS. We expect that our corporate and government
customers, including members of the international financial and commercial
community, will primarily be entities with multiple locations and high volume
communications requirements. We expect to provide these customers with dedicated
point-to-point communications that have the capacity to carry a wide range of
communications services (e.g., high speed intranet access). We offer our
high-bandwidth services to such customers at prices that are lower than those
currently offered by regulated CLECs and ILECs. However, our customers currently
provide their own transmission or switching equipment.
We believe that we can effectively compete for corporate and government
customers based upon price, nonmetered usage, reliability and solutions tailored
to the customers' needs. In addition, our NY Network utilizes, and the other
intracity networks will permit use of, SONET technology, which offers
reliability that we believe is generally superior to that provided by the ILECs.
We currently have dark fiber infrastructure leasing arrangements with a variety
of financial services firms, including investment and commercial banks,
securities and accounting firms and a financial exchange, although we have not
yet completed installation of the dark fiber to be leased pursuant to certain of
the contracts.
48
COMPETITION
Fiber optic systems are currently under construction both locally and
nationally. In New York City, for example, seven 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 New York City, Philadelphia, Washington, D.C., and the other cities where
we plan to deploy fiber optic communications networks, we face significant
competition from the ILECs, which currently dominate their local communications
markets. We also face competition from CLECs and other potential competitors in
these markets and will face competition in the cities in which we plan to build
our networks. Many of our competitors have financial, management and other
resources substantially greater than ours, as well as other competitive
advantages over us, including established reputations in the communications
market.
Various communications carriers already own fiber optic cables as part of
their communications networks. Accordingly, each of these carriers could, and
some do, compete directly with us in the market for leasing fiber capacity. In
addition, although CLECs generally provide a wider array of services to their
customers than we presently provide to our customers, CLECs nevertheless
represent an alternative means by which our potential customers could obtain
direct access to an IXC POP or other site of the customer's choosing. Thus,
CLECs could compete with us.
Some communications carriers and local cable companies have extensive
networks in place that could be upgraded to fiber optic cable, as well as
numerous personnel and substantial resources to undertake the requisite
construction to so equip their networks. To the extent that communications
carriers and local cable companies decide to equip their networks with fiber
optic cable, they are potential direct competitors provided that these
competitors are willing to offer this capacity to all of their customers.
We believe that as competition in the local exchange market develops, a
fundamental division between the needs of corporate, governmental and
institutional end users and residential end users will drive the creation of
differentiated communications services and service providers. We believe that
the CLECs, IXCs, ISPs, wireless carriers and corporate and government customers
on which we focus will have distinct requirements, including maximum
reliability, consistent high quality transmissions, capacity for highspeed data
transmissions, diverse routing and responsive customer service. We believe that
we will be able to satisfy the needs of such customers.
REGULATION
As explained in the section of this Prospectus entitled "Business--The
Company," we plan to offer telecommunications infrastructure to customers in two
forms. First, customers may lease fiber optic capacity from us and attach their
own transmission equipment (we call this "dark fiber"). Second, customers will
have the option to lease smaller amounts of broadband capacity (less than a full
strand of fiber) of facilities where we operate our own transmission equipment
(we call this "transmission services"). These two offerings are subject to
varying degrees of regulation in each of the jurisdictions in which we operate.
In the United States, some aspects of our services are regulated by the FCC and
various State regulatory bodies. In other countries where we operate we may also
be subject to regulations by the agencies having jurisdiction over the provision
of telecommunications services.
49
FEDERAL
In the United States, federal telecommunications law directly shapes the
market in which we compete. Telecommunications facilities and services are
subject to varying degrees of regulation by the FCC pursuant to the provisions
of the Communications Act of 1934 (the "Communications Act"), as amended by the
1996 Telecom Act and the FCC regulations issued under these laws.
Federal telecommunications law imposes special legal requirements on "common
carriers" who engage in "interstate or foreign communication by wire or radio,"
and on telecommunications carriers." Telecommunications carriers and common
carriers are essentially the same, and are companies that provide communications
services "directly to the public" or to all potential users on an indiscriminate
basis subject to standardized rates, terms, and conditions.
DARK FIBER. We believe that we are not a "telecommunications carrier" or
"common carrier" with respect to our leasing of dark fiber, and therefore that
these leases are not subject to special legal requirements applicable to such
carriers. First, we do not believe that the leasing of dark fiber is a
"telecommunications service" that is subject to FCC regulation. The FCC
generally regulates "communication by wire or radio" or the "transmission" of
"information of the users' choosing," neither of which describes the leasing of
dark fiber. Second, we do not intend to offer dark fiber facilities as a common
carrier, I.E., to all potential users on an indiscriminate basis. Instead, we
intend to enter into individualized negotiations on a selective basis with
prospective lessees of our dark fiber to determine whether and on what terms to
serve each potential lessee. Our dark fiber offerings should therefore not be
subject to the common carrier jurisdiction of the FCC or to the common carrier
provisions of the Communications Act.
If our offering of dark fiber facilities were deemed to constitute
"telecommunications," then our revenues from such leases to end users (but not
to other telecommunication carriers), whether or not provided on a common
carrier basis, would become subject to assessment for the FCC's Universal
Service Fund, a fund that was established by the FCC pursuant to the 1996
Telecom Act to assist in ensuring the universal availability of basic
telecommunications services at affordable prices. Such assessments could create
a liability equal to a percentage of these gross revenues. We anticipate that
the rate of assessment would be approximately 4% of gross interstate and 1% of
gross intrastate end-user revenues for the year 1999, and may be higher in
subsequent years. We may also be liable for assessments by state commissions for
state universal service programs.
TRANSMISSION SERVICES. With respect to our offering of telecommunications
transmission services, we will likely offer some of these services as a common
carrier (I.E., we will offer such transmission services to all potential users
indiscriminately) and therefore will be subject to the regulatory requirements
applicable to these 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 and to other FCC fees and assessments. Since
the revenues of our competitors will be subject to comparable assessments, this
should not reduce our competitiveness.
Also, having some of our services regulated as a "telecommunications
carrier" will give us certain legal benefits. In particular, we will be
entitled, like other CLECs, to insist upon access to the existing
telecommunications infrastructure by interconnecting our fiber-optic networks
with ILEC central offices
50
and other facilities. Under the 1996 Telecom Act, ILECs must, among other
things: (i) interconnect 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 allocates reasonable amounts of space to
carriers on a first-come first-served basis. If space limitations or practical
or technical reasons prohibit physical collocation, an ILEC must offer "virtual
collocation," by which the other carrier may specify ILEC equipment to be
dedicated to its use and electronically monitor and control communications
terminating in such equipment. We intend, in some instances, to collocate
portions of our network on the premises of certain ILECs. Our ability to do this
on a cost-effective basis will depend on the rates, terms and conditions
established for collocation, which will be established by state regulators in
arbitration proceedings and therefore may vary from one state to the next.
The FCC has responsibility under the 1996 Telecom Act's interconnection
provisions to determine what elements of an ILEC's network must be provided to
competitors on an unbundled basis. The FCC has decided not to declare dark fiber
an unbundled network element under these provisions. This decision is currently
subject to petitions for reconsideration before the FCC and is being challenged
in Supreme Court. In addition, a federal district court in North Carolina has
interpreted the 1996 Telecom Act to include dark fiber as a network element.
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. To date, state commissions in several states (including New York)
have either refused to require the ILECs to offer dark fiber to competitors or
have stated that the issue would be addressed at a later time. On the other
hand, other state commissions have found dark fiber to be a network element and
required the ILECs to offer it on an unbundled basis to CLECs. Decisions by
either the FCC or additional states to require unbundling of ILEC dark fiber or
geographic extension of the ruling of the federal district court in North
Carolina could decrease the demand for our dark fiber, and thereby have an
adverse effect on the results of our operations.
ILECs, CLECs and IXCs are subject to additional federal telecommunications
laws. These laws may affect our business by virtue of the interrelationships
that exist among us and many of these regulated telecommunications entities. For
example, the 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 has
also asked for public comments on proposed rules that would grant 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.
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. This provision of the 1996 Telecom Act should enable
us and our customers to provide telecommunications services in states that
previously prohibited competitive entry.
51
However, states retain jurisdiction under the 1996 Telecom Act to adopt
regulations necessary to preserve universal service, protect public safety and
welfare, ensure the continued quality of communications services and safeguard
the rights of consumers.
States continue to determine the rates that ILECs can charge for most of
their services. They are also responsible for mediating and arbitrating ILEC
interconnection arrangements with other carriers if voluntary agreements are not
reached. Accordingly, state involvement in local telecommunications services is
substantial.
Each state (and the District of Columbia, which is treated as a state for
the purpose of regulation of telecommunications services) has its own statutory
scheme for regulating providers of certain telecommunications-related services
as "common carriers," as "public utilities," or under similar rubrics. As with
the federal regulatory scheme, we believe that the offering of dark fiber
facilities is not subject to this type of regulation in most jurisdictions in
which we currently have or plan to construct facilities. Our offering of
transmission services (as distinct from dark fiber capacity), however, will
likely be subject to regulation in each of these jurisdictions to the extent
that these services are offered for intrastate use. Even though many of our
facilities will be physically intrastate, we anticipate that most customers will
use our facilities and services for the purpose of originating and/or
terminating interstate and foreign communications. Under current FCC policies,
any dedicated transmission service or facility that is used more than 10% of the
time for the purpose of interstate or foreign communication is subject to FCC
jurisdiction to the exclusion of any state regulation. Therefore, only a small
portion of our business should be subject to state regulation.
State regulation of the telecommunications industry is changing rapidly, and
the regulatory environment varies substantially from state to state. Our
subsidiaries are currently authorized to provide intrastate telecommunications
services in California, Connecticut, Delaware, District of Columbia, Illinois,
Maryland, Massachusetts, New Jersey, New York, Pennsylvania, Rhode Island,
Virginia, and Washington, and have an application pending in Oregon. At present,
we do not anticipate that the regulatory requirements to which we will be
subject in the states in which we currently intend to operate will have any
material adverse effect on our operations. These regulations may require, among
other things, that we obtain certification to operate, and that we provide
notification of, or obtain authorization for, certain corporate transactions. We
will incur certain costs to comply with these and other regulatory requirements
such as the filing of tariffs, submission of periodic financial and operational
reports to regulators, and payment of regulatory fees and assessments, including
contributions to state universal service programs. In some jurisdictions, our
pricing flexibility for intrastate services may be limited because of
regulation, although our direct competitors will be subject to similar
restrictions. However, we make no assurances that future regulatory, judicial,
or legislative action will not materially adversely affect us.
In response to the 1996 Telecom Act, Bell Atlantic Corporation "unbundled"
its local loop in October 1996. As a result, carriers such as us will be
permitted to access Bell Atlantic's existing wiring infrastructure in buildings
on an economical basis, which we believe enhances the strategic value of the NY
Network to potential customers. By virtue of the unbundling, Bell Atlantic
Corporation must make a significant portion of its in-house apartment wiring
available for $2 per month per apartment. We expect that the availability of an
unbundled local loop will enable new carriers to enter the residential voice
market on a competitive basis with Bell Atlantic Corporation, and these carriers
will be potential customers for our services.
LOCAL
In addition to federal and state laws, local governments exercise legal
authority that may impact our business. For example, local governments, such as
the City of New York, typically retain the ability to license public
rights-of-way, subject to the limitation that local governments may not prohibit
persons
52
from providing telecommunications services. Local authorities affect the timing
and costs associated with our use of public rights-of-way. These regulations may
have an adverse effect on our business.
FEDERAL REGULATION OF INTERNATIONAL SERVICE
Various regulatory requirements and limitations also will influence our
business as it attempts to enter international markets. Although we have not
fully determined our international business strategy, we have entered into a
50/50 joint venture, ION, with a subsidiary of Racal that contemplates jointly
acquiring and selling international, facilities-based telecommunications
capacity between the U.S. and the United Kingdom and possibly between the U.S.
and other markets. ION is a U.S. international common carrier subject to U.S.
regulation under Title II of the Communications Act, and, depending on our
specific business plans, it is possible that we will also become a U.S.
international common carrier subject to the same regulations. Under current FCC
rules, international carriers that do not exercise market power and that are not
affiliated with dominant foreign carriers (carriers possessing market power in
their local markets) are subject to relatively relaxed U.S. regulation as
non-dominant international carriers. As such a non-dominant common carrier, ION
is and we would be subject to, among other policies, the common carrier
obligations of nondiscrimination. In addition, FCC rules prohibit U.S. carriers
from bargaining for special concessions from certain foreign partners. ION is
and we would also be required, under Sections 214 and 203 of the Communications
Act to obtain authorization and file an international service tariff containing
rates, terms and conditions prior to initiating service. As a non-dominant
carrier, ION has sought and we would be eligible to seek "global" authorization
under Section 214 to operate as facilities-based and/or resale carriers.
International carriers are also subject to certain annual fees and filing
requirements, such as the requirement to file contracts with other carriers,
including foreign carrier agreements, and reports setting forth international
circuit, traffic and revenue data. Failure to obtain an appropriate U.S. license
for international service or the revocation of a license could materially
adversely affect our future operations.
To the extent that we and ION operate as international common carriers, we
and ION may also be required to comply with the FCC's ISP 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 ISP is designed to eliminate a foreign carrier's opportunity to
discriminate among different U.S. carriers by bargaining for accounting rates or
other terms that benefit the foreign carrier but is inconsistent with the U.S.
public interest. The ISP generally provides that U.S. carriers may only enter
into foreign carrier agreements for the exchange of switched traffic that
contain the same accounting rate and settlement rate (typically one-half of the
accounting rate) offered to all other U.S. carriers. The ISP also requires U.S.
carriers to adhere to the principle of proportionate return so that competing
U.S. carriers have comparable opportunities to receive the return traffic that
reduces the marginal cost of providing international service.
If we provide public switched services over international private lines, we
would be subject to FCC rules governing such activity rather than to the ISP.
These rules limit us from providing switched services over international private
lines between the United States and certain countries and impose certain
conditions on carriers engaging in such activity.
The FCC continues to refine its international service rules to promote
competition, reflect and encourage liberalization in foreign countries, and
reduce accounting rates toward cost. Among other things, the FCC has recognized
the advent of competition in the U.K. market by designating the U.K. as a
country that offers U.S. carriers effective competitive opportunities. The FCC
has also amended its rules to reflect the U.S. participation in the WTO
Agreement on Basic Telecommunications Services in which 72 countries have agreed
to eliminate barriers to competition in their markets for basic
telecommunications services. For example, the FCC has decided to permit U.S.
carriers to enter into "flexible" termination arrangements with carriers in WTO
countries, unless such arrangements would
53
not promote competition. By taking these actions, the FCC has relaxed or
eliminated regulatory limitations on many U.S. carrier services between the U.S.
and the U.K. (as well as between the U.S. and other members of the WTO). The FCC
has also proposed to eliminate the ISP contract requirements for agreements with
certain carriers in certain foreign countries. In addition, the FCC has
established reduced "benchmark" rates for the amounts U.S. carriers will be
allowed to pay foreign carriers for terminating U.S.-originated traffic. For
example, effective as of January 1, 1999, U.S. carriers may ask the FCC to
require that U.S. carriers pay foreign carriers in "high income" countries such
as the United Kingdom no more than $.15 per minute to terminate such calls.
Different rates would apply at different deadlines in different countries
depending on the countries' income level.
Regulation of the international telecommunications industry is changing
rapidly. We are unable to predict how the FCC will resolve the various pending
international policy issues and the effect of such resolutions on us.
REGULATION OF INTERNATIONAL OPERATIONS
Our international services would also be subject to regulation in other
countries where we operate. Such regulation, as well as policies and regulations
on the European Union level, may impose separate licensing, service and other
conditions on our international service operations, and these requirements may
have a material adverse impact on the Company. The following discussion is
intended to provide a general outline of certain regulations and current
regulatory posture in certain foreign jurisdictions in which we currently
operate or intend to operate, and is not intended as a comprehensive discussion
of such regulations or regulatory posture. Local laws and regulations differ
significantly among these jurisdictions, and, within such jurisdictions, the
interpretation and enforcement of such laws and regulations can be
unpredictable.
THE EUROPEAN UNION
The European Union (the "EU") was established by the Treaty of Rome and
subsequent treaties. EU member states are required to implement directives
issued by the European Commission (the "EC") and the European Council by passing
national legislation. The EC and European Council have issued a number of key
directives establishing basic principles for the liberalization of the EU
telecommunications market. This basic framework has been advanced by a series of
harmonization directives, which include the so-called Open Network Provision
directives and the Licensing Directive of April 1997 and the Interconnection
Directive of June 1997, which address the procedures for granting license
authorizations and conditions applicable to such licenses and the
interconnection of networks and the interoperability of services as well as the
achievement of universal service. The Licensing Directive sets out framework
rules for the procedures associated with the granting of national authorizations
for the provision of telecommunications services and for the establishment or
operation of any infrastructure for the provision of telecommunications
services. It distinguishes between "general authorizations," which should
normally be easier to obtain since they do not require an explicit decision by
the national regulatory authority, and "individual licenses." EU member states
may impose individual license requirements for the establishment and operation
of public telecommunications networks and for the provision of voice telephony,
among other things. Consequently, ION's operations in the U.K., our operation
with respect to the German Network and European Network may require that ION or
the Company, respectively, be subject to an individual licensing system rather
than to a general authorization in the majority of EU member states. In some
countries where we operate, we may also be required to contribute to a fund for
the provision of universal service. The United Kingdom and each other EU member
state in which ION currently conducts or we intend to conduct our business has a
different regulatory regime and such differences are expected to continue. The
requirement that ION or we obtain necessary approvals varies considerably from
country to country.
54
UNITED KINGDOM
The Telecommunications Act of 1984 (the "U.K. Act") provides a licensing and
regulatory framework for telecommunications activities in the United Kingdom.
The Secretary of State for Trade and Industry at the Department of Trade and
Industry (the "Secretary of Trade") is responsible for granting licenses under
the U.K. Act and for overseeing telecommunications policy, while the Director
General of Telecommunications (the "Director General") and his office (the
Office of Telecommunications ("OFTEL")) are responsible, among other things, for
enforcing the terms of such licenses. Operators wishing to use their own
facilities to provide international services are currently required to obtain an
international facilities license ("IFL"). An IFL licenses the running of
telecommunication systems within the U.K. and permits the licensee to connect
U.K. systems to overseas systems, and to offer international services subject to
certain restrictions. ION was awarded an IFL on 9 December 1998. The U.K.
Government is currently consulting on proposals to amend licenses to create one
license authorizing both international and domestic services. The changes are
expected to come into force in 1999 and may result in ION being licensed to
provide both international and domestic services. We have not applied for an IFL
or any other authorization for the U.K. portion of the European Network. OFTEL
is consulting on which operators will have the right and obligation to
interconnect with the networks of other operators under the regime established
by the Interconnection Directive. OFTEL is expected to announce its findings
shortly. Currently all operators with IFL licenses have the right and obligation
to interconnect, and this position is not expected to change. Therefore ION has
the right to request and receive interconnection from all other operators deemed
to be entitled to such rights and obligations (as notified by the Director
General) and also the obligation to offer to enter into an agreement to
interconnect at the request of any such operator. The U.K. Government is
currently consulting on changing the obligation to offer to enter into an
agreement to interconnect to an obligation to negotiate with a view to
concluding an interconnection agreement in response to the concern raised by
operators that the current obligation exceeds the requirements of the
Interconnection Directive. The U.K. Government passed the Competition Act 1998
on 9 November 1998 which introduces concurrent powers to the industry specific
regulators and the Director General of Fair Trading for the enforcement of
prohibitions against anti-competitive behavior modeled on Articles 85 and 86 of
the Treaty of Rome. The Act introduces into U.K. legislation prohibitions on the
abuse of a dominant position and anti-competitive agreements, and provides for
third party rights of action, stronger investigative powers, interim measures
and effective enforcement powers. The new rules are expected to come into force
on 1 March 2000. The Act gives the Director General power to exercise concurrent
powers with the Director General of Fair Trading in relation to "commercial
activities connected with telecommunications". The Act will enable third parties
to seek court orders directly against telecommunications operators who are in
breach of the prohibitions contained in the Act and seek damages rather than
have to wait for the Director General to issue an enforcement order. Depending
on how these provisions of the Act are implemented, it may give the Company (and
its competitors) greater ability to challenge anti-competitive behavior in the
U.K. telecommunications market.
GERMANY
The German Telecommunications Act of July 25, 1996 (the "German
Telecommunications Act") liberalized all telecommunications activities. Under
the German Telecommunications Act, voice telephony was liberalized as of January
1, 1998. The German Telecommunications Act has been complemented by several
Ordinances. The most significant Ordinances concern license fees, rate
regulation, interconnection, universal service, frequencies and customer
protection. Under the German regulatory scheme, licenses can be granted within
four license classes. A license is required for operation of transmission lines
that extend beyond the limits of a property and that are used to provide
telecommunications services for the general public. The licenses required for
the operation of transmission lines are divided into 3 infrastructure license
classes: mobile telecommunications (license
55
class 1); satellite (license class 2); and telecommunications services for the
general public (license class 3). Beside the infrastructure licenses, an
additional license is required for the provision of voice telephony services on
the basis of self-operated telecommunications networks (license class 4). A
class 4 license does not include the right to operate transmission lines.
According to the License Fees Ordinance, a nationwide class 4 license costs a
onetime fee of DM 3,000,000. The costs for a territorial class 3 license will be
determined by the Regulierungsbehorde fur Telekommunikation und Post (the
"RegTP") and is dependent on the population and the geographical area covered by
the territorial class 3 license. A nationwide territorial class 3 license costs
DM 10,600,000. Licensees that operate transmission lines crossing the boundary
of a property have the right to install transmission lines on, in and above
public roads, squares, bridges and public waterways without payment; however,
when installing transmission lines a planning agreement must be obtained from
the relevant authorities. A company which operates a public telecommunications
network has the right to receive favorable interconnection rates from Deutsche
Telekom, as a dominant carrier. If the company does not agree with the offered
rates or Deutsche Telekom refuses to interconnect for whatever reason, the
company can refer the case to the RegTP which shall decide upon the request for
interconnection within a period of six weeks; if the RegTP decides to extend
this deadline, it must at the latest decide within ten weeks of the request.
Whether, and under which conditions, carrier to carrier operators will receive
favorable interconnection rates or less favorable "special network access rates"
from Deutsche Telekom depends largely on whether they operate a "public
telecommunications network." No definition of "public telecommunications
network" has yet been provided. A public hearing on the regulatory treatment of
carrier networks--defined in the German Telecommunications Act as a
telecommunications network to which customers are not directly connected and
which interconnects access networks--and public telecommunications networks in
respect of interconnection has recently been conducted. The RegTP is expected to
publish the outcome of the hearing which shall include the RegTP's understanding
of the constituting elements of a public telecommunications network shortly. In
December 1998, the RegTP presented its preliminary views on the results of the
hearing to an audience of interested parties in Bonn. According to this
presentation, a carrier network constitutes a "public telecommunications
network" if it consists of at least one switch and more than two connected
transmission lines and is used to provide telecommunications services to the
public, irrespective of whether or not customers are directly or (in the case of
a carrier network) indirectly connected to such network. The RegTP indicated
that it did not intend to establish a minimum number of points of
interconnection that are required for interconnections with Deutsche Telekom.
However, the RegTP acknowledged that carrier networks with few points of
interconnection may cause atypical traffic patterns on Deutsche Telekom's
network which may create additional costs to Deutsche Telekom. The RegTP
indicated that Deutsche Telekom will be allowed to recover its additional costs
incurred due to atypical traffic patterns from the operations responsible for
such traffic patterns if and to the extent that Deutsche Telekom can prove such
costs. It is expected that the RegTP's position will become clearer once the
RegTP has published its views in writing in the official journal. In view of
this outcome of the public hearing, Deutsche Telekom has terminated a number of
interconnection agreements in December 1998 and has announced that it will offer
new standard interconnection agreements. In the last few months of 1998 and in
view of the public hearing, Deutsche Telekom was only willing to enter into
interim interconnection agreements and only if the companies requesting
interconnection have direct customer access, have a minimum of eight points of
interconnection in the startup phase or commit to establish this number of
points of interconnection as ports for interconnection become available and
upgrade the network to 23 points of interconnection in the initial phase. The
same number of points of interconnection was requested by Deutsche Telekom in a
special network offer for carrier networks. The rates offered by Deutsche
Telekom to carrier network operators were substantially higher than
interconnection rates. In January 1999, Deutsche Telekom presented new drafts
for interconnection agreements which significantly limit the ability of
interconnection partners of Deutsche Telekom to obtain Deutsche Telekom's
services in connection with an interconnection at favorable interconnection
rates. Deutsche Telekom, for example, sets forth requirements to establish
56
additional points of interconnection if traffic at existing points of
interconnection increases beyond certain thresholds. These drafts are currently
subject to intense discussions between Deutsche Telekom, other
telecommunications companies and representatives of the RegTP. The rates of
Deutsche Telekom's services in conjunction with interconnection and special
network access are subject to regulatory approval; such approval is typically
granted for a limited period of time. Licensed operators are under an obligation
to present their standard terms and conditions to the RegTP. The RegTP may,
based upon certain criteria, decide not to accept these terms and conditions. We
may become subject to universal service financing obligations. Currently, it is
unlikely that the universal service financing system will be implemented in
Germany in the foreseeable future. We have not made any regulatory filings with
respect to the German Network or the German portion of the European Network.
EMPLOYEES
As of January 1, 1999, we employed 126 people. Our employees are not
represented by any labor union. We consider our relationship with employees to
be good.
PROPERTIES
Our principal properties currently are the NY Network and its component
assets. We own substantially all of the communications equipment required for
our business. Our installed fiber optic cable is laid under the various
rights-of-way held by us. Please refer to the section of this Prospectus
entitled "--Build-out of Networks--Rights-of-Way." Our other fixed assets are
located at various leased locations in the geographic areas that we serve. Our
executive and administrative offices are located at our principal office at One
North Lexington Avenue, White Plains, New York. We lease this space (currently
approximately 21,000 square feet) under an agreement that expires in March 2003.
Our sales offices are located at 685 Third Avenue, New York, New York. We lease
this space (approximately 9,670 square feet) under an agreement that expires in
September 2003. We lease additional space (currently 8,710 square feet) at 60
Hudson Street, New York, New York, from Hudson Telegraph Associates under an
agreement that expires in March 2010. We also lease 2,665 square feet of sales
space in Malvern, Pennsylvania, and 3,438 square feet of sales space in McLean,
Virginia.
LEGAL PROCEEDINGS
On or about October 20, 1997, VCNY 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
(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. In its complaint, as amended, VCNY alleges four causes of
action in connection with its sale of 900,000 shares (not adjusted for
subsequent stock splits) of Class A Common Stock to Peter Sahagen and the Kramer
Defendants on January 13, 1997. The four causes of action include: (i) violation
of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated under such Act; (ii) fraud and fraudulent concealment; (iii) breach
of fiduciary duty; and (iv) negligent misrepresentation and omission. On the
first and second causes of action, VCNY is seeking, among other things,
rescission of the VCNY Sale, or alternatively, damages in an amount which we
cannot currently ascertain but believe to be in excess of $36 million, together
with interest. On the third and fourth causes of action, VCNY is seeking damages
in an amount which we cannot currently ascertain but believe to be in excess of
$36 million, together with interest. VCNY is also seeking punitive damages in
the amount of $50 million, reasonable legal fees and the cost of this action.
All the defendants, including the Company and Stephen A. Garofalo, have moved to
dismiss VCNY's amended complaint.
57
On or about June 12, 1998, Claudio E. Contardi commenced an action against
Peter Sahagen, Sahagen Consulting Group of Florida and the Company in the United
States District Court for the Southern District of New York (No. 98 CIV 4140).
Mr. Contardi alleges a cause of action for, among other things, breach of a
finder's fee agreement entered into between Mr. Sahagen and Mr. Contardi on or
about November 14, 1996 and breach of an implied covenant of good faith and fair
dealing contained in the finder's fee agreement. Mr. Contardi is seeking, among
other things, a number of shares of the Company which we cannot currently
ascertain but believe to be approximately 225,000 shares (calculated as of the
date on which the complaint was filed) or damages in an amount which we cannot
currently ascertain but believe to be approximately $4.9 million (calculated as
of the date on which the complaint was filed) and all costs and expenses
incurred by him in this action. We have filed an answer to the complaint and
have raised affirmative defenses.
We intend to vigorously defend both these actions because we believe that we
acted appropriately in connection with the matters at issue in these two cases.
However, we cannot assure you that we will not determine that the advantages of
entering into a settlement outweigh the risk and expense of protracted
litigation or that ultimately we will be successful in defending against these
allegations. If we are unsuccessful in defending against these allegations, an
award of the magnitude being sought in the VCNY Litigation would have a material
adverse effect on our financial condition or results of operations.
In addition, we are subject to various claims and proceedings in the
ordinary course of business. Based on information currently available, we
believe that none of such current claims, or proceedings, individually or in the
aggregate, including the VCNY Litigation and the Contardi litigation, will have
a material adverse effect on our financial condition or results of operations,
although we can make no assurances in this regard.
58
MANAGEMENT
The directors and executive officers of the Company and their ages as of
January 1, 1999 are as follows:
NAME AGE POSITION HELD
- ----------------------------------------------------- --- -----------------------------------------------------
Stephen A. Garofalo.................................. 47 Chairman of the Board and Chief Executive Officer
Howard M. Finkelstein................................ 45 President, Chief Operating Officer and Director
Vincent A. Galluccio................................. 52 Senior Vice President and Director
Gerard Benedetto..................................... 41 Vice President--Chief Financial Officer
Charlotte G. Denenberg............................... 51 Vice President--Chief Technology Officer
Nicholas M. Tanzi.................................... 40 Vice President--Sales
Silvia Kessel........................................ 48 Executive Vice President and Director
John W. Kluge........................................ 84 Director
David Rockefeller.................................... 83 Director
Stuart Subotnick..................................... 56 Director
Arnold L. Wadler..................................... 55 Executive Vice President, General Counsel, Secretary
and Director
Leonard White........................................ 59 Director
STEPHEN A. GAROFALO founded the Company in April 1993, and has been serving
as Chairman of the Board of Directors since the Company's inception. Mr.
Garofalo served as Chief Executive Officer since October 1996, as President from
1993 to 1996 and as Secretary from 1993 to 1997. From 1979 to 1993 Mr. Garofalo
served as president and chief executive officer of F. Garofalo Electric Co.,
Inc., an electrical contractor.
HOWARD M. FINKELSTEIN has been President, Chief Operating Officer and a
Director of the Company since April 1997. Prior to joining the Company, Mr.
Finkelstein was employed by various affiliates of Metromedia Company for 16
years. His most recent position was as Executive Vice President and Chief
Operating Officer of Metromedia International Telecommunications, Inc. From 1984
to 1993, Mr. Finkelstein served as President of Metromedia Communications
Corporation, a national long distance telecommunications carrier. In addition,
Mr. Finkelstein served as Executive Vice President and Chief Operating Officer
of Metromedia Restaurant Group from 1993 to 1995. Mr. Finkelstein is a Director
of Multimedia Medical Systems, Incorporated, a privately held company.
VINCENT A. GALLUCCIO has been a Director of the Company since February 1997
and has served as President of ION since February 1998 and as a Senior Vice
President of the Company since December 1995. From January 1992 to October 1994,
Mr. Galluccio was employed by British Telecommunications plc, as a global sales
manager for network outsourcing operations. Prior to joining British
Telecommunications plc, Mr. Galluccio spent 25 years with International Business
Machines Corporation in various sales, marketing and business development
positions and was involved in both domestic and world trade assignments.
GERARD BENEDETTO has been Vice President--Chief Financial Officer since
February 1998. From July 1995 to January 1998, he was Vice President--Chief
Accounting Officer at Metromedia International Telecommunications, Inc. From
October 1993 to July 1995 he was Vice President--Chief Financial Officer at
Metromedia Restaurant Group. From February 1985 to October 1993, he was Vice
President--Chief Financial Officer at Metromedia Communications Corporation.
CHARLOTTE G. DENENBERG has served as Vice President--Chief Technology
Officer since December 1998. Prior to joining the Company, Ms. Denenberg was
employed by Southern New England Telecommunications Corporation ("SNET"), since
1987 in a variety of positions. Ms. Denenberg held
59
the position of Chief Technology Officer for SNET from 1994 to November 1998.
Before SNET, Ms. Denenberg was employed by ITT Corporation as
Director--Technology Evaluation.
NICHOLAS M. TANZI has been Vice President--Sales since August 1997. From
March 1995 to July 1997, he served as Vice President, Enterprise Networks
Division at Fujitsu Business Communications Systems. From April 1993 to February
1995, Mr. Tanzi was Director of Sales, Eastern Region at Asante Technologies
Inc. Mr. Tanzi was employed in various capacities from November 1979 through
October 1993 at Digital Equipment Corporation.
SILVIA KESSEL has served as a Director of the Company since July 1997 and as
Executive Vice President since October 1997. Ms. Kessel has served as Chief
Financial Officer and Treasurer of Metromedia International Group, Inc. ("MMG")
since 1995 and Executive Vice President of MMG since 1996. In addition, Ms.
Kessel served as Executive Vice President of Orion Pictures Corporation
("Orion"), a motion picture production and distribution company, from January
1993 through July 1997, Senior Vice President of Metromedia Company since 1994
and President of Kluge & Company since January 1994. Prior to that time, Ms.
Kessel served as Senior Vice President and a Director of Orion from June 1991 to
November 1992 and Managing Director of Kluge & Company from April 1990 to
January 1994. Ms. Kessel is Executive Vice President and a member of the Board
of Directors of Big City Radio, Inc. ("YFM"), an American Stock Exchange listed
company that operates radio stations in New York, Los Angeles and Chicago, and
of MMG.
JOHN W. KLUGE has been a Director of the Company since July 1997. Mr. Kluge
has been the President and Chairman of Metromedia Company and its
predecessor-in-interest, Metromedia, Inc., for over five years. Mr. Kluge has
been the Chairman of the Board of MMG since 1995. In addition, Mr. Kluge was
Chairman of the Board of Directors and a Director of Orion from 1992 until July
1997. He also serves as a Director of Conair Corporation and Occidental
Petroleum Corporation.
DAVID ROCKEFELLER has served as a Director of the Company since October
1997. He currently serves as Chairman of The Chase Manhattan Bank's
International Advisory Committee, as Chairman of Rockefeller Center Properties,
Inc. (since 1995) and as a Director of Rockefeller & Co., Inc. (since 1994), a
privately owned investment management firm. From 1961 to 1981, Mr. Rockefeller
served as Chairman of The Chase Manhattan Corporation and The Chase Manhattan
Bank, N.A. From 1981 to 1995, he served as Chairman of Rockefeller Group, Inc.
STUART SUBOTNICK has been a Director of the Company since July 1997. Mr.
Subotnick has been the Vice Chairman of the Board of Directors of MMG since 1995
and President and Chief Executive Officer of MMG since December 1996. In
addition, Mr. Subotnick served as Vice Chairman of the Board of Directors of
Orion from 1992 until July 1997. Mr. Subotnick has served as Executive Vice
President of Metromedia Company and its predecessor-in-interest, Metromedia,
Inc., for over five years. Mr. Subotnick has served as Vice Chairman of MMG
since November 1995 and President and Chief Executive Officer of MMG since
November 1996. Mr. Subotnick is also a Director of Carnival Cruise Lines, Inc.
and Chairman of the Board of Directors of YFM.
ARNOLD L. WADLER has served as Executive Vice President, General Counsel and
Secretary of the Company since October 1997 and has served as a Director of the
Company since July 1997. Mr. Wadler has served as Executive Vice President,
General Counsel and Secretary of MMG since August 29, 1996 and, from November 1,
1995 until that date, as Senior Vice President, General Counsel and Secretary of
MMG and as the Executive Vice President, General Counsel, Secretary and Director
of YFM since December 1997. In addition, Mr. Wadler serves as a Director of MMG
and has served as a Director of Orion from 1991 until July 1997 and as Senior
Vice President, Secretary and General Counsel of Metromedia Company, and its
predecessor-in-interest, Metromedia, Inc., for over five years.
LEONARD WHITE has served as a Director of the Company since October 1997.
Mr. White has served as President and Chief Executive Officer of Rigel
Enterprises since July 1997. Mr. White served
60
as President and Chief Executive Officer of Orion from 1992 until 1997 and as
President and Chief Executive Officer of Orion Home Entertainment Corporation
from 1987 to 1992. Mr. White also serves as a director of MMG, YFM and American
Film Technologies, Inc.
BOARD OF DIRECTORS
There are presently nine members on the Board of Directors of the Company.
Holders of the Class B Common Stock are entitled to elect 75% of the Board of
Directors and holders of the Class A Common Stock are entitled to vote as a
separate class to elect the remaining directors. Currently six of the nine
directors are nominees of the holders of Class B Common Stock and as a result
holders of the Class B Common Stock are entitled to fill three vacancies on the
Board of Directors. Members of each class of directors will hold office until
their successors are elected and qualified. At each annual meeting of the
stockholders of the Company, the directors are elected by a plurality vote of
all votes cast at such meeting entitled to vote for such directors and hold
office for a one-year term.
COMPENSATION OF DIRECTORS
During 1998, each director of the Company who was not an officer, employee
or affiliate of the Company (the "Non-Employee Directors") will be entitled to
receive a $20,000 annual retainer plus a separate attendance fee of $1,200 for
each meeting of the Board of Directors attended by a Non-Employee Director in
person or $500 for each meeting of the Board of Directors in which a
Non-Employee Director participated by conference telephone call. Members of
committees of the Board of Directors are paid $500 for each meeting attended. In
addition, the Company's 1998 Incentive Stock Plan entitles any Non-Employee
Director who first serves on the Board of Directors subsequent to the adoption
of the 1998 Incentive Stock Plan to receive awards under such plan of 20,000
shares of Class A Common Stock, each having an exercise price equal to the fair
market value of a share of Class A Common Stock on the date of grant. Awards to
Non-Employee Directors under the 1998 Incentive Stock Plan will be aggregated
with awards under the 1997 Incentive Stock Plan so that total awards under each
plan will not exceed 20,000 shares of Class A Common Stock.
