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SECURITIES AND EXCHANGE COMMISSION


WASHINGTON, D.C. 20549





FORM 10-Q/A


(Amendment No. 1)





(Mark One)





|x |  | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- |  | ----------------------------------------------------------------------------------




For the quarterly period ended March 31, 2002





OR





| ̈ |  | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- |  | -----------------------------------------------------------------------------------




For the transition period from
 to





Commission file number 000-24661





FiberNet Telecom Group, Inc.


(Exact Name of Registrant as Specified in its Charter)





Delaware

52-2255974(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No.)





570 Lexington Avenue, New York, NY 10022


(Address of Principal Executive Offices)





(212) 405-6200


(Issuers Telephone Number, Including Area Code)





Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that
the registrant was required to file such reports), and (2) has been subject to such filing requirements for past 90 days.  Yes  ̈ No  ̈





The number of shares outstanding of the issuers common stock, as of August 28, 2002, was 64,331,722 shares of Common Stock, $.001
par value.





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INDEX





PagePART I.

FINANCIAL INFORMATION

4Item 1.

Consolidated Financial Statements

4Item 2.

Managements Discussion and Analysis of Financial Condition andResults of Operations

4Item 3

Quantitative and Qualitative Disclosures About Market Risk

12PART II.

OTHER INFORMATION

13Consolidated Balance Sheets as of March 31, 2002 and December 31, 2001

15Consolidated Statements of Operations for the three months ended March 31, 2002 and 2001

16Consolidated Statements of Cash Flows for the three months endedMarch 31, 2002 and 2001

17Notes to Consolidated Financial Statements

18




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EXPLANATORY NOTE





The purpose of this amendment is to amend Item 1 of Part I of our Form 10-Q, which was originally filed on May 15, 2002. We amended the notes to our consolidated financial statements to include
additional disclosure in footnote 2. Summary of Significant Accounting Policies. The amended disclosure now includes a table that presents the impact of SFAS No. 142 as if it had been in effect for the three months ended March 31, 2001.




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PART I





FINANCIAL INFORMATION





Item 1.Consolidated Financial Statements





See attached.





Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operation





This report contains certain forward-looking statements as that term is defined in the Private Securities Litigation Reform Act of 1995. Such statements are based on
managements current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Investors are cautioned that there can be no
assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors, including, but not limited to, the following: the difficulty
inherent in operating an early-stage company in a new and rapidly evolving market; our history of operating losses and accumulated deficit; our limited financial resources and uncertainty as to the availability of additional capital to fund our
operations on acceptable terms, if at all; our success in obtaining additional carrier hotel lease agreements and license agreements with building owners; growth in demand for our services; the frequency of service interruptions on our networks; the
potential development by competitors of competing products and technologies; restrictions imposed on us as a result of our debt; and changes in the regulatory environment. As a result, our future operations involve a high degree of risk. Except as
required by law, we undertake no obligation to update any forward- looking statement, whether as a result of new information, future events or otherwise.





Overview





We deploy, own and operate fiber-optic networks designed to provide
comprehensive broadband connectivity for data, voice and video transmission to service providers in major metropolitan areas. These networks provide an advanced, high bandwidth fiber-optic solution to support the demand for network capacity in the
local loop. We provide optical transport within and between carrier hotels, which are facilities where service providers exchange and route communications traffic, as well as optical transport from carrier hotels to tenants in commercial office
buildings. Our networks support multiple transmission protocols including synchronous optical network, or SONET, Ethernet, Frame Relay, asynchronous transfer mode, or ATM and Internet Protocol, or IP. We are currently operating in the three gateway
markets of New York, Chicago and Los Angeles.





We have experienced significant operating losses, net losses and
negative cash flows from operating activities. We expect to continue to experience such losses and negative cash flows as we continue to operate our business. We also have a limited operating history. Consequently, prospective investors have limited
operating history and financial data upon which to evaluate our performance.





The telecommunications industry is
currently experiencing a period of uncertainty and rationalization. Many companies in our industry are in financial distress, and some of our largest customers have filed for bankruptcy. We have been negatively impacted by the general economic
environment and by the difficulties that are impacting our industry. Most significantly, customer contracts and services have been cancelled, resulting in a loss of recurring revenues to us. We are unable to determine the extent to which additional
contracts or services that we provide to our customers will be cancelled, and we cannot forecast our ability to replace those cancelled contracts with new contracts. As a result, our revenues, business operations and liquidity may continue to be
negatively affected by the market environment.




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Factors Affecting Future Operations





Revenues.    We generate revenues from selling network capacity and related services to other communications service providers. We recognize
revenues when earned as services are provided throughout the life of each contract with a customer. Revenues are derived from three general types of services:





| |  |  | Transport services.    Our transport services include the offering of broadband circuits on our metropolitan transport networks and
FiberNet In-building Networks, or FINs. Over our metropolitan transport networks, we can provision circuits from one of our carrier point facilities to another carrier point facility or to an on-net building via an interconnection with our FIN in
that building. We can also provision circuits vertically between floors in a carrier point facility or an on-net building.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Colocation services.    Our colocation services include providing customers with the ability to locate their communications and
networking equipment at our carrier point facilities in a secure technical operating environment. We can also provide our customers with colocation services in the central equipment rooms of certain of our on-net and off-net buildings. Typically, if
a customer colocates its equipment at our facilities, our agreement with them may include a minimum commitment to use our transport services.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




| |  |  | Communications access management services.    Our access management services include providing our customers with the non-exclusive
right to market and provide their retail services to tenants in our on-net and off-net buildings. Customers typically enter into an agreement with us to gain access to all or a significant number of our properties. For certain of our on-net and
off-net buildings, we have the exclusive right to manage communications access. Once a customer has entered into an agreement with us for access services, we typically require that customer to utilize our in-building networking infrastructure for
connectivity to its retail customers, if such networking infrastructure is available.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




Our
revenues are generated on a monthly recurring basis under contracts with our customers. The terms of these contracts can range from month-to-month to five years in length. During the past year, we experienced a trend of entering into shorter-term
contracts with our customers. Previously, our customers typically entered into contracts with terms of three to five years. Increasingly, our customers are electing to purchase services on a month-to-month basis or for a contracted period of only
one year.





Our services are typically sold under fixed price agreements. In the case of transport services, we
provide an optical circuit or other means of connectivity for a fixed price. Revenues from transport services are not dependent on customer usage or the distance between the origination point and termination point of a circuit. The pricing of
colocation services is based upon the size of the colocation space or the number of colocation units, such as cabinets, provided to the customer. Revenues from access management services are typically determined by the square footage of the
commercial office properties to which a customer purchases access. The pricing of all of our services have declined significantly over the past year, although we believe not to the extent that the pricing in other segments of the telecommunications
market has declined.





The growth of our revenues is dependent upon our ability to provide additional services in
our existing facilities. We also believe that the majority of the growth in our revenues will come from our existing customers. Consequently, our growth in revenues is dependent on the underlying growth of our customers businesses and their
need for our services within the facilities that we already operate. We continue to add additional customers. However, we believe the number of companies that are potential customers is decreasing, due to the industry environment. In addition, we
currently do not anticipate expanding our network infrastructure to other carrier point facilities or on-net buildings and off-net buildings. Within each of our existing facilities, our revenues will depend upon the demand for our services, the
competition that we face and our customer service.





We typically begin our sales cycle by entering into a
non-binding business services agreement with a customer. This agreement establishes our mutual interest in exploring a business relationship and the general parameters upon which we will proceed. As a next step, we execute a telecommunications
services agreement,




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also known as an interconnection agreement. This is a technical document that outlines the engineering specifications and operating standards that are required of us by the customer. With the
technical requirements complete, we finalize a sales contract. Customers can order a specific circuit or colocation space, or, alternatively, they can purchase general availability on our networks or in our facilities by establishing minimum revenue
commitments on a recurring basis.





Currently our colocation and access services produce approximately one-third of
our revenues. In the future we anticipate generating significantly more of our revenues from transport services than from colocation or access management services. The scalability of our network architecture allows us to increase transport capacity
to a greater degree than is possible with our colocation and access management services.





Cost of
Services.    Cost of services are associated with the operation of our networks and facilities. The largest component of our cost of services is the occupancy expenses at our carrier point facilities, on-net buildings and
off-net buildings. Other specific costs include maintenance and repair costs and utility costs. Our license agreements for our on-net and off-net buildings require us to pay license fees to the owners of these properties. In addition, our lease for
our meet-me-room at 60 Hudson Street in New York City also requires us to pay a license fee. These license fees typically are calculated as a percentage of the revenues that we generate in each particular building. Other than our license fees, our
cost of services are generally fixed in nature. We do not anticipate that cost of services will change commensurately with any change in our revenues.





Selling, General and Administrative Expenses.    Selling, general and administrative expenses generally include all of our personnel costs, occupancy costs for our corporate
offices, insurance costs, professional fees, sales and marketing expenses and other miscellaneous expenses. Personnel costs, including wages, benefits and sales commissions, are our largest component of selling, general and administrative expenses.
We have reduced the number of our employees from 108 as of December 31, 2001 to 86 as of March 31, 2002, and our personnel costs have decreased significantly. Prospectively, we do not anticipate significant changes in headcount, and we believe that
our personnel costs will increase moderately. We do expect our insurance costs to increase materially upon our annual renewals as a result of increases in coverage premiums.





Stock Related Expense.    Stock related expense relates to the granting of certain stock options to our employees. We grant stock options to our
employees as a form of equity-based compensation to attract, retain and incentivize qualified personnel. These costs are non-cash charges that are amortized over the vesting term of each employees option agreement. Certain options granted to
employees are accounted for using variable plan accounting. Under variable plan accounting, the stock related expense is adjusted for changes in the market price of the underlying common stock.





Depreciation and Amortization.    Depreciation and amortization expense includes the depreciation of our network equipment and
infrastructure, computer hardware and software, furniture and fixtures, and leasehold improvements, as well as the amortization of certain deferred charges. We commence the depreciation of network related fixed assets when they are placed into
service and depreciate those assets over periods ranging from three to 20 years. As a result of the impairment to fixed assets that we recorded during 2001, depreciation and amortization expense may decrease going forward.





We review the carrying value of its assets for impairment whenever events and circumstances indicate the carrying value of an asset may
not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition.





In the fourth quarter of 2001, we determined that our forecasts for revenues for certain of our facilities would not be achieved due to the significant adverse change in the business climate. We further determined that the dramatic
change in the operating environment for the telecommunications industry resulted in a significantly less demand for our services in these facilities. We believe that the decrease in demand was a result of the significant number of bankruptcies of
telecommunications companies that were existing or potential customers of




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ours and the overall economic recession. We also determined that a rebound in demand for our services would not occur in the near term. As a result, we revised our business plan and conducted
extensive reviews of our assets and operations. The revisions to the business plan primarily included reductions in forecasts of revenues and capital expenditures. The projected amounts of certain cost of services and overhead expenses were reduced
as well to reflect the decrease in our expected business activity. We also determined that certain financial covenants in our credit facility would need to reflect the revised business plan, including our reduced revenue forecasts. Consequently, we
amended our credit facility in December 2001.





We used an undiscounted forecasted cash flow model to determine if
there was an impairment based on the cash flows expected to be generated from these assets, and used a discounted cash flow model to measure the impairment. As a result of this analysis, we have recorded an asset impairment of approximately $51.8
million in the fourth quarter of 2001, based on the amount by which the carrying amount of these assets exceeded their fair value. Of this amount, $40.4 million relates to assets held for use, and $11.4 million represents assets to be disposed of.





The assets that we identified for disposition were abandoned, as we determined that these assets had no value.
Consequently, there was no cost to us for this abandonment, nor do we expect to receive any proceeds or other consideration from this abandonment. We recorded no reserves, accruals or other liabilities related to this abandonment. These assets
primarily related to engineering and network architecture design costs and general contracting and project management costs for facilities that we are no longer pursuing.





During the third quarter of 2001, we evaluated the carrying value of certain long-lived assets and acquired equity investments, consisting primarily of goodwill resulting
from our acquisition of Devnet. Pursuant to APB Opinion No. 16, Business Combinations, the purchase price was determined and goodwill was recorded based on the stock price at the time the merger agreement was executed and announced. An
assessment of the goodwill related to the Devnet acquisition was performed pursuant to SFAS No. 121, due to the negative industry and economic trends affecting certain of our current operations and expected future revenues, as well as the general
decline in the valuations of telecommunications companies. The conclusion of that assessment was that the decline in market conditions within the telecommunications industry was significant and other than temporary.