Non-Employee Directors who meet the criteria for "outside director" under
Section 162(m) of the Internal Revenue Code ("Independent Directors") are
entitled to receive options to purchase 20,000 shares of the Company's Class A
Common Stock under the Company's 1997 Incentive Stock Plan. Under the 1997
Incentive Stock Plan, each Non-Employee Director who was a director of the
Company on October 28, 1997 was granted an option to purchase 20,000 shares of
the Company's common stock at an exercise price of $4.00, the price of the Class
A Common Stock on the date of the Initial Public Offering.
The 1997 Incentive Stock Plan further provides that each person who becomes
an Independent Director of the Company after October 28, 1997 will receive an
option to purchase 20,000 shares of the Company's Class A Common Stock on the
day such director is elected as a director, at an exercise price equal to the
closing price of the common stock on the trading day preceding such director's
election. Options granted to these Non-Employee Directors fully vest and become
exercisable as to all 20,000 shares on the date of grant.
In addition, on August 20, 1997, the Company granted to each of Mr. Kluge
and Mr. Subotnick options to purchase 1,014,000 shares of Class A Common Stock
at an exercise price of $.49 per share and to each of Mr. Wadler and Ms. Kessel
options to purchase 202,800 shares of Class A Common Stock at an exercise price
of $.49 per share.
EXECUTIVE COMPENSATION
The following table provides you with information on the compensation
awarded to, earned by or paid to our Chief Executive Officer and our four other
most highly compensated executive officers
61
whose individual compensation exceeded $100,000 during the fiscal years ended
December 31, 1998, December 31, 1997 and December 31, 1996 for services rendered
in all capacities to us and our subsidiaries. The persons listed in the table
below are referred to as the "Named Executive Officers."
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
----------------------------------------- -------------------------
NUMBER OF
SHARES ALL
OTHER ANNUAL UNDERLYING OTHER
COMPENSATION STOCK COMPENS.
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) ($)(1) OPTIONS(2) ($)
- ----------------------------------- ---- --------- -------- ------------ ------------ --------
Stephen A. Garofalo................ 1998 328,385 100,000 23,301 -- --
Chairman and Chief 1997 295,000 50,000 14,157 1,521,000(6) --
Executive Officer 1996 225,000 -- -- -- --
Howard M. Finkelstein.............. 1998 321,462 100,000 24,074 -- --
President and Chief 1997 196,756 50,000 11,769 6,084,000(7) --
Operating Officer(3) 1996 -- -- -- -- --
Vincent A. Galluccio............... 1998 183,400 15,000 1,673 150,000(8) --
Senior Vice President 1997 181,522 -- -- 1,090,920(9) --
1996 127,087 -- -- -- --
Gerard Benedetto................... 1998 181,423 -- 3,355 550,000(10) --
Vice President--Chief 1997 -- -- -- -- --
Financial Officer(4) 1996 -- -- -- -- --
Nicholas M. Tanzi.................. 1998 158,000 65,000 2,819 150,000(8) --
Vice President--Sales(5) 1997 -- -- -- 360,840(11) --
1996 -- -- -- -- --
- ------------------------
(1) Includes amounts paid as automobile allowance, insurance premiums and 401(k)
matching funds.
(2) This information gives effect to our Stock Splits.
(3) Officer was hired by Company during 1997, thus preceding year's compensation
is not applicable.
(4) Officer was hired by Company during 1998, thus preceeding years'
compensation is not applicable.
(5) Officer was hired by Company during 1997, thus preceding year's compensation
is not applicable. Compensation information for 1997 is omitted because
aggregate compensation during such fiscal year was less than $100,000.
(6) Includes presently exercisable options to purchase 1,521,000 shares of Class
A Common Stock at an exercise price of $.49 per share.
(7) Includes presently exercisable options to purchase 6,084,000 shares of Class
A Common Stock at an exercise price of $.49 per share.
(8) Includes options to purchase 150,000 shares of Class A Common Stock at an
exercise price of $10.50 per share that will become exercisable ratably over
a four year period commencing August 31, 1999.
(9) Includes presently exercisable options to purchase 640,920 shares of Class A
Common Stock at an exercise price of $.49 per share and the options to
purchase 150,000 shares of Class A Common Stock which the officer exercised
during 1998. Also, includes options to purchase 300,000 shares of Class A
Common Stock at an exercise price of $4.00 per share that will become
exercisable ratably over a four year period commencing October 28, 1998.
62
(10) Includes options to purchase 400,000 and 150,000 shares of Class A Common
Stock at an exercise price of $3.88 and $10.50 per share that will become
exercisable ratably over a four year period commencing January 6, 1999 and
August 31, 1999, respectively.
(11) Includes presently exercisable options to purchase 60,840 shares of Class A
Common Stock at an exercise price of $1.91 per share and options to purchase
300,000 shares of Class A Common Stock at an exercise price of $4.00 per
share that will become exercisable ratably over a four year period
commencing October 28, 1998.
During 1998 and 1997, Mr. Wadler and Ms. Kessel, each of whom serves as an
executive officer of the Company, were employed and paid by Metromedia Company
pursuant to a management agreement with Metromedia Company dated as of January
2, 1998 (the "Management Agreement"). Please refer to the section in this
Prospectus entitled "Certain Relationships and Related Transactions--Recent
Transactions--Management Agreement." The Company did not pay any other amounts
to the Named Executive Officers during 1998 or 1997.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of the following Named
Executive Officers.
GAROFALO EMPLOYMENT AGREEMENT. Mr. Garofalo's employment agreement, dated as
of February 26, 1997, has a five year term. It provides Mr. Garofalo a base
salary of $295,000 for the first year, $335,000 for the second year, $375,000
for the third year, $415,000 for the fourth year and $455,000 for the fifth
year. Mr. Garofalo is also entitled to receive an annual incentive bonus to be
determined by the Compensation Committee of the Board of Directors. The
incentive bonus will not be less than $100,000 per year. Mr. Garofalo's
employment agreement also provides for other employee benefits such as a car
allowance, life insurance, health care and certain disability and death
benefits. In addition, Mr. Garofalo was granted options to purchase 1,521,000
shares of Class A Common Stock at an exercise price of $.49 per share. These
options are immediately exercisable and expire 10 years from their grant. We
registered the shares of Class A Common Stock underlying the options under the
Securities Act upon the consummation of the Initial Public Offering. Except in
the case of disability, we may terminate Mr. Garofalo's employment only for
cause upon which termination Mr. Garofalo will have no right to receive any
compensation or benefit from us. If the agreement is terminated without cause,
or if Mr. Garofalo terminates employment for good reason, we will be obligated
to pay Mr. Garofalo an amount equal to the greater of (i) his monthly base
salary as then in effect multiplied by the number of months remaining in the
term of his employment as of such termination date and (ii) $1,000,000. "Good
reason" includes (i) a reduction in the nature or scope of Mr. Garofalo's
titles, authorities, powers, duties or responsibilities; (ii) a change in the
method or formula for determining the bonus which results in a decrease in the
amount of bonus payable to Mr. Garofalo; (iii) the removal of Mr. Garofalo as a
member of the Board of Directors, unless such removal occurs after termination
of Mr. Garofalo's employment for cause; (iv) a sale of all or substantially all
of the ownership interests or assets of the Company or a merger or consolidation
of the Company with any other corporation; (v) a change in control of the
Company, defined as any person or entity becoming a beneficial owner as defined
in Rule 13d-3 of the Securities Exchange Act of 1934 directly or indirectly of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities; or (vi) a material breach by the
Company of its affirmative or negative covenants or undertakings in the
employment agreement and a failure to remedy such breach within 15 days.
Pursuant to the agreement, Mr. Garofalo has agreed not to compete with the
Company for a period of one year following termination of the agreement. During
such non-compete period, Mr. Garofalo will be entitled to receive an amount
equal to his base salary as in effect on the date of termination so long as the
agreement was not terminated prior to the expiration of the term by either
party.
63
FINKELSTEIN EMPLOYMENT AGREEMENT. Mr. Finkelstein's employment agreement,
dated as of April 30, 1997, has a three year term. It provides Mr. Finkelstein
with a base salary of $295,000 for the first year, $335,000 for the second year
and $375,000 for the third year. Mr. Finkelstein is also entitled to receive an
annual incentive bonus to be determined by the Compensation Committee of the
Board of Directors. The incentive bonus will not be less than $100,000 for each
year. Mr. Finkelstein's employment agreement also provides for other employee
benefits such as a car allowance, life insurance, health care, and certain
disability and death benefits. In addition, Mr. Finkelstein was granted options
to purchase 6,084,000 shares of Class A Common Stock at an exercise price of
$.49 per share, which options are immediately exercisable and expire 10 years
from their grant. We registered such shares of Class A Common Stock under the
Securities Act on Form S-8 upon the consummation of the Initial Public Offering.
Except in the case of disability, we may terminate Mr. Finkelstein's employment
only for cause upon which termination Mr. Finkelstein will have no right to
receive any compensation or benefit from us. If the agreement is terminated
without cause or if Mr. Finkelstein terminates employment for good reason, we
will be obligated to pay to Mr. Finkelstein his base salary, bonus and benefits
that are accrued and unpaid as of the date of termination as well as an amount
equal to one and a half times his base salary as then in effect. "Good reason"
includes (i) a reduction in the nature or scope of Mr. Finkelstein's titles,
authorities, powers, duties or responsibilities; (ii) a change in the method or
formula for determining the bonus which results in a decrease in the amount of
bonus payable to Mr. Finkelstein; (iii) the removal of Mr. Finkelstein as a
member of the Board of Directors, unless such removal occurs after termination
of Mr. Finkelstein's employment for cause; (iv) a sale of all or substantially
all of the ownership interests or assets of the Company or a merger or
consolidation of the Company with any other corporation; (v) a change in control
of the Company, defined as any person or entity (other than Mr. Garofalo)
becoming a beneficial owner as defined in Rule 13d-3 of the Securities Exchange
Act of 1934 directly or indirectly of securities of the Company representing 50%
or more of the combined voting power of the Company's then outstanding
securities; or (vi) a material breach by the Company of its affirmative or
negative covenants or undertakings in the employment agreement and a failure to
remedy such breach within 15 days. Pursuant to the agreement, Mr. Finkelstein
has agreed not to compete with the Company for a period of one year following
termination of the agreement. During such non-compete period, Mr. Finkelstein
will be entitled to receive an amount equal to his base salary as in effect on
the date of termination so long as the agreement was not terminated prior to the
expiration of the term by either party.
GALLUCCIO EMPLOYMENT AGREEMENT. Mr. Galluccio's employment agreement, dated
as of August 31, 1998, has a one year term. It provides Mr. Galluccio with a
base salary of $183,400. Mr. Galluccio is also entitled to receive an annual
incentive bonus, which is dependent upon the Company's performance, to be
determined by the Compensation Committee of the Board of Directors. If approved
by the Compensation Committee, the incentive bonus has a target of 20% of Mr.
Galluccio's base salary. Mr. Galluccio's employment agreement also provides for
other employee benefits such as the right to participate in all group health and
insurance programs. In addition, Mr. Galluccio was granted options to purchase
150,000 shares of Class A Common Stock at an exercise price of $10.50 per share.
These shares have been registered under the Securities Act on Form S-8. Except
in the case of disability or a change of control, we may terminate Mr.
Galluccio's employment only for cause upon which termination Mr. Galluccio will
have no right to receive any compensation or benefit from us. If Mr. Galluccio's
employment is terminated for any reason other than for cause or in the event
that there is a change of control of the Company and Mr. Galluccio is requested
in connection with such change of control to perform his duties under this
agreement on a regular, full-time basis at a location further than 75 miles from
Mr. Galluccio's current principal office location, Mr. Galluccio, in his sole
and absolute discretion, may deem this agreement to be terminated by the Company
without cause and Mr. Galluccio will be entitled to receive his base salary for
the remaining term of his employment agreement, all previously earned and
accrued entitlements and benefits from us and our employee benefit plans and an
amount equal to 25% of Mr. Galluccio's base salary. Pursuant to his employment
agreement, Mr. Galluccio has agreed not to compete with the Company or any
affiliated company for a period of two years following the termination of the
agreement.
64
BENEDETTO EMPLOYMENT AGREEMENT. Mr. Benedetto's employment agreement, dated
as of August 31, 1998, has a three and one-half year term. It provides Mr.
Benedetto with a minimum base salary of $200,000 for each year. Mr. Benedetto is
also entitled to receive an annual incentive bonus, which is dependent upon the
Company's performance, to be determined by the Compensation Committee of the
Board of Directors. If approved by the Compensation Committee, the incentive
bonus has a target of 20% of Mr. Benedetto's base salary. Mr. Benedetto's
employment agreement also provides for other employee benefits such as the right
to participate in all group health and insurance programs. In addition, Mr.
Benedetto was granted options to purchase 150,000 shares of Class A Common Stock
at an exercise price of $10.50 per share. These shares have been registered
under the Securities Act on Form S-8. Except in the case of disability or a
change of control, we may terminate Mr. Benedetto's employment only for cause
upon which termination Mr. Benedetto will have no right to receive any
compensation or benefit from us. If Mr. Benedetto's employment is terminated for
any reason other than for cause or in the event that there is a change of
control of the Company and Mr. Benedetto is requested in connection with such
change of control to perform his duties under this agreement on a regular,
full-time basis at a location further than 75 miles from Mr. Benedetto's current
principal office location, Mr. Benedetto, in his sole and absolute discretion,
may deem this agreement to be terminated by the Company without cause and Mr.
Benedetto will be entitled to receive his base salary for the remaining term of
his employment agreement, all previously earned and accrued entitlements and
benefits from us and our employee benefit plans and an amount equal to 25% of
Mr. Benedetto's base salary. Pursuant to his employment agreement, Mr. Benedetto
has agreed not to compete with the Company or any affiliated company for a
period of two years following termination of the agreement.
TANZI EMPLOYMENT AGREEMENT. Mr. Tanzi's employment agreement, dated as of
August 31, 1998, has a two year term. It provides Mr. Tanzi with a minimum base
salary of $175,000 for each year. Mr. Tanzi is also entitled to receive an
annual incentive bonus, which is dependent upon the Company's performance, to be
determined by the Compensation Committee of the Board of Directors. If approved
by the Compensation Committee, the incentive bonus has a target of 40% of Mr.
Tanzi's base salary. Mr. Tanzi's employment agreement also provides for other
employee benefits such as the right to participate in all group health and
insurance programs. In addition, Mr. Tanzi was granted options to purchase
150,000 shares of Class A Common Stock at an exercise price of $10.50 per share.
These shares have been registered under the Securities Act on Form S-8. Except
in the case of disability or change of control, we may terminate Mr. Tanzi's
employment only for cause upon which termination Mr. Tanzi will have no right to
receive any compensation or benefit from us. If Mr. Tanzi's employment is
terminated for any reason other than for cause or in the event that there is a
change of control of the Company and Mr. Tanzi is requested in connection with
such change of control to perform his duties under this agreement on a regular,
full-time basis at a location further than 75 miles from Mr. Tanzi's current
principal office location, Mr. Tanzi, in his sole and absolute discretion, may
deem this agreement to be terminated by the Company without cause and Mr. Tanzi
will be entitled to receive his base salary for the remaining term of his
employment agreement, all previously earned and accrued entitlements and
benefits from us and our employee benefit plans and an amount equal to 25% of
Mr. Tanzi's base salary. Pursuant to his employment agreement, Mr. Tanzi has
agreed not to compete with the Company or any affiliated company for a period of
two years following termination of the agreement.
INDEMNIFICATION AGREEMENTS
We have entered into indemnification agreements (the "Indemnification
Agreements") with certain officers and directors. The Indemnification Agreements
provide for indemnification of such directors and officers to the fullest extent
authorized or permitted by law. The Indemnification Agreements also provide that
(i) we will advance all expenses incurred by the director or officer in
defending certain litigation, (ii) we will appoint in certain circumstances an
independent legal counsel to determine whether the director or officer is
entitled to indemnification and (iii) we will continue to maintain directors'
and officers' liability insurance (which currently consists of $25.0 million of
primary coverage).
65
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
HISTORICAL TRANSACTIONS
As of December 31, 1996, we had outstanding approximately $4.9 million of
indebtedness due to US ONE Communications of New York, Inc. ("US ONE"), a lessee
of our dark fiber, which was personally guaranteed by Stephen A. Garofalo. On
April 30, 1997, upon consummation of the Metromedia Investment, $1,370,000 of
the indebtedness was repaid in cash from proceeds of the Metromedia Investment
while the remainder was converted into a prepaid lease payment to us. Therefore,
there is no such indebtedness currently outstanding.
In February, 1996, we entered into a settlement agreement (the "Katz
Settlement Agreement") with Howard Katz, the Company's former Chief Financial
Officer, and Realprop Capital Corp. ("Realprop"), an affiliate of Mr. Katz, in
connection with the termination of Mr. Katz's employment with us. Pursuant to
the Katz Settlement Agreement, we agreed to pay Mr. Katz approximately $940,000
over a period of five years, including $90,000 per year pursuant to a consulting
agreement (the "Consulting Agreement"). Under the Consulting Agreement, Realprop
was to provide consulting services relating to Katz's knowledge and
understanding of transactions and the conduct of business in which we engaged
and to such other areas of consultation as Katz and we mutually agreed upon. On
November 12, 1996, Howard Katz, Lauren Katz, Stephen Katz and Realprop
(collectively, the "Katz Group") entered into an agreement (the "Katz Purchase
Agreement") with Peter Sahagen, at the time Acting Vice Chairman--Finance of the
Company. The Katz Purchase Agreement granted Mr. Sahagen the right to purchase
an aggregate of 1,058,524 shares of Class A Common Stock and an option to
purchase warrants for 831,532 shares of Class A Common Stock (collectively, the
"Katz Securities") for an aggregate purchase price of $640,000. In conjunction
with the Katz Purchase Agreement, in a letter agreement dated December 10, 1996,
Howard Katz and Realprop Capital Corp. agreed to release us from all liabilities
and obligations arising out of the Katz Settlement Agreement, and to reduce the
term of the $90,000 per year Consulting Agreement from five years to three
years. On February 11, 1997, Mr. Sahagen entered into a letter agreement with us
acknowledging that he was acting as nominee for us with respect to the Katz
Purchase Agreement and assigned to us all of his rights, title and interest in
and to the Katz Purchase Agreement. We agreed to reimburse Mr. Sahagen for
$25,000 in payments made to Mr. Katz for extending Mr. Sahagen's right to
purchase the Katz Securities. On February 11, 1997, we entered into an agreement
with the Katz Group, pursuant to which we purchased the Katz Securities for
$640,000 and confirmed that the Consulting Agreement may be terminated by us
after three years of its term had concluded. The purchase price was funded with
a portion of the proceeds of the Metromedia Loan (as described). In March, 1998,
we entered into an Amendment, Settlement and Release Agreement with the Katz
Group and Evelyn Katz in connection with the foregoing.
On April 15, 1996, we entered into an employment agreement with Gerald Vento
pursuant to which Mr. Vento would serve as Chief Executive Officer of the
Company. On the same day, we entered into a stock purchase agreement and a
consulting agreement with VCNY. Pursuant to the stock purchase agreement, we
issued 6,084,000 shares of Class A Common Stock to VCNY as consideration for
prior services provided by VCNY. On October 9, 1996, we entered into a
settlement agreement with Mr. Vento and VCNY. Pursuant to such settlement
agreement, (i) we agreed to terminate Mr. Vento's employment agreement, (ii)
VCNY agreed to sell to Stephen A. Garofalo 5,475,600 shares of Class A Common
Stock (the "Vento Shares") and (iii) we agreed to pay $112,500 to VCNY on behalf
of Mr. Vento. On January 3, 1997, Mr. Garofalo assigned his right to purchase
the Vento Shares to Mr. Sahagen. On January 13, 1997, Mr. Sahagen and other
parties purchased the Vento Shares for $425,000. Please refer to the section of
this Prospectus entitled "Business--Legal Proceedings."
On October 28, 1996, the Knobel 1995 Children's Investment Trust (the
"Knobel Trust") granted to Stephen A. Garofalo an option to purchase 1,599,556
shares of Class A Common Stock for an
66
aggregate purchase price of $500,000. By letter dated December 3, 1996, the
option was amended to reduce the number of option shares to 1,295,356. Mr.
Garofalo thereafter assigned this option to us. On February 11, 1997, we
exercised this option by payment of the sum of $500,000 to the Knobel Trust. We
paid such amount with a portion of the proceeds of the Metromedia Loan.
On February 11, 1997, we entered into an agreement (the "Sahagen Agreement")
with Mr. Sahagen. Pursuant to the Sahagen Agreement, we agreed to pay Mr.
Sahagen a fee of $250,000 upon an equity investment in the Company of at least
$10 million, in full and complete payment for all services rendered by Mr.
Sahagen in his capacity as Acting Vice Chairman--Finance of the Company and in
facilitating the Metromedia Investment and for any fees or compensation due to
Mr. Sahagen pursuant to any prior agreements with us. Mr. Sahagen agreed to
release us from any claims against us, subject to payments required by the
Sahagen Agreement. We agreed to designate Mr. Sahagen or a suitable designee
selected by Mr. Sahagen as a Director of the Company for a term of six months.
We also granted Mr. Sahagen certain "piggyback" registration rights. In
connection with the Metromedia Investment, we paid the $250,000 fee to Mr.
Sahagen.
On December 13, 1996, we issued and sold to Penny Lane Partners, L.P.
("Penny Lane"), for aggregate cash consideration of $2,025,000, (i) 600,000
shares of 10% cumulative convertible preferred stock (the "Series A Preferred
Stock") bearing dividends at a rate of $.34 per share per annum, (ii) warrants
to purchase 456,300 shares of Class A Common Stock at an exercise price of $1.24
per share (the "Penny Lane Warrants") and (iii) a contingent stock subscription
warrant to purchase a number of shares of Class A Common Stock (such number to
be determined based on certain future events) at an exercise price of $0.01 per
share (the "Contingent Warrants"). In connection with the Metromedia Investment,
Penny Lane 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 in connection
therewith we agreed to increase the number of shares underlying the Penny Lane
Warrants from 456,300 to 912,600. In January 1998, Penny Lane 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, we issued Penny Lane
1,382,048 shares for all its warrants.
RECENT TRANSACTIONS
METROMEDIA INVESTMENT. On February 10, 1997, Metromedia Company agreed to
loan us $2,000,000. Please refer to the section in this Prospectus entitled
"Security Ownership." Pursuant to an agreement dated March 6, 1997, Metromedia
Company agreed to loan to us up to an additional $6,000,000, subject to certain
conditions (together with the loan on February 10, the "Metromedia Loan"). On
April 30, 1997, we repaid the Metromedia Loan with a portion of the proceeds
from the Metromedia Investment. The Metromedia Loan was funded in two
installments: (i) $1,140,000 on February 10, 1997 and (ii) $860,000 on February
14, 1997. It provided for a revolving loan of up to an additional $6,000,000.
The Metromedia Loan was scheduled to mature on August 31, 1997 and bore interest
at the prime rate announced by The Chase Manhattan Bank. We used the proceeds
from the first installment of the Metromedia Loan to fund an escrow account
which repurchased on our behalf 2,353,880 shares of Class A Common Stock and
warrants to purchase 831,532 shares of Class A Common Stock (the "Repurchased
Securities"). Pursuant to an escrow arrangement, we pledged the Repurchased
Securities to Metromedia Company as security for the Metromedia Loan. We used
the proceeds from the other installments of the Metromedia Loan for working
capital. On April 30, 1997, we entered into an agreement (the "Metromedia
Agreement"), pursuant to which we sold to Metromedia Company, Mr. Subotnick, Mr.
Wadler and Ms. Kessel shares of Series B Convertible Preferred Stock, par value
$.01 per share (the "Series B Preferred Stock") (which constituted 100% of such
series), for $32,500,000. The shares of the Series B Preferred Stock were
exchanged for 16,884,636 shares of Class B Common Stock pursuant to the Series B
Reclassification (as defined). We used the
67
proceeds from this transaction to redeem the Series A Preferred Stock and
Contingent Warrants ($2,115,000), to repay the Metromedia Loan and accrued
interest thereon ($4,058,126), to repay indebtedness to US ONE ($1,370,000), to
repay indebtedness to Sterling Capital LLC ($555,000), and used the balance for
working capital. Upon repayment of the Metromedia Loan, the Repurchased Shares
were released from escrow and delivered to us.
MODIFICATION AGREEMENT. On October 28, 1997, we entered into a Modification
Agreement with Metromedia Company, Mr. Subotnick, Mr. Wadler, Ms. Kessel and Mr.
Garofalo pursuant to which the Metromedia Agreement was modified and Metromedia
Company, Mr. Subotnick, Mr. Wadler, Ms. Kessel and Mr. Garofalo agreed to vote
all of their shares of Series B Preferred Stock, common stock and Class A Common
Stock to approve of the adoption of our Amended and Restated Certificate of
Incorporation, the reclassification of the common stock into Class A Common
Stock and of the Series B Preferred Stock into Class B Common Stock and the
reverse stock split of shares of the Class A Common Stock and shares of the
Class B Common Stock, as more fully described below.
TRADEMARK LICENSE AGREEMENT. We are a party to a license agreement with
Metromedia Company (the "Metromedia License Agreement"), pursuant to which
Metromedia Company has granted us a nonexclusive, nontransferable, nonassignable
right and license, without the right to grant sublicenses, to use the trade
name, trademark and corporate name "Metromedia" in the United States and
worldwide, royalty-free for a term of 10 years. The Metromedia License Agreement
can be terminated by Metromedia Company upon one month's prior written notice in
the event that (i) Metromedia Company or its affiliates own less than 20% of the
common stock; (ii) a "change in control of the Company" occurs; or (iii) any of
the stock or all or substantially all of the assets of any of our subsidiaries
are sold or transferred, in which case, the Metromedia License Agreement will
terminate with respect to such subsidiary. A "change in control of the Company"
is defined as (i) a transaction in which a person or "group" (within the meaning
of Section 13(d)(3) of the Securities Exchange Act of 1934) not in existence at
the time of the execution of the Metromedia License Agreement becomes the
beneficial owner of stock entitling such person or group to exercise 50% or more
of the combined voting power of all classes of stock of the Company; (ii) a
change in the composition of Board of Directors whereby a majority of the
members thereof are not directors serving on the Board of Directors at the time
of the Metromedia License Agreement or any person succeeding such director who
was recommended or elected by such directors; (iii) a reorganization, merger or
consolidation where following consummation thereof, Metromedia Company would
hold less than 20% of the combined voting power of all classes of the Company's
stock; (iv) a sale or other disposition of all or substantially all of the
assets of the Company; or (v) any transaction the result of which would be that
the common stock would not be required to be registered under the Securities
Exchange Act of 1934 and the holders of common stock would not receive common
stock of the survivor to the transaction which is required to be registered
under the Securities Exchange Act of 1934.
In addition, Metromedia Company has reserved the right to terminate the
Metromedia License Agreement in its entirety immediately upon written notice to
us if, in Metromedia Company's sole judgment, our continued use of "Metromedia"
as a trade name would jeopardize or be detrimental to the good will and
reputation of Metromedia Company.
Pursuant to the Metromedia License Agreement, we have agreed to indemnify
Metromedia Company and hold it harmless against any and all losses, claims,
suits, actions, proceedings, investigations, judgments, deficiencies, damages,
settlements, liabilities and reasonable legal expenses (and other expenses
related thereto) arising in connection with the Metromedia License Agreement.
SHARE RECLASSIFICATION AND EXCHANGES. On September 23, 1997, in connection
with the Initial Public Offering, we approved of a reverse stock split pursuant
to which each share of the old common stock, par value $.01 per share, was
converted into .507 shares of the old common stock. On October 28, 1997, we
approved two share exchanges pursuant to which 9,564,940 shares of the old
common stock,
68
par value $.01 per share, were exchanged for the same number of shares of Class
A Common Stock and a total of 8,403.25 shares of the Series B Convertible
Preferred Stock, par value $.01 per share, of the Company held by Metromedia
Company, Stuart Subotnick, Arnold Wadler and Silvia Kessel were exchanged for
4,260,486 shares of our Class B Common Stock (without giving effect to the Stock
Split) (the "Series B Reclassification"). Messrs. Kluge, Subotnick and Wadler
and Ms. Kessel are directors of the Company and Messrs. Kluge and Subotnick are
general partners of, and Mr. Wadler and Ms. Kessel are executive officers of,
Metromedia Company. Immediately thereafter, Mr. Wadler and Ms. Kessel converted
an aggregate of 39,327 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, by virtue of Section 3(a)(9) of such Act.
MANAGEMENT AGREEMENT. We are a party to the Management Agreement pursuant to
which Metromedia Company provides us with consultation and advisory services
relating to legal matters, insurance, personnel and other corporate policies,
cash management, internal audit and finance, taxes, benefit plans and other
services as we may reasonably request. The Management Agreement terminates on
December 31, 1998, and is automatically renewed for successive one year terms
unless either party terminates upon 60 days prior written notice. The management
fee under the Management Agreement is $500,000 per year, payable monthly at a
rate of $41,667 per month. We are also obligated to reimburse Metromedia Company
all its out-of-pocket costs and expenses incurred and advances paid by
Metromedia Company in connection with the Management Agreement. Pursuant to the
Management Agreement, we have agreed to indemnify Metromedia Company and hold it
harmless from and against any and all damages, liabilities, losses, claims,
actions, suits, proceedings, fees, costs or expenses (including reasonable
attorneys' fees and other costs and expenses incident to any suit, proceeding or
investigation of any kind) imposed on, incurred by or asserted against
Metromedia Company in connection with the Management Agreement. In 1997,
Metromedia Company received no money for its out-of-pocket costs and expenses or
for interest on advances extended by it to us pursuant to the Management
Agreement. For the year ended December 31, 1998, we incurred $500,000 to
Metromedia Company under this agreement.
STOCK SPLITS. On July 23, 1998, the Executive Committee of the Board of
Directors approved a two-for-one stock split of the shares of Class A Common
Stock and Class B Common Stock in the form of a 100% stock dividend. The stock
dividend was issued to stockholders of record as of the close of business on
August 7, 1998. As of September 30, 1998, adjusted for the effect of such stock
split, we had 38,730,226 shares of Class A Common Stock outstanding and
8,442,318 shares of Class B Common Stock outstanding. On December 3, 1998, the
Executive Committee of the Board of Directors approved a two-for-one stock split
of the shares of Class A Common Stock and Class B Common Stock in the form of a
100% stock dividend (the "Stock Split"). The stock dividend was issued to
stockholders of record as of the close of business on December 8, 1998. As of
January 8, 1999, adjusted for the effect of the Stock Split, we had 77,605,110
shares of Class A Common Stock outstanding and 16,884,636 shares of Class B
Common Stock outstanding.
69
SECURITY OWNERSHIP
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table provides you with certain information, as of January 1,
1999, regarding the beneficial ownership of our voting stock after giving effect
to the Stock Splits by (i) each of our directors and director nominees, (ii)
each person whom we believe beneficially owns more than 5% of our outstanding
voting stock, (iii) each Named Executive Officer and (iv) all our executive
officers and directors as a group. In accordance with the rules promulgated by
the Securities and Exchange Commission, such ownership includes shares currently
owned as well as shares which the named person has the right to acquire
beneficial ownership of within 60 days, including through the exercise of
options, warrants or other rights, or through the conversion of a security.
Accordingly, more than one person may be deemed to be a beneficial owner of the
same securities. Except as otherwise indicated, each stockholder listed below
has sole voting and investment power of the shares beneficially owned by such
person.
CLASS A CLASS B
COMMON STOCK COMMON STOCK(1)
--------------------- ----------------------
PERCENT PERCENT
NUMBER OF NUMBER OF PERCENT OF
OF SHARES CLASS OF SHARES CLASS TOTAL VOTING POWER
----------- ----- ----------- ------ ------------------
Stephen A. Garofalo........... 22,747,756(2) 25.7% -- -- 8.9%
Metromedia Company............ -- * 15,731,024 93.2% 61.3%(14)
Putnam Investments, Inc....... 11,309,872(3) 12.8% -- -- 4.4%
Howard M. Finkelstein......... 6,084,000(4) 6.9% -- -- 2.4%
Vincent A. Galluccio.......... 715,920(5) * -- -- *
Gerard Benedetto.............. 102,000(6) * -- -- *
Nicholas M. Tanzi............. 138,440(7) * -- -- *
Silvia Kessel................. 255,236(8) * -- -- *
John W. Kluge................. 1,014,000(9) 1.1% 15,731,024(10) 93.2% 61.7%
David Rockefeller............. 1,414,552(11) 1.6% -- -- *
Stuart Subotnick.............. 1,014,000(9) 1.1% 16,884,636(10) 100.0% 66.2%
Arnold L. Wadler.............. 307,672(8) * -- -- *
Leonard White................. 23,000(12) * -- -- *
All Directors and Executive
Officers as a Group......... 33,816,576(13) 38.2% 16,884,636 100.0% 78.6%
- ------------------------
* less than 1.0%
(1) The shares of Class B Common Stock are convertible into shares of Class A
Common Stock at the rate of one share of Class A Common Stock for each share
of Class B Common Stock and the holders of shares of Class B Common Stock
are entitled to 10 votes per share.
(2) Includes presently exercisable options to purchase 1,521,000 shares of Class
A Common Stock at an exercise price of $.49 per share. Mr. Garofalo's
address is One North Lexington Avenue, White Plains, New York 10601.
(3) Based solely upon the Schedule 13-G, dated September 18, 1998 filed by
Putnam Investments, Inc. The Putnam Investments, Inc. address is One Post
Office Square, Boston, Massachusetts, 02109.
(4) Represents presently exercisable options to purchase 6,084,000 shares of
Class A Common Stock at an exercise price of $.49 per share. Mr.
Finkelstein's address is One North Lexington Avenue, White Plains, New York
10601.
(5) Represents presently exercisable options to purchase 640,920 and 75,000
shares of Class A Common Stock at an exercise price of $.49 and $4.00 per
share, respectively.
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(6) Includes presently exercisable options to purchase 100,000 shares of Class A
Common Stock at an exercise price of $3.88 per share.
(7) Includes presently exercisable options to purchase 60,840 and 75,000 shares
of Class A Common Stock at an exercise price of $1.91 and $4.00 per share,
respectively. Also, includes 2,600 shares of Class A Common Stock owned by
members of Mr. Tanzi's family to which Mr. Tanzi has been granted a proxy to
vote. Mr. Tanzi's address is One North Lexington Avenue, White Plains, New
York 10601.
(8) Includes 202,800 presently exercisable options to acquire shares of Class A
Common Stock at an exercise price of $.49 per share held by each of Ms.
Kessel and Mr. Wadler. Does not include shares owned by Metromedia Company.
Ms. Kessel and Mr. Wadler are employed by Metromedia Company and disclaim
beneficial ownership of the shares owned by Metromedia Company.
(9) Consists of 1,014,000 presently exercisable options to acquire shares of
Class A Common Stock at an exercise price of $.49 per share held by each of
Mr. Kluge and Mr. Subotnick. Mr. Kluge's address is 215 East 67th Street,
New York, NY 10021 and Mr. Subotnick's address is 215 East 67th Street, New
York, NY 10021.
(10) Includes 15,731,024 shares owned by Metromedia Company. Messrs. Kluge and
Subotnick, Directors of the Company, are general partners of Metromedia
Company.
(11) Represents 1,394,552 shares owned by DR & Descendants Partnership, of which
Mr. Rockefeller is a partner and for which he exercises voting and
investment power and presently exercisable options to purchase 20,000 shares
of Class A Common Stock at an exercise price of $4.00 per share. Mr.
Rockefeller disclaims actual beneficial ownership of shares owned by DR &
Descendants Partnership except as to shares attributable to his
proportionate interest in the partnership.
(12) Includes 20,000 presently exercisable options to acquire shares of Class A
Common Stock at an exercise price of $4.00 per share.
(13) Includes presently exercisable options to acquire 10,679,520, 60,840,
100,000 and 190,000 shares of Class A Common Stock at an exercise price of
$.49, $1.91, $3.88 and $4.00 per share, respectively.
(14) Metromedia Company's address is One Meadowlands Plaza, East Rutherford, NJ
07073.
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THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
Under the Registration Rights Agreement, we are required to file not later
than February 23, 1999 (90 days following the date of original issuance of the
Initial Notes (the "Closing Date")) the Registration Statement of which this
Prospectus is a part for a registered exchange offer with respect to an issue of
new notes substantially identical in all material respects to the Initial Notes
except that the new notes will be registered under the Securities Act, will not
bear legends restricting their transfer and will not be entitled to registration
rights under the Registration Rights Agreement. The summary herein of certain
provisions of the Registration Rights Agreement does not purport to be complete
and we refer you to the provisions of the Registration Rights Agreement, which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part and a copy of which is available as set forth under the
heading "Available Information."
Under the Registration Rights Agreement, we are required to:
- use our reasonable best efforts to cause the Registration Statement to be
declared effective no later than May 24, 1999 (180 days after the Closing
Date),
- keep the Exchange Offer effective for not less than 20 business days (or
longer if required by applicable law) after the date that notice of the
Exchange Offer is mailed to holders of the Initial Notes, and
- use our reasonable best efforts to consummate the Exchange Offer no later
than June 23, 1999 (210 days after the Closing Date).
The Exchange Offer being made here, if commenced and consummated within the
time periods described in this paragraph, will satisfy those requirements under
the Registration Rights Agreement.
This Prospectus, together with the Letter of Transmittal, is being sent to
all record holders of Initial Notes as of , 1999.
Based on interpretations by the staff of the Securities and Exchange
Commission, as set forth in no-action letters issued to third parties, we
believe that the Exchange Notes issued pursuant to the Exchange Offer may be
offered for resale, resold or otherwise transferred by each holder of Exchange
Notes (other than a broker-dealer who acquires the Initial Notes directly from
the Company for resale pursuant to Rule 144A under the Securities Act or any
other available exemption under the Securities Act, and other than any holder
that is an "affiliate" (as defined in Rule 405 under the Securities Act) of the
Company) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such holder:
- is acquiring the Exchange Notes in the ordinary course of its business,
- is not participating in, and does not intend to participate in, a
distribution of such Exchange Notes within the meaning of the Securities
Act and has no arrangement or understanding with any person to participate
in a distribution of the Exchange Notes within the meaning of the
Securities Act, and
- is not an affiliate (as defined in Rule 405 under the Securities Act) of
the Company.