Devnet had entered into exclusive license agreements to manage communications access to commercial office properties, and we associated
the related goodwill primarily to those agreements. We used an undiscounted forecasted cash flow model to determine if there was an impairment based on the cash flows expected to be generated from business activities in the commercial office
properties underlying the license agreements and used a discounted cash flow model to measure the impairment. As a result, we recorded a charge of $56.5 million during the third quarter of 2001 to reduce goodwill associated with the purchase of
Devnet. The charge was based on the amount by which the carrying amount of the asset exceeded its fair value. In June 2001, the FASB issued SFAS No. 142, Goodwill and Other Intangible Assets, applicable for fiscal years beginning after
December 15, 2001. SFAS No. 142, which we adopted effective January 1, 2002, requires that goodwill and certain intangible assets resulting from business combinations entered into prior to June 30, 2001 no longer be amortized, but instead be
reviewed for recoverability. Any write-down of goodwill would be charged to results of operations as accumulative change in accounting principle upon adoption of the new accounting standard if the recorded value of goodwill and certain intangibles
exceeds its fair value. Any write-down of goodwill up to and including December 31, 2001 would not be subject to the rules of this new standard. We are evaluating the impact of the adoption of SFAS No. 142 and expect to complete our analysis by June
30, 2002.





Restatement of Financial Statements





We restated our consolidated financial statements for the quarter ended March 31, 2001 to record a beneficial conversion feature of $21.0 million in connection with the
reduction of the conversion price on our series H and I preferred stock on February 9, 2001. Other than with respect to the consolidated financial statements for the quarter ended March 31, 2001, this restatement has no impact on our assets or total




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stockholders equity, and it resulted in an increase in additional paid-in-capital and an increase in net loss. The change increased net loss by $21.0 million and increased net loss
applicable to common stockholders per share by $0.56. The change has no impact on our cash flows. This change was already reflected in our annual report on Form 10-K for the fiscal year ended December 31, 2001.





Three Months Ended March 31, 2002 Compared to Three Months Ended March 31, 2001





Revenues.    Revenues for the three months ended March 31, 2002 were $7.0 million compared to $7.4 for the three months ended March 31, 2001, a
decrease of $0.4 million. We generated revenues by providing transport, colocation and communications access management services to our customers. For the three months ended March 31, 2002, we recognized $4.4 million in transport services, $1.5
million in colocation and other services and $1.1 million in communications access management services. For the three months ended March 31, 2001, we recognized $5.1 million in transport services, $0.8 million in colocation and other services and
$1.5 million in communications access management services. During the three-months ended March 31, 2002, two of our customers, 360networks and Qwest, accounted for approximately 31.4% of our revenues.





The decrease in revenues was due to the elimination of certain reciprocal agreements that were terminated during the first quarter of
2002. Reciprocal agreements accounted for $0.4 million, or 6.0%, of our revenues in the first quarter of 2002, down from $1.2 million, or 16.3%, of our revenues for the first quarter of 2001.





Cost of services.    Cost of services for the three months ended March 31, 2002 and March 31, 2001 were $2.4 and $2.9 million, respectively.
The decrease of $0.5 million was due to reduction in expenses associated with our network facilities. These costs included on-net building license fees, maintenance and repair costs, rent expense at carrier hotel facilities and on-net and off-net
buildings, and related utility costs. Reciprocal agreements accounted for $0.4 million of our cost of services in the first quarter of 2002 and $1.2 million of our cost of services in the first quarter of 2001.





Selling, General and Administrative Expenses.    Selling, general and administrative expenses for the three
months ended March 31, 2002 were $4.2 million compared to $9.9 million for the three months ended March 31, 2001. This decrease is a result of our aggressive cost savings initiatives to reduce corporate overhead in line with our current outlook for
business activity. Cost reductions were realized in nearly all components of selling, general and administrative expenses, including advertising and marketing costs, professional fees and travel and entertainment expenses. The greatest decrease in
overhead came in personnel costs, as we reduced headcount from 194 employees at the beginning of 2001 to 86, as of March 31, 2002.





Stock Related Expense.    Stock related expense for the three months ended March 31, 2002 was $0.1 million compared to ($0.1) million for the three months ended March 31, 2001. This non-cash
expense relates to the granting of stock options to our employees. The amount recorded for the three months ended March 31, 2001 was a reversal of an expense incurred during 2000 due to a decline in the public market price of our common stock
during the first quarter of 2001.





Depreciation and Amortization.    Depreciation and
amortization expense for the three months ended March 31, 2002 was $2.6 million compared to $3.1 million of depreciation and amortization expense for the three months ended March 31, 2001. The decrease resulted from the impairment of property,
plant and equipment that we recorded in 2001.





Interest Expense, Net.    Interest
expense, net for the three months ended March 31, 2002 was $2.2 million compared to $2.1 million, net for the three months ended March 31, 2001. Interest expense was generated as a result of borrowings under our senior secured credit facility and
our outstanding capital lease obligations.





Preferred Stock Dividends.    For the three
months ended March 31, 2002, we accrued approximately $28,000 in non-cash dividends on our series H preferred stock, payable in the form of additional shares of




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preferred stock, based on the closing price per share at the end of the period. For the three months ended March 31, 2001 we accrued $0.7 million in non-cash dividends on our series D, E, F,
H and I preferred stock, payable in the form of additional shares of each respective series of preferred stock, based on the closing price per share at the end of the period. For the period ending March 31, 2002 the liquidation value of all of the
dividends accrued was $0.2 million. Both of our series H and J of preferred stock, currently outstanding, are convertible into shares of common stock.