By tendering the Initial Notes in exchange for Exchange Notes, each holder,
other than a broker-dealer, will be required to make representations to that
effect. If a holder of Initial Notes is participating in or intends to
participate in, a distribution of the Exchange Notes, or has any arrangement or
understanding with any person to participate in a distribution of the Exchange
Notes to be acquired pursuant to the Exchange Offer, such holder may be deemed
to have received restricted securities and may not rely on the applicable
interpretations of the staff of the Securities and Exchange
72
Commission. Any such holder will have to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction.
Each broker-dealer that receives Exchange Notes for its own account in
exchange for Initial Notes may be deemed to be an "underwriter" within the
meaning of the Securities Act and must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with offers to resell, resales and other
transfers of Exchange Notes received in exchange for Initial Notes which were
acquired by such broker-dealer as a result of market making or other trading
activities. We have agreed that we will make this Prospectus available to any
broker-dealer for a period of time not to exceed 180 days after the consummation
of the Exchange Offer for use in connection with any such offer to resell,
resale or other transfer. Please refer to the section in this Prospectus
entitled "Plan of Distribution."
SHELF REGISTRATION STATEMENT
In the event that:
(i) because of any change in law or applicable interpretations thereof by
the staff of the Securities and Exchange Commission, we are not permitted to
effect the Exchange Offer, or
(ii) for any other reason, the Exchange Offer is not consummated within 180
days from the Closing Date, or
(iii) any holder of Initial Notes notifies us within 20 days following the
consummation of the Exchange Offer that (x) such holder was prohibited by law of
policy of the Securities and Exchange Commission from participating in the
Exchange Offer, or (y) such holder may not resell the Exchange Notes acquired by
it in the Exchange Offer to the public without delivering a prospectus and this
Prospectus is not appropriate or available for such resale, or (z) such holder
is a broker-dealer and holds Notes acquired directly from us or any of our
Affiliates (within the meaning of the Securities Act), then in the case of
clauses (i) through (iii) of this sentence, we will be obligated, at our sole
expense, to:
- use our reasonable best efforts, as promptly as practicable and in no
event more than 30 days following such request, to file with the
Securities and Exchange Commission a shelf registration statement (the
"Shelf Registration Statement") covering resales of the Initial Notes,
- use our reasonable best efforts to cause the Shelf Registration Statement
to be declared effective under the Securities Act within 120 days after
the date we are required to file a Shelf Registration Statement, and
- use our reasonable best efforts to keep the Shelf Registration Statement
continuously effective, supplemented and amended as required by the
Securities Act, in order to permit the prospectus which is a part of such
Shelf Registration Statement to be usable by holders for a period of two
years after the Shelf Registration Statement is declared effective or such
shorter period of time that will terminate when all of the applicable
Initial Notes have been sold thereunder.
We will, in the event that a Shelf Registration Statement is filed, provide
to each holder of the Initial Notes being registered copies of the prospectus
that is a part of the Shelf Registration Statement, notify each such holder when
the Shelf Registration Statement has become effective and take certain other
actions as are required to permit unrestricted resales of the Initial Notes
being registered. A holder that sells Initial Notes pursuant to the Shelf
Registration Statement will be required to be named as a selling security holder
in the related prospectus and to deliver a prospectus
73
to purchasers, will be subject to certain of the civil liability provisions
under the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement that are applicable to such a
holder (including certain indemnification rights and obligations).
LIQUIDATED DAMAGES
In the event that:
(i) we do not file the Registration Statement or the Shelf Registration
Statement, as the case may be, with the Securities and Exchange Commission on or
before the dates specified above for such filings,
(ii) the Registration Statement or the Shelf Registration Statement, as the
case may be, is not declared effective on or before the dates specified above
for such effectiveness,
(iii) the Exchange Offer is not consummated on or prior to June 23, 1999
(210 days after the Closing Date), or
(iv) the Shelf Registration Statement is filed and declared effective but
thereafter ceases to be effective or usable in connection with its intended
purpose (each such event referred to in clauses (i) through (iv), a
"Registration Default"),
then we will be obligated to pay to each holder of Transfer Restricted
Securities (as defined in the Registration Rights Agreement) liquidated damages.
Liquidated damages will accrue and be payable semi-annually on the Initial Notes
and the Exchange Notes (in addition to the stated interest on the Initial Notes
and the Exchange Notes) in an amount equal to 0.50% per year during the first
90-day period, which will increase by 0.25% per year for each subsequent 90-day
period, but in no event will such rate exceed 1.50% per year in the aggregate,
regardless of the number of Registration Defaults. Liquidated damages will
accrue from the date a Registration Default occurs until the date on which:
- the Registration Statement is filed,
- the Registration Statement or Shelf Registration Statement is declared
effective and the Exchange Offer is consummated,
- the Shelf Registration Statement is declared effective, or
- the Shelf Registration Statement again becomes effective or made usable,
as the case may be.
Following the cure of all Registration Defaults, the accrual of liquidated
damages will cease.
Upon consummation of the Exchange Offer, subject to certain exceptions,
holders of Initial Notes who do not exchange their Initial Notes for Exchange
Notes in the Exchange Offer will no longer be entitled to registration rights
and will not be able to offer or sell their Initial Notes, unless such Initial
Notes are subsequently registered under the Securities Act (which, subject to
certain limited exceptions, we will have no obligation to do), or pursuant to an
exemption from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. Please refer to the section in this Prospectus
entitled "Risk Factors--The Failure to Participate in The Exchange Offer Will
Have Adverse Consequences."
TERMS OF THE EXCHANGE OFFER
EXPIRATION DATE; EXTENSIONS; AMENDMENTS; TERMINATION
The Exchange Offer will expire at 5:00 p.m., New York City time, on
, 1999, unless we extend it in our reasonable discretion (such date
as it may be extended is referred to in this Prospectus as the "Expiration
Date"). The Expiration Date will be at least 20 business days after the
74
commencement of the Exchange Offer in accordance with Rule 14e-1(a) under the
Securities Exchange Act of 1934 and the Registration Rights Agreement.
In order to extend the Expiration Date, we are obligated to notify the
Exchange Agent of any extension by oral (promptly confirmed in writing) or
written notice and to notify the holders of the Initial Notes by mailing an
announcement or by means of a press release or other public announcement
communicated, unless otherwise required by applicable law or regulation, prior
to 9:00 A.M., New York City time, on the next business day after the previously
scheduled Expiration Date.
We expressly reserve the right:
- to delay acceptance of any Initial Notes, to extend the Exchange Offer or
to terminate the Exchange Offer and not permit acceptance of Initial Notes
not previously accepted if any of the conditions set forth below under
"--Conditions" have occurred and have not been waived by us (if permitted
to be waived), by giving oral or written notice of such delay, extension
or termination to the Exchange Agent, or
- to amend the terms of the Exchange Offer in any manner.
If we amend the Exchange Offer in a manner determined by us to constitute a
material change, we will promptly disclose such amendment in a manner reasonably
calculated to inform the holders of the Initial Notes of such amendment
including providing public announcement, or giving oral or written notice to the
holders of the Initial Notes. A material change in the terms of the Exchange
Offer could include, among other things, a change in the timing of the Exchange
Offer, a change in the Exchange Agent, and other similar changes in the terms of
the Exchange Offer. If any material change is made to terms of the Exchange
Offer, we will disclose such change by means of a post-effective amendment to
the Registration Statement of which this Prospectus is a part and will
distribute an amended or supplemented Prospectus to each registered holder of
Initial Notes. In addition, we will also extend the Exchange Offer for an
additional five to ten business days as required by the Securities Exchange Act
of 1934, depending on the significance of the amendment, if the Exchange Offer
would otherwise expire during such period. Any such delay in acceptance,
extension, termination or amendment will be followed as promptly as practicable
by oral (promptly confirmed in writing) or written notice thereof to the
Exchange Agent.
PROCEDURES FOR TENDERING
To tender your Initial Notes in the Exchange Offer, you must complete, sign
and date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver the Letter of Transmittal or the facsimile, or an Agent's
Message (as defined below), together with the certificates representing the
Initial Notes being tendered and any other required documents, to the Exchange
Agent on or prior to 5:00 p.m., New York City time, on the Expiration Date.
Alternatively, you may either:
- send a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Initial Notes, if such procedure is available, into
the Exchange Agent's account at The Depository Trust Company ("DTC")
pursuant to the procedure for book-entry transfer described below, on or
prior to 5:00 p.m. on the Expiration Date, or
- comply with the guaranteed delivery procedures described below.
The term "Agent's Message" means a message, transmitted by DTC to, and
received by, the Exchange Agent and forming a part of a Book-Entry Confirmation,
which states that DTC has received an express acknowledgment from the
participant in DTC tendering Initial Notes which are the subject
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of such Book-Entry Confirmation that such participant has received and agrees to
be bound by the terms of the Letter of Transmittal, and that we may enforce such
agreement against such participant.
THE METHOD OF DELIVERY OF THE INITIAL NOTES, THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS IS AT YOUR ELECTION AND RISK. INSTEAD OF DELIVERY
BY MAIL, WE RECOMMEND THAT YOU USE AN OVERNIGHT OR HAND-DELIVERY SERVICE. IF
SUCH DELIVERY IS BY MAIL, WE RECOMMEND THAT YOU USE REGISTERED MAIL, PROPERLY
INSURED, WITH RETURN RECEIPT REQUESTED. IN ALL CASES, YOU SHOULD ALLOW
SUFFICIENT TIME TO ASSURE TIMELY DELIVERY. YOU SHOULD NOT SEND ANY LETTERS OF
TRANSMITTAL OR INITIAL NOTES TO US. You must deliver all documents to the
Exchange Agent at its address set forth below. You may also request your
respective brokers, dealers, commercial banks, trust companies or nominees to
effect such tender on your behalf.
Your tender of Initial Notes will constitute an agreement between you and us
in accordance with the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal.
Only a holder of Initial Notes may tender such Initial Notes in the Exchange
Offer. The term "holder" with respect to the Exchange Offer means any person in
whose name Initial Notes are registered on our books or any other person who has
obtained a properly completed bond power from the registered holder.
If you are the beneficial owner of Initial Notes that are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
you wish to tender your Initial Notes, you should contact such registered holder
promptly and instruct such registered holder to tender on your behalf. If you
wish to tender on your own behalf, you must, prior to completing and executing
the Letter of Transmittal and delivering your Initial Notes, either make
appropriate arrangements to register ownership of the Initial Notes in your name
or obtain a properly completed bond power from the registered holder. The
transfer of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed by a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., a
commercial bank or trust company having an office or correspondent in the United
States or an "eligible guarantor" institution within the meaning of Rule 17Ad-15
under the Securities Exchange Act of 1934 (each, an "Eligible Institution"),
unless the Initial Notes are tendered:
- by a registered holder (or by a participant in DTC whose name appears on a
security position listing as the owner) who has not completed the box
entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal if the Exchange Notes are being
issued directly to such registered holder (or deposited into the
participant's account at DTC), or
- for the account of an Eligible Institution.
If the Letter of Transmittal is signed by the recordholder(s) of the Initial
Notes tendered, the signature must correspond with the name(s) written on the
face of the Initial Notes without alteration, enlargement or any change
whatsoever. If the Letter of Transmittal is signed by a participant in DTC, the
signature must correspond with the name as it appears on the security position
listing as the holder of the Initial Notes.
If the Letter of Transmittal is signed by a person other than the registered
holder of any Initial Notes listed, such Initial Notes must be endorsed or
accompanied by bond powers and a proxy that authorize such person to tender the
Initial Notes on behalf of the registered holder in satisfactory form to us as
determined in our sole discretion, in each case as the name of the registered
holder or holders appears on the Initial Notes.
If the Letter of Transmittal or any Initial Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or
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representative capacity, such persons should so indicate when signing. Unless
waived by us, evidence satisfactory to us of their authority to so act must also
be submitted with the Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by the Initial
Notes tendered (or a timely confirmation received of a book-entry transfer of
Initial Notes into the Exchange Agent's account at DTC with an Agent's Message)
or a Notice of Guaranteed Delivery from an Eligible Institution is received by
the Exchange Agent. Issuances of Exchange Notes in exchange for Initial Notes
tendered pursuant to a Notice of Guaranteed Delivery by an Eligible Institution
will be made only against delivery of the Letter of Transmittal (and any other
required documents) and the tendered Initial Notes (or a timely confirmation
received of a book-entry transfer of Initial Notes into the Exchange Agent's
account at DTC with an Agent's Message) with the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Initial Notes will be
determined by us in our sole discretion, which determination will be final and
binding. We reserve the absolute right to reject any and all Initial Notes not
properly tendered or any Initial Notes which, if accepted, would, in our opinion
or our counsel's opinion, be unlawful. We also reserve the absolute right to
waive any conditions of the Exchange Offer or irregularities or defects in
tender as to particular Initial Notes. Our interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Initial Notes must be
cured within such time as we shall determine. We, the Exchange Agent or any
other person will be under no duty to give notification of defects or
irregularities with respect to tenders of Initial Notes. None of us or the
Exchange Agent will incur any liability for failure to give such notification.
Tenders of Initial Notes will not be deemed to have been made until such
irregularities have been cured or waived. Any Initial Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering holders of such Initial Notes, unless
otherwise provided in the Letter of Transmittal, as promptly as practicable
following the Expiration Date.
In addition, we reserve the right in our sole discretion, subject to the
provisions of the Indenture, to:
- purchase or make offers for any Initial Notes that remain outstanding
subsequent to the Expiration Date, or, as set forth under "--Expiration
Date; Extensions; Amendments; Termination", to terminate the Exchange
Offer in accordance with the terms of the Registration Rights Agreement,
and
- to the extent permitted by applicable law, purchase Initial Notes in the
open market, in privately negotiated transactions or otherwise. The terms
of any such purchases or offers could differ from the terms of the
Exchange Offer.
ACCEPTANCE OF INITIAL NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all of the conditions to the Exchange Offer,
we will accept all Initial Notes properly tendered, promptly after the
Expiration Date, and will issue the Exchange Notes promptly after the Expiration
Date and acceptance of the Initial Notes. Please refer to the section of this
Prospectus entitled "--Conditions" below. For purposes of the Exchange Offer,
Initial Notes will be deemed to have been accepted as validly tendered for
exchange when, as and if we had given oral or written notice to the Exchange
Agent.
In all cases, issuance of Exchange Notes for Initial Notes that are accepted
for exchange pursuant to the Exchange Offer will be made only after timely
receipt by the Exchange Agent of certificates for
77
such Initial Notes or a timely Book-Entry Confirmation of such Initial Notes
into the Exchange Agent's account at the Book-Entry Transfer Facility, a
properly completed and duly executed Letter of Transmittal or an Agent's Message
and all other required documents, in each case, in form satisfactory to us and
the Exchange Agent. If any tendered Initial Notes are not accepted for any
reason set forth in the terms and conditions of the Exchange Offer or if Initial
Notes are submitted for a greater principal amount than the holder desires to
exchange, such unaccepted or non-exchanged Initial Notes will be returned
without expense to the tendering holder thereof (or, in the case of Initial
Notes tendered by book-entry transfer procedures described below, such
non-exchanged Initial Notes will be credited to an account maintained with such
Book-Entry Transfer Facility) as promptly as practicable after withdrawal,
rejection of tender, the Expiration Date or earlier termination of the Exchange
Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Initial Notes at DTC for purposes of the Exchange Offer within two
business days after the date of this Prospectus. Any financial institution that
is a participant in DTC's systems may make book-entry delivery of Initial Notes
by causing DTC to transfer such Initial Notes into the Exchange Agent's account
at DTC in accordance with DTC's procedures for transfer.
However, although delivery of Initial Notes may be effected through
book-entry transfer into the Exchange Agent's account at DTC, an Agent's Message
or the Letter of Transmittal or facsimile thereof with any required signature
guarantees and any other required documents must, in any case, be transmitted to
and received by the Exchange Agent at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must be complied with. DELIVERY OF DOCUMENTS TO DTC
DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All references in the
Prospectus to deposit of Initial Notes will be deemed to include DTC's
book-entry delivery method.
GUARANTEED DELIVERY PROCEDURE
If you are a registered holder of Initial Notes and desire to tender such
Initial Notes, and the Initial Notes are not immediately available, or time will
not permit your Initial Notes or other required documents to reach the Exchange
Agent before the Expiration Date, or the procedures for book-entry transfer
cannot be completed on a timely basis and an Agent's Message delivered, you may
still tender in the Exchange Offer if:
- you tender through an Eligible Institution,
- prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) and Notice of Guaranteed Delivery,
substantially in the form provided by us (by facsimile transmission, mail
or hand delivery), setting forth your name and address as holder of the
Initial Notes and the amount of Initial Notes tendered, stating that the
tender is being made thereby and guaranteeing that within five business
days after the Expiration Date the certificates for all tendered Initial
Notes, in proper form for transfer, or a Book-Entry Confirmation with an
Agent's Message, as the case may be, and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution
with the Exchange Agent, and
- the certificates for all tendered Initial Notes, in proper form for
transfer, or a Book-Entry Confirmation as the case may be, and all other
documents required by the Letter of Transmittal are received by the
Exchange Agent within five business days after the Expiration Date.
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WITHDRAWAL OF TENDERS
Except as otherwise provided in this Prospectus, you may withdraw tenders of
Initial Notes at any time prior to 5:00 p.m., New York City time, on the
Expiration Date.
For a withdrawal to be effective, you must send a written or facsimile
transmission notice of withdrawal to the Exchange Agent prior to 5:00 p.m., New
York City time, on the Expiration Date at the address set forth below under
"--Exchange Agent" and prior to acceptance for exchange thereof by us. Any such
notice of withdrawal must:
- specify the name of the person having tendered the Initial Notes to be
withdrawn (the "Depositor"),
- identify the Initial Notes to be withdrawn (including, if applicable, the
registration number or numbers and total principal amount of such Initial
Notes),
- be signed by the Depositor in the same manner as the original signature on
the Letter of Transmittal by which such Initial Notes were tendered
(including any required signature guarantees) or be accompanied by
documents of transfer sufficient to permit the Trustee with respect to the
Initial Notes to register the transfer of such Initial Notes into the name
of the Depositor withdrawing the tender,
- specify the name in which any such Initial Notes are to be registered, if
different from that of the Depositor, and
- if applicable because the Initial Notes have been tendered pursuant to the
book-entry procedures, specify the name and number of the participant's
account at DTC to be credited, if different than that of the Depositor.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by us and our determination will be
final and binding on all parties. Any Initial Notes so withdrawn will be deemed
not to have been validly tendered for exchange for purposes of the Exchange
Offer. Any Initial Notes which have been tendered for exchange which are not
exchanged for any reason will be returned to the holder thereof without cost to
such holder (or, in the case of Initial Notes tendered by book-entry transfer
into the Exchange Agent's account at DTC pursuant to the book-entry transfer
procedures described above, such Initial Notes will be credited to an account
maintained with DTC for the Initial Notes) as promptly as practicable after
withdrawal, rejection of tender, Expiration Date or earlier termination of the
Exchange Offer. Properly withdrawn Initial Notes may be retendered by following
one of the procedures described under "--Procedures for Tendering" and
"--Book-Entry Transfer" above at any time on or prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, we will not be
required to accept Initial Notes for exchange, or issue Exchange Notes in
exchange for any Initial Notes, and we may terminate or amend the Exchange Offer
as provided in this Prospectus before the acceptance of such Initial Notes, if:
- an action or proceeding has been instituted or threatened in any court or
before any governmental agency or body that in our judgment would
reasonably be expected to prohibit, prevent or otherwise impair our
ability to proceed with the Exchange Offer;
- a change in the current interpretation of the staff of the Securities and
Exchange Commission has occurred which current interpretation permits the
Exchange Notes issued pursuant to the Exchange Offer in exchange for the
Initial Notes to be offered for resale, resold or otherwise transferred by
holders thereof (other than in certain circumstances);
79
- a law, statute, rule or regulation has been adopted or enacted which, in
our judgment, would reasonably be expected to impair our ability to
proceed with the Exchange Offer;
- a stop order has been issued by the Securities and Exchange Commission or
any state securities authority suspending the effectiveness of the
Registration Statement of which this Prospectus is a part or the
qualification of the Indenture under the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"), or proceedings shall have been
initiated or, to our knowledge, threatened for that purpose;
- a governmental approval has not been obtained, which approval we deem in
our sole discretion, necessary for the consummation of the Exchange Offer;
or
- a change, or a development involving a prospective change, in our business
or financial affairs has occurred which, in our sole judgment, might
materially impair our ability to proceed with the Exchange Offer.
These conditions are for our sole benefit and may be asserted by us
regardless of the circumstances giving rise to any such condition or may be
waived by us, in whole or in part, at any time and from time to time, if we
determine in our reasonable discretion that any of the foregoing events or
conditions has occurred or exists or has not been satisfied, subject to
applicable law. Our failure at any time to exercise any of the foregoing rights
will not be deemed a waiver of any such right and each such right will be deemed
an ongoing right which we may assert at any time and from time to time.
If we determine that we may terminate the Exchange Offer, as provided above,
we may:
- refuse to accept any Initial Notes and return any Initial Notes that have
been tendered to the holders thereof,
- extend the Exchange Offer and retain all Initial Notes tendered prior to
the Expiration Date, subject to the rights of such holders of tendered
Initial Notes to withdraw their tendered Initial Notes, or
- waive such termination event with respect to the Exchange Offer and accept
all properly tendered Initial Notes that have not been withdrawn or
otherwise amend the terms of the Exchange Offer in any respect as provided
under the section in this Prospectus entitled "--Expiration Date;
Extensions; Amendments; Termination."
The Exchange Offer is not conditioned upon any minimum principal amount of
Initial Notes being tendered for exchange.
We have no obligation to, and will not knowingly, permit acceptance of
tenders of Initial Notes from our Affiliates (within the meaning of Rule 405
under the Securities Act) or from any other holder or holders who are not
eligible to participate in the Exchange Offer under applicable law or
interpretations thereof by the Securities and Exchange Commission, or if the
Exchange Notes to be received by such holder or holders of Initial Notes in the
Exchange Offer, upon receipt, will not be tradable by such holder without
restriction under the Securities Act and the Securities Exchange Act of 1934 and
without material restrictions under the "blue sky" or securities laws of
substantially all of the states of the United States.
ACCOUNTING TREATMENT
We will record the Exchange Notes at the same carrying value as the Initial
Notes, as reflected in our accounting records on the date of the exchange.
Accordingly, we will not recognize any gain or loss for accounting purposes. We
will amortize the costs of the Exchange Offer and the unamortized expenses
related to the issuance of the Exchange Notes over the term of the Exchange
Notes.
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EXCHANGE AGENT
We have appointed IBJ Whitehall Bank & Trust Company as Exchange Agent for
the Exchange Offer. All questions and requests for assistance and requests for
additional copies of this Prospectus or the Letter of Transmittal should be
directed to the Exchange Agent as follows:
By Mail:
IBJ Whitehall Bank & Trust Company
P.O. Box 84
Bowling Green Station
New York, NY 10274-0084
ATTN: Reorganization Operations Department
By Hand/Overnight Delivery:
IBJ Whitehall Bank & Trust Company
One State Street
New York, NY 10004
ATTN: Securities Processing Window, Subcellar One, (SC-1)
Facsimile Transmission: (212) 858-2611
Confirm by Telephone: (212) 858-2103
Via Telex No.: 177754
FEES AND EXPENSES
We will bear the expenses of soliciting tenders pursuant to the Exchange
Offer. The principal solicitation for tenders pursuant to the Exchange Offer is
being made by mail; however, our offices and regular employees may make
additional solicitations by telegraph, telephone, telecopy or in person.
We will not make any payments to brokers, dealers or other persons
soliciting acceptances of the Exchange Offer. However, we will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse the
Exchange Agent for its reasonable out-of-pocket expenses in connection with the
Exchange Offer. We may also pay brokerage houses and other custodians, nominees
and fiduciaries the reasonable out-of-pocket expenses incurred by them in
forwarding copies of the Prospectus, Letters of Transmittal and related
documents to the beneficial owners of the Initial Notes, and in handling or
forwarding tenders for exchange.
We will pay the expenses incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting,
legal, printing and related fees and expenses.
We will pay all transfer taxes, if any, applicable to the exchange of
Initial Notes pursuant to the Exchange Offer. However, the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder if:
- certificates representing Exchange Notes or Initial Notes for principal
amounts not tendered or accepted for exchange are to be delivered to, or
are to be registered or issued in the name of, any person other than the
registered holder of the Initial Notes tendered, or
- tendered Initial Notes are registered in the name of any person other than
the person signing the Letter of Transmittal, or
- a transfer tax is imposed for any reason other than the exchange of
Initial Notes pursuant to the Exchange Offer.
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If satisfactory evidence of payment of such taxes or exemption therefrom is
not submitted with the Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
THE FAILURE TO PARTICIPATE IN THE EXCHANGE OFFER WILL HAVE ADVERSE CONSEQUENCES
If you do not exchange your Initial Notes for Exchange Notes pursuant to the
Exchange Offer, you will not be able to resell, offer to resell or otherwise
transfer the Initial Notes unless they are registered under the Securities Act
or unless you resell them, offer to resell or otherwise transfer them under an
exemption from the registration requirements of, or in a transaction not subject
to, the Securities Act. In addition, you will no longer be able to obligate us
to register the Initial Notes under the Securities Act except in the limited
circumstances provided under the Registration Rights Agreement. The restrictions
on transfer of your Initial Notes arise because we issued the Initial Notes
pursuant to exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
addition, if you want to exchange your Initial Notes in the Exchange Offer for
the purpose of participating in a distribution of the Exchange Notes, you may be
deemed to have received restricted securities, and, if so, will be required to
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. To the extent the
Initial Notes are tendered and accepted in the Exchange Offer, the trading
market, if any, for the Initial Notes would be adversely affected. Please refer
to the section in this Prospectus entitled "Risk Factors."
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DESCRIPTION OF THE EXCHANGE NOTES
GENERAL
The form and terms of the Exchange Notes are the same as the form and terms
of the Initial Notes, except that the Exchange Notes have been registered under
the Securities Act and therefore will not bear legends restricting the transfer
thereof. We issued the Initial Notes and will issue the Exchange Notes pursuant
to the Indenture, dated as of November 25, 1998, between us and IBJ Whitehall
Bank & Trust Company, as trustee (the "Trustee"). The terms of the Exchange
Notes will include those stated in the Indenture and the Security Agreement,
dated as of November 25, 1998, among us, the Trustee and IBJ Whitehall Bank &
Trust Company as security intermediary (the "Security Agreement") and those made
part of the Indenture by reference to the Trust Indenture Act. The Exchange
Notes will be subject to all such terms, and we refer you to the Indenture, the
Security Agreement and the Trust Indenture Act for a statement of such terms.
Except as otherwise indicated, the following description relates both to the
Initial Notes and the Exchange Notes and is a summary of the material provisions
of the Indenture and the Security Agreement. It does not restate those
agreements in their entirety. We urge you to read the Indenture and the Security
Agreement because they, and not this description, define your rights as holder
of the Exchange Notes. We have filed copies of the Indenture and the Security
Agreement as exhibits to the Registration Statement which includes this
Prospectus. The definitions of certain terms used in the following summary are
set forth below under "--Certain Definitions." For purposes of this summary, the
term "Company" refers only to Metromedia Fiber Network, Inc. and not to any of
its Subsidiaries. Also, in this description "Initial Notes" and "Exchange Notes"
are collectively referred to as the "Notes."
As of the Issue Date, all of our Subsidiaries will be Restricted
Subsidiaries. Under certain circumstances, we will be able to designate existing
or future Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries
will not be subject to many of the restrictive covenants contained in the
Indenture. Our investment in ION and our investment in the joint venture
constructing the German Network will not be considered Subsidiaries for purposes
of the Indenture.
TERMS OF NOTES
The Notes:
- are general obligations of the Company,
- rank without preference in right of payment with all existing and future
unsecured senior Indebtedness of the Company,
- rank senior in right of payment to all subordinated Indebtedness of the
Company that may be issued in the future, if any, and
- are not secured by any assets, and, therefore, will be effectively
subordinated to any existing and future secured Indebtedness of the
Company and its Subsidiaries, including the Credit Agreement, to the
extent of the value of the assets securing such Indebtedness.
We conduct substantially all of our operations through our Subsidiaries and,
therefore, we are dependent on the cash flow of our Subsidiaries to meet our
obligations, including our obligations with respect to the Notes. The Notes will
be effectively subordinated to all Indebtedness and other liabilities and
commitments (including trade payables and lease obligations) of our
Subsidiaries, including any Guarantees of such Subsidiaries with respect to the
Credit Agreement. Any right of the Company to receive assets of any of its
Subsidiaries upon the liquidation or reorganization of such Subsidiary (and the
consequent right of the Holders of the Notes to participate in those assets)
will be effectively subordinated to the claims of that Subsidiary's creditors,
except to the extent that the Company is itself recognized as a creditor of such
Subsidiary. In such case the claims of the Company would still be
83
subordinate to any security in the assets of such Subsidiary and any
indebtedness of such Subsidiary that is senior to that held by the Company.
Please refer to the sections in this Prospectus entitled "Risk Factors--Risk
Factors Relating to the Notes--Company Structure."
PRINCIPAL, MATURITY AND INTEREST
The Company will issue Notes with a maximum aggregate principal amount of
$650.0 million. The Company will issue Notes in denominations of $1,000.00 and
integral multiples of $1,000.00. For each Initial Note accepted for exchange,
the holder of such Initial Note will receive an Exchange Note having a principal
amount equal to that of the surrendered Initial Note. The Notes will mature on
November 15, 2008.
Interest on the Exchange Notes will accrue at the rate of 10% per year and
will be payable semi-annually in arrears on May 15 and November 15, commencing
on May 15, 1999. The Company will make each interest payment to the Holders of
record of these Notes on the immediately preceding May 1 and November 1.
Interest on the Exchange Notes will accrue from the most recent date to
which interest has been paid on the Initial Notes or, if no interest has been
paid on the Initial Notes, from November 25, 1998. Accordingly, if the relevant
record date for interest payment occurs after the consummation of the Exchange
Offer, registered holders of Exchange Notes on such record date will receive
interest accruing from the most recent date to which interest has been paid on
the Initial Notes or, if no interest has been paid, from November 25, 1998.
Holders of Initial Notes whose Initial Notes are accepted for exchange will not
receive any payment in respect of interest on such Initial Notes otherwise
payable on any interest payment date the record date for which occurs on or
after the consummation of the Exchange Offer. If, however, the relevant record
date for interest payment occurs prior to the consummation of the Exchange
Offer, registered holders of Initial Notes on such record date will receive
interest accruing from the most recent date to which interest has been paid or,
if no interest has been paid, from November 25, 1998. Interest will cease to
accrue on Initial Notes accepted for exchange from and after the date of
consummation of the Exchange Offer, except as described in the immediately
preceding sentence. Interest is computed on the basis of a 360-day year
comprised of twelve 30-day months.
If a Holder has given wire transfer instructions to the Company, the Company
will make all payments of principal, premium, if any, and interest on the Notes
to such Holder by wire transfer of immediately available funds in accordance
with those instructions. All other payments of principal, premium, if any, and
interest on the Notes are payable at the office or agency of the Company
maintained for such purpose within the City and State of New York unless the
Company has elected to pay interest on the Notes by check mailed to the Holders
of the Notes at their respective addresses set forth in the register of Holders
of Notes by the Holders thereof. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose.
PAYING AGENT AND REGISTRAR FOR THE NOTES
The Trustee initially will be the Paying Agent and Registrar under the
Indenture, and the Company may act as Paying Agent or Registrar under the
Indenture.
THE SECURITY AGREEMENT
The Company's obligation to pay interest on the Notes on May 15, 1999,
November 15, 1999, and May 15, 2000 is secured by funds held by IBJ Whitehall
Bank & Trust Company, as security agent (the "Security Agent") under an
agreement between the Company and the Security Agent (the "Security Agreement").
Concurrently with the closing of the offering of the Initial Notes, the Company
deposited
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with the Security Agent in the security account (the "Security Account")
approximately $91.5 million in U.S. Government Securities, that, together with
the proceeds from the investment thereof, will be sufficient to pay when due the
first three interest payments on the Notes. Following the third interest payment
on the Notes, any amounts remaining in the Security Account will be released to
the Company and will thereafter remain subject to the applicable provisions of
the Indenture.
OPTIONAL REDEMPTION
Except as set forth below, the Notes will not be redeemable at the Company's
option prior to November 15, 2003.
After November 15, 2003, the Company may redeem the Notes, in whole or in
part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below, plus
accrued and unpaid interest (and Liquidated Damages, if any) thereon to the
applicable redemption date (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date), if redeemed during the twelve-month period beginning on November 15 of
the years indicated below:
YEAR PERCENTAGE
- ----------------------------------------------------------------------- -----------
2003................................................................... 105.000%
2004................................................................... 103.333%
2005................................................................... 101.667%
2006 and thereafter.................................................... 100.000%
Notwithstanding the foregoing, at any time prior to November 15, 2001, the
Company may, on any one or more occasions, redeem up to 35% of the aggregate
principal amount of Notes originally issued pursuant to the Indenture at a
redemption price of 110% of the principal amount thereof, plus accrued and
unpaid interest (and Liquidated Damages, if any) thereon to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date), if:
- the Company uses the Net Cash Proceeds received from any Public Equity
Offering made by the Company resulting in gross proceeds to the Company of
at least $100 million, and
- at least 65% of the aggregate principal amount of the Notes originally
issued pursuant to the Indenture remain outstanding immediately after the
occurrence of any such redemption.
The Company may make any such redemption upon not less than 30 nor more than
60 days' notice (but in no event more than 90 days after the closing of the
related Public Equity Offering).
SELECTION AND NOTICE
If less than all of the Notes are to be redeemed at any time, the Trustee
will select Notes for redemption as follows:
- in compliance with the requirements of the principal national securities
exchange, if any, on which the Notes are then listed, or
- if the Notes are not so then listed, on a pro rata basis, by lot or by
such method as the Company deems fair and appropriate.
No Notes of $1,000 or less shall be redeemed in part. Notices of redemption
shall be mailed by first class mail at least 30 but not more than 60 days prior
to the redemption date to each Holder of Notes to be redeemed at its registered
address. Notices of redemption may not be conditional.
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If any Note is to be redeemed in part only, the notice of redemption that
relates to such Note shall state the portion of the principal amount of such
Note to be redeemed. A new Note in principal amount equal to the unredeemed
portion of such Note will be issued in the name of the Holder of such original
Note upon cancellation of the original Note. Notes called for redemption will
become due on the date fixed for redemption. On and after the redemption date,
interest will cease to accrue on Notes or portions thereof called for redemption
unless the Company defaults in the payment of such interest.
MANDATORY REDEMPTION
The Company is not be required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
If a Change of Control occurs, each Holder of Notes will have the right to
require the Company to purchase all or any part (equal to $1,000 or an integral
multiple thereof) of that Holder's Notes pursuant to the offer described below
(the "Change of Control Offer") at a purchase price in cash equal to 101% of the
aggregate principal amount thereof (the "Change of Control Payment"), plus
accrued and unpaid interest (and Liquidated Damages, if any) thereon to the date
of purchase (subject to the right of Holders of record on the relevant record
date to receive interest due on the relevant interest payment date). However,
the Company shall not be obligated to repurchase Notes pursuant to a Change of
Control Offer if it has exercised its rights to redeem all of the Notes pursuant
to the Indenture. Within 30 days following any Change of Control, the Company
will mail a notice to each Holder describing the transaction or transactions
that constitute the Change of Control and offering to purchase Notes on the date
specified in such notice, which date shall be no earlier than 30 and no later
than 60 days from the date such notice is mailed (the "Change of Control Payment
Date"), in accordance with the procedures required by the Indenture and
described in such notice.
The Company will comply with the requirements of Rule 14e-1 under the
Securities Exchange Act of 1934 and any other securities laws and regulations to
the extent such laws and regulations are applicable in connection with the
purchase of Notes as a result of a Change of Control. To the extent that the
provisions of any securities laws or regulations conflict with any of the
provisions of this covenant, the Company will comply with the applicable
securities laws and regulations and will be deemed not to have breached its
obligations under this covenant by virtue thereof.
On the Change of Control Payment Date, the Company will, to the extent
lawful:
- accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer,
- deposit with the Paying Agent an amount equal to the Change of Control
Payment plus accrued and unpaid interest thereon and Liquidated Damages,
if any, in respect of all Notes or portions thereof so tendered, and
- deliver or cause to be delivered to the Trustee Notes so accepted together
with an Officer's Certificate stating the aggregate principal amount of
Notes or portions thereof being purchased by the Company.
The Paying Agent will promptly mail or deliver to each Holder of Notes so
tendered the Change of Control Payment plus accrued and unpaid interest thereon
and Liquidated Damages, if any, for such Notes, and the Trustee will promptly
authenticate and mail or deliver (or cause to be transferred by book entry) to
each Holder a new Note in principal amount equal to any unpurchased portion of
Notes
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surrendered, if any; PROVIDED that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Company will publicly
announce the results of the Change of Control Offer on or as soon as practicable
after the Change of Control Payment Date.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Notes to require that the Company
purchase or redeem the Notes in the event of a takeover, recapitalization or
similar transaction.
The Company's ability to purchase Notes upon a Change of Control may be
limited by the Company's then existing financial resources. We cannot assure you
that sufficient funds will be available when necessary to make any such required
purchases. The Company shall not be required to make a Change of Control Offer
if a third party makes the Change of Control Offer in the manner, at the times
and otherwise in compliance with the requirements of the Indenture and purchases
all Notes validly tendered and not withdrawn.
ASSET SALES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, consummate any Asset Sale, unless:
(i) the Company (or such Restricted Subsidiary, as the case may be) receives
consideration at the time of such Asset Sale at least equal to the fair
market value of the assets or Equity Interests issued or sold or
otherwise disposed of. For purposes of this covenant, fair market value
will be as determined in good faith by the Board of Directors (including
as to the value of all non cash consideration) and set forth in an
Officer's Certificate delivered to the Trustee,
(ii) at least 75% of the consideration therefor is in the form of cash
and/or Cash Equivalents or Telecommunications Assets, and
(iii) the Company (or such Restricted Subsidiary, as the case may be) applies
the Net Proceeds received from such Asset Sale within 360 days
following the receipt of such Net Cash Proceeds, to the extent the
Company elects:
(a) to the permanent redemption or repurchase of outstanding
Indebtedness (other than Subordinated Indebtedness) that is secured
Indebtedness (including that in the case of a revolver or similar
arrangement that makes credit available, such commitment is so
permanently reduced by such amount), or Indebtedness of the Company
or such Restricted Subsidiary that ranks equally with the Notes but
has a maturity date that is prior to the maturity date of the Notes,
and/or
(b) to reinvest such Net Cash Proceeds (or any portion thereof) in
Telecommunications Assets.
Notwithstanding anything herein to the contrary, with respect to the
reinvestment of Net Cash Proceeds, only proceeds from an Asset Sale of assets,
or Equity Interests, of a Foreign Subsidiary may be used to retire Indebtedness
of a Foreign Subsidiary or reinvest in assets or Equity Interests of a Foreign
Subsidiary.
The balance of the Net Cash Proceeds that are not applied or invested as
described in the immediately preceding clauses (a) and (b), shall constitute
"Excess Proceeds."
When the aggregate amount of Excess Proceeds equals or exceeds $15.0 million
(taking into account income earned on such Excess Proceeds), the Company will be
required to make a pro rata offer to all Holders of Notes and PARI PASSU
Indebtedness with comparable provisions requiring such
87
Indebtedness to be purchased with the proceeds of such Asset Sale (an "Asset
Sale Offer") to purchase the maximum principal amount or accreted value in the
case of Indebtedness issued with an original issue discount of Notes and PARI
PASSU Indebtedness that may be purchased out of the Excess Proceeds, at a
purchase price in cash in an amount equal to 100% of the principal amount
thereof or the accreted value thereof, as applicable, plus accrued and unpaid
interest thereon to the date of purchase (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), in accordance with the procedures set forth in the
Indenture and the agreements governing such PARI PASSU Indebtedness. To the
extent that any Excess Proceeds remain after consummation of an Asset Sale
Offer, the Company may use such Excess Proceeds for any purpose not otherwise
prohibited by the Indenture. If the aggregate principal amount of Notes and PARI
PASSU Indebtedness tendered into such Asset Sale Offer surrendered by Holders
thereof exceeds the amount of Excess Proceeds, the Trustee shall select the
Notes and PARI PASSU Indebtedness to be purchased on a pro rata basis in
proportion to the respective principal amounts (or accreted values in the case
of Indebtedness issued with an original issue discount) of the Notes and such
other Indebtedness. Upon completion of such Asset Sale Offer, the amount of
Excess Proceeds shall be reset at zero for purposes of the first sentence of
this paragraph.
For purposes of this provision, the following amounts will be deemed to be
cash and/or Cash Equivalents:
(i) any liabilities (as shown on the Company's (or such Restricted
Subsidiary's, as the case may be), most recent balance sheet), other
than Subordinated Indebtedness, of the Company or any Restricted
Subsidiary, that are assumed by the transferee of any such assets
pursuant to an agreement that immediately releases the Company and all
of its Restricted Subsidiaries from all liability in respect thereof,
(ii) Indebtedness of any Restricted Subsidiary that is no longer a
Restricted Subsidiary as a result of such Asset Sale, if the Company
and all of its Restricted Subsidiaries immediately are released from
all Guarantees of payment of such Indebtedness and such Indebtedness is
no longer the liability of the Company or any of its Restricted
Subsidiaries, and
(iii) any securities, notes or other obligations received by the Company (or
such Restricted Subsidiary, as the case may be) from such transferee
that are contemporaneously (subject to ordinary settlement periods)
converted by the Company (or such Restricted Subsidiary, as the case
may be) into cash and/or Cash Equivalents (to the extent of the cash
and/or Cash Equivalents received).
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly:
(i) declare or pay any dividend or make any other payment or distribution on
account of the Company's or any of its Restricted Subsidiaries' Equity Interests
or to the direct or indirect holders of the Company's or any of its Restricted
Subsidiaries' Equity Interests in their capacity as stockholders (other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of the Company or to the Company or a Restricted Subsidiary of the
Company),
(ii) purchase, redeem or otherwise acquire or retire for value any Equity
Interests of the Company or any of its Restricted Subsidiaries or any direct or
indirect parent of the Company (other than any such Equity Interests owned by
the Company or any Consolidated Subsidiary of the Company),
88
(iii) make any payment on or with respect to, or purchase, redeem, defease
or otherwise acquire or retire for value any Subordinated Indebtedness, except a
payment of interest or principal at Stated Maturity, or
(iv) make any Restricted Investment (all such payments and other actions set
forth in clauses (i) through (iv) above being collectively referred to as
"Restricted Payments"), unless:
(a) at the time of and after giving effect to such Restricted Payment, no
Default or Event of Default shall have occurred and be continuing or
would occur as a consequence thereof,
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been
made at the beginning of the applicable period, have been permitted to
incur at least $1.00 of additional Indebtedness pursuant to either
clause (i) or (ii) of the first paragraph of the covenant described
below under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock", and
(c) such Restricted Payment, together with the aggregate amount of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
on and after the Issue Date (excluding Restricted Payments permitted by,
and made pursuant to, clauses (ii), (iii) and (viii) of the next
succeeding paragraph), is less than the sum, without duplication and
except as credited in the next succeeding paragraph, of:
(i) 50% of the Consolidated Net Income of the Company for the period
(taken as one accounting period) beginning on the last day of the
fiscal quarter immediately preceding the Issue Date and ending on
the last day of the fiscal quarter immediately preceding the date of
such Restricted Payment (or, if such Consolidated Net Income for
such period is a deficit, less 100% of such deficit), plus
(ii) 100% of the aggregate Net Cash Proceeds received by the Company on
and after the Issue Date as a Capital Contribution or from the
issue or sale of Equity Interests of the Company (other than
Disqualified Stock) or from the issue or sale of Disqualified Stock
or debt securities of the Company that have been converted or
exchanged into such Equity Interests (other than Equity Interests
(or Disqualified Stock or converted debt securities) sold to a
Subsidiary of the Company), plus the amount of Net Cash Proceeds
received by the Company upon such conversion or exchange, plus
(iii) the aggregate amount equal to the net reduction in Investments in
Unrestricted Subsidiaries on and after the Issue Date resulting
from (x) dividends, distributions, interest payments, return of
capital, repayments of Investments or other transfers of assets to
the Company or any Restricted Subsidiary from any Unrestricted
Subsidiary, (y) proceeds realized by the Company or any Restricted
Subsidiary upon the sale of such Investment to a Person other than
the Company or any Subsidiary of the Company, or (z) the
redesignation of any Unrestricted Subsidiary as a Restricted
Subsidiary, not to exceed in the case of any of the immediately
preceding clauses (x), (y) or (z) the aggregate amount of
Restricted Investments made by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary on and after the Issue
Date, plus
(iv) to the extent that any Restricted Investment that was made on and
after the Issue Date is sold for cash or otherwise liquidated or
repaid for cash, the lesser of, to the extent paid to the Company
or a Restricted Subsidiary, (A) the cash return of capital with
respect to such Restricted Investment (less the cost of
disposition, if any) and (B) the initial amount of such Restricted
Investment.
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The foregoing provisions will not prohibit:
(i) the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have complied with
the foregoing provisions;
(ii) the redemption, repurchase, retirement, defeasance or other acquisition
of any Subordinated Indebtedness or Equity Interests of the Company in exchange
for, or out of the Net Cash Proceeds of the substantially concurrent sale (other
than to a Subsidiary of the Company) of, Equity Interests of the Company (other
than any Disqualified Stock); PROVIDED that the amount of any such Net Cash
Proceeds that are utilized for, and the Equity Interests issued or exchanged
for, any such redemption, repurchase, retirement, defeasance or other
acquisition shall be excluded from clause (c) of the preceding paragraph and
each other clause of this paragraph;
(iii) the defeasance, redemption, retirement, repurchase or other
acquisition of Subordinated Indebtedness with the Net Cash Proceeds from, or
issued in exchange for, a substantially concurrent incurrence of Permitted
Refinancing Indebtedness; PROVIDED that the amount of any such Net Cash Proceeds
that are utilized for any such redemption, repurchase, retirement, defeasance or
other acquisition shall be excluded from clause (c) of the preceding paragraph
and each other clause of this paragraph;
(iv) the payment of any dividend or other distribution by a Restricted
Subsidiary of the Company to the holders of its Equity Interests on a pro rata
basis;
(v) the repurchase, redemption or other acquisition or retirement for value
of any Equity Interests of the Company or any of its Restricted Subsidiaries
held by any member of the Company's or such Restricted Subsidiary's management;
PROVIDED that the aggregate price paid for all such repurchased, redeemed,
acquired or retired Equity Interests shall not exceed $1.0 million in any fiscal
year;
(vi) retiring any Equity Interests of the Company to the extent necessary
(as determined in good faith by a majority of the disinterested members of the
Board of Directors, whose determination shall be evidenced by a resolution
thereof) to prevent the loss, or to secure the renewal or reinstatement, of any
license or franchise held by the Company or any Restricted Subsidiary from any
governmental agency;
(vii) Investments in Telecommunications Assets, PROVIDED that the aggregate
fair market value (measured on the date each such Investment was made or
returned, as applicable), when taken together with all other Investments made
pursuant to this clause (vii) that are at the time outstanding, does not exceed
the sum of (y) $15.0 million, plus (z) the aggregate amount equal to the net
reduction in Investments made pursuant to this clause (vii) on and after the
Issue Date resulting from dividends, distributions, interest payments, return of
capital, repayments of such Investments or Net Cash Proceeds realized by the
Company or any Restricted Subsidiary upon the sale of such Investment to a
Person other than the Company or any Subsidiary of the Company, except to the
extent any such net reduction amount is included in the amount calculated
pursuant to clause (c) of the preceding paragraph or any other clause of this
paragraph;
(viii) Investments in Telecommunications Assets made with the Net Cash
Proceeds, the fair market value of Telecommunications Assets or Equity Interests
of a Person that becomes a Restricted Subsidiary (PROVIDED the assets of such
Person consist entirely or substantially entirely of Telecommunications Assets)
received from the sale (other than to a Subsidiary of the Company) of Equity
Interests of the Company (other than any Disqualified Stock) and, PROVIDED,
FURTHER, that the amount of any such Net Cash Proceeds that are utilized for any
such Investment shall be excluded from clause (c) of the preceding paragraph and
each other clause of this paragraph;
(ix) Investments in ION, PROVIDED that the aggregate fair market value
thereof (measured on the date each such Investment was made or returned, as
applicable), when taken together with all other
90
Investments made pursuant to this clause (ix) does not exceed the sum of (I)
$15.0 million, plus, (II) for each fiscal year, an amount equal to the amount of
cash received by the Company or any of its Restricted Subsidiaries from ION or
any of its Subsidiaries during such fiscal year except to the extent any such
amount is included in the amount calculated pursuant to clause (c) of the
preceding paragraph or any other clause of this paragraph during such fiscal
year plus, (III) to the extent necessary to pay reasonable and necessary
operating expenses of ION, an amount not to exceed $1.0 million in each fiscal
year; and
(x) Investments in the German Joint Venture, PROVIDED that the aggregate
fair market value (measured on the date each such Investment was made or
returned, as applicable), when taken together with all other Investments made
pursuant to this clause (x) that are at the time outstanding, does not exceed
the sum of (I) $100.0 million, plus (II) the aggregate amount equal to the net
reduction in Investments made pursuant to this clause (x) on and after the Issue
Date resulting from dividends, distributions, interest payments, return of
capital, repayments of such Investments or Net Cash Proceeds realized by the
Company or any Restricted Subsidiary upon the sale of such Investment to a
Person other than the Company or any Subsidiary of the Company, except to the
extent such amount is included in the amount calculated pursuant to clause (c)
of the preceding paragraph or any other clause of this paragraph.
The Board of Directors may not designate any Subsidiary of the Company
(other than a newly created Subsidiary in which no Investment has previously
been made (other than any de minimus amount required to capitalize such
Subsidiary in connection with its organization)) as an Unrestricted Subsidiary
(a "Designation") unless:
(i) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such Designation;
(ii) the Company would, immediately after giving effect to such Designation,
have been permitted to incur at least $1.00 of additional Indebtedness pursuant
to either clause (i) or (ii) of the first paragraph of the covenant described
below under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock"; and
(iii) the Company would not be prohibited under the Indenture from making an
Investment at the time of such Designation (assuming the effectiveness of such
Designation for purposes of this covenant) in an amount equal to the fair market
value of the net Investment of the Company and all Restricted Subsidiaries in
such Subsidiary on such date.
In the event of any such Designation, all outstanding Investments owned by
the Company and its Restricted Subsidiaries in the Subsidiary so designated will
be deemed to be an Investment made as of the time of such Designation and will
reduce the amount available for Restricted Payments under the first or second
paragraph of this covenant or Investments, as applicable. All such outstanding
Investments will be deemed to constitute Restricted Payments in an amount equal
to the fair market value of such Investments at the time of such Designation.
The Indenture will further provide that a Designation may be revoked and an
Unrestricted Subsidiary may thus be redesignated as a Restricted Subsidiary (a
"Revocation") by a resolution of the Board of Directors delivered to the
Trustee; PROVIDED that the Company will not make any Revocation unless:
(i) no Default or Event of Default shall have occurred and be continuing at
the time of or after giving effect to such Designation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary outstanding
immediately following such Revocation would, if incurred at such time, have been
permitted to be incurred at such time for all purposes under the Indenture.
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The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) or securities
proposed to be transferred or issued by the Company (or such Restricted
Subsidiary, as the case may be) pursuant to the Restricted Payment. The fair
market value of any asset(s) or securities that are required to be valued by
this covenant shall be determined in good faith by the Board of Directors (such
determination to be based upon an opinion or appraisal issued by an accounting,
appraisal or investment banking firm of national standing if such fair market
value exceeds $15.0 million).
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, issue, assume, guarantee or otherwise
become directly or indirectly liable, contingently or otherwise (including by
way of merger, consolidation or acquisition), with respect to (collectively,
"incur") any Indebtedness and the Company will not issue or incur any
Disqualified Stock and will not permit any of its Restricted Subsidiaries to
issue or incur any shares of Preferred Stock. However, the Company may incur
Indebtedness or issue or incur shares of Disqualified Stock and its Restricted
Subsidiaries may incur Acquired Debt or Acquired Preferred Stock if either:
(i) the Consolidated Leverage Ratio at the end of the Company's most
recently ended fiscal quarter (the "Reference Period") for which a consolidated
balance sheet of the Company is available immediately preceding the date on
which such additional Indebtedness is incurred or such Preferred Stock is issued
or incurred would have been less than 5.5 to 1.0 (if the Reference Period ends
on or prior to December 31, 2001), or 5.0 to 1.0 (if the Reference Period ends
subsequent to December 31, 2001), determined on a pro forma basis (including a
pro forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Preferred Stock had been issued, as the
case may be, at the beginning of the Reference Period; or
(ii) the Consolidated Capital Ratio at the end of the Reference Period would
have been less than 2.0 to 1.0, determined after giving effect to the incurrence
or issuance of such Indebtedness or Preferred Stock and, to the extent set forth
in the definitions used herein, on a pro forma basis (including a pro forma
application of the net proceeds therefrom).
Notwithstanding the foregoing, the provisions of the paragraph set forth
immediately above will not prohibit the incurrence of any of the following items
of Indebtedness (collectively, "Permitted Indebtedness"):
(a) the incurrence by the Company of Indebtedness represented by the Notes;
(b) the incurrence by the Company or any of its Restricted Subsidiaries of
Existing Indebtedness;
(c) the incurrence of Indebtedness by the Company to any Consolidated
Subsidiary or Indebtedness of any Restricted Subsidiary to the Company or
any Consolidated Subsidiary (but such Indebtedness shall be deemed to be
incurred upon such Indebtedness being held by any person other than the
Company or such Consolidated Subsidiary including upon Designation and
upon such Restricted Subsidiary otherwise no longer being a Consolidated
Subsidiary); PROVIDED that in the case of Indebtedness of the Company,
such obligations shall be unsecured and subordinated in all respects to
the Company's obligations pursuant to the Notes;
(d) the incurrence by the Company of Indebtedness in an aggregate amount
incurred and outstanding at any time pursuant to this clause (d) (plus
any Permitted Refinancing Indebtedness and any other Indebtedness
incurred to retire, defease, refinance, replace or refund such
Indebtedness) of up to $25.0 million;
92
(e) the incurrence by the Company, or any Guarantee thereof by any
Restricted Subsidiary (other than any Foreign Subsidiary), of
Indebtedness pursuant to the Credit Agreement in an aggregate amount
incurred and outstanding at any time pursuant to this clause (e) (plus
any Permitted Refinancing Indebtedness and any other Indebtedness
incurred to retire, defease, refinance, replace or refund such
Indebtedness) of up to $150.0 million, minus the amount of any such
Indebtedness (i) retired with the Net Cash Proceeds from any Asset Sale
applied to permanently reduce the outstanding amounts or the commitments
with respect to such Indebtedness pursuant to the covenant "Asset Sales"
or (ii) assumed by a transferee in an Asset Sale;
(f) the incurrence by the Company or any Foreign Subsidiaries of Purchase
Money Indebtedness; PROVIDED that in each case, such Indebtedness shall
not constitute more than 100% of the cost (determined in accordance with
GAAP in good faith by the Board of Directors of the Company) to the
Company or such Foreign Subsidiary, as applicable, of the property so
purchased, developed, acquired, constructed, improved or leased;
(g) the incurrence by the Company or any of its Restricted Subsidiaries of
Hedging Obligations that are incurred for the purpose of fixing or
hedging interest or foreign currency exchange rate risk with respect to
any floating rate Indebtedness or foreign currency based Indebtedness,
respectively, that is permitted by the terms of the Indenture to be
outstanding; PROVIDEDthat the notional amount of any such Hedging
Obligation does not exceed the amount of Indebtedness or other liability
to which such Hedging Obligation relates;
(h) the incurrence by a Foreign Subsidiary of Indebtedness pursuant to a
Foreign Subsidiary Credit Agreement (or any Guarantee thereof by any
other Foreign Subsidiary) in an aggregate principal amount incurred and
outstanding at any time pursuant to this clause (h) (plus any Permitted
Refinancing Indebtedness and any other Indebtedness incurred to retire,
defease, refinance, replace or refund such Indebtedness) of up to $50.0
million (or the equivalent thereof at the time of incurrence in the
applicable foreign currencies), minus the amount of any such Indebtedness
(i) retired with the Net Cash Proceeds from any Asset Sale applied to
permanently reduce the outstanding amounts or the commitments with
respect to such Indebtedness pursuant to the covenant "Asset Sales" or
(ii) assumed by a transferee of an Asset Sale;
(i) the Company and its Restricted Subsidiaries may incur Indebtedness
solely in respect of bankers acceptances, letters of credit and
performance bonds, all in the ordinary course of business in accordance
with customary industry practices, in amounts and for the purposes
customary in the Company's industry (other than to the extent not
supporting Indebtedness); and
(j) the incurrence by the Company or any of its Restricted Subsidiaries, as
applicable, of Permitted Refinancing Indebtedness in exchange for, or the
net proceeds of which are used to, refund, refinance or replace
Indebtedness that was incurred pursuant to the first paragraph hereof or
clauses (a), (b), (d), (e), (f), (h) or this clause (j) of this
paragraph.
Indebtedness or Preferred Stock of any Person which is outstanding at the
time such Person becomes a Restricted Subsidiary of the Company (including upon
designation of any Subsidiary or other Person as a Restricted Subsidiary or upon
a Revocation such that such Subsidiary becomes a Restricted Subsidiary) or is
merged with or into or consolidated with the Company or a Restricted Subsidiary
of the Company shall be deemed to have been incurred at the time such Person
becomes such a Restricted Subsidiary of the Company or is merged with or into or
consolidated with the Company or a Restricted Subsidiary of the Company, as
applicable.
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Upon each incurrence, the Company may designate pursuant to which provision
of this covenant such Indebtedness is being incurred and such Indebtedness shall
not be deemed to have been incurred by the Company under any other provision of
this covenant, except as stated otherwise in the foregoing provisions.
The Company will not, and will not permit any of its Restricted Subsidiaries
to, incur any Indebtedness (including Permitted Indebtedness) that is
contractually subordinated in right of payment to any other Indebtedness of the
Company unless such Indebtedness is also contractually subordinated in right of
payment to the Notes on substantially identical terms; PROVIDED, HOWEVER, that
no Indebtedness of the Company shall be deemed to be contractually subordinated
in right of payment to any other Indebtedness of the Company solely by virtue of
being unsecured.
LIENS
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create, incur, assume or otherwise cause or suffer
to exist or become effective any Lien of any kind (other than Permitted Liens)
upon any of their property or assets, now owned or hereafter acquired, or upon
any income or profits therefrom unless all payments due under the Indenture and
the Notes are secured (except as provided in the next clause) on an equal and
ratable basis with the obligations so secured and no Lien shall be granted or be
allowed to exist which secures Subordinated Indebtedness except with respect to
Acquired Debt, in which case, however, such Liens must be made junior and
subordinate to the Liens granted to the Holders of the Notes.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, directly or indirectly, create or otherwise cause or suffer to exist or
become effective any encumbrance or restriction on the ability of any Restricted
Subsidiary to:
(i) (a) pay dividends or make any other distributions to the Company or any
of its Restricted Subsidiaries (y) on its Capital Stock or (z) with respect to
any other interest or participation in, or measured by, its profits, or
(b) pay any indebtedness owed to the Company or any of its Restricted
Subsidiaries,
(ii) make loans or advances to the Company or any of its Restricted
Subsidiaries or
(iii) transfer any of its properties or assets to the Company or any of its
Restricted Subsidiaries.
However, the foregoing restrictions will not apply to encumbrances or
restrictions existing under or by reason of:
(a) Existing Indebtedness as in effect on the Issue Date,
(b) the Indenture, the Notes and Indebtedness ranking PARI PASSU with the
Notes provided such provisions are no more restrictive than the Notes,
(c) the Credit Agreement, any Foreign Subsidiary Credit Agreement, PROVIDED
that the restrictions contained in the Credit Agreement are no more
restrictive, taken as a whole, than those contained in a credit agreement
with terms that are commercially reasonable for a borrower that has
substantially comparable Indebtedness, and PROVIDED, FURTHER, that no
such provision shall prohibit or restrict the ability of any Restricted
Subsidiary to pay dividends or make other upstream distributions or other
payments to the Company or any of its Restricted Subsidiaries,
(d) applicable law,
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(e) any instrument governing Indebtedness or Capital Stock of a Person or
assets acquired by the Company or any of its Restricted Subsidiaries as
in effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person,
or the property or assets of the Person, so acquired; PROVIDED, that in
the case of Indebtedness, such Indebtedness was permitted by the terms of
the Indenture to be incurred,
(f) customary non-assignment provisions in leases entered into in the
ordinary course of business and consistent with past practices,
(g) purchase money obligations (including pursuant to Purchase Money
Indebtedness obligations) for property acquired in the ordinary course of
business that impose restrictions of the nature described in clause (iii)
above on the property so acquired, constructed, leased or improved,
(h) any agreement for the sale or other disposition of a Restricted
Subsidiary that restricts distributions by that Restricted Subsidiary
pending its sale or other disposition, provided that the consummation of
such transaction would not result in an Event of Default or an event
that, with the passing of time or giving of notice or both, would
constitute an Event of Default, that such restriction terminates if such
transaction is not consummated and that the consummation or abandonment
of such transaction occurs within one year of the date such agreement was
entered into,
(i) Permitted Refinancing Indebtedness, PROVIDED that the restrictions
contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive, taken as a whole, than those
contained in the agreements governing the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded,
(j) Liens securing Indebtedness otherwise permitted to be incurred pursuant
to the provisions of the covenant described above under the caption
"--Liens" that limit the right of the Company or any of its Restricted
Subsidiaries to dispose of the assets subject to such Lien,
(k) provisions with respect to the disposition or distribution of assets or
property in joint venture agreements and other similar agreements entered
into in the ordinary course of business, and
(l) restrictions on cash or other deposits or net worth imposed by customers
under contracts entered into in the ordinary course of business.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Company may not, directly or indirectly, consolidate or merge with or
into (whether or not the Company is the surviving corporation), or sell, assign,
transfer, convey or otherwise dispose of all or substantially all of its
properties or assets, in one or more related transactions, to another Person
unless:
(i) the Company is the surviving corporation or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, conveyance or other disposition shall
have been made is a corporation organized or existing under the laws of the
United States, any state thereof or the District of Columbia;
(ii) the Person formed by or surviving any such consolidation or merger (if
other than the Company) or the Person to which such sale, assignment, transfer,
conveyance or other disposition shall have been made assumes all the obligations
of the Company under the Registration Rights Agreement, the Notes and the
Indenture pursuant to a supplemental indenture in a form reasonably satisfactory
to the Trustee;
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(iii) no Default or Event of Default (or an event that, with the passing of
time or giving of notice or both, would constitute an Event of Default) shall
exist or shall occur immediately after giving effect on a pro forma basis to
such transaction;
(iv) except in the case of a merger of the Company with or into a Wholly
Owned Restricted Subsidiary of the Company, the Company or the Person formed by
or surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, conveyance or other disposition shall
have been made will immediately after such transaction and after giving pro
forma effect thereto and any related financing transactions as if the same had
occurred at the beginning of the applicable period, be permitted to incur at
least $1.00 of additional Indebtedness pursuant to either clause (i) or (ii) of
the first paragraph of the covenant described above under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock";
(v) if, as a result of any such transaction, property or assets of the
Company would become subject to a Lien subject to the provisions of the
Indenture described under "--Liens" above, the Company or the successor entity
to the Company shall have secured the Notes as required by said covenant; and
(vi) the Company shall have delivered to the Trustee an Officers'
Certificate and an opinion of counsel, each stating that such consolidation,
merger or transfer and such supplemental indenture (if any) comply with the
Indenture.
The Indenture will also provide that the Company may not, directly or
indirectly, lease all or substantially all of its properties or assets, in one
or more related transactions, to any other Person. The provisions of this
covenant will not be applicable to a sale, assignment, transfer, conveyance or
other disposition of assets solely between or among the Company and its Wholly
Owned Restricted Subsidiaries.
Upon any consolidation or merger or any transfer of all or substantially all
of the assets of the Company in accordance with the foregoing, the successor
corporation formed by such consolidation or into which the Company is merged or
to which such transfer is made shall succeed to and (except in the case of a
lease) be substituted for, and may exercise every right and power of, the
Company under the Indenture with the same effect as if such successor
corporation had been named therein as the Company, and (except in the case of a
lease) the Company shall be released from the obligations under the Notes and
the Indenture except with respect to any obligations that arise from, or are
related to, such transaction.
For purposes of the foregoing, the transfer (by assignment, sale or
otherwise) of all or substantially all of the properties and assets of one or
more Subsidiaries, the Company's interest in which constitutes all or
substantially all of the properties and assets of the Company, shall be deemed
to be the transfer of all or substantially all of the properties and assets of
the Company.
TRANSACTIONS WITH AFFILIATES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, make any payment to, or sell, lease, transfer or otherwise dispose of any of
its properties or assets to, or purchase any property or assets from, or enter
into or make or amend any transaction, contract, agreement, understanding, loan,
advance or guarantee with, or for the benefit of, any Affiliate (each of the
foregoing, an "Affiliate Transaction"), unless:
(i) such Affiliate Transaction is on terms that are not materially less
favorable to the Company or the relevant Restricted Subsidiary than those that
would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person, and
(ii) with respect to any Affiliate Transaction or series of related
Affiliate Transactions (A) involving aggregate consideration in excess of $5.0
million, the Company delivers to the Trustee a
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resolution of the Board of Directors set forth in an Officers' Certificate that
such Affiliate Transaction is approved by a majority of the disinterested
members of the Board of Directors and that, except with respect to matters
governed by the Management Agreement, certifying that such Affiliate Transaction
complies with clause (i) above and is in the best interests of the Company or
such Restricted Subsidiary and (B) if involving aggregate consideration in
excess of $15.0 million, a favorable written opinion as to the fairness to the
Company of such Affiliate Transaction from a financial point of view is also
obtained by the Company from an accounting, appraisal or investment banking firm
of national standing.
Notwithstanding the foregoing, the following items shall not be deemed to be
Affiliate Transactions:
(i) (a) the entering into, maintaining or performance of any employment
contract, collective bargaining agreement, benefit plan, program or arrangement,
related trust agreement or any other similar arrangement for or with any
employee, officer or director heretofore or hereafter entered into in the
ordinary course of business, including vacation, health, insurance, deferred
compensation, retirement, savings or other similar plans,
(b) the payment of compensation, performance of indemnification or
contribution obligations, or an issuance, grant or award of stock,
options, or other equity-related interests or other securities, to
employees, officers or directors in the ordinary course of business,
(c) any transaction with an officer or director in the ordinary course of
business not involving more than $100,000 in any one case, or
(d) Management Advances and payments in respect thereof,
(ii) transactions between or among the Company and/or its Restricted
Subsidiaries,
(iii) payment of reasonable directors fees,
(iv) any sale or other issuance of Equity Interests (other than Disqualified
Stock) of the Company,
(v) Affiliate Transactions in effect or approved by the Board of Directors
on the Issue Date, including any amendments thereto (PROVIDED that the terms of
such amendments are not materially less favorable to the Company than the terms
of such agreement prior to such amendment),
(vi) transactions with respect to capacity between the Company or any
Restricted Subsidiary and any Unrestricted Subsidiary or another Affiliate and
joint sales and marketing pursuant to an agreement or agreements between the
Company or any Restricted Subsidiary and any Unrestricted Subsidiary or another
Affiliate (PROVIDED that in the case of this clause (vi), such agreements are on
terms that are no less favorable to the Company or the relevant Restricted
Subsidiary than those that could have been obtained at the time of such
transaction in an arm's-length transaction with an unrelated third party or, in
the case of a transaction with an Unrestricted Subsidiary, ION or another
Affiliate, are either (x) entered into in connection with a transaction
involving the selection by a customer of cable system capacity entered into in
the ordinary course of business or (y) involve the provision by the Company or a
Restricted Subsidiary to an Unrestricted Subsidiary, ION or another Affiliate of
sales and marketing services, operations, administration and maintenance
services or development services for which the Company or such Restricted
Subsidiary receives a fair rate of return (as determined by the Board of
Directors and set forth in an Officers' Certificate delivered to the Trustee)
above its expenses of providing such services), and
(vii) Restricted Payments that are permitted by the covenant described above
under the caption "--Restricted Payments."
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BUSINESS ACTIVITIES
The Company will not, and will not permit any of its Restricted Subsidiaries
to, engage, to more than a de minimus extent, in any business other than a
Telecommunications Business.
PAYMENTS FOR CONSENT
The Company and each of its Restricted Subsidiaries will not directly or
indirectly, pay or cause to be paid any consideration, whether by way of
interest, fee or otherwise, to any Holder of any Notes for or as an inducement
to any consent, waiver or amendment of any of the terms or provisions of the
Indenture or the Notes unless such consideration is offered to be paid or is
paid to all Holders of the Notes that consent, waive or agree to amend such
terms or provisions of the Indenture or the Notes in the time frame set forth in
the solicitation documents relating to such consent, waiver or agreement.
REPORTS
Whether or not required by the rules and regulations of the Securities and
Exchange Commission, so long as any Notes are outstanding, the Company will
furnish to the Trustee and the Holders of the Notes:
(i) all quarterly and annual financial information that would be required to
be contained in a filing with the Securities and Exchange Commission on Forms
10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that describes the financial condition and results of operations of
the Company and its consolidated Subsidiaries and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants, and
(ii) all current reports that would be required to be filed with the
Securities and Exchange Commission on Form 8-K if the Company were required to
file such reports, in each case within the time periods specified in the
Securities and Exchange Commission's rules and regulations.
In addition, following the consummation of the Exchange Offer, whether or
not required by the rules and regulations of the Securities and Exchange
Commission, the Company will file a copy of all such information and reports
with the Securities and Exchange Commission for public availability within the
time periods specified in the Commission's rules and regulations (unless the
Securities and Exchange Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following will constitute an
Event of Default:
(i) default for 30 days in the payment when due of interest on the Notes;
(ii) default in the payment when due of the principal of, or premium, if
any, on, the Notes;
(iii) failure by the Company or any of its Restricted Subsidiaries to comply
with the provisions described above under the captions "--Change of Control," or
"--Asset Sales";
(iv) failure by the Company or any of its Restricted Subsidiaries for 60
days after notice to comply with any of its other agreements in the Indenture or
the Notes;
(v) default under any mortgage, indenture or instrument under which there
may be issued or by which there may be secured or evidenced any Indebtedness for
money borrowed by the Company or any of its Restricted Subsidiaries (or the
payment of which is Guaranteed by the Company or any of its Restricted
Subsidiaries) whether such Indebtedness or Guarantee now exists, or is created
after the Issue Date, which default results in the acceleration of such
Indebtedness prior to its express maturity
98
and, in each case, the amount of any such Indebtedness, together with the amount
of any other such Indebtedness or the maturity of which has been so accelerated,
aggregates $15 million or more;
(vi) failure by the Company or any of its Restricted Subsidiaries to pay
final judgments not subject to appeal aggregating in excess of $15 million (net
of applicable insurance coverage which is acknowledged in writing by the
insurer), which judgments are not paid, vacated, discharged or stayed for a
period of 60 days; and
(vii) certain events of bankruptcy or insolvency with respect to the Company
or any of its Restricted Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Notes may declare
all the Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, with respect to the Company, any Restricted Subsidiary that is a
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding Notes will
become due and payable without further action or notice. Holders of the Notes
may not enforce the Indenture or the Notes except as provided in the Indenture.
Subject to certain limitations, Holders of a majority in principal amount of the
then outstanding Notes may direct the Trustee in its exercise of any trust or
power. The Trustee may withhold from Holders of the Notes notice of any
continuing Default or Event of Default (except a Default or Event of Default
relating to the payment of principal of, premium, if any, or interest on, the
Notes) if it determines that withholding notice is in their interest.
The Holders of a majority (or super majority of at least 66 2/3% in the case
of any covenant requiring 66 2/3% to amend) in aggregate principal amount of the
then outstanding Notes by notice to the Trustee may on behalf of the Holders of
all of the Notes waive any existing Default or Event of Default and its
consequences under the Indenture, except a continuing Default or Event of
Default in the payment of principal of, premium, if any, or interest on the
Notes.
The Company will be required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company will be required upon
becoming aware of any Default or Event of Default to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATORS OR
SHAREHOLDERS
No director, officer, employee, incorporator or shareholder of the Company,
as such, will have any liability for any obligations of the Company with respect
to the Notes or the Indenture, or for any claim based on, or in respect or by
reason of, such obligations or their creation. Each Holder of Notes by accepting
a Note will waive and release any and all such liability. Such waiver and
release are part of the consideration for issuance of the Notes. Such waiver may
not be effective to waive liabilities under federal securities laws and it is
the view of the Securities and Exchange Commission that such a waiver is against
public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Indenture will be discharged and cancelled upon the delivery by the
Company to the Trustee for cancellation of all the Notes or upon irrevocable
deposit with the Trustee, within not more than one year prior to the final
stated maturity of the Notes, or when the Notes are to be called for redemption
within one year under arrangements satisfactory to the Trustee, of funds
sufficient for the payment or redemption of all the Notes.
99
In addition, the Indenture will provide that the Company may, at its option
and at any time, elect to have all of its obligations discharged with respect to
the outstanding Notes ("Legal Defeasance"), except for:
(i) the rights of Holders of outstanding Notes to receive payments in
respect of the principal of, premium, if any, and interest on such Notes when
such payments are due from the trust referred to below;
(ii) the Company's obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust;
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and
the Company's obligations in connection therewith; and
(iv) the Legal Defeasance provisions of the Indenture.
In addition, the Company may, at its option and at any time, elect to have
its obligations released with respect to certain covenants that are contained in
the Indenture ("Covenant Defeasance") and, thereafter, any omission to comply
with such obligations will not constitute a Default or Event of Default. In the
event Covenant Defeasance occurs, certain events (but not including non-payment,
bankruptcy, receivership, rehabilitation or insolvency events) described under
"--Events of Default and Remedies" will no longer constitute an Event of
Default.
In order to exercise either Legal Defeasance or Covenant Defeasance:
(i) the Company must irrevocably deposit, or cause to be deposited, with the
Trustee, in trust, for the benefit of the Holders of the Notes, cash in U.S.
dollars, non-callable Government Securities, or a combination thereof, in such
amounts as will be sufficient, in the opinion of a nationally recognized firm of
independent public accountants, to pay the principal of, premium, if any, and
interest on the outstanding Notes on the stated maturity thereof or on the
applicable redemption date, as the case may be, and the Company must specify
whether the Notes are being defeased to maturity or to a particular redemption
date;
(ii) in the case of Legal Defeasance, the Company must deliver to the
Trustee an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that, since the Issue Date, the Company has received from, or
there has been published by, the Internal Revenue Service a ruling, or there has
been a change in the applicable United States federal income tax law, in either
case to the effect that, and based thereon such opinion of counsel shall confirm
that, the Holders of the outstanding Notes will not recognize income, gain or
loss for United States federal income tax purposes as a result of such Legal
Defeasance, and will be subject to United States federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Legal Defeasance had not occurred;
(iii) in the case of Covenant Defeasance, the Company must deliver to the
Trustee an opinion of counsel in the United States reasonably acceptable to the
Trustee confirming that the Holders of the outstanding Notes will not recognize
income, gain or loss for United States federal income tax purposes as a result
of such Covenant Defeasance, and such Holders will be subject to United States
federal income tax on the same amounts, in the same manner and at the same times
as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit (other than a Default or Event of Default resulting
from the borrowing of funds to be applied to such deposit) or insofar as Events
of Default from bankruptcy or insolvency events are concerned, at any time in
the period ending on the 91st day after the date of deposit;
100
(v) such Legal Defeasance or Covenant Defeasance will not result in a breach
or violation of, or constitute a default under, any material agreement or
instrument (other than the Indenture) to which the Company or any of its
Restricted Subsidiaries is a party or by which the Company or any of its
Restricted Subsidiaries is bound;
(vi) the Company must deliver to the Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of the Notes over other creditors of the Company, or with
the intent of defeating, hindering, delaying or defrauding creditors of the
Company or others; and
(vii) the Company must deliver to the Trustee an Officers' Certificate and
an opinion of counsel in the United States reasonably acceptable to the Trustee,
each stating that the conditions precedent provided for or relating to Legal
Defeasance or Covenant Defeasance, as applicable, in the case of the Officers'
Certificate, in clauses (i) through (vi) and, in the case of the opinion of
counsel, in clauses (i) (with respect to the validity and perfection of the
security interest) and clauses (ii) and (iii) of this paragraph, have been
complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the procedures
set forth in the Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents,
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Indenture.