Preferred StockBeneficial Conversion.    In February 2001, the conversion price of the Series H and Series I was reduced to $4.38, in accordance with the original
terms of the issuance transactions. The certificates of designation of the Series H and Series I include provisions requiring the conversion prices to be lowered to the per share price at which we issue any shares of common stock, subject to certain
exceptions, subsequent to the initial issuance of the Series H and Series I. In February 2001, we issued shares of common stock in a directed public offering at a price of $4.38 per share, resulting in the reduction of the conversion price. The
Company recorded a beneficial conversion charge of $21.0 million as a result of the reduction of the conversion price. Additionally, in connection with the conversion of the Series H and I preferred stock, the conversion price of the remaining
100,000 shares of Series H preferred stock was reduced to $1.31. However, as all of the proceeds from the issuances of the Series H and Series I had been allocated to beneficial conversion features, no additional proceeds were allocated upon the
reset of the conversion price of the Series H preferred stock to $1.31. No additional beneficial conversion feature was recorded during the first quarter of 2002 on our Series J preferred stock based upon our evaluation of changes in the conversion
price of the Series J preferred stock and the public market price of our common stock.





Net Loss Applicable to
Common Stockholders.    We reported a net loss applicable to common stockholders of $4.5 million for the three months ended March 31, 2002, compared to a loss of $39.7 million for the three months ended March 31, 2001. The
decrease is a result of the aforementioned changes in our operations and two non-recurring charges recorded in the first quarter of 2001: a non-cash charge of $7.4 million related to an early extinguishment of debt from the modification of our
credit facility on February 9, 2001 and the preferred stockbeneficial conversion of $21.0 million recorded in February 2001.





Liquidity and Capital Resources





As a result of our developmental activities and the
deployment of our networks and facilities, we have incurred significant losses from inception to date. We expect such losses to continue, as we further execute our business plan and expand our operations. Consequently, we have been dependent upon
external sources of capital to fund our operations. Prospectively, we will continue to incur losses and will not be able to fund our operations with internally generated funds. Therefore we will require additional, external capital. Additionally, we
have no relevant operating history upon which an evaluation of our performance and prospects can be made. We are subject to unforeseen capital requirements, failure to achieve market acceptance, failure to establish and maintain business
relationships, and competitive disadvantages against larger and more established companies.





To date, we have
financed our operations through direct equity investments from our stockholders, the issuance of additional debt and equity securities in private transactions and by arranging a senior secured credit facility with a group of lenders. We incurred an
EBITDA (as defined) profit and a net loss applicable to common stockholders for the three months ended March 31, 2002 of $0.4 million and $4.5 million, respectively, compared to an EBITDA (as defined) loss of $5.4 million and net loss applicable to
common stockholders of $39.7 million, respectively, for the three months ended March 31, 2001. During the three months ended March 31, 2002, cash used to fund operating activities was $3.7 million, and cash purchases of property, plant and equipment
were $0.3 million, compared to $6.9 million and $18.0 million, respectively, for the three months ended March 31, 2001. During the three months ended March 31, 2002, we received $2.7 million in net cash proceeds from financing activities,
including $2.0 million in gross proceeds from the issuance of a subordinated convertible note, as discussed below, and $1.0 million from an additional draw under our credit facility.




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On March 15, 2002, we received gross proceeds of $2.0 million from the issuance
of a subordinated note to an existing investor. The issuance of the note was in lieu of a second closing on our series J convertible preferred stock, as was previously contemplated. The subordinated note has a maturity date of June 14, 2002 and
bears interest, which is due and payable on the maturity date, at an annual rate of 8%. The subordinated note may be converted into equity in our company, on terms to be determined, as part of a larger equity financing and in connection with a
broader recapitalization that we are pursuing. Additionally, in connection with this financing, the lenders under our credit facility agreed to extend the due date of the current quarterly interest payment to April 15, 2002. On April 15, 2002, in
connection with our ongoing efforts to seek additional financing and to undertake this broader recapitalization, the lenders agreed to further extend the due date of the current quarterly interest payment to May 6, 2002, and possibly, depending on
the satisfaction of certain conditions, to May 27, 2002.





On May 6, 2002 the lenders again agreed to
extend the due date of the current quarterly interest payment to May 28, 2002, and we reached a conditional agreement with the lenders to convert $25 million of indebtedness into convertible preferred stock with a conversion price of $0.40 per
share. Under the arrangement the lenders would convert $25 million of indebtedness into a minimum of 2,500 shares of new series K preferred stock. The closing of this transaction is subject to a number of conditions, including, but not limited to
final credit approval of each of the lenders, the completion of an acceptable equity financing and the conversion of all of our currently outstanding convertible securities, excluding certain options and warrants. Each share of series K preferred
stock would have a stated value of $10,000 per share and would convert into 25,000 shares of common stock.





Concurrently with the consummation of the transaction and the related equity issuance and conversions, the holders of the series K preferred stock would be issued a sufficient number of warrants to purchase shares of common stock to
ensure that they would hold on an aggregate basis a fully-diluted ownership position in the company of at least 30%. The exercise price of such warrants issued to the holders of the series K preferred stock would be the lower of 125% of the market
price as of the closing date or 110% of the exercise price of any warrants issued to investors in the concurrent equity financing, and the term of the warrants would be five years.





This arrangement would also involve certain amendments to the provisions of the senior secured credit facility, including the reduction of the maximum availability to
approximately $77 million and the reduction in the interest rate currently from LIBOR + 4.5% to LIBOR + 3.75%.





It
is anticipated that, if these conditions are met, the closing of these transactions will occur as soon as practicable. However, there can be no assurance that we will be able to successfully effectuate any or all of the transactions described above.
In addition, any financing or broader recapitalization we undertake will be substantially dilutive to our existing stockholders.





As of March 31, 2002, the outstanding borrowings under our credit facility were $96.0 million, and the weighted average interest rate on our outstanding borrowings under the facility was 6.6%. Outstanding letters of credit under the
credit facility totaled $7.4 million. We were in full compliance with all of the covenants contained in the credit agreement underlying the facility. Our access to the additional availability under the credit facility is subject to our compliance
with the covenants, and other terms and conditions, in the credit agreement. Material financial covenants monitored on a quarterly basis include minimum requirements for cumulative revenues and EBITDA (as defined), a maximum limitation on capital
expenditures, and compliance with ratios of total debt to consolidated capitalization and total debt to property, plant and equipment, net of accumulated depreciation. Non-compliance with any of these covenants, requirements, or other terms and
conditions, constitutes an event of default under the credit agreement, prohibiting access to any additional funds available under the credit facility and potentially accelerating the outstanding balance for immediate payment.