The Company will not be required to transfer or exchange any Note selected
for redemption. Also, the Company will not be required to transfer or exchange
any Note for a period of 15 days before:
(i) a selection of Notes to be redeemed,
(ii) an interest payment date, or
(iii) the mailing of notice of a Change of Control Offer or Asset Sale
Offer.
The registered Holder of a Note will be treated as the owner of it for all
purposes under the Indenture.
AMENDMENT, SUPPLEMENT AND WAIVER
The Indenture will contain provisions permitting the Company and the Trustee
to enter into a supplemental indenture for certain limited purposes without the
consent of the Holders. With the consent of the Holders of not less than a
majority in aggregate principal amount of the Notes at the time outstanding, the
Company and the Trustee are permitted to amend or supplement the Indenture or
any supplemental indenture or modify the rights of the Holders; PROVIDED that no
such modification may, without the consent of Holders of at least 66 2/3% in
aggregate principal amount of Notes at the time outstanding, modify the
provisions (including the defined terms used therein) of the covenant
"Repurchase at the Option of the Holders--Change of Control" in a manner adverse
to the Holders or, except with respect to the Lien on the Security Account,
release or modify a Lien granted to the Holders of the Notes; and PROVIDED that
no such modification may, without the consent of each Holder affected thereby:
(i) change the Stated Maturity on any Note, or reduce the principal amount
thereof or the rate (or extend the time for payment) of interest thereon or any
premium payable upon the redemption at the option of the Company thereof, or
change the place of payment where, or the coin or currency in which, any Note or
any premium or the interest thereon is payable, or impair the right to institute
suit for the enforcement of any such payment on or after the Stated Maturity
thereof (or, in the case of redemption at the option of the Company, on or after
the Redemption Date) or reduce the Change of
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Control Payment or the Asset Sale Offer Price after the corresponding Asset Sale
or Change of Control has occurred, or
(ii) alter the provisions (including the defined terms used therein)
regarding the right of the Company to redeem the Notes as a right, or at the
option, of the Company in a manner adverse to the Holders, or
(iii) reduce the percentage in principal amount of the outstanding Notes,
the consent of whose Holders is required for any such amendment, supplemental
indenture or waiver provided for in the Indenture, or
(iv) modify any of the waiver provisions, except to increase any required
percentage or to provide that certain other provisions of the Indenture cannot
be modified or waived without the consent of the Holder of each outstanding Note
affected thereby, or
(v) cause the Notes to become subordinate in right of payment to any other
Indebtedness, or
(vi) release any funds from the Security Account in any manner inconsistent
with the provisions of the Security Agreement as in effect on the Issue Date or
modify any provision of the Security Agreement in a manner adverse to the
Holders of the Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the Trustee may amend or supplement the Indenture or the Notes:
(i) to cure any ambiguity, defect or inconsistency,
(ii) to provide for uncertificated Notes in addition to or in place of
certificated Notes,
(iii) to provide for the assumption of the Company's obligations to Holders
of Notes in the case of a merger or consolidation or sale of all or
substantially all of the Company's assets in accordance with the terms of the
Indenture,
(iv) to make any change that would provide any additional rights or benefits
to the Holders of Notes or that does not adversely affect the legal rights under
the Indenture of any such Holder, or
(v) to comply with the requirements of the Securities and Exchange
Commission in order to effect or maintain the qualification of the Indenture
under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest, it must
eliminate such conflict within 90 days, apply to the Securities and Exchange
Commission for permission to continue, or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. In case an Event of Default shall occur (which shall not be
cured) the Trustee will be required, in the exercise of its power, to use the
degree of care of a prudent person in the conduct of their own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
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GOVERNING LAW
The Indenture and the Notes are governed by and construed in accordance with
the laws of the State of New York.
The Company will submit to the jurisdiction of the U.S. federal and New York
state courts located in the Borough of Manhattan, City and State of New York for
purposes of all legal actions and proceedings instituted in connection with the
Notes and the Indenture.
CERTAIN DEFINITIONS
We have provided below certain defined terms used in the Indenture. We urge
you to read the Indenture for a full disclosure of all such terms, as well as
any other capitalized terms used in this Prospectus for which we have provided
no definition.
"ACQUIRED DEBT" or "ACQUIRED PREFERRED STOCK" means, with respect to any
specified Person, Indebtedness or Preferred Stock of any other Person existing
at the time such other Person is merged with or into or became a Subsidiary of
such specified Person (including by Designation or Revocation) provided such
Indebtedness or Preferred Stock is not incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person.
"AFFILIATE" of any specified Person means any other Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with") as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; PROVIDED that
beneficial ownership of 10% or more of the Voting Stock of a Person shall be
deemed to be control.
"ASSET SALE" means:
(i) the sale, lease, transfer, conveyance or other disposition of any assets
or rights (including, without limitation, by way of a sale and
leaseback) other than sales of inventory in the ordinary course of
business and other than any sale, lease, transfer, conveyance or other
disposition in the ordinary course of business of capacity on any fiber
optic or cable system owned, controlled or operated by the Company or
any Restricted Subsidiary or of telecommunications capacity,
transmission rights, conduit or rights-of-way acquired by the Company or
any Restricted Subsidiary for use in a Telecommunications Business of
the Company or any Restricted Subsidiary (PROVIDED that the sale, lease,
transfer, conveyance or other disposition of all or substantially all of
the assets of the Company and its Restricted Subsidiaries taken as a
whole will be governed by the provisions of the Indenture described
above under the caption "--Repurchase at the Option of Holders--Change
of Control" and/or the provisions described above under the caption
"--Certain Covenants--Merger, Consolidation or Sale of Assets" and not
by the provisions of the Asset Sale covenant), and
(ii) the issue or sale by the Company or any of its Restricted Subsidiaries
of Equity Interests of any Subsidiary.
Notwithstanding the foregoing, the following items shall not be deemed to be
Asset Sales: (i) a transfer of assets by the Company to a Consolidated
Subsidiary or by a Subsidiary to the Company or to a Consolidated Subsidiary,
(ii) an issuance of Equity Interests by a Subsidiary to the Company or to a
Consolidated Subsidiary, (iii) a Restricted Payment that is permitted by the
covenant described above under the caption "--Certain Covenants--Restricted
Payments," (iv) Permitted Investments made in accordance with clause (a) or (c)
of the definition thereof, (v) a disposition of obsolete or worn out
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equipment or equipment that is no longer useful in the conduct of a
Telecommunications Business of the Company and its Restricted Subsidiaries and
that is disposed of in the ordinary course of business, (vi) the surrender or
waiver by the Company or any of its Restricted Subsidiaries of contract rights
or the settlement, release or surrender of contract, tort or other claims of any
kind by the Company or any of its Restricted Subsidiaries or the grant by the
Company or any of its Restricted Subsidiaries of a Lien not prohibited by the
Indenture, (vii) the sale of Cash Equivalents in the ordinary course of
business; and (viii) sales, transfers, assignments and other dispositions of
assets (or related assets in related transactions) in the ordinary course of
business with an aggregate fair market value of less than $1.0 million.
"BOARD OF DIRECTORS" means the board of directors or other governing body of
the Company or, if the Company is owned or managed by a single entity, the board
of directors or other governing body of such entity, or, in either case, any
committee thereof duly authorized to act on behalf of such board or governing
body.
"BOARD RESOLUTION" means a duly authorized resolution of the Board of
Directors.
"CAPITAL CONTRIBUTION" means any contribution to the equity of the Company
from a direct or indirect parent of the Company for which no consideration other
than the issuance of common stock with no redemption rights and no special
preferences, privileges or voting rights is given.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership or limited liability
company, partnership or membership interests (whether general or limited) and
(iv) any other interest or participation that confers on a Person the right to
receive a share of the profits and losses of, or distributions of assets of, the
issuing Person.
"CASH EQUIVALENTS" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof (provided that the full faith and credit
of the United States is pledged in support thereof) having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any domestic commercial bank
having capital and surplus in excess of $500 million and a Thompson Bank Watch
Rating of "B" or better, (iv) repurchase obligations with a term of not more
than seven days for underlying securities of the types described in clause (ii)
above entered into with any financial institution meeting the qualifications
specified in clause (iii) above, (v) commercial paper having the highest rating
obtainable from Moody's Investors Service, Inc. or Standard & Poor's Ratings
Group and in each case maturing within six months after the date of acquisition
and (vi) money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i)-(v) of this definition,
PROVIDED that with respect to any Foreign Subsidiary, Cash Equivalents shall
also mean those investments that are comparable to clauses (iii) through (vi)
above in such Foreign Subsidiary's country of organization or country where it
conducts business operations.
"CHANGE OF CONTROL" means the occurrence of any of the following:
(i) any "person" or "group" (as such terms are used in Section 13(d)(3) of
the Securities Exchange Act of 1934), other than a Permitted Holder, is
or becomes the beneficial owner, directly or indirectly, of 35% or more
of the Voting Stock (measured by voting power rather than number of
shares) of the Company and the Permitted Holders own, in the aggregate,
a
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lesser percentage of the total Voting Stock (measured by voting power
rather than by number of shares) of the Company than such person and do
not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the board of directors of
the Company (for the purposes of this clause, such other person shall be
deemed to "beneficially own" any Voting Stock of a specified corporation
held by a parent corporation if such other person beneficially owns,
directly or indirectly, more than 35% of the Voting Stock (measured by
voting power rather than by number of shares) of such parent corporation
and the Permitted Holders beneficially own, directly or indirectly, in
the aggregate a lesser percentage of Voting Stock (measured by voting
power rather than by number of shares) of such parent corporation and do
not have the right or ability by voting power, contract or otherwise to
elect or designate for election a majority of the board of directors of
such parent corporation),
(ii) during any period of two consecutive years, Continuing Directors cease
for any reason to constitute a majority of the Board of Directors of
the Company,
(iii) the Company consolidates or merges with or into any other Person, other
than a consolidation or merger (a) of the Company into a Wholly Owned
Restricted Subsidiary of the Company or (b) pursuant to a transaction
in which the outstanding Voting Stock of the Company is changed into or
exchanged for cash, securities or other property with the effect that
the beneficial owners of the outstanding Voting Stock of the Company
immediately prior to such transaction, beneficially own, directly or
indirectly, at least a majority of the Voting Stock (measured by voting
power rather than number of shares) of the surviving corporation
immediately following such transaction, or
(iv) the sale, transfer, conveyance or other disposition (other than by way
of merger or consolidation) in one or a series of related transactions,
of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole to any person other than a
Wholly Owned Restricted Subsidiary of the Company or a Permitted Holder
or a person more than 50% of the Voting Stock (measured by voting power
rather than by number of shares) of which is owned, directly or
indirectly, following such transaction or transactions by the Permitted
Holders; PROVIDED, HOWEVER, that sales, transfers, conveyances or other
dispositions in the ordinary course of business of capacity on cable
systems owned, controlled or operated by the Company or any Restricted
Subsidiary or fiber optic or of telecommunications capacity or
transmission rights, rights-of-way or conduit acquired by the Company
or any Restricted Subsidiary for use in the Telecommunications Business
of the Company or a Restricted Subsidiary, including, without
limitation, for sale, lease, transfer, conveyance or other disposition
to any customer of the Company or any Restricted Subsidiary shall not
be deemed a disposition of assets for purposes of this clause (iv).
The definition of a Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the assets of the Company and its Restricted Subsidiaries taken as a
whole. The Indenture is governed by New York law, and there is no clearly
established meaning under New York law of the phrase "substantially all" of the
assets of a corporation. Accordingly, the ability of a Holder of Notes to
require the Company to purchase such Notes as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of the
Company and its Restricted Subsidiaries taken as a whole to another Person or
group may be uncertain.
"CONSOLIDATED CAPITAL RATIO" means, with respect to the Company as of any
date, the ratio of (i) the aggregate consolidated amount of Indebtedness of the
Company and its Restricted Subsidiaries then outstanding to (ii) the
Consolidated Net Worth of the Company and its Consolidated Subsidiaries as of
such date.
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"CONSOLIDATED CASH FLOW" means, with respect to the Company for any period,
the Consolidated Net Income of the Company and its Consolidated Subsidiaries for
such period
plus (A) to the extent that any of the following items were deducted in
computing such Consolidated Net Income, but without duplication, (i) provision
for taxes based on income or profits of the Company and its Consolidated
Subsidiaries for such period, plus (ii) consolidated interest expense of the
Company and its Consolidated Subsidiaries for such period, whether paid or
accrued and whether or not capitalized (including, without limitation,
amortization of debt issuance costs and original issue discount, non-cash
interest payments, the interest component of any deferred payment obligations,
the interest component of all payments associated with Capital Lease
Obligations, commissions, discounts and other fees and charges incurred in
respect of letter of credit or bankers' acceptance financings, and net payments
(if any) pursuant to Hedging Obligations) plus (iii) depreciation, amortization
(including amortization of goodwill and other intangibles and the amount of
capacity available for sale (other than for backhaul capacity) charged to cost
of sales) but excluding amortization of prepaid cash expenses that were paid in
a prior period) and other non-cash expenses (excluding any such non-cash expense
to the extent that it represents an accrual of or reserve for cash expenses in
any future period or amortization of a prepaid cash expense that was paid in a
prior period) of the Company and its Consolidated Subsidiaries for such period,
minus (B) non-cash items increasing such Consolidated Net Income for such
period (other than items that were accrued in the ordinary course of business)
in each case, on a consolidated basis and determined in accordance with GAAP.
Notwithstanding the foregoing, the provision for taxes on the income or
profits of, and the depreciation and amortization and other non-cash expenses
of, a Restricted Subsidiary of the Company shall be added to Consolidated Net
Income to compute Consolidated Cash Flow of the Company only to the extent that
a corresponding amount would be permitted at the date of determination to be
dividended to the Company by such Restricted Subsidiary without prior
governmental approval (that has not been obtained) and without direct or
indirect restriction pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to that Restricted Subsidiary or its shareholders.
"CONSOLIDATED LEVERAGE RATIO" means, with respect to the Company, as of any
date, the ratio of (i) the aggregate consolidated amount of Indebtedness of the
Company and its Restricted Subsidiaries then outstanding to (ii) the annualized
Consolidated Cash Flow of the Company and its Consolidated Subsidiaries for the
most recently ended fiscal quarter.
"CONSOLIDATED NET INCOME" means, with respect to the Company for any period,
the aggregate of the Net Income of the Company and its Consolidated Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
PROVIDED that:
(i) the Net Income (but not loss) of any Person that is accounted for by the
equity method of accounting shall be included only to the extent of the amount
of dividends or distributions paid in cash to the Company or a Consolidated
Subsidiary thereof by such Person but not in excess of the Company's Equity
Interests in such Person,
(ii) the Net Income of any Restricted Subsidiary shall be excluded to the
extent that the declaration or payment of dividends or similar distributions by
that Restricted Subsidiary of that Net Income is not at the date of
determination permitted without any prior governmental approval (that has not
been obtained) or, directly or indirectly, by operation of the terms of its
charter or any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
shareholders, except that the Company's equity in the net income of any such
Restricted Subsidiary for such period may be included in such Consolidated Net
Income up to
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the aggregate amount of cash that could have been distributed by such Restricted
Subsidiary during such period to the Company as a dividend,
(iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded,
(iv) the equity of the Company or any Restricted Subsidiary in the net
income (if positive) of any Unrestricted Subsidiary shall be included in such
Consolidated Net Income up to the aggregate amount of cash actually distributed
by such Unrestricted Subsidiary during such period to the Company or a
Consolidated Subsidiary as a dividend or other distribution (but not in excess
of the amount of the Net Income of such Unrestricted Subsidiary for such period)
and
(v) the cumulative effect of a change in accounting principles shall be
excluded.
"CONSOLIDATED NET WORTH" means, with respect to the Company as of any date,
the sum of (i) the consolidated equity of the common shareholders of the Company
and its Consolidated Subsidiaries that are Consolidated Subsidiaries as of such
date plus (ii) the respective amounts reported on the Company's balance sheet as
of such date with respect to any series of Preferred Stock (other than
Disqualified Stock) that by its terms is not entitled to the payment of
dividends unless such dividends may be declared and paid only out of net
earnings in respect of the year of such declaration and payment, but only to the
extent of any cash received by the Company upon issuance of such Preferred
Stock, less (x) all write-ups (other than write-ups resulting from foreign
currency translations and write-ups of tangible assets of a going concern
business made within 12 months after the acquisition of such business)
subsequent to the Closing Date in the book value of any asset owned by the
Company or a Restricted Subsidiary that is a Consolidated Subsidiary of the
Company, (y) all outstanding net Investments as of such date in unconsolidated
Restricted Subsidiaries and in Persons that are not Restricted Subsidiaries
(except, in each such case, Permitted Investments) and (z) all unamortized debt
discount and expense and unamortized deferred charges as of such date, all of
the foregoing determined in accordance with GAAP.
"CONSOLIDATED SUBSIDIARY" means, for any Person, each Restricted Subsidiary
of such Person (whether now existing or hereafter created or acquired) the
financial statements of which are consolidated for financial statement reporting
purposes with the financial statements of such Person in accordance with GAAP.
"CONTINUING DIRECTORS" means individuals who at the beginning of the period
of determination constituted the Board of Directors of the Company, together
with any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by a
vote of a majority of the directors of the Company then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved or is the designee of any one of the
Permitted Holders or any combination thereof or was nominated or elected by any
such Permitted Holder(s) or any of their designees.
"CREDIT AGREEMENT" means one or more credit agreements, loan agreements or
similar facilities, secured or unsecured, entered into from time to time by the
Company and its Restricted Subsidiaries, and including any related notes,
Guarantees, collateral documents, instruments and agreements executed in
connection therewith, as the same may be amended, supplemented, modified,
restated or replaced from time to time.
"CURRENCY AGREEMENT" means, with respect to any Person, any foreign exchange
contract, currency swap agreement or other similar agreement as to which such
Person is a party or beneficiary.
"DEFAULT" means any event that is, or with the passage of time or the giving
of notice or both would be, an Event of Default.
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"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible, or for which it is
exchangeable, in each case at the option of the holder thereof) or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the Holder
thereof, in whole or in part, on or prior to the date that is 91 days after the
date on which the Notes mature; PROVIDED, HOWEVER, that any Capital Stock that
would constitute Disqualified Stock solely because the holders thereof have the
right to require the Company to repurchase such Capital Stock upon the
occurrence of a Change of Control or an Asset Sale shall not constitute
Disqualified Stock if the terms of such Capital Stock provide that the Company
may not repurchase or redeem any such Capital Stock pursuant to such provisions
unless such repurchase or redemption complies with the covenant described above
under the caption "--Certain Covenants Restricted Payments."
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EXISTING ASSETS" means property, plant and equipment and other tangible
business assets existing as of the Closing Date used in a Telecommunications
Business of the Company, but does not include cash or Cash Equivalents existing
on the Closing Date, and the proceeds from the sale, disposition or other
transfer of any Existing Assets outside the ordinary course of business.
"EXISTING INDEBTEDNESS" means Indebtedness of the Company and its Restricted
Subsidiaries in existence on the Closing Date, until such amounts are repaid.
"FOREIGN SUBSIDIARY" means any Restricted Subsidiary of the Company which
(i) is not organized under the laws of the United States, any state thereof or
the District of Columbia, and (ii) conducts substantially all of its business
operations outside the United States of America.
"FOREIGN SUBSIDIARY CREDIT AGREEMENT" means one or more credit agreements,
loan agreements or similar facilities, secured or unsecured, entered into from
time to time by one or more of the Company's Foreign Subsidiaries, and including
any related notes, Guarantees, collateral documents, instruments and agreements
executed in connection therewith, as the same may be amended, supplemented,
modified, restated or replaced from time to time.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Closing Date.
"GERMAN JOINT VENTURE" means the Person(s) formed or organized to engineer,
develop and construct the German Network.
"GOVERNMENT SECURITIES" means securities that are (a) direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentally thereof) of the
payment of which the full faith and credit of the United States of America is
pledged, (b) obligations of a Person controlled or supervised by and acting as
an agency or instrumentality of the United States of America the payment of
which is unconditionally guaranteed as a full faith and credit obligation by the
United States of America or (c) obligations of a Person the payment of which is
unconditionally guaranteed as a full faith and credit obligation by the United
States of America.
"GUARANTEE" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of) such
Indebtedness of such other Person (whether arising by virtue of partnership
arrangements, or by agreement to keep-well, to purchase assets, goods,
securities or
108
services, to take-or-pay, or to maintain financial statement conditions or
otherwise) or (ii) entered into for purposes of assuring in any other manner the
obligee of such Indebtedness of the payment thereof or to protect such obligee
against loss in respect thereof (in whole or in part) PROVIDED, HOWEVER, that
the term "Guarantee" shall not include endorsements for collection or deposit in
the ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under any Interest Rate Agreement or Currency Agreement.
"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance of the deferred and unpaid
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing (other than letters of credit (or reimbursement
agreements in respect thereof), banker's acceptances and Hedging Obligations)
would appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, as well as all Indebtedness of others secured by a Lien on
any asset of such Person (whether or not such Indebtedness is assumed by such
Person), Disqualified Stock of such Person and Preferred Stock of such Person's
Restricted Subsidiaries and, to the extent not otherwise included, the Guarantee
by such Person of any Indebtedness of any other Person. The amount of any
Indebtedness outstanding as of any date shall be (i) the accreted value thereof,
in the case of any Indebtedness issued with original issue discount, but the
accretion of original issue discount in accordance with the original terms of
Indebtedness issued with an original issue discount will not be deemed to be an
incurrence, and (ii) the principal amount thereof, together with any interest
thereon that is more than 30 days past due, in the case of any other
Indebtedness.
"INTEREST RATE AGREEMENT" means, with respect to any Person, any interest
rate protection agreement, interest rate future agreement, interest rate option
agreement, interest rate swap agreement, interest rate cap agreement, interest
rate collar agreement, interest rate hedge agreement or other similar agreement
or arrangement to which such Person is a party or beneficiary.
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to directors, officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities, together with all items that are or would
be classified as investments on a balance sheet prepared in accordance with
GAAP. If the Company or any of its Restricted Subsidiaries sells or otherwise
disposes of any Equity Interests of any direct or indirect Subsidiary such that,
after giving effect to any such sale or disposition, such Person is no longer a
Subsidiary of the Company or such Restricted Subsidiary, the Company shall be
deemed to have made an Investment on the date of any such sale or disposition
equal to the fair market value of the Equity Interests of such Subsidiary not
sold or disposed of in an amount determined as provided in the final paragraph
of the covenant described above under the caption "--Certain Covenants and
Restricted Payments."
"ION" means International Optical Network, L.L.C., a Delaware limited
liability company.
"ISSUE DATE" means the date of first issuance of the Initial Notes under the
Indenture.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
thereof, any option or other agreement to sell or give a security interest in,
and any filing of or
109
agreement to give any financing statement under the Uniform Commercial Code (or
equivalent statutes) of any jurisdiction).
"MANAGEMENT ADVANCES" means loans or advances made to directors, officers or
employees of the Company or any Restricted Subsidiary (i) in respect of travel,
entertainment or moving-related expenses incurred in the ordinary course of
business, (ii) in respect of moving-related expenses incurred in connection with
any closing or consolidation of any facility, or (iii) otherwise in the ordinary
course of business not exceeding $3.0 million in the aggregate at any time
outstanding.
"MANAGEMENT AGREEMENT" means the Metromedia Management Agreement as the same
may be amended, supplemented, modified, restated or replaced from time to time
with the approval of a majority of the disinterested members of the Board of
Directors.
"NET CASH PROCEEDS" means the aggregate amount of cash or Cash Equivalents
received by the Company in the case of a sale, or Capital Contribution in
respect, of Capital Stock and by the Company and its Restricted Subsidiaries in
respect of an Asset Sale plus, in the case of an issuance of Capital Stock upon
any exercise, exchange or conversion of securities (including options, warrants,
rights and convertible or exchangeable debt) of the Company that were issued for
cash on or after the Closing Date, the amount of cash originally received by the
Company upon the issuance of such securities (including options, warrants,
rights and convertible or exchangeable debt) less, in each case, the sum of all
payments, fees, commissions and reasonable and customary expenses (including,
without limitation, the fees and expenses of legal counsel and investment
banking fees and expenses) incurred in connection with such Asset Sale or sale
of Capital Stock, and, in the case of an Asset Sale only, less the amount
(estimated reasonably and in good faith by the Company) of income, franchise,
sales and other applicable federal, state, provincial, foreign and local taxes
required to be paid or accrued as a liability by the Company or any of its
respective Restricted Subsidiaries in connection with such Asset Sale in the
taxable year that such sale is consummated or in the immediately succeeding
taxable year, the computation of which shall take into account the reduction in
tax liability resulting from any available operating losses and net operating
loss carryovers, tax credits and tax credit carryforwards, and similar tax
attributes.
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale or (b) the disposition of
any securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and (ii) any extraordinary gain or loss, together with any related
provision for taxes on such extraordinary gain or loss.
"NON-RECOURSE DEBT" means Indebtedness (i) as to which neither the Company
nor any Restricted Subsidiary (a) provides any Guarantee or credit support of
any kind (including any undertaking, guarantee, indemnity, agreement or
instrument that would constitute Indebtedness) or (b) is directly or indirectly
liable (as a guarantor or otherwise) and (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an Unrestricted Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any
Restricted Subsidiary to declare a default under such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity.
"OFFICER" means the President, the Chief Executive Officer, any Executive
Vice President, and the Chief Financial Officer of the Company.
"OFFICERS' CERTIFICATE" means a certificate signed by two Officers.
"PARI PASSU INDEBTEDNESS" means Indebtedness of the Company ranking PARI
PASSU in right of payment with the Notes.
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"PERMITTED HOLDER" means Metromedia Company, its general partners and their
respective Related Persons and Persons that would constitute a Class B Permitted
Holder as defined in the Company's Amended and Restated Certificate of
Incorporation.
"PERMITTED INVESTMENTS" means (a) any Investment in the Company or in a
Consolidated Subsidiary of the Company that is engaged entirely or substantially
entirely in a Telecommunications Business; (b) any Investment in Cash
Equivalents; and (c) any Investment by the Company or any of its Restricted
Subsidiaries in a Person, if as a result of such Investment (i) such Person
becomes a Consolidated Subsidiary of the Company that is engaged entirely or
substantially entirely in a Telecommunications Business or (ii) such Person is
merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Consolidated Subsidiary of the Company that is engaged entirely or substantially
entirely in a Telecommunications Business.
"PERMITTED LIENS" means (i) Liens to secure Indebtedness permitted by
clauses (e) (f), (g) and (h) of the second paragraph of the covenant described
above under the caption "--Incurrence of Indebtedness and Issuance of Preferred
Stock", PROVIDED that with respect to Liens to secure Indebtedness permitted by
clause (f) thereof or any Permitted Refinancing Indebtedness of such
Indebtedness, such Lien must cover only the assets acquired with such
Indebtedness; (ii) Liens in favor of the Company or any Restricted Subsidiary;
(iii) Liens on property of a Person existing at the time such Person is merged
with or into or consolidated with the Company or any of its Restricted
Subsidiaries, PROVIDED that such Liens were in existence prior to the
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with the Company or
such Restricted Subsidiary; (iv) Liens on property existing at the time of
acquisition thereof by the Company or any of its Restricted Subsidiaries,
PROVIDED that such Liens were in existence prior to the contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like nature
incurred in the ordinary course of business; (vi) Liens existing on the Closing
Date; (vii) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, PROVIDED that any
reserve or other appropriate provision as shall be required in conformity with
GAAP shall have been made therefor; (viii) zoning restrictions, rights-of-way,
easements and similar charges or encumbrances incurred in the ordinary course
which in the aggregate do not detract from the value of the property thereof,
and (ix) Liens incurred in the ordinary course of business of the Company or any
of its Restricted Subsidiaries with respect to obligations that do not exceed
$5.0 million at any one time outstanding and that (a) are not incurred in
connection with the borrowing of money or the obtaining of advances or credit
(other than trade credit in the ordinary course of business) and (b) do not in
the aggregate materially detract from the value of the property or materially
impair the use thereof in the operation of business by the Company or such
Restricted Subsidiary.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries
(other than intercompany Indebtedness); PROVIDED that: (i) the principal amount
(or accreted value, if applicable) of such Permitted Refinancing Indebtedness
does not exceed the principal amount of (or accreted value, if applicable), plus
accrued interest on, the Indebtedness so extended, refinanced, renewed,
replaced, defeased or refunded (plus the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of such
Indebtedness or otherwise reasonably determined by the Company to be necessary
and reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date later than the final maturity
date of, and has a Weighted Average Life to Maturity equal to or greater than
the
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Weighted Average Life to Maturity of, the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded; (iii) if the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded is
subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is expressly subordinated in right of payment to, the Notes on terms at
least as favorable to the Holders of the Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iv) such Indebtedness is incurred solely by the
Company or the Restricted Subsidiary who is the obligor on the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and (v)
such Indebtedness is secured only by the assets, if any, that secured the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"PERSON" means any individual, corporation, partnership, joint venture,
limited liability company, incorporated or unincorporated association,
joint-stock company, trust, unincorporated organization or government or other
agency or political subdivision thereof or other entity of any kind.
"PREFERRED STOCK" means any Equity Interest of any class or classes of a
Person (however designated) which is preferred as to payments of dividends, or
as to distributions upon any liquidation or dissolution, over Equity Interests
of any other class of such Person.
"PUBLIC EQUITY OFFERING" means an underwritten offering of common stock of
the Company for cash pursuant to an effective registration statement under the
Securities Act.
"PURCHASE MONEY INDEBTEDNESS" means Indebtedness (including Acquired Debt,
in the case of leases, Capital Lease Obligations, mortgage financings and
purchase money obligations) incurred for the purpose of financing all or any
part of the cost of the engineering, construction, installation, acquisition,
lease (other than pursuant to a sale and leaseback of Existing Assets),
development or improvement of any Telecommunications Assets used by the Company
or any Restricted Subsidiary, in the case of Indebtedness incurred by the
Company, or any Foreign Subsidiary, in the case of Indebtedness incurred by any
Foreign Subsidiary, including any related notes, Guarantees, collateral
documents, instruments and agreements executed in connection therewith, as the
same may be amended, supplemented, modified or restated from time to time.
"RELATED PERSON" means any Person who controls, is controlled by or is under
common control with a Permitted Holder; PROVIDED, that for purposes of this
definition "control" means the beneficial ownership of more than 50% of the
total voting power of a Person normally entitled to vote in the election of
directors, managers or trustees, as applicable, of a Person.
"RESTRICTED INVESTMENT" means any Investment other than a Permitted
Investment.
"RESTRICTED SUBSIDIARY" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary. Unless the context specifically
requires otherwise, Restricted Subsidiary means a direct or indirect Restricted
Subsidiary of the Company.
"SIGNIFICANT SUBSIDIARY" means any Restricted Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the date hereof.
"STATED MATURITY" means, with respect to any installment of interest or
principal on any series of Indebtedness, the date on which such payment of
interest or principal was scheduled to be paid in the original documentation
governing such Indebtedness, and shall not include any contingent obligations to
repay, redeem or repurchase any such interest or principal prior to the date
originally scheduled for the payment thereof.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company that is
subordinated in right of payment by its terms or the terms of any document or
instrument or instrument relating thereto to the Notes, in any respect.
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"SUBSIDIARY" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"TELECOMMUNICATIONS ASSETS" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business and the Equity Interests of
a Person engaged entirely or substantially entirely in a Telecommunications
Business.
"TELECOMMUNICATIONS BUSINESS" means the business of (i) transmitting, or
providing services relating to the transmission of, voice, video or data through
owned or leased transmission facilities, (ii) constructing, creating, developing
or marketing communications related network equipment, software and other
devices for use in a telecommunications business or (iii) evaluating,
participating or pursuing any other activity or opportunity that is primarily
related to those identified in (i) or (ii) above; PROVIDED, THAT, the
determination of what constitutes a Telecommunications Business shall be made in
good faith by the Board of Directors of the Company.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution; but only to the extent that such Subsidiary at the time of
such designation: (a) has no Indebtedness other than Non-Recourse Debt; (b) is a
Person with respect to which neither the Company nor any of its Restricted
Subsidiaries has any direct or indirect obligation to maintain or preserve such
Person's financial condition or to cause such Person to achieve any specified
levels of operating results; and (c) has not Guaranteed or otherwise directly or
indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries. Any such designation by the Board of Directors
shall be evidenced by filing with the Trustee a certified copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted by the covenant described above under the caption "--Certain Covenants
and Restricted Payments." The Board of Directors of the Company may at any time
designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided
that such designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall only be permitted if (i) such
Indebtedness is permitted under the covenant described under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Preferred
Stock," calculated on a pro forma basis as if such designation had occurred at
the beginning of the applicable reference period, and (ii) no Default or Event
of Default would be in existence following such designation.
"VOTING STOCK" of any Person as of any date means the Capital Stock of such
Person that is at the time entitled to vote in the election of the Board of
Directors of such Person.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"WHOLLY OWNED RESTRICTED SUBSIDIARY" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors'
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qualifying shares) shall at the time be owned by such Person or by one or more
Wholly Owned Restricted Subsidiaries of such Person and one or more Wholly Owned
Restricted Subsidiaries of such Person.
BOOK-ENTRY, DELIVERY AND FORM
Except as described below, we will initially issue the Exchange Notes in the
form of one or more registered Exchange Notes in global form without coupons
(each a "Global Note"). We will deposit each Global Note on the date of the
closing of the Exchange Offer (the "Exchange Offer Closing Date") with, or on
behalf of, DTC in New York, New York, and register the Exchange Notes in the
name of DTC or its nominee, or will leave such Notes in the custody of the
Trustee.
DEPOSITORY PROCEDURES
We are providing you with the following description of the operations and
procedures of DTC, Euroclear and Cedel solely as a matter of convenience. These
operations and procedures are solely within the control of the respective
settlement systems and are subject to change by them from time to time. We take
no responsibility for these operations and procedures and urge you to contact
the system or their participants directly to discuss these matters.
DTC has advised us that it is a limited-purpose trust company created to
hold securities for its participating organizations (collectively, the "Direct
Participants") and to facilitate the clearance and settlement of transactions in
those securities between Direct Participants through electronic book-entry
changes in accounts of Participants. The Direct Participants include securities
brokers and dealers (including the Initial Purchasers), banks, trust companies,
clearing corporations and certain other organizations, including Euroclear and
Cedel. Access to DTC's system is also available to other entities that clear
through or maintain a direct or indirect, custodial relationship with a Direct
Participant (collectively, the "Indirect Participants" and together with the
Direct Participants, the "Participants"). DTC may hold securities beneficially
owned by other persons only through the Direct Participants or Indirect
Participants and such other persons' ownership interest and transfer of
ownership interest will be recorded only on the records of the Direct
Participant and/or Indirect Participant, and not on the records maintained by
DTC.
DTC has also advised us that, pursuant to DTC's procedures, (i) upon deposit
of the Global Notes, DTC will credit the accounts of the Direct Participants
with an interest in the Global Notes, and (ii) DTC will maintain records of the
ownership interests of such Direct Participants in the Global Notes and the
transfer of ownership interests by and between Direct Participants. DTC will not
maintain records of the ownership interests of, or the transfer of ownership
interests by and between, Indirect Participants or other owners of beneficial
interests in the Global Notes. Direct Participants and Indirect Participants
must maintain their own records of ownership interests of, and the transfer of
ownership interests by and between, Indirect Participants and other owners of
beneficial interests in the Global Notes.
Investors in the Global Notes may hold their interests in such Notes
directly through DTC if they are Direct Participants in DTC or indirectly
through organizations (including Euroclear and Cedel) that are Direct
Participants in DTC. Euroclear and Cedel will hold interests in the Global Notes
on behalf of their participants through customers' securities accounts in their
respective names on the books of their respective depositories, which are Morgan
Guaranty Trust Company of New York, Brussels office, as operator of Euroclear,
and Citibank, N.A., as operator of Cedel. All interests in a Global Notes,
including those held through Euroclear or Cedel, may be subject to the
procedures and requirements of DTC. Those interests held through Euroclear or
Cedel may also be subject to the procedures and requirements of such systems.
114
The laws of some states require that certain persons may take physical
delivery in definitive, certificated form, of securities that they own. This may
limit or curtail the ability to transfer beneficial interests in a Global Note
to such persons. Because DTC can act only on behalf of Direct Participants,
which in turn act on behalf of Indirect Participants and others, the ability of
a person having a beneficial interest in a Global Note to pledge such interest
to persons or entities that are not Direct Participants in DTC, or to otherwise
take actions in respect of such interests, may be affected by the lack of
physical certificates evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTERESTS IN THE GLOBAL NOTES WILL NOT
HAVE NOTES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL DELIVERY OF
NOTES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE REGISTERED OWNERS OR
"HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments with respect to the principal of, premium, if any, and interest on,
any Exchange Notes represented by a Global Note registered in the name of DTC or
its nominee on the applicable record date will be payable by the Trustee to or
at the direction of DTC or its nominee in its capacity as the registered holder
of the Global Note representing such Exchange Notes under the Indenture. Under
the terms of the Indenture, we and the Trustee will treat the persons in whose
names the Notes are registered (including Notes represented by Global Notes) as
the owners thereof for the purpose of receiving payments and for any and all
other purposes whatsoever. Payments in respect of the principal, premium,
liquidated damages, if any, and interest on Global Notes registered in the name
of DTC or its nominee will be payable by the Trustee to DTC or its nominee as
the registered Holder under the Indenture. Consequently, none of us, the Trustee
or any of our agents, or the Trustee's agents has or will have any
responsibility or liability for (i) any aspect of DTC's records or any Direct
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interests in the Global Notes or for
maintaining, supervising or reviewing any of DTC's records or any Direct
Participant's or Indirect Participant's records relating to the beneficial
ownership interests in any Global Note or (ii) any other matter relating to the
actions and practices of DTC or any of its Direct Participants or Indirect
Participants.
DTC has advised us that its current practice, upon receipt of any payment in
respect of securities such as the Notes (including principal and interest), is
to credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in the
principal amount of beneficial interest in the relevant security as shown on the
records of DTC, unless DTC has reason to believe it will not receive payment on
such payment date. Payments by the Direct Participants and the Indirect
Participants to the beneficial owners of interests in the Global Note will be
governed by standing instructions and customary practice and will be the
responsibility of the Direct Participants or the Indirect Participants, as the
case may be, and will not be the responsibility of DTC, the Trustee or us.
None of us or the Trustee will be liable for any delay by DTC or any Direct
Participant or Indirect Participant in identifying the beneficial owners of the
related Exchange Notes and we and the Trustee may conclusively rely on, and will
be protected in relying on, instructions from DTC for all purposes (including
with respect to the registration and delivery, and the respective principal
amounts, of the Exchange Notes).
Except for trades involving only Euroclear and Cedel participants, interests
in the Global Notes are expected to be eligible to trade in DTC's Same-Day Funds
Settlement System and secondary market trading activity in such interests will,
therefore, settle in immediately available funds, subject in all cases to the
rules and procedures of DTC and its Participants. Please refer to the section in
this Prospectus entitled "--Same Day Settlement and Payment."
Transfers between Participants in DTC will be effected in accordance with
DTC's procedures, and will be settled in same day funds, and transfers between
participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
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Cross-market transfers between the Participants in DTC, on the one hand, and
Euroclear or Cedel participants, on the other hand, will be effected through DTC
in accordance with DTC's rules on behalf of Euroclear or Cedel, as the case may
be, by its respective depositary. However, such cross market transactions will
require delivery of instructions to Euroclear or Cedel, as the case may be, by
the counterparty in such system in accordance with the rules and procedures and
within the established deadlines (Brussels time) of such system. Euroclear or
Cedel, as the case may be, will, if the transaction meets its settlement
requirements, deliver instructions to its respective depositary to take action
to effect final settlement on its behalf by delivering or receiving interests in
the relevant Global Note in DTC and making or receiving payment in accordance
with normal procedures for same-day funds settlement applicable to DTC.
Euroclear participants and Cedel participants may not deliver instructions
directly to the depositories for Euroclear or Cedel.
DTC has advised us that it will take any action permitted to be taken by a
Holder of Notes only at the direction of one or more Participants to whose
account DTC has credited the interests in the Global Notes and only in respect
of such portion of the aggregate principal amount of the Notes as to which such
Participant or Participants has or have given such direction. However, if there
is an Event of Default with respect to the Notes, DTC reserves the right to
exchange the Global Notes for legended Notes in certificated form, and to
distribute such Notes to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Regulation S Global Notes and in the
Global Notes among Participants in DTC, Euroclear and Cedel, they are under no
obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. None of us, the Trustee or any of
our or the Trustee's respective agents will have any responsibility for the
performance by DTC, Euroclear or Cedel or their respective participants or
indirect participants of their respective obligations under the rules and
procedures governing their operations.
EXCHANGE OF BOOK-ENTRY NOTES FOR CERTIFICATED NOTES
A Global Note is exchangeable for definitive Notes in registered
certificated form if:
- DTC notifies us that it is unwilling or unable to continue as depository
for the Global Notes and we fail to appoint a successor depository within
90 days, or
- DTC ceases to be a clearing agency registered under the Securities
Exchange Act of 1934, or
- we elect to cause the issuance of the Certificated Notes upon a notice to
the Trustee, or
- a Default or Event of Default under the Notes has occurred and is
continuing, or
- such a request is made but only upon prior written notice given to the
Trustee by or on behalf of DTC in accordance with the Indenture.
In all cases, certificated Notes delivered in exchange for any Global Note
or beneficial interests in a Global Note will be registered in the names, and
issued in any approved denominations, requested by or on behalf of the
depositary (in accordance with its customary procedures).
EXCHANGE OF CERTIFICATED NOTES FOR BOOK-ENTRY NOTES
Notes issued in certificated form may not be exchanged for beneficial
interests in any Global Note unless the transferor first delivers to the Trustee
a written certificate (in the form provided in the Indenture) to the effect that
such transfer will comply with the appropriate transfer restrictions applicable
to such Notes.
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SAME DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
the Global Notes (including principal, premium, if any, and interest) be made by
wire transfer of immediately available funds to the accounts specified by the
Holder of the Global Notes. With respect to Notes in certificated form, we will
make all payments of principal, premium, if any, and interest on the Notes at
our office or agency maintained for such purpose within the City and State of
New York (initially the office of the Paying Agent maintained for such purpose)
or, at our option, by check mailed to the Holders thereof at their respective
addresses set forth in the register of Holders of Notes. However, we are
required to make all payments of principal, premium, if any, and interest on
Notes in certificated form the Holders of which have given us wire transfer
instructions, by wire transfer of immediately available funds to the accounts
specified by the Holders thereof. The Notes represented by the Global Notes are
expected to be eligible to trade in DTC's Same-Day Funds Settlement System, and
any permitted secondary market trading activity in such Notes will, therefore,
be required by DTC to be settled in immediately available funds. We expect that
secondary trading in any certificated Notes will also be settled in immediately
available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Note from a Direct
Participant or Indirect Participant in DTC will be credited, and any such
crediting will be reported to the relevant Euroclear or Cedel participant,
during the securities settlement processing day (which must be a business day
for Euroclear and Cedel) immediately following the settlement date of DTC. DTC
has advised us that cash received in Euroclear or Cedel as a result of sales of
interests in a Global Note by or through a Euroclear or Cedel participant to a
Participant in DTC will be received with value on the settlement date of DTC but
will be available in the relevant Euroclear or Cedel cash account only as of the
business day for Euroclear or Cedel following DTC's settlement date.
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CERTAIN UNITED STATES FEDERAL TAX CONSIDERATIONS
The following discussion is a summary of certain United States federal
income and estate tax considerations that may be relevant to the exchange of
Initial Notes for Exchange Notes pursuant to the Exchange Offer and to the
purchase, ownership and disposition of the Exchange Notes. This summary does not
purport to be a complete analysis of all of the potential United States federal
income and estate tax considerations relating to the purchase, ownership and
disposition of the Exchange Notes and generally does not address any other taxes
that might be applicable to a holder of the Exchange Notes. In the opinion of
Paul, Weiss, Rifkind, Wharton & Garrison, special United States tax counsel to
the Company, the discussion accurately reflects the material United States
federal income tax consequences to U.S. and non-U.S. Holders (as defined) of the
consummation of the Exchange Offer and the ownership and disposition of the
Exchange Notes. We cannot assure you that the United States Internal Revenue
Service (the "IRS") will take a similar view of such consequences. Further, the
discussion does not address all aspects of taxation that may be relevant to
particular holders of Initial Notes or Exchange Notes in light of their
individual circumstances (including the effect of any foreign, state or local
laws) or to certain types of purchasers subject to special treatment under
United States federal income tax laws (including dealers in securities,
insurance companies, financial institutions, persons that hold the Initial Notes
or Exchange Notes that are a hedge or that are hedged against currency risks or
that are part of a straddle or conversion transaction or a constructive sale,
persons whose functional currency is not the U.S. dollar and tax-exempt
entities). The discussion below assumes that the Initial Notes or Exchange Notes
are held as capital assets within the meaning of section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code").
The discussion of the United States federal income and estate tax
considerations below is based on currently existing provisions of the Code, the
applicable Treasury regulations promulgated and proposed thereunder (the
"Treasury Regulations"), judicial decisions, and administrative interpretations,
all of which are subject to change, possibly on a retroactive basis. Because
individual circumstances may differ, you are strongly urged to consult your tax
advisor with respect to your particular tax situation and the particular tax
effects of any state, local, non-United States or other tax laws and possible
changes in the tax laws.
As used in this section, the term "U.S. Holder" means a beneficial owner of
an Exchange Note who or which is for United States federal income tax purposes
(i) a citizen or resident of the United States, (ii) a corporation, partnership
or other entity created or organized in or under the laws of the United States
or of any political subdivision thereof, (iii) an estate the income of which is
subject to United States federal income taxation regardless of its source or
(iv) a trust if a court within the United States is able to exercise primary
supervision over the administration of the trust and one or more United States
persons have the authority to control all substantial decisions of the trust.
The term also includes certain former citizens of the United States whose income
and gain on the Exchange Notes will be subject to United States taxation. As
used herein, the term "Non-U.S. Holder" means a beneficial owner of an Exchange
Note that is not a U.S. Holder.
FEDERAL INCOME TAX CONSEQUENCES OF THE EXCHANGE OFFER
The exchange of Initial Notes for Exchange Notes pursuant to the Exchange
Offer will not be treated as an "exchange" or otherwise as a taxable event to
holders. Consequently, (i) no gain or loss will be realized by a holder upon
receipt of an Exchange Note, (ii) the holding period of the Exchange Note will
include the holding period of the Initial Note exchanged therefor and (iii) the
adjusted tax basis of the Exchange Note will be the same as the adjusted tax
basis of the Initial Note exchanged therefor immediately before the exchange.
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TAX CONSIDERATIONS FOR U.S. HOLDERS
PAYMENTS OF INTEREST
Interest on an Exchange Note generally will be taxable to a U.S. Holder as
ordinary interest income at the time it accrues or is received in accordance
with the U.S. Holder's method of accounting for United States federal income tax
purposes.
MARKET DISCOUNT AND BOND PREMIUM
If a U.S. Holder purchases an Exchange Note for an amount that is less than
its principal amount, the difference generally will be treated as "market
discount". In such case, any partial principal payment on and gain realized on
the sale, exchange or retirement of the Exchange Note and unrealized
appreciation on certain nontaxable dispositions of the Note will be treated as
ordinary income to the extent of the market discount that has not previously
been included in income and that is treated as having accrued on the Exchange
Note prior to such payment or disposition and the U.S. Holder might be required
to defer all or a portion of the interest expense on any indebtedness incurred
or continued to purchase or carry such Exchange Note (in each case, unless the
U.S. Holder has made an election to include such market discount in income as it
accrues). Unless the U.S. Holder elects to treat market discount as accruing on
a constant yield method, market discount will be treated as accruing on a
straight-line basis over the remaining term of the Exchange Note. An election
made to include market discount in income as it accrues will apply to all debt
instruments acquired by the U.S. Holder on or after the first day of the taxable
year to which such election applies and may be revoked only with the consent of
the IRS.
If a U.S. Holder purchases an Exchange Note for an amount in excess of all
amounts payable on the Exchange Note after the purchase date, other than
payments of stated interest, such excess will be treated as "bond premium". In
general, a U.S. Holder may elect to amortize bond premium over the remaining
term of the Exchange Note on a constant yield method. The amount of bond premium
allocable to any accrual period is offset against the stated interest allocable
to such accrual period (and any excess may be deducted, subject to certain
limitations). An election to amortize bond premium applies to all taxable debt
instruments held at the beginning of the first taxable year to which such
election applies and thereafter acquired by the U.S. Holder and may be revoked
only with the consent of the IRS.
SALE, EXCHANGE OR RETIREMENT OF NOTES
Upon the sale, exchange or retirement of a an Exchange Note, a U.S. Holder
will recognize taxable gain or loss equal to the difference between the amount
of cash plus the fair market value of any property received (not including any
amount attributable to accrued but unpaid interest) and such holder's adjusted
tax basis in the Exchange Note. A U.S. Holder's adjusted tax basis in an
Exchange Note will be its cost, increased by any accrued market discount
included in income and reduced by any amortized bond premium and any principal
payment on the Exchange Note received by such holder.
Subject to the discussion of market discount above, gain or loss realized on
the sale, exchange or retirement of an Exchange Note by a U.S. Holder generally
will be capital gain or loss if the Exchange Note is held as a capital asset by
the U.S. Holder. Net capital gains of individuals are subject to tax at lower
rates than items of ordinary income. The deductibility of capital losses is
subject to limitations.
TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
Generally, payments of principal or interest on the Exchange Notes by the
Company or any paying agent to a beneficial owner of an Exchange Note that is a
Non-U.S. Holder will not be subject to U.S. federal income or income withholding
tax, provided that, in the case of interest, (i) such Non-U.S.
119
Holder does not own, actually or constructively, 10% or more of the combined
voting power of all classes of stock of the Company entitled to vote, (ii) such
Non-U.S. Holder is not, for U.S. federal income tax purposes, a controlled
foreign corporation related to the Company actually or constructively through
stock ownership, (iii) such Non-U.S. Holder is not a bank receiving interest
described in section 881(c)(3)(A) of the Code and (iv) either (a) the Non-U.S.
Holder provides the Company or its agent with an IRS Form W-8 (or a suitable
substitute form) signed under penalties of perjury that includes its name and
address and certifies as to its non-United States status in compliance with
applicable law and Treasury Regulations or (b) a securities clearing
organization, bank or other financial institution that holds customers'
securities in the ordinary course of its trade or business holds the Exchange
Note and provides a statement to the Company or its agent signed under penalties
of perjury in which such organization, bank or financial institution certifies
that such a Form W-8 (or suitable substitute) has been received by it from the
Non-U.S. Holder or from another financial institution acting on behalf of the
Non-U.S. Holder and furnishes the Company or its agent with a copy thereof. If
these requirements cannot be met, a Non-U.S. Holder generally will be subject to
United States federal income withholding tax at a rate of 30% (or such lower
rate provided by an applicable treaty) with respect to payments of interest on
the Exchange Notes. The Non-U.S. Holder must inform the Company or its agent or
the financial institution to which the Non-U.S. Holder provided the Form W-8 (or
suitable substitute) within 30 days of any change in the information provided in
such form.
Treasury Regulations generally effective for payments made after December
31, 1999 (the "New Regulations") provide alternative methods for satisfying the
certification requirements described in clause (iv) above. The New Regulations
also will require, in the case of Exchange Notes held by a foreign partnership,
that (i) the certification be provided by the partners rather than by the
foreign partnership and (ii) the partnership provide certain information,
including a U.S. taxpayer identification number.
A Non-U.S. Holder of an Exchange Note generally will not be subject to
United States federal income or income withholding tax on gain realized on the
sale, exchange, redemption, retirement or other disposition of such Exchange
Note, unless (i) such Non-U.S. Holder is an individual who is present in the
United States for 183 days or more in the taxable year of the disposition, and
certain other conditions are met or (ii) such gain is effectively connected with
the conduct by such Non-U.S. Holder of a trade or business in the United States.
Notwithstanding the above, if a Non-U.S. Holder of an Exchange Note is
engaged in a trade or business in the United States and if interest on the
Exchange Note, or gain realized on the disposition of the Exchange Note, is
effectively connected with the conduct of such trade or business, the Non-U.S.
Holder generally will be subject to regular United States federal income tax on
such interest or gain in the same manner as if it were a U.S. Holder, unless an
applicable treaty provides otherwise. In addition, if such Non-U.S. Holder is a
foreign corporation, it may be subject to a branch profits tax equal to 30% (or
such lower rate provided by an applicable treaty) of its effectively connected
earnings and profits for the taxable year, subject to certain adjustments. Even
though such effectively connected income is subject to income tax, and may be
subject to the branch profits tax, it generally is not subject to income
withholding if the Non-U.S. Holder delivers a properly executed IRS Form 4224
(or other form applicable under the New Regulations) to the payor.
An Exchange Note held by an individual Non-U.S. Holder who at the time of
death is not a United States citizen or resident of the United States (as
defined for United States federal estate tax purposes) will not be subject to
United States federal estate taxation as a result of such individual's death
unless (i) the individual owns, actually or constructively, 10% or more of the
combined voting power of all classes of stock of the Company entitled to vote or
(ii) the interest on the Exchange Note is effectively connected with the conduct
by such individual of a trade or business in the United States.
120
TAX CONSIDERATIONS APPLICABLE TO BOTH U.S. HOLDERS AND NON-U.S. HOLDERS
BACKUP WITHHOLDING AND INFORMATION REPORTING
Under current United States federal income tax law, a 31% backup withholding
tax might apply to certain payments on, and the proceeds from a sale, exchange
or redemption of, the Exchange Notes, unless the holder of the Exchange Note (i)
is a corporation or comes within certain other exempt categories and, when
required, demonstrates that fact or (ii) provides a correct taxpayer
identification number, certifies as to its exemption from backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
Backup withholding and information reporting generally will not apply to
payments made by the Company or a paying agent on an Exchange Note to a Non-U.S.
Holder if the certification described under "Tax Considerations for Non-U.S.
Holders" is duly provided or the Non-U.S. Holder otherwise establishes an
exemption and the payor does not have actual knowledge that the holder is a U.S.
Holder or that the conditions of any other exemption are not, in fact,
satisfied. The payments of proceeds from the disposition of an Exchange Note to
or through a non-United States office of a "broker" (as defined in applicable
Treasury Regulations) that is (i) a United States person, (ii) a controlled
foreign corporation for United States federal income tax purposes, (iii) a
foreign person, 50% or more of whose gross income from all sources for certain
periods is from activities effectively connected with the conduct of a United
States trade or business or (iv) after December 31, 1999, a foreign partnership
if either (a) more than 50% of the income or capital interest is owned by U.S.
Holders or (b) such partnership has certain connections to the United States,
will be subject to information reporting requirements unless such broker has
documentary evidence in its files of the holder's Non-U.S. Holder status and has
no actual knowledge to the contrary or otherwise establishes an exemption.
Before January 1, 2000, backup withholding will not apply to any payment of the
proceeds from the sale of an Exchange Note made to or through a foreign office
of a broker. However, after December 31, 1999, backup withholding might apply if
the broker has actual knowledge that the payee is a U.S. Holder. Payments of the
proceeds from the sale of an Exchange Note to or through the United States
office of a broker are subject to information reporting and possible backup
withholding unless the holder certifies, under penalties of perjury, that it is
not a U.S. Holder and that certain other conditions are met or otherwise
establishes an exemption, provided that the broker does not have actual
knowledge that the holder is a U.S. Holder or that the conditions of any other
exemption are not, in fact, satisfied.
Holders of Exchange Notes should consult their tax advisors regarding the
application of backup withholding in their particular situations, the
availability of an exemption therefrom, and the procedure for obtaining such an
exemption, if available. Any amounts withheld from payment under the backup
withholding rules will be allowed as a credit against the holder's United States
federal income tax liability and may entitle the holder to a refund if the
required information is furnished to the IRS.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION ONLY AND IS NOT TAX
ADVICE. ACCORDINGLY, YOU SHOULD CONSULT YOUR TAX ADVISOR AS TO THE PARTICULAR
TAX CONSEQUENCES TO YOU OF THE EXCHANGE OFFER AND OF PURCHASING, HOLDING AND
DISPOSING OF THE INITIAL NOTES OR THE EXCHANGE NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR NON-UNITED STATES TAX LAWS AND
ANY RECENT OR PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS AND THE EFFECT OF THE
NEW REGULATIONS WITH RESPECT TO PAYMENTS MADE AFTER DECEMBER 31, 1999.
121
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer in exchange for Initial Notes acquired by such
broker-dealer as a result of market making or other trading activities may be
deemed to be an "underwriter" within the meaning of the Securities Act and,
therefore, must deliver a prospectus meeting the requirements of the Securities
Act in connection with any resales, offers to resell or other transfers of the
Exchange Notes received by it in connection with the Exchange Offer.
Accordingly, each such broker-dealer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. The Letter of Transmittal states that by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Initial Notes where such
Initial Notes were acquired as a result of market-making activities or other
trading activities. We have agreed that, starting on the consummation of the
Exchange Offer, and ending on the close of business 180 days after the
consummation of the Exchange Offer, we will make this Prospectus, as amended or
supplemented, available to any broker-dealer for use in connection with any such
resale.
We will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the Exchange Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For a period of 180 days after the consummation of the Exchange Offer, we
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. We have agreed to pay all expenses incident to the
Exchange Offer (including the expenses of one counsel for the holders of the
Notes) other than commissions or concessions of any brokers or dealers and will
indemnify the holders of the Notes (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
LEGAL MATTERS
Paul, Weiss, Rifkind, Wharton & Garrison, New York, New York, will pass upon
certain legal matters, including certain tax matters on our behalf, with respect
to the Exchange Notes.
122
EXPERTS
The consolidated financial statements of Metromedia Fiber Network, Inc. at
December 31, 1996 and December 31, 1997 and for the years then ended, appearing
in this Prospectus have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon appearing elsewhere in this Prospectus. Our
consolidated statements of operations, stockholders' deficiency and cash flows
for the twelve months ended December 31, 1995 have been audited by M.R. Weiser &
Co. LLP, Certified Public Accountants, as stated on their report. Their report
contains an explanatory paragraph regarding an uncertainty as to our ability to
continue as a going concern. Such financial statements are included in reliance
upon such reports given upon the authority of such firms as experts in
accounting and auditing.
AVAILABLE INFORMATION
We have filed a Registration Statement on Form S-4 with the Securities and
Exchange Commission covering the Exchange Notes, and this Prospectus is part of
our Registration Statement. For further information on the Company and the
Exchange Notes, you should refer to our Registration Statement and its exhibits.
This Prospectus summarizes material provisions of contracts and other documents
that we refer you to. Since the Prospectus may not contain all the information
that you may find important, you should review the full text of these documents.
We have included copies of these documents as exhibits to our Registration
Statement.
We are currently subject to the periodic reporting and other informational
requirements of the Securities Exchange Act of 1934. In addition, the Indenture
governing the Initial Notes and the Exchange Notes to be issued in this Exchange
Offer requires that we file reports under the Securities Exchange Act of 1934
with the Securities and Exchange Commission and provide those reports to the
Trustee and holders of the Notes. The reports and other information that we file
with the Securities and Exchange Commission can be inspected and copied at
prescribed rates at the public reference facilities maintained by the Securities
and Exchange Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and will also be available for inspection and copying at
the regional offices of the Securities and Exchange Commission located at 7
World Trade Center, Suite 1300, New York, New York 10048 and the Citicorp Center
at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. You may
obtain information on the operation of the public reference facilities by
calling the Securities and Exchange Commission at 1-800-SEC-0330. The Securities
and Exchange Commission also maintains an Internet Web Site at
http://www.sec.gov that contains reports, proxy and information statements and
other information. You can also obtain copies of such materials from us upon
request. We have agreed that, whether or not we are required to do so by the
rules and regulations of the Securities and Exchange Commission, for so long as
any of the Exchange Notes remain outstanding, we will furnish you as a holder of
the Exchange Notes and will, if permitted, file with the Securities and Exchange
Commission (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Securities and Exchange Commission
on Forms 10-Q and 10-K if we were required to file such forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with respect to the annual information only, a report thereon
by our certified independent accountants, and (ii) all reports that would be
required to be filed with the Securities and Exchange Commission on Form 8-K if
we were required to file such reports. In addition, for so long as any of the
Exchange Notes remain outstanding, we have agreed to make available to any
prospective purchaser of the Exchange Notes or beneficial owner of the Notes in
connection with any sale thereof the information required by Rule 144 under the
Securities Act.
123
DOCUMENTS INCORPORATED BY REFERENCE
The following documents and other materials, which we have filed with the
Securities and Exchange Commission, are incorporated herein and specifically
made a part of this Prospectus by this reference:
(1) Annual Report on Form 10-K for the fiscal year ended December 31, 1997;
(2) Quarterly Reports on Form 10-Q for the quarters ended September 30, 1997,
March 31, 1998, June 30, 1998 and September 30, 1998;
(3) Proxy Statement for the Annual Meeting of Stockholders filed on May 18,
1998; and
(4) Current Reports on Form 8-K filed on February 24, 1998, June 15, 1998, July
16, 1998 and December 4, 1998.
In addition, all documents that we file with the Securities and Exchange
Commission pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Securities
Exchange Act of 1934 subsequent to the date of this Prospectus will be deemed to
be incorporated by reference into this Prospectus and to be a part hereof from
the date of filing of such documents with the Securities and Exchange
Commission. Any statement contained in this Prospectus or in a document
incorporated or deemed to be incorporated by reference in this Prospectus will
be deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded will not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
Statements contained in this Prospectus or in any document incorporated by
reference in this Prospectus as to the contents of any contract or other
document referred to herein or therein are not necessarily complete. In each
instance, where applicable, we refer you to the copy of such contract or other
document filed as an exhibit to the documents incorporated by reference, each
such statement being qualified in all respects by such reference.
This Prospectus incorporates documents by reference that are not presented
herein or delivered herewith. Copies of such documents, other than exhibits to
such documents that are not specifically incorporated by reference herein, are
available without charge to any person to whom this Prospectus is delivered,
upon written or oral request to: Metromedia Fiber Network, Inc., c/o Metromedia
Company, One Meadowlands Plaza, East Rutherford, NJ 07073; Attention: General
Counsel; tel: (201) 531-8000.
124
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Statements of Operations for the Nine-Month Periods Ended September 30,
1998 and 1997 (unaudited).......................................................... F-2
Consolidated Balance Sheet as of September 30, 1998 (unaudited)...................... F-3
Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30,
1998 and 1997 (unaudited).......................................................... F-4
Notes to Consolidated Financial Statements (unaudited)............................... F-5
Reports of Independent Auditors...................................................... F-11
Consolidated Balance Sheets as of December 31, 1997 and 1996......................... F-13
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and
1995............................................................................... F-14
Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and
1995............................................................................... F-15
Consolidated Statements of Changes in Stockholders' Equity (Deficiency) for the years
ended December 31, 1997, 1996 and 1995............................................. F-16
Notes to Consolidated Financial Statements........................................... F-18
F-1
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
Revenue................................................................................... $ 20,840 $ 1,745
Expenses:
Cost of sales........................................................................... 9,499 2,647
Selling, general and administrative..................................................... 9,811 3,722
Consulting and employment incentives.................................................... 248 19,124
Settlement agreement.................................................................... 3,400 --
Depreciation and amortization........................................................... 738 567
---------- ----------
Income (loss) from operations............................................................. (2,856) (24,315)
Interest income........................................................................... 5,028 491
Interest expense.......................................................................... (16) (732)
Income (loss) from joint venture.......................................................... (264) --
---------- ----------
Income (loss) before income taxes......................................................... 1,892 (24,556)
Income taxes.............................................................................. 825 --
---------- ----------
Net income (loss)......................................................................... $ 1,067 $ (24,556)
---------- ----------
---------- ----------
Net income (loss) per share, basic........................................................ $ .01 $ (.64)
---------- ----------
---------- ----------
Net income (loss) per share, diluted...................................................... $ .01 N/A
---------- ----------
---------- ----------
Weighted average number of shares outstanding, basic...................................... 93,196 38,652
---------- ----------
---------- ----------
Weighted average number of shares outstanding, diluted.................................... 108,604 N/A
---------- ----------
---------- ----------
See accompanying notes
F-2
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN 000'S, EXCEPT SHARE AMOUNTS)
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents........................................................................ $ 76,335
Accounts receivable.............................................................................. 17,902
Prepaid expenses and other current assets........................................................ 1,042
-------------
Total current assets........................................................................... 95,279
Fiber optic transmission network and related equipment, net...................................... 148,579
Property and equipment, net...................................................................... 1,732
Investment in/advances to joint venture.......................................................... 2,537
Other assets..................................................................................... 7,300
-------------
Total assets................................................................................... $ 255,427
-------------
-------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................................. $ 3,409
Accrued expenses................................................................................. 39,119
Current portion of deferred revenue.............................................................. 6,409
Current portion of capital lease obligations..................................................... 55
-------------
Total current liabilities...................................................................... 48,992
Capital lease obligations.......................................................................... 19,687
Deferred revenue................................................................................... 32,006
Commitments and contingencies (see notes)
Stockholders' equity:
Class A common stock, $.01 par value; 180,000,000 shares authorized; 77,460,452 shares issued and
outstanding.................................................................................... 774
Class B common stock, $.01 par value; 20,000,000 shares authorized; 16,884,636 shares issued and
outstanding.................................................................................... 169
Additional paid-in capital....................................................................... 195,955
Accumulated deficit.............................................................................. (42,156)
-------------
Total stockholders' equity..................................................................... 154,742
-------------
Total liabilities and stockholders' equity..................................................... $ 255,427
-------------
-------------
See accompanying notes
F-3
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN 000'S)
NINE MONTHS ENDED
SEPTEMBER 30,
----------------------
1998 1997
---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................................................... $ 1,067 $ (24,556)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating
activities:
Depreciation and amortization......................................................... 738 567
Options issued for settlement agreement............................................... 3,000 --
Stocks, options and warrants issued for services...................................... 248 19,344
Reserve for accounts receivable....................................................... 156 --
Loss from joint venture............................................................... 264 --
CHANGE IN OPERATING ASSETS AND LIABILITIES:
Accounts receivable................................................................... (17,221) (162)
Accounts payable and accrued expenses................................................. 3,442 (3,877)
Deferred revenue...................................................................... 26,920 8,225
Other................................................................................. (1,749) (3,411)
---------- ----------
Net cash provided by (used in) operating activities..................................... 16,865 (3,870)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures on fiber optic transmission network and related equipment............ (71,739) (1,522)
Deposit................................................................................... (4,675) --
Investment in/advances to joint venture................................................... (2,745) --
Capital expenditures on property and equipment............................................ (1,109) (225)
---------- ----------
Net cash used in investing activities................................................... (80,268) (1,747)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................................................... 892 10
Proceeds from issuance of preferred stock and warrants.................................... -- 32,500
Dividends paid on preferred stock......................................................... -- (77)
Repayments of notes payable and private placement......................................... -- (1,408)
Repayments of notes payable............................................................... -- (5,950)
Purchase of common stock.................................................................. -- (1,140)
Purchase of preferred stock............................................................... -- (2,038)
---------- ----------
Net cash provided by financing activities............................................... 892 21,897
---------- ----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS...................................... (62,511) 16,280
CASH AND CASH EQUIVALENTS-BEGINNING OF PERIOD............................................. 138,846 464
---------- ----------
CASH AND CASH EQUIVALENTS-END OF PERIOD................................................... $ 76,335 $ 16,744
---------- ----------
---------- ----------
Supplemental information:
Interest paid........................................................................... $ 16 $ 1,145
---------- ----------
---------- ----------
Income taxes paid....................................................................... $ 3,080 $ --
---------- ----------
---------- ----------
Supplemental disclosure of significant non-cash investing activities:
Capital lease obligations............................................................... $ 19,742 $ --
---------- ----------
---------- ----------
Accrued capital expenditures............................................................ $ 32,743 $ --
---------- ----------
---------- ----------
See accompanying notes
F-4
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS AND LINE OF BUSINESS
We are a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure to communications
carriers and corporate/government customers in the United States. We focus our
operations on domestic intra-city fiber optic networks in clusters of Tier I
cities throughout the United States. We currently operate high-bandwidth fiber
optic communications networks in New York and within the next two quarters
expect to operate similar networks in Philadelphia and Washington, D.C. We have
also begun constructing and engineering networks in Chicago, San Francisco and
Boston and within the next two years we also plan to complete an expansion into
four additional markets including Los Angeles, Seattle, Dallas and Houston. We
expect that our domestic intra-city networks will ultimately encompass
approximately 756,000 fiber miles covering approximately 1,771 route miles.
We have also built inter-city fiber optic capacity to link certain of our
intra-city networks. We expect to have operational a 241 route mile network from
New York to Washington, D.C. during the first quarter of 1999, and when finally
complete, as currently planned, this network will cover approximately 180,000
fiber miles. We have also obtained rights for fiber optic capacity with other
facilities-providers and obtained fiber optic capacity linking certain of the
metropolitan areas (New York and Chicago, New York and Boston, Chicago and
Seattle and Portland) in which we plan to construct intra-city networks, except
in Portland.
In addition, we have entered into a joint venture with a U.K.
telecommunications company to connect our New York network to London and we have
announced that we intend to form a joint venture to construct a high-bandwidth
fiber optic network connecting 13 cities in Germany and obtain certain
additional fiber optic capacity in Western Europe. Please refer to the sections
in this Offering Memorandum entitled "Business" and "Risk Factors and Risks
Associated with Growth Strategy; Management of Expansion."
BASIS OF PRESENTATION
The interim unaudited consolidated financial statements in this Report have
been prepared in accordance with the United States Securities and Exchange
Commission's Regulation S-X and consequently do not include all disclosures
required under generally accepted accounting principles. The interim unaudited
consolidated financial statements should be read in conjunction with the audited
Consolidated Financial Statements of the Company and accompanying Notes for the
year ended December 31, 1997 contained in the Company's Annual Report on Form
10-K for the year then ended. The Form 10-K includes information with respect to
the Company's significant accounting and financial reporting policies and other
pertinent information. The Company believes that all adjustments of a normal
recurring nature that are necessary for a fair presentation of the results of
the interim periods presented in this report have been made. Certain balances
have been reclassified to conform to the current period presentation.
STOCK SPLITS
On December 22, 1998, the Company completed a two-for-one stock split of the
Company's Class A and Class B Common Stock in the form of a 100% stock dividend
to all shareholders of record as of the close of business on December 8, 1998.
On August 28, 1998, the Company completed a
F-5
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
two-for-one stock split of the Company's Class A and Class B Common Stock in the
form of a 100 percent stock dividend to all shareholders of record as of the
close of business on August 7, 1998. All share and per share amounts presented
herein give retroactive effect to the stock splits. (See note 8.)
RECOGNITION OF REVENUE
The Company recognizes revenue on telecommunications services ratably over
the term of the applicable lease agreements with customers. Amounts billed in
advance of the service provided are recorded as deferred revenue. The Company
also provides installation services for its customers, and as these services
typically are completed within a year, the Company records the revenues and
related costs for these services under the completed contract method. In
addition, the Company occasionally grants Indefeasible Rights of Use ("IRU's")
to portions of its network. For those grants occurring prior to completion of
the portion of the network granted, the Company recognizes revenue on these
telecommunication services using the percentage of completion method. Under the
percentage of completion method, progress is generally measured on performance
milestones relating to the contract where such milestones fairly reflect the
progress toward contract completion. Network construction costs include all
direct material and labor costs and those indirect costs related to contract
performance. General and administrative costs are charged to expense as
incurred. If necessary, the estimated loss on an uncompleted contract is
expensed in the period in which it is identified. Contract costs are estimated
using allocations of the total cost of constructing the specific phase of the
network. Revisions to estimated profits on contracts are recognized in the
period that they become known.
2. CONSULTING AND EMPLOYMENT INCENTIVES
The amounts represent the value of common stock, warrants and options issued
to consultants, officers, employees and directors of the Company as incentive to
provide services to the Company.
The 1997 amounts represent the value of options to purchase 12,380,940
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.
F-6
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
Fiber optic transmission network and related equipment consist of the
following (in 000's):
SEPTEMBER 30,
1998
-------------
Material-fiber optic cable......................................................................... $ 4,900
Engineering and layout costs....................................................................... 4,123
Fiber optic cable installation costs............................................................... 2,668
Other.............................................................................................. 2,750
Construction in progress........................................................................... 135,960
-------------
150,401
Less: accumulated depreciation..................................................................... (1,822)
-------------
$ 148,579
-------------
-------------
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.
4. INVESTMENT IN/ADVANCES TO JOINT VENTURE
The Company has a joint venture agreement with Racal Telecommunications,
Inc. ("Racal"), that provides broad-based transatlantic communication services
between New York and London. As of December 31, 1997, neither party had yet made
a capital contribution. The balance of the investment at December 31, 1997
represents advances made to the joint venture by the Company. The Company
accounts for its investment using the equity method. During the first nine
months of 1998, each party made capital contributions of $2.8 million. The
Company and Racal may each be required to contribute additional capital as
needed for their respective 50% interests. As of September 30, 1998, the Company
recorded a $264,000 loss from the joint venture based on its 50% interest in the
joint venture. Included in the Company's accounts receivable is $168,000 for
administrative services provided to the joint venture through September 30,
1998.
5. GERMAN NETWORK BUILD
The Company signed a letter of intent with Viatel, Inc. and Carrier 1
Holdings, Ltd. to jointly build a national fiber optic telecommunications
network in Germany. Upon completion of construction, the Company will own its
own separate German broadband network. The Company expects construction to be
completed in stages, with the first segment expected to be available by the
third quarter of 1999. In connection with this agreement, the Company made a
deposit payment of $4.7 million. Upon signing a definitive agreement the Company
would expect to be required to provide an irrevocable standby letter of credit
as security for the construction costs of the network.
6. RELATED PARTY TRANSACTIONS
The Company is party to the Management Agreement with Metromedia Company
pursuant to which Metromedia Company provides the Company with consultation and
advisory services. These services encompass legal, insurance, personnel,
benefits and other corporate matters, cash management,
F-7
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
6. RELATED PARTY TRANSACTIONS (CONTINUED)
internal audit, finance, taxes and other services as may be reasonably requested
by the Company. The Management Agreement terminates on December 31, 1998 and is
automatically renewed for successive one-year terms unless either party
terminates upon 60 days notice. The management fee under the Management
Agreement is $500,000 per year. In addition, the Company is obligated to
reimburse Metromedia Company all of its out-of-pocket costs and expenses
incurred in connection with the agreement.
In fiscal 1997, Metromedia Company received no payments for its
out-of-pocket costs and expenses or for any other services rendered under the
Management Agreement. With respect to 1998, in accordance with the Management
Agreement, amounts expensed as of September 30, 1998 were $375,000.
In 1997, the Company paid in full the outstanding balance of a loan made to
the Company in prior years by the Company's majority shareholder at the time
such loan was advanced.
7. SETTLEMENT AGREEMENTS
The Company was a defendant in KATZ, ET AL. V. NATIONAL FIBER NETWORK, INC.,
ET AL., No. 97 Civ. 2764 (JGK) (the "Katz Litigation"). The subject matter of
the Katz Litigation is set forth in detail in the Company's Annual Report on
Form 10-K for the year ended December 31, 1997, which description is
incorporated by reference herein and made a part hereof. 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 the Katz Litigation.
8. EQUITY TRANSACTIONS
STOCK SPLITS
As discussed in Note 1, on December 22, 1998, the Company completed a
two-for-one stock split of the Company's Class A and Class B Common Stock in the
form of a 100% stock dividend to all shareholders of record as of the close of
business on December 8, 1998 and on August 28, 1998, the Company completed a
two-for-one stock split of the Company's Class A and Class B Common Stock in the
form of a 100 percent stock dividend to all shareholders of record as of the
close of business on August 7, 1998. All share and per share amounts presented
herein give retroactive effect to the stock splits. As of September 30, 1998,
adjusted for the effect of the stock dividend, the Company had 77,460,452 Class
A common shares outstanding and 16,884,636 Class B common shares outstanding.