On January 2, 2002 we entered into an interest rate swap transaction with Deutsche Bank AG for a notional amount of $25.0
million and a term of two years. Pursuant to this transaction, we were obligated to make quarterly interest payments at a fixed, annual interest rate of 3.7%. Because such interest rate excludes the applicable margin




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of 4.5% that we pay on our credit facility, the total interest rate for us on this swap transaction was 8.2%. As part of this agreement, Deutsche Bank AG was obligated to pay to us on a quarterly
basis a floating rate of interest based upon LIBOR with a designated maturity of three months. On March 20, 2002 we terminated this interest rate swap transaction with Deutsche Bank AG with no payments of other amounts owed by either party. As a
result, all of our outstanding borrowings under our credit facility bear interest at a floating rate.





When we
filed our Form 10-K for the fiscal year ended December 31, 2001 on March 1, 2002, our then existing shelf registration statement on Form S-3 was deemed post-effectively amended and no longer effective. As of March 1, 2002, we were no longer eligible
to use Form S-3 for shelf registrations since we did not satisfy an eligibility requirement of Form S-3 for primary issuances which requires that the aggregate market value of voting common stock held by non-affiliates be at least $75 million.
Accordingly, no further issuances of our securities may be made pursuant to that shelf registration statement.





We
anticipate spending $7.0 million to $9.0 million during the fiscal year 2002 on capital expenditures for the implementation of customer orders and the maintenance of our networks. We have substantially completed the deployment of our FINs, carrier
hotel facilities and metropolitan transport networks. We may expend additional capital for the selected expansion of our network infrastructure, depending upon market conditions, customer demand and our liquidity and capital resources.





Our planned operations continue to require additional capital to fund equipment purchases, engineering and construction costs,
marketing costs, administrative expenses and other operating activities. Although we reported that we generated positive EBITDA (as defined) for the three months ended March 31, 2002, there can be no assurance that we will be able to achieve such a
result prospectively. We cannot fund our operating and investing activities with internally generated cash flows. We continue to require external sources of capital. The successful completion of our recapitalization, as discussed above, and the
related equity financing is critical to our liquidity. From time to time, we may consider private or public sales of additional equity or debt securities and other financings, depending upon market conditions, in order to finance the continued
operations of our business. There can be no assurance that we will be able to successfully consummate any such financing on acceptable terms, or at all. We do not have any off-balance sheet financing arrangements, nor do we anticipate entering into
any.





EBITDA (as defined), as discussed above, is defined as net loss before income taxes and minority interest,
interest expense, interest income, depreciation and amortization, stock related expense and other non-cash, non-recurring charges. EBITDA (as defined) is commonly used in the communications industry and by financial analysts, and others who follow
the industry, to measure operating performance. EBITDA (as defined) should not be construed as an alternative to operating income or cash flows from operating activities, both of which are determined in accordance with generally accepted accounting
principles, or as a measure of liquidity. Because it is not calculated under generally accepted accounting principles, our EBITDA (as defined) may not be comparable to similarly titled measures used by other companies.




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Consolidated Financial Data


(in thousands) (unaudited)





Quarter Ended March
31,2002


2001restated(1)Calculation of EBITDA (as defined):Net loss

$
(4,488
)

$
(17,934
)Plus:Operating expenses:Stock related expense for selling, general, and administrative matters


74



(137
)Depreciation and amortization


2,642



3,105Extraordinary loss on early extinguishments of debt






7,398Interest expense, net


2,157



2,126EBITDA (as defined)

$
385


$
(5,442
)


---

|(1) |  | See Footnote 5 to the notes of the consolidated financial statements for a discussion of the restatement of our financial results for the quarter ended March
31, 2001.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------




Item 3.    Quantitative and Qualitative Disclosures About Market Risk





Our exposure to financial market risk, including changes in interest rates, relates primarily to our credit
facility and marketable security investments. Borrowings under our credit facility bear interest at floating rates, based upon LIBOR or a base rate plus an applicable margin. As a result, we are subject to fluctuations in interest rates. A 100 basis
point increase in LIBOR would increase our annual interest expense by less than $1.0 million per year. As of March 31, 2002, we had borrowed $96.0 million under our credit facility. We are subject to fluctuations in interest rates on the entire
portion of our outstanding balance, with a current weighted average interest rate of 6.6%.





On January 2, 2002 we
entered into an interest rate swap transaction with Deutsche Bank AG for a notional amount of $25.0 million and a term of two years. Pursuant to this transaction, we were obligated to make quarterly interest payments at a fixed, annual interest rate
of 3.7%. Because such interest rate excludes the applicable margin of 4.5% that we pay on our credit facility, the total interest rate for us on this swap transaction was 8.2%. As part of this agreement, Deutsche Bank AG was obligated to pay to us
on a quarterly basis a floating rate of interest based upon LIBOR with a designated maturity of three months. On March 20, 2002 we terminated this interest rate swap transaction with Deutsche Bank AG with no payments of other amounts owed by either
party. As a result, all of our outstanding borrowings under our credit facility bear interest at a floating rate.





We generally place our marketable security investments in high credit quality instruments, primarily U.S. government obligations and corporate obligations with contractual maturities of less than one year. We operate only in the
United States, and all sales have been made in U.S. dollars. We do not have any material exposure to changes in foreign currency exchange rates.




12




---




PART II





OTHER INFORMATION





Item 1.    Legal
Proceedings





None.





Item 2.    Changes in Securities and Use of Proceeds





None.





Item 3.    Defaults Upon Senior Securities





None.





Item 4.    Submission of
Matters to a Vote of Security Holders





None.





Item 5.    Other Information





None.





Item 6.    Exhibits and Reports on Form 8-K





(a)  The following documents are filed herewith as part of this Form 10-Q:





None.





(b)  The following reports were filed on Form 8-K, under Item 5, during the quarter ended March 31, 2002:





On March 18, 2002, we filed a report regarding our issuance of a $2.0 million subordinated note.







13




---




SIGNATURES





In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





Date: August 30, 2002


FIBERNET TELECOM GROUP, INC.By:

/s/    JON A. DELUCAName:

Jon A. DeLucaTitle:

Senior Vice PresidentFinance Chief Financial Officer*


---

|* |  | The Chief Financial Officer is signing this quarterly report on Form 10-Q as both the principal financial officer and authorized officer.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



14




---




FIBERNET TELECOM GROUP, INC.





CONSOLIDATED BALANCE SHEETS


(DOLLARS IN 000S)





March 31, 2002


December 31, 2001(unaudited)ASSETSCurrent Assets:Cash and cash equivalents

$
2,119


$
3,338Accounts receivable, net of allowance of $1,909 and $2,245 atMarch 31, 2002 and December 31, 2001,
respectively


3,109



2,659Prepaid expenses and other


453



700Total current assets


5,681



6,697Property, plant and equipment, net


107,630



109,837Other Assets:Goodwill, net of accumulated amortization of $1,159 and $1,159 atMarch 31, 2002 and December 31, 2001,
respectively


7,509



7,509Deferred charges, net of accumulated amortization of $2,269 and $1,937 at March 31, 2002 and December 31, 2001,
respectively


11,940



12,099Other assets


456



445Total other assets


19,905



20,053TOTAL ASSETS

$
133,216


$
136,587LIABILITIES AND STOCKHOLDERS EQUITYCurrent Liabilities:Accounts payable

$
5,185


$
6,742Accrued expenses


7,889



7,452Deferred revenues


5,608



6,071Capital lease obligationcurrent portion


248



250Subordinated note payable


2,000



Note payable, affiliate


1,793



2,321Total current liabilities


22,723



22,836Long-Term Liabilities:Notes payable, less original issue discount of $5,773 and $6,071 atMarch 31, 2002 and December 31, 2001,
respectively


90,227



88,929Capital lease obligation


412



474Total liabilities


113,362



112,239Stockholders Equity:Common stock, $.001 par value, 150,000,000 and 50,000,000 shares authorized and 62,400,351 and 61,572,613 shares issued
and outstanding atMarch 31, 2002 and December 31, 2001, respectively


62



62Series H preferred stock $.001 par value, 100,556 and 100,556 shares issued and outstanding at March 31, 2002 and
December 31, 2001, respectively(Preference in involuntary liquidation value, $100. 00 per share)


17,096



17,096Series J preferred stock $.001 par value, 334 and 356 shares issued and outstanding at March 31, 2002 and December 31,
2001, respectively(Preference in involuntary liquidation value, $10,000.00 per share)


1,147



7,063Subscription receivable from Series J preferred stock






(5,700
)Additional paid-in-capital and other


295,889



295,649Accumulated deficit


(294,340
)


(289,822
)Total stockholders equity


19,854



24,348TOTAL LIABILITIES AND STOCKHOLDERS EQUITY

$
133,216


$
136,587





The accompanying notes are an integral part of these consolidated
statements.




15




---




FIBERNET TELECOM GROUP, INC.





CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)


(DOLLARS IN 000S, EXCEPT PER SHARE AMOUNTS)





Three Months EndedMarch 31,2002


2001As restated see
Note 5Revenues

$
7,014


$
7,374Operating expenses:Cost of services (exclusive of items shown separately below)


2,403



2,921Selling, general and administrative expense excluding stock related expense


4,226



9,895Stock related expense for selling, general, and administrative matters


74



(137
)Depreciation and amortization


2,642



3,105Total operating expenses


9,345



15,784Loss from operations


(2,331
)


(8,410
)Interest expense, net


(2,157
)


(2,126
)Loss from operations before income taxes


(4,488
)


(10,536
)Income Taxes






Loss before extraordinary item


(4,488
)


(10,536
)Extraordinary loss on early extinguishment of debt






(7,398
)Net loss


(4,488
)


(17,934
)Preferred stock dividends


(28
)


(731
)Preferred stockbeneficial conversion






(21,019
)Net loss applicable to common stockholders

$
(4,516
)

$
(39,684
)Net loss applicable to common stockholders per sharebasic and diluted

$
(0.07
)

$
(1.06
)Weighted average common shares outstandingbasic and diluted


62,212



37,461








The accompanying notes are an
integral part of these consolidated statements.




16




---

FIBERNET TELECOM GROUP, INC.





CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


(DOLLARS IN 000S)





Three Months Ended March
31,2002


2001As restated see Note 5Cash flows from operating activities:Net loss applicable to common stockholders

$
(4,516
)

$
(39,684
)Adjustments to reconcile net loss to net cash used in operating activities:Extraordinary item






7,398Depreciation and amortization


2,642



3,105Preferred stock dividends


28



731Preferred stockbeneficial conversion






21,019Stock related expense


74



(137
)Other non-cash items


477



744Change in assets and liabilities:(Increase) decrease in accounts receivable, prepaid expenses and other Assets


(263
)


3,218Increase (decrease) in accounts payable, accrued expenses and deferred revenues


(2,113
)


(3,292
)Cash used in operating activities


(3,671
)


(6,898
)Cash flows from investing activities:Capital expenditures


(254
)


(18,005
)Cash used in investing activities


(254
)


(18,005
)Cash flows from financing activities:Net proceeds/(repayments) of debt financings


2,819



(1,404
)Net proceed from issuance of equity securities


(50
)


26,011Repayment of capital lease obligation


(63
)


(55
)Cash provided by financing activities


2,706



24,552Net decrease in cash


(1,219
)


(351
)Cash at beginning of period


3,338



1,582Cash at end of period

$
2,119


$
1,231Supplemental disclosures of cash flow information:Interest paid

$
165



1,160Income taxes paid












The accompanying notes are an integral part of these consolidated
statements.




17




---




FIBERNET TELECOM GROUP, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)





1.    ORGANIZATION AND OPERATIONS





FiberNet Telecom, Inc. (Original FiberNet) was organized under the laws of the State of Delaware on August 10, 1994. On November 24, 1997, an existing public company, Desert Native Design,
Inc. (DND), acquired Original FiberNet, pursuant to an agreement and plan of merger dated that date (the Original Merger). To effect the Original Merger, DND effectuated a 3.5 for 1 forward stock split, which entitled DND
shareholders to 3.5 shares of DND stock for every one share held by them and issued 11,500,000 shares of common stock and 80,000 Series B Preferred Stock in exchange for all of the outstanding shares of Original FiberNet. Upon consummation of the
Original Merger, Original FiberNet became a wholly-owned subsidiary of DND, which subsequently changed its name to FiberNet Telecom Group, Inc., a Nevada corporation (FiberNet Nevada). For accounting purposes, the acquisition was treated
as a recapitalization of DND with Original FiberNet as the acquirer (reverse acquisition). On December 9, 1999, FiberNet Nevada changed its state of incorporation to Delaware (hereinafter referred to as FiberNet or the
Company).