STOCK OPTIONS
In 1997, the Company granted to key employees, officers and directors
options to purchase up to 12,380,940 shares of the common stock of the Company.
The options have exercise prices ranging from $0.49 to $1.91 per share, vesting
schedules ranging from immediate to twelve months from date of grant and expire
ten years after date of grant. The Company recorded non-cash charges of $53,000
and $248,000 for the three- and nine-month periods ending September 30, 1998,
respectively, to reflect the pro-rata value applicable to the vesting period of
such grants.
F-8
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
8. EQUITY TRANSACTIONS (CONTINUED)
STOCK WARRANTS
On December 31, 1996, the Company issued and sold to Penny Lane Partners, LP
("Penny Lane") for aggregate cash consideration of $2,025,000 (i) 300,000 shares
of 10% cumulative convertible preferred stock (the "Series A Preferred Stock")
bearing dividends at a rate of $.34 per share per annum, and (ii) warrants to
purchase 456,300 shares of Common Stock at an exercise price of $1.24 per share
of Common Stock (such number to be adjusted based on certain future events) at
an exercise price of $0.01 per share (the "Contingent Warrants"). In March 1997,
Penny Lane agreed to permit 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 in
connection therewith the number of Penny Lane Warrants was increased from
456,300 to 912,600.
In January 1998, Penny Lane exercised all its warrants under the terms of
the agreement. Penny Lane elected to make a cashless exercise of its warrants
and the number of shares issuable upon exercise was reduced by the number of
shares at the closing price on the day of exercise having a value equal to the
aggregate exercise price. As such, Penny Lane was issued 691,024 shares in
connection with the exercise of all of its warrants.
9. CONTINGENCIES
(a) On or about October 20, 1997, Vento & Company of New York, LLC ("VCNY")
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 (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, plaintiff filed an amended complaint. The complaint, as
amended, alleges four causes of action including (i) violation of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder;
(ii) fraud and fraudulent concealment; (iii) breach of fiduciary duty; and (iv)
negligent misrepresentation and omission made in connection with the sale by
VCNY 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
"VCNY Sale"). Plaintiff seeks, among other things, (i) on the first and second
causes of action, rescission of the VCNY Sale, or alternatively, damages in an
amount not presently ascertainable, but believed to be in excess of $36 million,
together with interest thereon; (ii) on the third and fourth causes of action,
damages in an amount not presently ascertainable, but believed to be in excess
of $36 million, together with interest thereon; (iii) punitive damages in the
amount of $50 million, and (iv) plaintiff's reasonable legal fees and the cost
of this action. All the defendants, including the Company and Stephen A.
Garofalo, have moved to dismiss the amended complaint. The Company intends to
vigorously defend itself against these allegations based on its belief that it
acted appropriately in connection with the matters at issue in this litigation.
However, no assurance can be made 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 its
defense of the allegations. If the Company is unsuccessful in its defense of the
allegations, an award of the magnitude being sought by the plaintiff in the VCNY
Litigation would have a material adverse effect on the Company's financial
condition or results of operations.
F-9
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
9. CONTINGENCIES (CONTINUED)
(b) On or about June 12, 1998, Claudio E. Contardi commenced an action
against Peter Sahagen, Sahagen Consulting Group of Florida and the Company in
the United States District Court for the Southern District of New York (No. 98
CIV 4140). The plaintiff alleges a cause of action for, among other things,
breach of a finder's fee agreement entered into between Peter Sahagen and
plaintiff 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. Plaintiff
seeks, among other things, a number of shares of the Company not presently
ascertainable, but believed to be approximately 225,000 shares (calculated as of
the date on which the complaint was filed) or damages in an amount not presently
ascertainable, but believed to be approximately $4.9 million (calculated as of
the date on which the complaint was filed) and all costs and expenses incurred
by the plaintiff in this action. The Company has answered the complaint and
asserted affirmative defenses thereto, and the Company intends to vigorously
defend itself against these allegations based on its belief that it acted
appropriately in connection with the matters at issue in this litigation.
However, no assurances can be made 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 its
defense of the allegations. The Company has filed an answer to the complaint and
has raised affirmative defenses.
F-10
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, 1997 and
1996, and the related consolidated statements of operations, stockholders'
deficiency and cash flows for each of the years then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated 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, 1997 and
1996, and the consolidated results of their operations and their cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Ernst & Young LLP
New York, New York
March 16, 1998
F-11
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders of
Metromedia Fiber Network, Inc.
We have audited the accompanying consolidated statements of operations,
stockholders' deficiency and cash flows for the year ended December 31, 1995 of
Metromedia Fiber Network, Inc. and Subsidiary (the "Company"). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of operations
and cash flows for the year ended December 31, 1995 of Metromedia Fiber Network,
Inc. and Subsidiary in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company's significant recurring
losses, operating history and significant working capital deficiency, including
significant amounts of past due payables, raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are also discussed in Note 1. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or the amounts and classification of
liabilities that might result from the outcome of this uncertainty.
M.R. Weiser & Co. LLP
New York, New York
June 26, 1996
F-12
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
------------------------------
1997 1996
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................................... $ 138,846,458 $ 464,324
Accounts receivable............................................................ 836,628 180,790
Other current assets........................................................... 874,010 --
-------------- --------------
Total current assets......................................................... 140,557,096 645,114
Fiber optic transmission network and related equipment, net...................... 24,933,510 6,368,653
Property and equipment, net...................................................... 759,014 525,268
Investment in/advance to Joint Venture........................................... 56,015 --
Other assets..................................................................... 1,072,055 438,471
-------------- --------------
Total assets................................................................. $ 167,377,690 $ 7,977,506
-------------- --------------
-------------- --------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable............................................................... $ 3,072,091 $ 5,256,929
Accrued expenses............................................................... 3,180,010 917,526
Current portion of deferred revenue............................................ 1,183,633 --
Notes payable.................................................................. -- 7,358,000
-------------- --------------
Total current liabilities.................................................... 7,435,734 13,532,455
Deferred revenue................................................................. 10,311,023 1,107,724
Other............................................................................ 90,000 195,243
Commitments and Contingencies
Stockholders' equity (deficiency):
Preferred stock, $.10 par value, authorized 2,000,000 shares, none and 600,000
shares issued and outstanding, respectively.................................... -- 60,000
Common stock, $.01 par value; authorized 60,000,000 shares; none and 40,005,240
shares issued and outstanding, respectively.................................... -- 400,051
Class A common stock, $.01 par value; authorized 180,000,000 shares; 74,896,568
shares and none issued and outstanding, respectively........................... 748,966 --
Class B common stock, $.01 par value; authorized 20,000,000 shares; 16,884,636
shares and none issued outstanding, respectively............................... 168,846 --
Additional paid-in capital....................................................... 191,845,909 8,421,468
Accumulated deficit.............................................................. (43,222,788) (15,739,435)
-------------- --------------
Total stockholders' equity (deficiency)...................................... 149,540,933 (6,857,916)
-------------- --------------
Total liabilities and stockholders' equity (deficiency).................... $ 167,377,690 $ 7,977,506
-------------- --------------
-------------- --------------
See accompanying notes.
F-13
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
-------------- -------------- -------------
Revenues.......................................................... $ 2,524,311 $ 236,082 $ 56,149
Expenses:
Cost of sales................................................... 3,572,005 698,793 --
Selling, general and administrative............................. 6,303,041 2,070,345 3,886,568
Consulting and employment incentives............................ 19,218,591 3,652,101
Depreciation and amortization................................... 757,133 612,530 161,576
-------------- -------------- -------------
Loss from operations.............................................. (27,326,459) (6,797,687) (3,991,995)
Interest income................................................... 1,808,007 -- --
Interest expense (including financing costs)...................... (740,786) (3,561,010) (327,106)
-------------- -------------- -------------
Net loss.......................................................... (26,259,238) (10,358,697) (4,319,101)
-------------- -------------- -------------
-------------- -------------- -------------
Net loss per share-basic and diluted.............................. $ (.56) $ (0.29) $ (0.17)
-------------- -------------- -------------
-------------- -------------- -------------
See accompanying notes.
F-14
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
-------------- -------------- -------------
Cash flows from operating activities:
Net loss.......................................................... $ (26,259,238) $ (10,358,697) $ (4,319,101)
Adjustments to reconcile net loss to net cash (used in) provided
by operating activities:
Depreciation and amortization................................... 757,133 612,530 161,576
Stock, options and warrants issued for services................. 19,438,627 5,395,132 --
Changes in operating assets and liabilities:
Accounts receivable............................................. (655,838) 1,928 (182,718)
Accounts payable and accrued expenses........................... (12,354) 757,897 2,916,058
Advance payments received from customers........................ 10,386,932 832,690 275,034
Other........................................................... (1,467,609) 12,930 (141,666)
-------------- -------------- -------------
Net cash provided (used) in operating activities.............. 2,187,653 (2,745,590) (1,290,817)
-------------- -------------- -------------
Cash flows from investing activities:
Capital expenditures on fiber optic transmission network and
related equipment............................................... (19,205,912) (974,107) (3,709,928)
Deposit on fiber optic cable order................................ (86,771) -- --
Investment in/advance to joint venture............................ (56,015) -- --
Capital expenditures on property and equipment.................... (318,281) (95,356) (476,378)
-------------- -------------- -------------
Net cash used in investing activities......................... (19,666,979) (1,069,463) (4,186,306)
-------------- -------------- -------------
Cash flows from financing activities:
Proceeds from issuance of common stock.......................... 133,974,844 123,500 --
Proceeds from issuance of preferred stock and warrants.......... 32,500,000 2,025,000 --
Dividends paid on preferred stock............................... (76,562) -- --
(Repayments) proceeds from notes payable-private placement...... (1,408,000) 25,000 1,383,000
(Repayments) of notes payable................................... (5,950,000) (3,350,036) --
Proceeds from notes payable..................................... -- 5,450,000 3,850,036
Purchase of common stock........................................ (1,140,384) -- --
Purchase of preferred stock..................................... (2,038,438) -- --
-------------- -------------- -------------
Net cash provided by financing activities..................... 155,861,460 4,273,464 5,233,036
-------------- -------------- -------------
Net increase in cash and cash equivalents......................... 138,382,134 458,411 (244,087)
Cash and cash equivalents and beginning of period................. 464,324 5,913 250,000
-------------- -------------- -------------
Cash and cash equivalents and end of period....................... $ 138,846,458 $ 464,324 $ 5,913
-------------- -------------- -------------
-------------- -------------- -------------
Supplemental information: Interest paid........................... $ 1,145,416 $ 996,060 $ 67,149
-------------- -------------- -------------
-------------- -------------- -------------
Income taxes paid................................................. $ -- $ -- $ --
-------------- -------------- -------------
-------------- -------------- -------------
See accompanying notes.
F-15
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
CLASS A
SERIES A SERIES B COMMON
PREFERRED STOCK PREFERRED STOCK COMMON STOCK STOCK
-------------------- ------------------------ ----------------------- -----------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
--------- --------- ----------- ----------- ----------- ---------- -----------
Balance at December 31, 1994........... -- $ -- -- $ -- 24,336,000 $ 243,360 --
Issuance of common stock as an
inducement for entering into a loan
agreement............................ -- -- -- -- 623,976 6,240 --
Net loss for the year.................. -- -- -- -- -- -- --
--------- --------- ----------- ----------- ----------- ---------- -----------
Balance at December 31, 1995........... -- -- -- -- 24,959,976 249,600 --
Issuance of common stock in 1996 for
legal services rendered.............. -- -- -- -- 1,964,420 19,644 --
Issuance of common stock and warrants
in conjunction with sale of Senior
Subordinated Notes in 1996........... -- -- -- -- 1,524,348 15,244 --
Issuance of shares to holder of Senior
Subordinated Notes in exchange for
warrants............................. -- -- -- -- 912,600 9,126 --
Issuance of common stock in April 1996
to extend maturity of private
placement Subordinated Notes......... -- -- -- -- 237,436 2,374 --
Issuance of common stock in exchange
for management services.............. -- -- -- -- 6,084,000 60,840 --
Issuance of additional common stock to
the holder of the Senior Subordinated
Notes in connection with antidilution
provisions........................... -- -- -- -- 152,100 1,521 --
Issuance of common stock in April 1996
and July 1996 in connection with the
exercise of warrants................. -- -- -- -- 762,172 7,622 --
Issuance of common stock to related
electrical contractor in May 1996 as
payment for services................. -- -- -- -- 1,825,200 18,252 --
Issuance of common stock to majority
shareholder in May 1996 in exchange
for debt............................. -- -- -- -- 608,400 6,084 --
Sale of common stock and warrants in
June 1996............................ -- -- -- -- 152,100 1,521 --
Issuance of common stock in July 1996
in exchange for services rendered.... -- -- -- -- 48,672 486 --
Issuance of common stock for services
rendered............................. -- -- -- -- 730,080 7,300 --
Sale of common stock in September
1996................................. -- -- -- -- 43,736 437 --
CLASS B
COMMON STOCK ADDITIONAL
-------------------- PAID-IN ACCUMULATED
AMOUNT SHARES AMOUNT CAPITAL DEFICIT TOTAL
--------- --------- --------- ------------- ------------ -------------
Balance at December 31, 1994........... $ -- -- $ -- $ (203,360) $ (1,061,637) $ (1,021,637)
Issuance of common stock as an
inducement for entering into a loan
agreement............................ -- -- -- (1,240) -- 5,000
Net loss for the year.................. -- -- -- -- (4,319,101) (4,319,101)
--------- --------- --------- ------------- ------------ -------------
Balance at December 31, 1995........... -- -- -- (204,600) (5,380,738) (5,335,738)
Issuance of common stock in 1996 for
legal services rendered.............. -- -- -- 887,657 -- 907,301
Issuance of common stock and warrants
in conjunction with sale of Senior
Subordinated Notes in 1996........... -- -- -- 673,769 -- 689,013
Issuance of shares to holder of Senior
Subordinated Notes in exchange for
warrants............................. -- -- -- (9,126) -- --
Issuance of common stock in April 1996
to extend maturity of private
placement Subordinated Notes......... -- -- -- 104,948 -- 107,322
Issuance of common stock in exchange
for management services.............. -- -- -- 2,699,160 -- 2,760,000
Issuance of additional common stock to
the holder of the Senior Subordinated
Notes in connection with antidilution
provisions........................... -- -- -- (1,521) -- --
Issuance of common stock in April 1996
and July 1996 in connection with the
exercise of warrants................. -- -- -- (7,622) -- --
Issuance of common stock to related
electrical contractor in May 1996 as
payment for services................. -- -- -- 674,635 -- 692,887
Issuance of common stock to majority
shareholder in May 1996 in exchange
for debt............................. -- -- -- 593,916 -- 600,000
Sale of common stock and warrants in
June 1996............................ -- -- -- 98,479 -- 100,000
Issuance of common stock in July 1996
in exchange for services rendered.... -- -- -- 20,714 -- 21,200
Issuance of common stock for services
rendered............................. -- -- -- 327,500 -- 334,800
Sale of common stock in September
1996................................. -- -- -- 23,063 -- 23,500
F-16
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIENCY) EQUITY
(CONTINUED)
SERIES A SERIES B CLASS A
PREFERRED STOCK PREFERRED STOCK COMMON STOCK COMMON STOCK
-------------------- ---------------------- ------------------------ ----------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- --------- --------- ----------- ------------ ---------- ----------- ---------
Issuance of warrants for legal
services rendered (to purchase
608,400 shares at $0.015 per
share)............................ -- -- -- -- -- -- -- --
Issuance of warrants in connection
with debt issuance (to purchase
377,208 shares at $1.48 per
share)............................ -- -- -- -- -- -- -- --
Issuance of warrants in connection
with debt issuance (to purchase
762,172 shares at $.002 per
share)............................ -- -- -- -- -- -- -- --
Issuance of warrants in connection
with debt issuance (to purchase
428,312 shares at $2.00 per
share)............................ -- -- -- -- -- -- -- --
Sale of preferred stock with
warrants in December 1996......... 600,000 60,000 -- -- -- -- -- --
Net loss for the year............... -- -- -- -- -- -- -- --
--------- --------- --------- ----- ------------ ---------- ----------- ---------
Balance at December 31, 1996........ 600,000 60,000 -- -- 40,005,240 400,051 -- --
Issuance of common stock in
connection with the exercise of
warrants.......................... -- -- -- -- 608,400 6,084 -- --
Issuance of options to employees,
officers and directors (to
purchase 12,380,940 shares)....... -- -- -- -- -- -- -- --
Issuance of warrants in connection
with debt extension (to purchase
230,728 shares at $2.00 per
share)............................ -- -- -- -- -- -- -- --
Dividends on preferred stock........ -- -- -- -- -- -- -- --
Repurchase and retirement of Series
A preferred stock and warrants.... (600,000) (60,000) -- -- -- -- -- --
Repurchase and retirement of common
stock and warrants................ -- -- -- -- (2,353,880) (23,539) (68) --
Sales of Series B preferred stock... -- -- 8,403 84 -- -- -- --
Initial Public Offering............. -- -- -- -- -- -- 36,432,000 364,320
Conversion of Common Stock to Series
A Common Stock.................... -- -- -- -- (38,259,760) (382,596) 38,259,760 382,596
Conversion of Series B Preferred
Stock to Series A and B Common
Stock............................. -- -- (8,403) (84) -- -- 157,308 1,574
Issuance of common stock in
connection with the exercise of
warrants.......................... -- -- -- -- -- -- 47,568 476
Net loss for the year............... -- -- -- -- -- -- -- --
--------- --------- --------- ----- ------------ ---------- ----------- ---------
Balance at December 31, 1997........ -- $ -- -- $ -- -- $ -- 74,896,568 $ 748,966
CLASS B
COMMON STOCK ADDITIONAL
---------------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
----------- --------- ------------- ------------- -------------
Issuance of warrants for legal
services rendered (to purchase
608,400 shares at $0.015 per
share)............................ -- -- 200,000 -- 200,000
Issuance of warrants in connection
with debt issuance (to purchase
377,208 shares at $1.48 per
share)............................ -- -- 13,640 -- 13,640
Issuance of warrants in connection
with debt issuance (to purchase
762,172 shares at $.002 per
share)............................ -- -- 250,550 -- 250,550
Issuance of warrants in connection
with debt issuance (to purchase
428,312 shares at $2.00 per
share)............................ -- -- 111,306 -- 111,306
Sale of preferred stock with
warrants in December 1996......... -- -- 1,965,000 -- 2,025,000
Net loss for the year............... -- -- -- (10,358,697) (10,358,697)
----------- --------- ------------- ------------- -------------
Balance at December 31, 1996........ -- -- 8,421,468 (15,739,435) (6,857,916)
Issuance of common stock in
connection with the exercise of
warrants.......................... -- -- 3,916 -- 10,000
Issuance of options to employees,
officers and directors (to
purchase 12,380,940 shares)....... -- -- 19,218,591 -- 19,218,591
Issuance of warrants in connection
with debt extension (to purchase
230,728 shares at $2.00 per
share)............................ -- -- 220,036 -- 220,036
Dividends on preferred stock........ -- -- (76,562) (76,562)
Repurchase and retirement of Series
A preferred stock and warrants.... -- -- (1,965,000) (13,438) (2,038,438)
Repurchase and retirement of common
stock and warrants................ -- -- 17,270 (1,134,115) (1,140,384)
Sales of Series B preferred stock... -- -- 32,499,916 -- 32,500,000
Initial Public Offering............. -- -- 133,514,303 -- 133,878,623
Conversion of Common Stock to Series
A Common Stock.................... -- -- -- -- --
Conversion of Series B Preferred
Stock to Series A and B Common
Stock............................. 16,884,636 168,846 (170,336) -- --
Issuance of common stock in
connection with the exercise of
warrants.......................... -- -- 85,745 -- 86,221
Net loss for the year............... -- -- -- (26,259,238) (26,259,238)
----------- --------- ------------- ------------- -------------
Balance at December 31, 1997........ 16,884,636 $ 168,846 $ 191,845,909 $ (43,222,788) $ 149,540,933
See accompanying notes.
F-17
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BUSINESS OPERATIONS AND LINE OF BUSINESS
Metromedia Fiber Network, Inc. (formerly National Fiber Network, Inc.) and
its subsidiaries (the "Company") was granted a nonexclusive right from the City
of New York, effective December 20, 1993, to provide telecommunication services
and construct a fiber optic network for the purpose of providing these services.
In October 1995, the basic backbone of the Fiber Optic Cable Network in the City
of New York was completed and the Company began servicing its customers.
The Company entered into a joint venture agreement with Racal
Telecommunications, Inc. ("Racal") on November 26, 1997. The joint venture will
enable the Company and Racal to provide broadband transatlantic communication
services, between New York and London, to their respective customers. Racal is
part of the Racal Electronics Group which is headquartered in the United
Kingdom.
The accompanying consolidated financial statements have been prepared on a
going concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. On April 30, 1997
the Company sold 8,403 shares of Series B preferred shares in exchange for
$32,500,000 in cash. Prior thereto, the Company had working capital deficiencies
and stockholders' deficiencies. Further, substantially all of its trade payables
and certain current liabilities were past due. These factors, prior to the April
1997 sale of preferred stock, raised substantial doubt about the Company's
ability to continue as a going concern.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and it subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation. The investment in the Racal joint venture in which
the Company owns 50% is accounted for by the equity method. Certain balances
have been restated to conform to the current period presentation.
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 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.
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.
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.
F-18
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
FRANCHISE COSTS
Amortization of franchise costs on the New York City Network began upon
commencement of service to customers and is computed on the straight-line method
through December 20, 2008 (159 months), the expiration date of the franchise
agreement.
ORGANIZATION COSTS
Costs incurred in connection with the organization of the company were
capitalized and are being amortized over five years on a straight-line basis.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets and certain
identifiable intangibles whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. No such impairment
indicators have been identified by the Company.
INCOME TAXES
The Company recognizes deferred tax liabilities and assets, if any, for the
expected future tax consequences of events that have been included in the
financial statements or tax returns. Under this method, deferred tax liabilities
and assets are determined based on the difference between the financial
statement and tax bases of assets and liabilities using enacted tax rates in
effect for the year in which the differences are expected to reverse. Valuation
allowances are provided when the expected realization of tax assets does not
meet a more likely than not criterion.
RECAPITALIZATIONS
On February 17, 1995, the Company effected a 4,000-for-one stock split of
its outstanding shares of common stock. 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-1 reverse stock split of its common stock. On October 28, 1997, the
total authorized number of shares of common stock of the Company was increased
to 200 million shares, par value $0.01 per share, of which 180 million shares
were designated Class A common stock and 20 million shares were designated Class
B common stock.
On August 28, 1998, the Company completed a two-for-one stock split of the
Company's Class A and Class B common stock in the form of a 100 percent stock
dividend. On December 22, 1998, the Company completed a two-for-one stock split
of the Company's Class A and Class B common stock in the form of a 100% stock
dividend. The accompanying financial statements give retroactive effect to the
above recapitalizations.
F-19
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF REVENUE
The Company recognizes revenue on telecommunications services ratably over
the term of the applicable agreements with customers. The Company also provides
installation services for its customers, and as these services typically are
completed within a year, the Company records the revenues and related costs for
these services under the completed contract method.
STOCK-BASED COMPENSATION
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." The Company applies APB Opinion No.
25, "Accounting for Stock Issued to Employees," and related interpretations in
accounting for its stock options.
CONSULTING AND EMPLOYMENT INCENTIVES
The amounts represent the value of common stock, warrants and options issued
to consultants, officers, employees and directors of the Company as incentive to
provide services to the Company. The 1997 amounts represent the value of options
to purchase 12,380,940 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.
EARNINGS PER SHARE
The Company, as required, adopted SFAS No. 128, "Earnings Per Share," for
the year end 1997. All prior period earnings per share data have been restated.
Net loss per share computations are based upon the net loss attributable to
common shareholders divided by the weighted average number of shares of common
stock outstanding during the respective periods. The effect of stock options and
warrants, using the treasury stock method in computing diluted earnings per
share, is anti-dilutive.
RESTRICTED CASH
In 1997, the Company entered into agreements regarding the issuance of
long-term standby letters of credit with a financial institution whereby the
financial institution required the Company to maintain collateral in the form of
an interest-bearing cash balance with the financial institution in the full
amount of the standby letters of credit issued. The restricted cash is invested
in short-term time deposits of the issuing financial institution and the
interest earned on the time deposits is free of restriction and released to the
Company periodically.
DEFERRED REVENUES
Deferred revenue represents prepayments received from customers for future
use of the Company's fiber optic network as well as prepayment for installation
services which have not yet been provided. The Company derives revenues from
leasing dark fiber optic cable. Lease payments are structured as either
prepayments or monthly recurring charges. Prepayments are accounted for as
deferred revenues and recognized over the term of the respective customer lease
agreement. At December 31, 1997, the Company had received prepaid lease payments
totaling $11.5 million.
F-20
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. FIBER OPTIC TRANSMISSION NETWORK AND RELATED EQUIPMENT
Fiber optic transmission network and related equipment consist of the
following:
DECEMBER 31,
---------------------------
1997 1996
------------- ------------
Material-fiber optic cable........................................................... $ 1,133,916 $ 719,067
Engineering and layout costs......................................................... 3,322,978 2,643,448
Fiber optic cable installation costs................................................. 1,869,119 1,205,041
Other................................................................................ 2,016,852 1,279,397
Construction in progress............................................................. 17,835,000 1,125,000
------------- ------------
26,177,865 6,971,953
Less: accumulated depreciation....................................................... (1,244,355) (603,300)
------------- ------------
$ 24,933,510 $ 6,368,653
------------- ------------
------------- ------------
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
DECEMBER 31,
----------------------
1997 1996 USEFUL LIFE
---------- ---------- -------------
Leasehold improvements.................................................... $ 537,962 $ 528,958 174 months
Furniture, equipment and software......................................... 352,056 42,776 5 years
---------- ----------
890,018 571,734
Less accumulated depreciation and amortization............................ (131,004) (46,466)
---------- ----------
$ 759,014 $ 525,268
---------- ----------
---------- ----------
4. INVESTMENT IN/ADVANCES TO JOINT VENTURE
On November 26, 1997, the Company entered into a joint venture agreement
with Racal, to provide broad-based transatlantic communication services between
New York and London. The Company and Racal will each be required to contribute
capital of $3,400,000 through October 1, 1998 for their respective 50%
interests. As of December 31, 1997, neither party had yet made a capital
contribution. The balance of the investment at December 31, 1997 represents
advances made to the joint venture by the Company.
5. RELATED PARTY TRANSACTIONS
Prior to 1996, the Company engaged the services of an electrical contractor
controlled by the person who was then the Company's majority shareholder. During
1995, the Company incurred charges for labor and materials of $692,887. As of
December 31, 1995, $692,887 was owed to this related company. In May 1996, the
Company and the assignee of this related party entered into an agreement whereby
the full amount of this indebtedness was satisfied by the issuance of 1,825,200
shares of the Company's common stock. The value of the stock was based upon the
invoices rendered for services performed based upon negotiations between the
Company and the electrical contractor.
The person who was then the Company's majority shareholder made loans to the
Company which at December 31, 1994 totaled $1,967,109. In April 1995, such
shareholder of the Company agreed to contribute to the Company's capital $1.7
million of amounts due to him. By agreement between the
F-21
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. RELATED PARTY TRANSACTIONS (CONTINUED)
Company and such shareholder in May 1996 the transaction was rescinded. During
1995, the Company made repayments (net of additional advances) of $1,070,130. As
of December 31, 1995, the Company owed such shareholder $896,979. Pursuant to an
agreement dated May 21, 1996, the Company issued 608,400 shares of its common
stock to such shareholder in consideration for the cancellation of $600,000 of
the outstanding balance. In 1997, the remaining balance of the note was repaid
in full.
In March and June 1997, the Company entered into two one-year leases for
office space with an affiliate. Subsequent to June 1997, the affiliate sold this
property. For the year ended December 31, 1997 office rent expenses for these
leases amounted to approximately $110,000.
6. NOTES PAYABLE
Notes payable consisted of the following:
DECEMBER 31,
-----------------------
1997 1996
--------- ------------
U.S. One Communications............................................................... a) $ -- $ 4,900,000
Convertible Subordinated Notes........................................................ b) -- 858,000
Sterling Capital Bridge Loan.......................................................... c) -- 550,000
Subordinated Notes.................................................................... d) -- 550,000
AT&T Wireless......................................................................... e) -- 500,000
Senior Subordinated Notes............................................................. f) -- --
--------- ------------
$ -- $ 7,358,000
--------- ------------
--------- ------------
A. On April 16, 1996, the Company entered into an agreement with U.S. One
Communications ("U.S. One") for the exclusive usage rights for fibers on the
Company's fiber optic transmission network. The initial term of the agreement
was for a period beginning April 1996 and expiring December 2008. The agreement
was renewable, at the option of U.S. One, for an extended term of 13 years
expiring December 2021. In connection with this agreement, the Company borrowed
$4,900,000 from U.S. One, of which $3,227,867 was immediately used to repay all
notes payable to Tomen America.
On April 30, 1997 the Company amended this agreement which allows U.S. One
to have the exclusive right to use 888 fiber miles of the network. Additionally,
pursuant to the amended agreement, U.S. One received an option to acquire from
the Company up to 1,620 additional fiber miles upon payment of a predetermined
amount. In accordance with the amended agreement the following occurred: (i) all
interest accrued from the inception of the loan to the closing date of the
agreement was waived by U.S. One, and (ii) the $4,900,000 principal balance of
the loan was offset against the $3,530,000 scheduled payment due from U.S. One
to the Company under the amended lease agreement, and (iii) the Company paid to
U.S. One the difference of $1,370,000.
In connection with the execution of the aforementioned lease and financing
agreements, the Company granted U.S. One a warrant to purchase common stock of
the Company. The warrant is exercisable for a number of shares of Class A common
stock to be determined at the Company's discretion subject to a minimum number
of 304,200 shares and maximum number of 1,825,200 shares. The per share exercise
price is to be determined pursuant to a formula, but in no event shall the
aggregate purchase price exceed $1,250,000.
F-22
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE (CONTINUED)
B.In October 1995, the Company initiated a private offering of $858,000 of
convertible subordinated notes. Through December 31, 1995, $783,000 of notes
were sold pursuant to this offering, and an additional $75,000 of notes were
sold during January and February of 1996. These notes were scheduled to mature
during the period October 1996 through February 1997 and bore interest at an
annual rate of 15%, payable at maturity. The notes were convertible, at the
Company's option, into shares of common stock. Concurrent with the issuance of
these notes, warrants were issued by the Company to the noteholders to purchase
522,008 shares of common stock at $2.00 per share through November 2000. In
1997, the Company repaid the outstanding balance of these notes plus all accrued
interest.
In December 1996, the Company offered the noteholders warrants to purchase
428,312 shares of its common stock exercisable at $2.00 per share through
November 2000 in exchange for the extension of the due dates on the notes. All
of the noteholders accepted this offer and accordingly, the Company recorded a
non cash charge of $111,306. As of December 31, 1997, 15,212 of such warrants
have been exercised.
In March 1997, in consideration for the extension of the due dates of the
notes, the Company issued warrants to the noteholders to purchase an aggregate
of 230,728 shares of common stock, exercisable at $2.00 per share through
November 2000. The Company recorded a non-cash charge of $220,036 for such
issuance. As of December 31, 1997, 7,606 of such warrants have been exercised.
C. On September 24, 1996, the Company entered into a loan agreement with
Sterling Capital ("Sterling") for $550,000. The loan bore interest at 10% per
annum and matured on March 1, 1997. The loan was secured by all of the Company's
assets. As an incentive for the loan, the Company issued to Sterling warrants to
purchase 377,208 shares of common stock at an exercise price of $1.48. The
warrants are exercisable through September 1999. On May 1, 1997 the company
repaid the loan in full and all accrued interest. As of December 31, 1997,
17,144 of the warrants have been exercised.
D. In August 1995, the Company initiated a $600,000 private offering of
subordinated notes. These notes were scheduled to mature in March 1996 and bore
interest at an annual rate of 15%, payable quarterly in arrears. Concurrent with
the issuance of these notes, warrants were issued by the Company to the
noteholders which were exercisable for common shares of the Company in an amount
equal to 0.7% of the outstanding shares of common stock immediately following an
initial public offering of the Company's common stock, at an exercise price
equal to 60% of the initial public offering price. These warrants are
exercisable over a three-year period beginning on the effective date of such
initial public offering. In April 1996, the Company offered the warrantholders
shares of common stock equal to 0.7% of the common stock then issued and
outstanding, in exchange for the surrender and cancellation of the outstanding
warrants, and in consideration for the extension of the maturity date of the
notes through June 30, 1996. All of the warrantholders accepted this offer and,
accordingly, the Company issued a total of 237,436 shares of the Company's
common stock. The Company recorded a noncash charge of $107,322 in connection
with such issuance. In 1996, the Company repaid $50,000 of this debt. In 1997,
the Company repaid the outstanding balance of these notes plus all accrued
interest.
E. On April 18, 1995, the Company entered into a loan agreement, which was
subsequently amended, with AT&T Wireless for $500,000 bearing interest at 11%
per annum. In July 1997 the note was repaid in full. In 1995, the Company issued
to AT&T Wireless a warrant entitling the holder to purchase a total of 2,676,668
shares of the Company's common stock.
F-23
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. NOTES PAYABLE (CONTINUED)
This warrant, was canceled and replaced by a new warrant issued on February
13, 1997, to purchase 1,825,200 shares of the Company's common stock at $1.21
per share. The new warrant expires on February 13, 2000.
F. On February 13, 1996, the Company entered into an investment agreement
with an individual (the "Investor") pursuant to which the company borrowed
$1,000,000 in consideration for the issuance of 12% senior subordinated
promissory notes maturing on November 1, 1996. The notes were guaranteed
personally by the Company's president. The notes were convertible at a price of
$.66 per unit for each $1,000 of principal outstanding. Each unit consisted of
the following: (i) one share of common stock, and (ii) one warrant to purchase
one share of common stock at $1.32 per share. As an inducement for entering into
the investment agreement, the Company issued to the Investor the following: (i)
1,524,348 shares of common stock, and (ii) a warrant to purchase 1,524,348
shares of common stock at $1.32 per share, exercisable through August 15, 2002.
The Company recorded noncash charges of $689,013 for such issuances.
On March 19, 1996, a supplemental investment agreement was executed with the
Investor providing for an additional advance of $500,000 with the same maturity
date, interest rate, conversion rights, and guaranty features as the initial
$1,000,000 investment. This advance was subsequently repaid, along with interest
on April 16, 1996. In connection with this supplemental agreement, the Company
issued a warrant to purchase 762,172 shares of common stock at $1.32 per share,
exercisable through August 15, 2002. The Company also issued a warrant to
purchase an additional 762,172 shares of Class A common stock at $0.002 per
share exercisable through August 15, 2002. The Company recorded a noncash charge
of $250,550 for such issuance.
On April 11, 1996, a memorandum of understanding was entered into between
the parties pursuant to which the warrants issued on February 13, 1996 to
purchase 1,524,348 shares at $1.32 per share and the warrants issued on March
19, 1996, to purchase 762,172 shares at $1.32 per share were surrendered by the
Investor to the Company in consideration for the issuance of 456,300 shares of
the Company's common stock.
In April and July 1996, the Investor purchased 608,400 and 153,772 shares of
common stock, respectively, at $0.002 per share in connection with the exercise
of all warrants held by the Investor. Further, in accordance with the investment
agreement an additional 152,100 shares of common stock was issued to the
Investor in compliance with the anti-dilutive requirements in the agreement.
7. SETTLEMENT AGREEMENTS
In February 1996, the Company entered into a settlement agreement with a
former officer regarding the termination of his employment. This agreement
provided for the Company to make payments to the officer totaling $1,003,000,
including interest. The former officer's services effectively terminated prior
to December 31, 1995. Accordingly, as of December 31, 1995, the Company recorded
$876,146 as a liability in accordance with the terms of the settlement
agreement.
The settlement agreement also reaffirmed the option previously issued to
this former officer on May 1, 1995, which entitles the holder to purchase
831,532 shares of the Company's common stock at $0.002 per share through
February 1, 1999. In 1997 the Company repurchased and retired the warrant.
On November 14, 1996, the Company amended the above referenced settlement
agreement with the former officer, whereby a consultant to the Company agreed to
purchase common stock of the
F-24
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. SETTLEMENT AGREEMENTS (CONTINUED)
company from the former officer and certain of his affiliates in exchange for
$640,000 and the complete satisfaction of the aforementioned liability.
On February 11, 1997, the Company entered into an agreement with a
consultant/director. Pursuant to the agreement the Company agreed to pay the
consultant/director a fee of $250,000 in full and complete payment for all
services provided to the Company by the consultant/director and for any fees or
compensation due to the consultant/director resulting from any prior agreements
with the Company, and the consultant/director agreed to release the Company from
any claims against the Company.
8. EQUITY TRANSACTIONS
STOCK ISSUED TO LEGAL COUNSEL
On January 12, 1996, the Company entered into an agreement with its legal
counsel which calls for the issuance by the Company of common stock as
additional consideration for legal services provided. Pursuant to this
agreement, as amended, the Company issued a total of 1,964,420 shares of its
common stock. Management has estimated the value of the 1,964,420 shares issued
to be $907,301 and has recorded a noncash charge in connection with such
issuance.
PREFERRED STOCK
On April 30, 1997, the Company sold an aggregate of 8,403.325 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 1,014 shares of the
Company's common stock. On October 28, 1997, the Series B convertible preferred
shares were converted into 17,041,944 shares of Class B common stock. Further,
on October 28, 1997, a total of 157,308 shares of Class B common stock
outstanding were converted into an equivalent number of shares of Class A common
stock.
A portion of the proceeds from the Metromedia Investment was used to repay
the Metromedia Loan, discussed below, and accrued interest thereon ($4,058,127),
repay other short-term indebtedness ($3,485,000), and redeem (for $2,115,000)
all of the outstanding shares of the Company's preferred stock (the "Series A
preferred stock") and related warrants.
Through April 30, 1997, Metromedia loaned the Company an aggregate of
$4,000,000 (the "Metromedia Loan"). A portion of the proceeds from the
Metromedia Loan was used to purchase 2,353,880 shares of the Company's common
stock and warrants to purchase 831,532 shares of its common stock at December
31, 1997.
No shares of the Company's Series A preferred stock or Series B preferred
stock remained outstanding at December 31, 1997. Both the Series A and Series B
preferred stock of the Company have been eliminated pursuant to actions by the
Board of Directors.
F-25
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY TRANSACTIONS (CONTINUED)
COMMON STOCK
On November 3, 1997, the Company completed the initial public offering ("the
"IPO") of 36,432,000 shares of its Class A common stock, at an offering price of
$4 per share. The net proceeds to the Company from the IPO, after deducting
expenses of the IPO, were approximately $133.9 million.
In addition, on October 28, 1997, a total of 38,259,760 shares of the common
stock of the Company owned by stockholders prior to the IPO were exchanged for
an equal number of shares of Class A common stock. The Company also reserved for
issuance 17,041,944 shares of Class A common stock for conversion of the Class B
common stock.
On October 28, 1996, a shareholder granted to the Company's Chairman of the
Board an option to purchase 1,599,556 shares of common stock of the company for
an aggregate exercise price of $500,000. By letter dated December 3, 1996, the
option was amended to reduce the number of option shares to 1,295,356 shares.
The option was thereafter assigned by the Chairman to the Company. On February
11, 1997, the Company exercised the option by payment of $500,000.
On April 15, 1996, the Company entered into a stock purchase agreement with
Vento & Company of New York, LLC ("VCNY"). Pursuant to this agreement, the
Company issued 6,084,000 shares of common stock to VCNY as consideration for
services provided by VCNY. The Company estimated the value of the stock issued
approximated $2,760,000.
Concurrent with the execution of the aforementioned stock purchase
agreement, the parties entered into a consulting agreement. The term of the
agreement was from April 15, 1996 to April 15, 2001. Under the terms of the
agreement, VCNY was to provide guidance and advice with respect to the
management of the day-to-day operations of the Company's fiber optic
transmission network. In consideration for such services, the Company reimbursed
VCNY for all reasonable personnel and travel costs incurred by VCNY with respect
to the performance of these services. On October 9, 1996, the Company entered
into a settlement agreement with the Company's former chief executive officer
and VCNY regarding the termination of such officer's employment and services
provided by VCNY. The agreement provided for VCNY to deliver a total of
6,084,000 shares of common stock in exchange for payments made by the Company.
The payments were not made and the sale of the shares and the Company's
obligation to buy the shares was deemed null and void.
In September 1996, the Company sold 43,736 shares of common stock to three
individuals for total proceeds of $23,500.
In August 1996, the Company issued 730,080 shares of common stock for
consulting services. The Company has recorded a noncash charge of $334,800 for
such issuance.
In July 1996, the Company issued 48,672 shares of common stock as
consideration for consulting services. The Company recorded a noncash charge of
$21,200 for such issuance. In addition, the Company issued 602,316 shares to
three employees for services rendered. The transaction was later rescinded and
the shares were returned to the Company.
In June 1996, the Company sold a total of 152,100 shares of common stock to
two individuals for total proceeds of $100,000. Concurrent with the issuance of
these shares, warrants were issued by the Company to these shareholders
entitling the holders to purchase a total of 152,100 shares at $0.66 per share
for a three-year period.
F-26
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY TRANSACTIONS (CONTINUED)
STOCK WARRANTS
In 1997, 1996 and 1995 in connection with the issuance of notes and the
extension of their due dates the Company issued warrants to the noteholders to
purchase 659,040 shares of common stock at $2.00 per share through November
2000; see Note 6.
As of December 31, 1997, the Company has reserved approximately 4,704,792
shares of its common stock for exercise of warrants and contingent warrants.
On December 31, 1996, the Company issued and sold to Penny Lane Partners,
L.P. ("Penny Lane") for aggregate cash consideration of $2,025,000 (i) 600,000
shares of 10% cumulative convertible preferred stock (the "Series A Preferred
Stock") bearing dividends at a rate of $0.34 per share per annum, (ii) warrants
to purchase 456,300 shares of Common Stock at an exercise price of $1.24 per
share of Common Stock (such number to be determined based on certain future
events) at an exercise price of $0.01 per share (the "Contingent Warrants"). In
March 1997, Penny Lane agreed to permit 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 in connection therewith the number of Penny Lane Warrants
was increased from 456,300 to 912,600.
In September 1996, the Company granted 377,208 common stock purchase
warrants to Sterling at an exercise price of the lesser of $1.48 per share, the
price at which the Company shall issue its securities in the future less $1.48,
or one half the price at which the common stock of the Company is offered in an
initial public offering, exercisable on the later date of September 24, 1999 or
twelve months and 90 days after the date the warrant shares have been covered by
a registration statement. The Company has recorded a noncash charge of $13,640
for such issuance.
In June 1996, the Company granted 608,400 common stock purchase warrants to
the Company's legal counsel exercisable at $0.02 per share for a period of four
years as additional consideration for legal services provided. The Company has
recorded a noncash charge of $200,000 for such issuance.
STOCK OPTIONS
In 1997, the Company granted to certain officers, employees and directors
options to purchase up to 12,380,940 shares of its Common Stock. The options
have exercise prices between $0.49 and $1.91 per share and expire in 2007. The
Company has recorded a noncash charge of $19,218,591 for such issuance.
On October 28, 1997, the Stockholders of the Company approved the Metromedia
Fiber Network, Inc. 1997 Incentive Stock Plan ("Option Plan"). The Option Plan
authorized the award of up to 4,000,000 options to acquire Class A Common Stock
of the Corporation to directors, officers and employees of the Company and
others who are deemed to provide substantial and important services to the
Company. Options to purchase 2,450,000 shares of the Company's common stock were
granted at an exercise price of $4.00 per share, the market price at the date of
grant.
The Compensation Committee of the Board of Directors is responsible for
determining the type of award, when and to whom awards are granted, the number
of shares and terms of the awards and the exercise price. The options are
exercisable for a period not to exceed ten years from the date of the grant.
Vesting periods range from immediate vesting to four years.
F-27
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. EQUITY TRANSACTIONS (CONTINUED)
The following table summarizes the stock option transactions for the year
ended December 31, 1997:
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
------------ -----------------
Granted....................................................... 14,830,940 $ 1.09
Balance outstanding at December 31, 1997...................... 14,830,940 $ 1.09
Exercisable at December 31, 1997.............................. 12,241,172
Pro forma information regarding net income and earnings per share is
required by Statement of Financial Standards No. 123, "Accounting for
Stock-Based Compensation" ("SAF 123"), 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:
DECEMBER 31, 1997
-----------------
Assumption
Risk-free interest yield................................................... 5.73-6.56%
Volatility factor.......................................................... .369
Dividend yield............................................................. --
Average life............................................................... 5 years
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 has 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 option, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purpose 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:
DECEMBER 31,
1997
--------------
Pro forma net loss applicable to common stock................................. $ (28,043,370)
Pro forma loss per share applicable to common stock basic and diluted......... $ (0.59)
The weighted average fair value of options granted during the year ended
December 31, 1997 is $1.97. The weighted average remaining contractual life of
options outstanding at December 31, 1997 is 9.4 years.
9. INCOME TAXES
There was no provision for federal or state income taxes for the years ended
December 31, 1997, 1996 and 1995. At December 31, 1997, the Company expects to
have available approximately
F-28
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES (CONTINUED)
$16,000,000 of net operating loss carryforwards, expiring in the years 2009
through 2012. The Company has recorded a full valuation allowance against the
deferred tax asset as its realization is uncertain.
10. RECONCILIATION OF EARNINGS PER SHARE:
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
-------------- -------------- -------------
BASIC AND DILUTED EPS
Net loss.......................................................... $ (26,259,238) $ (10,358,697) $ (4,319,101)
Deduct dividend on preferred shares............................... 76,562 -- --
-------------- -------------- -------------
Net loss applicable to common stock............................... $ (26,335,800) $ (10,358,697) $ (4,319,101)
-------------- -------------- -------------
-------------- -------------- -------------
SHARES
Weighted average number of common shares outstanding.............. 47,446,912 35,858,252 24,828,940
-------------- -------------- -------------
Net loss per common share basic and diluted....................... $ (0.56) $ (0.29) $ (0.17)
-------------- -------------- -------------
-------------- -------------- -------------
11. COMMITMENTS AND CONTINGENCIES
A. The Company entered into a franchise agreement with the City of New York
on December 20, 1993, whereby the company was granted a nonexclusive franchise
to install, operate, repair, maintain and replace cable, wire, fiber or other
transmission medium and the related equipment and facilities on, over and under
the property of the City of New York. In exchange, the company is obligated to
pay franchise fees commencing on the completion date of the initial backbone of
the fiber optic cable network through December 20, 2008. In connection with the
agreement, among other requirements, the Company maintains a performance bond in
the amount of approximately $1,750,000 and has provided the City with a $500,000
letter of credit as a security fund.
Franchise fees are based on a percentage of the Company's gross sales: 10%
for the first and second years, 6% for the third year and 5% for the fourth and
each year thereafter. However, during each year of the term, the franchise fee
shall be no less than $200,000.
Franchise fees charged to operations in connection with this agreement
amounted to $200,000 for the years ended December 31, 1997, 1996, and 1995.
B. The Company entered into a license agreement with Jersey City, New Jersey
on July 10, 1995, whereby the Company was granted a license to construct a
fiber-optic system within Jersey City. The term of this agreement continues
until written notice of termination is given by either party.
C. The Company entered into a conduit occupancy agreement with Bell
Atlantic, formerly known as The New York Telephone Company, in 1993, whereby the
Company was granted a right to place and maintain cable facilities in the
conduit system of Bell Atlantic. The term of this agreement is for one year from
the date of the agreement and thereafter until three months after written notice
of termination is given by either party.
The Company also has the right to place and maintain cable facilities in the
conduit system of Empire City Subway Company, Ltd., by virtue of the franchise
agreement with the City of New York.
F-29
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Occupancy fees charged to operations in connection with this agreement were
approximately $120,000 and $152,000 for the years ending December 31, 1997 and
1996, respectively.
D. The Company leases several office facilities under operating leases which
expire at various times through March 31, 2010.
Rent expense charged to operations was approximately $268,000, $158,000 and
$148,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
E. On June 1, 1995, the Company entered into two lease agreements with the
Port Authority of New York and New Jersey, whereby the Company was granted a
nonexclusive right to lease two ducts in the North and South tubes of the
Holland Tunnel to install, maintain, operate and provide telecommunications
equipment for its customers. The term of these agreements is for ten years
through June 1, 2005.
Lease expense charged to operations in connection with these leases was
approximately $112,000, $107,000 and $63,000 for the years ending December 31,
1997, 1996 and 1995, respectively.
F. On August 11, 1995, the Company entered into a service agreement with an
unrelated party, for the maintenance of the Company's telecommunications
equipment located in Jersey City. The term of this agreement is for one year
with an option to renew this agreement annually for up to five consecutive one
year renewal terms. Service fees charge to operations in connections with this
agreement was approximately $24,000 in 1997.
G. On November 17, 1997 the Company entered into an agreement with a
telecommunication company (the "Seller") to purchase conduit and associated
improvements (the "Conduit System") within a multiple conduit system being
constructed by the Seller, in the counties of Philadelphia and Montgomery,
Pennsylvania.
The purchase price for the conduit system is $546,940 which is payable in
installments. Upon the acceptance of the multiple Conduit System by the Company
the Seller will grant, bargain, sell, assign, transfer, convey and set over all
right, title, and interest in the Conduit System.
H. On December 1, 1997, the Company entered into an Agreement which provides
the Company with the right-of-way to construct, install, operate and maintain
two innerducts containing fiber optic cable in a tunnel which connects New York
City and Secaucus, New Jersey.
The initial term of this agreement is for five years with an option to renew
and extend the agreement for five consecutive renewal terms of five years. The
annual rental fee is $151,199 for the first contract year. On each anniversary
of the effective date the annual rental fee shall be adjusted to reflect the
increases in the CPI of the previous year.
I. On December 5, 1997 the Company entered into an agreement with a utility
company to purchase conduit (existing and future) for the installation of fiber
optic cable used exclusively to provide telecommunication services in the city
of Chicago. The purchase price for the existing conduit is $1.3 million, of
which $130,000 was paid in December 1997 with the remainder payable during the
first quarter of 1998.
F-30
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
J. Approximate minimum annual franchise, license, lease and service fees and
conduit payments under the aforementioned agreement are as follows:
For the year ended December 31:
1998........................................................... $3,095,604
1999........................................................... 1,612,782
2000........................................................... 1,614,689
2001........................................................... 1,601,907
2002........................................................... 1,597,535
Thereafter..................................................... 5,374,572
----------
$14,897,089
----------
----------
K. In February 1997, a former investment advisor to the Company asserted a
claim against the Company in the amount of $305,731 pursuant to an agreement
made on June 27, 1995, for the payment of certain fees and expenses. In
September 1997, the Company paid the former investment advisor $250,000 in full
settlement of such claim plus any and all related expenses.
L. On or about April 18, 1997, Howard Katz, Realprop Capital Corporation and
Evelyn Katz commenced an action against, among others, the Company, Stephen A.
Garofalo, Peter Sahagen and Peter Silverman in the United States District Court
for the Southern District Court of New York captioned Katz, et al. v. National
Fiber Network, Inc., et al., No. 97 Civ. 2764 (JGK) (the "Katz Litigation"). On
May 28, 1997, the plaintiffs filed an amended complaint and on September 15,
1997, the plaintiffs filed a second amended complaint. The complaint as amended
alleges causes of action for, among other things, common law fraud, violations
of section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5
promulgated thereunder, breach of fiduciary duty and negligent misrepresentation
for alleged misrepresentations and omissions made in connection with the
repurchase of a right to purchase an aggregate of 1,058,524 shares of Class A
common stock of the Company, which class of shares was authorized in October
1997, and an option to purchase warrants for the purchase of 831,552 shares of
Class A common stock. The amended complaint also contains allegations of
corporate waste against the Company and Stephen A. Garofalo. Plaintiffs seek,
among other things, compensatory damages of not less than $12 million, punitive
damages in the amount of $100 million and, in the alternative, rescission of the
purchase of the common stock and warrants by the Company. On October 31, 1997,
all defendants moved to dismiss the amended complaint. The motions were fully
briefed as of December 12, 1997. The Company intends to vigorously defend itself
against these allegations based on its belief that the Company acted
appropriately in connection with the matters at issue in this litigation. No
assurance can be made, though, 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 its
defense of the allegations. If the Company is unsuccessful in its defense of the
allegations, an award of the magnitude being sought by the plaintiffs in the
Katz Litigation would have a material adverse effect on the Company's financial
condition or results of operations.
M. On or about October 20, 1997, Vento & Company of New York, LLC ("VCNY")
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 (collectively, the "Sahagen Defendants") and
Robert Kramer, Birdie Capital Corp, Lawrence Black, Sterling Capital
F-31
METROMEDIA FIBER NETWORK, INC. & SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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"). The
complaint alleges causes of action for, among other things, violation of Section
10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder, fraud and fraudulent concealment, breach of fiduciary duty and
negligent misrepresentation and omission made in connection with the sale by
VCNY of 2,737,800 shares of Class A common stock to Peter Sahagen and the Kramer
Defendants on January 13, 1997 (the "VCNY Sale"). The complaint also alleges a
cause of action for declaratory judgment asserting that certain "piggyback"
registration rights are applicable to shares of the Company's Class A common
stock which VCNY owns (or which may be rescinded to VCNY pursuant to its
requested remedies). The complaint further requests a declaratory judgement that
a stockholders' agreement between the Company, Stephen A. Garofalo and VCNY be
declared operative, which agreement indirectly required VCNY, through designated
directors, to approve significant transactions, and, accordingly, the Metromedia
Loan and the Metromedia Investment should be rescinded and Mr. Vento should be
reappointed as Chief Executive Officer of the Company. The Company believes,
among other things, that the stockholder's agreement to which Mr. Vento was a
party had terminated and, as a result, Mr. Vento had no such rights to approve
the Metromedia Investment or the Metromedia Loan or to remain as Chief Executive
Officer of the Company. Plaintiff seeks, among other things, (i) rescission of
the VCNY Sale, or alternatively, damages in an amount not presently
ascertainable, but believed to be in the excess of $36 million, together with
interest thereon, (ii) punitive damages in the amount of $50 million, and (iii)
the declaratory judgements discussed above. The Company intends to vigorously
defend itself against these allegations based on its belief that it acted
appropriately in connection with the matters at issue in this litigation.
However, no assurance can be made 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 its
defense of the allegations. If the Company is unsuccessful in its defense of the
allegations, an award of the magnitude being sought by the plaintiffs in the
VCNY Litigation would have a material adverse effect on the Company's financial
condition or results of operations.
F-32
APPENDIX A
GLOSSARY
Access Charge................... The fees paid by long distance carriers to LECs for
originating and terminating long distance calls on the
LECs' local networks.
Analog Transmission............. A way of sending voice, video and data signals
electronically in which the transmitted signal is
analogous to the original signal.
ATM (Asynchronous Transfer
Mode)......................... An information transfer standard that is one of a general
class of packet technologies that relay traffic by way of
an address contained within the first five bytes of a
standard fifty-three-byte-long packet or cell. The ATM
format can be used by many different information systems,
including local area networks to deliver traffic at
varying rates, permitting a mix of voice, data and video
(multimedia).
Backbone........................ The backbone is the part of the telecommunications network
which carries the most traffic. It is the through-portion
of a transmission network, as opposed to spurs which
branch off the through-potions.
Bandwidth....................... The range of analog frequencies or digital signals that
can be passed through a transmission medium, such as fiber
optic cable. The greater the bandwidth, the greater the
information carrying capacity. Bandwidth is measured in
Hertz (analog) or Bits Per Second (digital).
Bit............................. A contraction of the term Binary Digit, it is the basic
unit in data communications. Bits are typically
represented by ones or zeros.
Capacity........................ The information carrying ability of a telecommunications
facility.
Central Office.................. Telephone company facility where subscribers' lines are
joined to switching equipment for connecting other
subscribers to each other, locally and long distance.
Channel......................... A path of communication either electrical or
electromagnetic, between two or more points. Also called a
circuit, facility, line, link, or path.
CLEC (Competitive Local Exchange
Carrier)...................... A company that competes with local exchange carriers in
the local services market.
Coaxial Cable................... A cable composed of an insulated central conducting wire
wrapped in another cylindrical conducting wire. It is
typically used to carry high-speed data.
Collocation..................... Collocation refers to the physical location of a
telecommunication carrier's switch in the ILECs premises
to facilitate the interconnection of their respective
switching equipment.
A-1
Common Carrier.................. A government defined group of private companies offering
telecommunications services or facilities to the general
public on a non-discriminatory basis.
Conduit......................... A pipe, usually made of metal, ceramic or plastic, that
protects buried cables.
Dark Fiber...................... Fiber optic cable without any of the electronic or
optronic equipment necessary to use the fiber for
transmission.
Digital......................... Describes a method of storing, processing and transmitting
information through the use of distinct electronic or
optical pulses that represent the binary digits 0 and 1.
Digital transmission/switching technologies employ a
sequence of discrete, distinct pulses to represent
information, as opposed to the continuously variable
analog signal.
DS-3............................ DS is the standard telecommunications industry designation
of a hierarchy of digital signal speeds used to classify
capacities of lines and trunks. DS-3 service has a bit
rate of approximately 45 megabits per second and can
transmit roughly 672 simultaneous voice conversations.
FCC (Federal Communications
Commission)................... Regulatory body established pursuant to the Communications
Act of 1934; it has the authority to regulate all
interstate communications originating in the United
States.
Fiber Miles..................... The number of strands of fiber in a length of fiber optic
cable multiplied by the length of the cable in miles.
Fiber Optics.................... A technology in which light is used to transport
information from one point to another. Fiber optic cables
are thin filaments of glass through which light beams are
transmitted over long distances carrying enormous amounts
of data. Modulating light on thin strands of glass
produces major benefits in high-bandwidth, relatively low
cost, low power consumption, small space needs, total
insensitivity to electromagnetic interference and great
insensitivity to being bugged.
Frame Relay..................... A high-speed, data-packet switching service used to
transmit data between computers. Frame Relay supports data
units of variable lengths at access speeds ranging from 56
kilobits per second to 1.5 megabits per second. This
service is well-suited for connecting local area networks,
but is not presently well-suited for voice and video
applications due to the variable delays which can occur.
Frame Relay was designed to operate at high speeds on
modern fiber optic networks.
ILEC (Incumbent Local Exchange
Carrier)...................... A company historically providing local telephone service.
Often refers to one of the Regional Bell Operating
Companies (RBOCs). Often referred to as "LEC" (Local
Exchange Carrier).
ISP (Internet Service
Provider)..................... A vendor who provides direct access to the Internet. The
ISP also usually provides a core group of Internet
utilities and services like E-mail and News Group Readers.
A-2
IXC (Interexchange Carrier)..... Literally, a company providing services which cross local
exchange boundaries. Refers to long distance providers.
LAN (Local Area Network)........ A short distance data communications network (typically
within a building or campus) used to link together
computers and peripheral devices (such as printers) under
some form of standard control.
Lit Fiber....................... Fiber activated or equipped with the requisite electronic
and optronic equipment necessary to use the fiber for
transmission.
Metered Telecommunications
Service....................... Service provided by phone companies where charges are
levied based on use, as opposed to unmetered service,
where charges are levied according to a flat, fixed rate.
OC-3, OC-12, OC-48 and OC-192... OC, or Optical Carrier, is a measure of a SONET
transmission optical carrier level. The number following
the OC designation is equal to the corresponding number of
DS-3s. (e.g. OC-192 is equal to 192 DS-3s).
POP (Point of Presence)......... The place where an IXC terminates an end user's long
distance lines just before those lines are connected to
the end-user's local phone company's lines or the
end-user's own direct hookup.
Private Line.................... A direct channel specifically dedicated to a customer's
use between specified points.
RBOCs (Regional Bell Operating
Companies).................... The seven local telephone companies (formerly part of
AT&T) established as a result of the AT&T Divestiture
Decree.
Regeneration/Amplifier.......... Devices which automatically re-transmit or boost signals
on an out-bound circuit.
Route Miles..................... The number of miles spanned by fiber optic cable
calculated without including physically overlapping
segments of cable.
SONET (Synchronous Optical
Network)...................... An electronics and network architecture for variable
bandwidth products which enables transmission of voice,
data and video (multimedia) at very high speeds. SONET
ring architecture provides for virtually instantaneous
restoration of service in the event of a fiber cut by
automatically rerouting traffic in the opposite direction
around the ring.
Switch.......................... A device which opens or closes circuits, completes or
breaks an electrical path, or selects paths or circuits.
Switching is the process of interconnecting circuits to
form a transmission path between users. It also captures
information for billing purposes.
Tier I.......................... The top 15 cities in the United States based on
population.
Unbundled....................... Services, programs, software and training sold separately
from the hardware.
Video Services.................. The provision of video over a channel. Akin to voice dial
tone.
Wireless........................ A communications system that operates without wires.
Cellular service is an example.
A-3
METROMEDIA FIBER NETWORK, INC.
OFFER TO EXCHANGE $650,000,000 OF ITS
10% SERIES B SENIOR NOTES DUE 2008,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT,
FOR $650,000,000 OF ITS OUTSTANDING
10% SERIES A SENIOR NOTES DUE 2008
---------------------
PROSPECTUS
, 1999
---------------------
No person has been authorized to give any information or to make any
representations other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities other than the securities to
which it relates or an offer to sell or the solicitation of an offer to buy such
securities in any circumstances in which such offer or solicitation is unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall, under
any circumstances, create any implication that there has been no change in the
affairs of the Company since the date hereof or that the information contained
herein is correct as of any time subsequent to its date.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law provides that a Delaware
corporation may indemnify any person who was or is a party or is threatened to
be made a party, to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding") (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his or her conduct was unlawful. A Delaware corporation may indemnify any person
under such section in connection with a proceeding by or in the right of the
corporation to procure judgment in its favor, as provided in the preceding
sentence, against expenses (including attorneys' fees) actually and reasonably
incurred by him or her in connection with the defense or settlement of such
action, except that no indemnification shall be made in respect thereof unless,
and then only to the extent that, a court of competent jurisdiction shall
determine upon application that such person is fairly and reasonably entitled to
indemnity for such expenses as the court shall deem proper. A Delaware
corporation must indemnify any person who was successful on the merits or
otherwise in defense of any action, suit or proceeding or in defense of any
claim, issue or matter in any proceeding, by reason of the fact that such person
is or was a director, officer, employee r agent of the corporation or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, against expenses (including attorneys' fees) actually and reasonably
incurred by such person in connection therewith. A Delaware corporation may pay
for the expenses (including attorneys' fees) incurred by an officer or director
in defending a proceeding in advance of the final disposition upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he or she is not entitled to be
indemnified by the corporation.
The Company's Amended and Restated Certificate of Incorporation provides
that the Company will indemnify any person, including persons who are not
directors or officers of the Company, to the extent permitted by Section 145 of
the Delaware General Corporation Law.
Section 102(b) (7) of the Delaware General Corporation Law provides that a
Delaware corporation may in its articles of incorporation eliminate or limit the
personal liability of a director to the corporation or its stockholders for
monetary damages for breach of fiduciary duty as a director except for
liability: for any breach of the director's duty of loyalty to the corporation
or its stockholder; for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; under Section 174
(pertaining to certain prohibited acts including unlawful payment of dividends
or unlawful purchase or redemption of the corporation's capital stock); or for
any transaction from which the director derived an improper personal benefit.
The Company's Amended and Restated Certificate of Incorporation eliminates the
liability of directors for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the Company or its stockholders, (ii) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit, and provides that if the Delaware General Corporation Law is amended to
authorize corporate action further eliminating or limiting the personal
liability of directors, then the liability of a director of the
II-1
Company shall be eliminated or limited to the fullest extent permitted by the
Delaware General Corporation Law, as so amended.
The Delaware General Corporation Law permits the purchase of insurance on
behalf of directors and officers against any liability asserted against
directors and officers and incurred by such persons in such capacity, or arising
out of their status as such, whether or not the corporation would have the power
to indemnify officers and directors against such liability. The Company's
Amended and Restated Certificate of Incorporation allows the Company to maintain
insurance, at its expense, to protect itself and any director, officer, employee
or agent of the Company or another corporation, partnership, joint venture,
trust or other enterprise against any expense, liability or loss, whether or not
the Company would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law. The Company has
obtained liability coverage, which includes coverage to reimburse the Company
for amounts required or permitted by law to be paid to indemnify directors and
officers.
The Company's Amended and Restated Certificate of Incorporation limits the
liability of directors thereof to the extent permitted by Section 102(b)(7) of
the Delaware General Corporation Law.
The Company's Indenture, dated November 25, 1998, provides that no past,
present or future director, officer, employee, incorporator, agent or
shareholder of the Company, as such, shall have any liability for any
obligations of the Company under the Notes, the Indenture or for any claim based
on, in respect of, or by reason of, such obligations or their creation.
The Company's Purchase Agreement, dated November 20, 1998, provides that
each Initial Purchaser of the Initial Notes severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors, officers,
employees, agents and each person who controls the Company within the meaning of
the Securities Act or the Securities Exchange Act of 1934, against any and all
losses, claims, damages or liabilities, joint or several, to which they or any
of them may become subject under the Securities Act, the Securities Exchange Act
of 1934 or other federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the preliminary memorandum, the
final memorandum for the Initial Notes (or in any supplement or amendment
thereto) or any information provided by the Company to any holder or prospective
purchaser of Notes pursuant to Section 5(h), or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein, in the light of the circumstances under which they
were made, not misleading, and agrees to reimburse each such indemnified party,
as incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action, but only with reference to written information relating to
such Initial Purchaser furnished to the Company by or on behalf of such Initial
Purchaser through the Representatives specifically for inclusion in the
preliminary memorandum or the final memorandum (or in any amendment or
supplement thereto). This indemnity will be in addition to any liability which
any Initial Purchaser may otherwise have. The indemnity agreement will be in
addition to any liability which any initial purchaser of the Initial Notes may
otherwise have.
The Company's Registration Rights Agreement, dated November 25, 1998,
provides that each holder of Notes, covered by any registration statement
(including each Initial Purchaser and each exchanging dealer) severally agrees
to indemnify and hold harmless (i) the Company, (ii) each of its directors,
(iii) each of its officers, employees and agents and (iv) each Person who
controls the Company within the meaning of either the Securities Act or the
Securities Exchange Act of 1934 against any and all losses, claims, damages or
liabilities to which they may become subject under the Securities Act, the
Securities Exchange Act of 1934 or other federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities arise out of or are
II-2
based upon any untrue statement or alleged untrue statement of a material fact
contained in the registration statement or any omission or alleged omission to
state therein a material fact required to be stated or necessary to make the
statements therein not misleading, but only with reference to written
information relating to such holder furnished to the Company by or on behalf of
such holder specifically for inclusion in the documents referred to in the
foregoing indemnity. This indemnity agreement will be in addition to any
liability which any such holder may otherwise have. The indemnity will be in
addition to any liability which any such holder may otherwise have.
The Company's Underwriting Agreement, dated October 28, 1997, provides that
each U.S. Underwriter (as defined in the Underwriting Agreement) severally
agrees to indemnify and hold harmless the Company, each of its directors, each
of its officers who signs the Registration Statement, and each person who
controls the Company within the meaning of either the Securities Act or the
Securities Exchange Act of 1934, but only with reference to written information
relating to such U.S. Underwriter furnished to the Company by or on behalf of
such U.S. Underwriter through the U.S. Representatives specifically for
inclusion in the documents referred to in the foregoing indemnity. The indemnity
agreement will be in addition to any liability which any U.S. Underwriter may
otherwise have.
The Company's Directors' and Officers' liability insurance policy is
designed to reimburse the Company for payments made by it pursuant to the
foregoing indemnification. Such policy has aggregate coverage of $25 million.
II-3
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
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).
4.3* Form of 10% Series A Senior Notes due 2008 of Metromedia Fiber Network, Inc.
4.4** Form of 10% Series B Senior Notes due 2008 of Metromedia Fiber Network, Inc.
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding the legality of the Exchange Notes.
8.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding certain United States federal income tax
matters.
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 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)).
II-4
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
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 Office Lease by and between National Fiber Network, Inc. and 110 East 42nd Street, dated as of June 1997
(incorporated by reference to the Company's Registration Statement on Form S-1 (Registration No.
333-33653)).
10.11 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)).
10.12 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)).
10.13 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)).
10.14 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 Annual Report on Form 10-K (File No.000-2369)).
10.15 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 Annual Report on Form 10-K (File No.000-2369)).
10.16 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 Annual
Report on Form 10-K (File No. 000-2369)).
II-5
EXHIBIT
NUMBER DESCRIPTION
- ----------- --------------------------------------------------------------------------------------------------------
10.17* 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.
10.18* 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.
10.19* Security Agreement, dated as of November 25, 1998, between Metromedia Fiber Network, Inc. and IBJ
Schroder Bank & Trust Company.
10.20** Employment Agreement by and between Metromedia Fiber Network, Inc. and Vincent A. Galluccio, dated as of
August 31, 1998.
10.21** Employment Agreement by and between Metromedia Fiber Network, Inc. and Gerard Benedetto, dated as of
August 31, 1998.
10.22** Employment Agreement by and between Metromedia Fiber Network, Inc. and Nicholas M. Tanzi, dated as of
August 31, 1998.
12.1** Statement Regarding Computation of Ratios.
21.1* List of Subsidiaries of Metromedia Fiber Network, Inc.
23.1* Consent of Ernst & Young LLP.
23.2* Consent of M.R. Weiser & Co. LLP.
23.3* Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in the opinion filed as Exhibit 5.1 to
this Registration Statement).
23.4* Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in the opinion filed as Exhibit 8.1 to
this Registration Statement).
24.1* Power of Attorney from officers and directors (contained on signature page).
25.1* Statement of Eligibility of IBJ Whitehall Bank & Trust Company as Trustee, on Form T-1.
99.1** Form of Exchange Agency Agreement.
99.2* Form of Letter of Transmittal.
99.3** Form of Notice of Guaranteed Delivery.
- ------------------------
* Filed herewith.
** To be filed by Amendment.
(B) FINANCIAL DATA SCHEDULES.
None.
ITEM 22. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 20, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities
II-6
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in this
Registration Statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Securities and
Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
The undersigned Registrant hereby undertakes that for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes as follows:
II-7
(a) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is part of this registration
statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c) the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other Items of the applicable form.
(b) Every prospectus (i) that is filed pursuant to the paragraph immediately
preceding, or (ii) that purports to meet the requirements of section 10(a)(3) of
the Act and is used in connection with an offering of securities subject to Rule
415, will be filed as a part of an amendment to the registration statement and
will not be used until such amendment is effective, and that, for purposes of
determining any liability under the Securities act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Metromedia Fiber Network, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, State of New York, on January 25, 1999.
METROMEDIA FIBER NETWORK, INC.
By: /s/ STEPHEN A. GAROFALO
-----------------------------------------
Name: Stephen A. Garofalo
Title: Chief Executive Officer and
Chairman of the Board of Directors
Metromedia Fiber Network, Inc., a Delaware Corporation, and each person
whose signature appears below constitutes and appoints Stephen A. Garofalo,
Howard M. Finklestein, Gerard Benedetto, Silvia Kessel, and Arnold L. Wadler,
and each of them, with full power to act without the others, such person's true
and lawful attorneys-in-fact, with full power of substitution and
resubstitution, for him or her and in his name, place and stead, in any and all
capacities, to (i) sign this Registration Statement, and any and all amendments
thereto (including, without limitation, post-effective amendments and any
subsequent registration statement filed pursuant to Rule 462(b) or Rule 462(d)
under the Securities Act of 1933, as amended), and other documents in connection
therewith, with the Securities and Exchange Commission, (ii) act on, sign and
file such certificates, instruments, agreements and other documents as may be
necessary or appropriate in connection therewith, (iii) act on and file any
supplement to any prospectus included in this Registration Statement or any such
amendment or any subsequent registration statement filed pursuant to Rule 462(b)
under the Securities Act, and (iv) take any and all actions which may be
necessary or appropriate in connection therewith, granting unto said
attorneys-in-fact, and each of them, full power and authority to do and perform
each and every act and thing necessary or desirable to be done in and about the
premises, as fully and to all intents and purposes as he or she might or could
do in person, hereby ratifying and confirming all that said attorneys-in-fact,
or either of them, or their substitute or substitutes may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated below and on January 25, 1999.
SIGNATURE TITLE
- ------------------------------ --------------------------
/s/ STEPHEN A. GAROFALO Chief Executive Officer
- ------------------------------ and Chairman of the
Stephen A. Garofalo Board of Directors
/s/ GERARD BENEDETTO
- ------------------------------ Vice President--Chief
Gerard Benedetto Financial Officer
/s/ HOWARD M. FINKELSTEIN
- ------------------------------ President, Chief Operating
Howard M. Finkelstein Officer and Director
II-9
SIGNATURE TITLE
- ------------------------------ --------------------------
- ------------------------------ Senior Vice President and
Vincent A. Galluccio Director
/s/ SILVIA KESSEL
- ------------------------------ Executive Vice President
Silvia Kessel and Director
/s/ JOHN W. KLUGE
- ------------------------------ Director
John W. Kluge
- ------------------------------ Director
David Rockefeller
/s/ STUART SUBOTNICK
- ------------------------------ Director
Stuart Subotnick
/s/ ARNOLD L. WADLER Executive Vice President,
- ------------------------------ General Counsel,
Arnold L. Wadler Secretary and Director
- ------------------------------ Director
Leonard White
II-10
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
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).
4.3* Form of 10% Series A Senior Notes due 2008 of Metromedia Fiber Network, Inc.
4.4** Form of 10% Series B Senior Notes due 2008 of Metromedia Fiber Network, Inc.
5.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding the legality of the Exchange Notes.
8.1* Opinion of Paul, Weiss, Rifkind, Wharton & Garrison regarding certain United States federal
income tax matters.
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 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)).
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
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 Office Lease by and between National Fiber Network, Inc. and 110 East 42nd Street, dated as of
June 1997 (incorporated by reference to the Company's Registration Statement on Form S-1
(Registration No. 333-33653)).
10.11 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)).
10.12 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)).
10.13 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)).
10.14 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 Annual Report on Form 10-K (File No.000-2369)).
10.15 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 Annual Report on Form 10-K (File
No.000-2369)).
10.16 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
Annual Report on Form 10-K (File No. 000-2369)).
10.17* 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.
10.18* 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.
EXHIBIT
NUMBER DESCRIPTION PAGE
- ----------- ------------------------------------------------------------------------------------------------- -----
10.19* Security Agreement, dated as of November 25, 1998, between Metromedia Fiber Network, Inc. and IBJ
Schroder Bank & Trust Company.
10.20** Employment Agreement by and between Metromedia Fiber Network, Inc. and Vincent A. Galluccio,
dated as of August 31, 1998.
10.21** Employment Agreement by and between Metromedia Fiber Network, Inc. and Gerard Benedetto, dated as
of August 31, 1998.
10.22** Employment Agreement by and between Metromedia Fiber Network, Inc. and Nicholas M. Tanzi, dated
as of August 31, 1998.
12.1** Statement Regarding Computation of Ratios.
21.1* List of Subsidiaries of Metromedia Fiber Network, Inc.
23.1* Consent of Ernst & Young LLP.
23.2* Consent of M.R. Weiser & Co. LLP.
23.3* Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in the opinion filed as Exhibit 5.1
to this Registration Statement).
23.4* Consent of Paul, Weiss, Rifkind, Wharton & Garrison (included in the opinion filed as Exhibit 8.1
to this Registration Statement).
24.1* Power of Attorney from officers and directors (contained on signature page).
25.1* Statement of Eligibility of IBJ Whitehall Bank & Trust Company as Trustee, on Form T-1.
99.1** Form of Exchange Agency Agreement.
99.2* Form of Letter of Transmittal.
99.3** Form of Notice of Guaranteed Delivery.
- ------------------------
* Filed herewith.
** To be filed by Amendment.