FiberNet deploys, owns and operates fiber-optic networks designed to provide comprehensive
broadband connectivity for data, voice and video transmission to service providers in major metropolitan areas. These networks provide an advanced, high bandwidth fiber-optic solution to support the demand for network capacity in the local loop. The
Company provides optical transport within and between carrier hotels, which are facilities where service providers exchange and route communications traffic, as well as optical transport from carrier hotels to tenants in commercial office buildings.
FiberNets networks support multiple transmission protocols including synchronous optical network, or SONET, Ethernet, Frame Relay, asynchronous transfer mode, or ATM and Internet Protocol, or IP. The Company currently operates in the three
gateway markets of New York, Chicago and Los Angeles.





FiberNet is holding a company that owns all of the
outstanding common stock of FiberNet Operations Inc., a Delaware corporation and an intermediate level holding company, and Devnet L.L.C. (Devnet), a Delaware limited liability company. FiberNet Telecom Operations, Inc. owns all of the
outstanding common stock of FiberNet Telecom Inc., a Delaware corporation. FiberNet Telecom, Inc. owns all of the outstanding membership interests of Local Fiber, L.L.C. (Local Fiber), a New York limited liability company, and all of the
outstanding membership interests of FiberNet Equal Access, LLC (Equal Access), also a New York limited liability company. The Company conducts its primary business operations through its operating subsidiaries, Devnet, Local Fiber and
Equal Access.





The Company has agreements with other entities, including telecommunications license agreements
with on-net building landlords, interconnection agreements with other telecommunications service providers and leases with carrier hotel property owners. FiberNet also has entered into contracts with suppliers for the components of its
telecommunications networks. These contracts and agreements are critical to the Companys ability to execute its business strategy and operating plan.





2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





Basis of Presentation





The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries,
FiberNet Operations, Inc., Devnet, FiberNet Telecom, Inc., FiberNet Equal Access and Local Fiber and have been prepared in accordance with generally accepted accounting principles in the United States. All significant intercompany balances and
transactions have been eliminated.




18




---



FIBERNET TELECOM GROUP, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(UNAUDITED)







Use of Estimates





The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those
estimates.





The Companys operations and ability to grow may be affected by numerous factors, including the
difficulty inherent in operating an early-stage company in a new and rapidly evolving market; its history of operating losses and accumulated deficit; its limited financial resources and uncertainty as to the availability of additional capital to
fund its operations on acceptable terms, if at all; its success in obtaining additional carrier hotel lease agreements and license agreements with building owners; growth in demand for its services; the frequency of service interruptions on its
networks; the potential development by competitors of competing products and technologies; restrictions imposed on it as a result of its debt; and changes in the regulatory environment. The failure of the Company to achieve certain operational
results would violate certain debt covenants thereby potentially accelerating the outstanding balance for immediate payment.





Cash and
Cash Equivalents





Cash and cash equivalents include highly liquid investments with an original maturity of
three months or less when purchased. The carrying amount approximates fair value because of the short maturity of the instruments.





Property, Plant and Equipment





Property, plant and equipment are stated at cost less
accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets, once placed in service. The estimated lives are as follows:





Computer software

3-5 YearsComputer equipment

3-5 YearsOffice equipment and fixtures

5-10 YearsLeasehold improvements

9-15 YearsNetwork equipment

5-10 YearsNetwork infrastructure

5-20 Years





Maintenance and repairs are expensed as incurred. Long-term
improvements are capitalized as additions to property, plant and equipment.





Impairment of Long-Lived Assets





The Company reviews the carrying value of long-lived assets including property, plant and equipment for impairment whenever
events and circumstances indicate the carrying value of an asset may not be recoverable from the estimated future cash flows expected to result from its use and eventual disposition. In cases where undiscounted expected future cash flows are less
than the carrying value, an impairment loss would be recognized equal to an amount by which the carrying value exceeds the fair value of the assets, based upon discounted expected future cash flows.




19




---



FIBERNET TELECOM GROUP, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(UNAUDITED)







Revenue Recognition





FiberNet generates revenues from selling network capacity and related services to other communications service providers. The Company recognizes revenues when earned as
services are provided throughout the life of each contract with a customer. The majority of the Companys revenues are generated on a monthly recurring basis under contracts of various lengths, ranging from one month to five years. Revenue is
recognized over the service contract period for all general services. Deferred revenues consist primarily of payments received in advance of revenue being earned under the service contracts. Most of its customers are obligated to make minimum
payments for the utilization of its networks and facilities. Customers may elect to purchase additional services in excess of minimum contractual requirements.





Revenues are derived from three general types of services:





Transport
services.    FiberNets transport services include the offering of broadband circuits on its metropolitan transport networks and vertically on its in-building networks. The Company also offers vertical dark fiber in
certain of its carrier hotel facilities and on-net and off-net buildings. The meet-me-room facility offers customers a single location within the carrier hotel to facilitate network cross connections.





Colocation services.    FiberNets colocation services include providing customers with the ability to
locate their communications and networking equipment at its carrier point facilities in a secure technical operating environment. The Company also can provide its customers with colocation services in the central equipment rooms of certain of its
on-net buildings. If a customer purchases colocation services, the Company may require the customer to make a minimum commitment for transport services, as well.





Communications access management services.    FiberNets access management services include providing its customers with the non-exclusive right to market and provide
their retail services to tenants in its on-net and off-net buildings. Customers typically enter into an agreement with the Company to gain access to all or a significant number of its properties. For certain of its on-net and off-net buildings, the
Company has the exclusive right to manage communications access. Once a customer has entered into an agreement with the Company for access services, FiberNet typically requires that customer to utilize its in-building network infrastructure for
connectivity to end-user tenants, if such networking infrastructure is available.





As of March 31, 2002 the
Company had one reciprocal agreement. During the fiscal year ended December 31, 2001, the Company had four reciprocal agreements. The services provided and obtained through these agreements were priced at fair market value as of the date of the
agreements and are included in revenues and cost of services in the accompanying consolidated statements of operations. The Company recorded revenues for transport services and colocation services of approximately $0.4 million and $1.2 million for
the three months ended March 31, 2002 and 2001, respectively, from these reciprocal agreements. The Company leased colocation facilities under these agreements, and the total amounts expensed for services rendered under the reciprocal agreements for
the three months ended March 31, 2002 and 2001, were approximately $0.4 million and $1.2 million, respectively.





Fair Value of
Financial Instruments





The Company estimates that the carrying value of its financial instruments approximates
fair value.




20




---



FIBERNET TELECOM GROUP, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(UNAUDITED)







Goodwill and Intangibles





Cost in excess of net assets of acquired business, principally goodwill, is accounted for under SFAS No. 142, Goodwill and Other Intangible Assets. Other
intangible assets include the cost to access buildings and deferred financing costs. Costs to access buildings are amortized over 15 years, which represents the term of the related contracts. Deferred financing costs are amortized over the term of
the related debt instrument.





Earnings Per Share





Basic earnings per share have been computed using the weighted average number of shares during the period. Diluted earnings per share is computed by including the dilutive
effect on common stock that would be issued assuming conversion of stock options, warrants and other dilutive securities. Dilutive options, warrants and other securities did not have an effect on the computation of diluted earnings per share in 2002
and 2001, as they were anti-dilutive.





Concentration of Credit Risk





The Company has concentration of credit risk among its customer base. The Company performs ongoing credit evaluations of its customers financial condition. As of
March 31, 2002, two customers in the aggregate accounted for 27.6% of the Companys total accounts receivable, and as of December 31, 2001 one customer accounted for 19.4% of the Companys total accounts receivable.





For the quarter ended March 31, 2002, two customers in the aggregate accounted for 31.4% of the Companys total revenue,
and for the quarter ended March 31, 2001, three customers in the aggregate accounted for 60.5% of the Companys total revenue.





As of December 31, 2001, the Company had an allowance for doubtful accounts of $2.2 million. During the quarter ended March 31, 2002, FiberNet wrote off $0.4 million of this allowance and recorded $50,000 of bad debt
expense, resulting in an allowance for doubtful accounts of $1.9 million, as of March 31, 2002. For the quarter ended March 31, 2001, the Company also recorded $50,000 of bad debt expense.





Stock Option Plan





The Company accounts for
stock option grants in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and, accordingly, recognizes expense for stock option grants to the extent that the estimated fair
value of the stock exceeds the exercise price of the option at the measurement date. Stock option grants to non-employees are accounted in accordance with Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for
Stock-Based Compensation. The resulting expense is charged against operations ratably over the vesting period of the options.





Accounting for Income Taxes





The Company accounts for income taxes in accordance with
Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes, which requires the use of the liability method of accounting for deferred income taxes. Under this method, deferred income taxes represent the net
tax effect of temporary differences between carrying amount of assets and liabilities for financial reporting purposes and the amount used for income tax purposes. Additionally, if it is more likely than not that some portion or all of a deferred
tax asset will not be realized, a valuation allowance is required to be recognized.




21




---



FIBERNET TELECOM GROUP, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(UNAUDITED)







Accounting for Derivative Instruments





The Company accounts for derivative instruments in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging
Activities, as amended. SFAS No. 133 establishes standards of accounting and reporting for derivative instruments and hedging activities, and requires that all derivatives be recognized on the balance sheet at fair value. Changes in the fair
value of derivatives that do not meet the hedge accounting criteria are to be reporting in earnings. The adoption of SFAS No. 133 did not have a material impact on the Companys consolidated financial statements, as the Company has did not have
any derivative instrument contracts for the quarters ended March 31, 2002 and 2001.





Reclassifications





Certain balances have been reclassified in the consolidated financial statements to conform to current year presentation.





Segment Reporting





The Company is a single segment operating company providing telecommunications services.





Recent Accounting
Pronouncements





In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141,
Business Combinations, applicable for fiscal years beginning after December 15, 2001. SFAS No. 141 establishes new standards of accounting for business combinations, eliminating the use of the pooling-of-interests method and requires
that the purchase method be used for business combinations initiated at June 30, 2001.





In June 2001, the FASB
issued SFAS No. 142, Goodwill and Other Intangible Assets, applicable for fiscal years beginning after December 15, 2001. SFAS No. 142, which was adopted by the Company effective January 1, 2002, requires that goodwill and certain
intangible assets resulting from business combinations entered into prior to June 30, 2001 no longer be amortized, but instead be reviewed for recoverability. Any write-down of goodwill would be charged to results of operations as accumulative
change in accounting principle upon adoption of the new accounting standard if the recorded value of goodwill and certain intangibles exceeds its fair value. Any write-down of goodwill up to and including December 31, 2001 would not be subject to
the rules of this new standard. The Company is evaluating the impact of the adoption of SFAS No. 142 and expects to be completed with its analysis by June 30, 2002.




22




---



FIBERNET TELECOM GROUP, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(UNAUDITED)







The following table presents the impact of SFAS No. 142 as if it had
been in effect for the three months ended March 31, 2001 (in thousands, except per share data).





Three Months Ended March
31,2002


2001As restated   see Note 5Reported net loss

$
(4,516
)

$
(39,684
)Plus: amortization of goodwill






1,203Adjusted net loss

$
(4,516
)

$
(38,481
)Basic and diluted earnings per share:Reported net loss

$
(0.07
)

$
(1.06
)Plus: amortization of goodwill






0.03Adjusted net loss

$
(0.07
)

$
(1.03
)





In July 2001, the FASB issued SFAS No. 143, Accounting for
Asset Retirement Obligations. The Statement requires entities to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred. When the liability is initially recorded, the entity capitalizes a
cost by increasing the carrying amount of the related long-lived asset. Over time, the liability is accreted to its then present value, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the
liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. The Statement is effective for fiscal years beginning after June 15, 2002, with earlier application encouraged. The Company does not
expect the adoption of the Statement to have a material impact on its results of operations.





In October, 2001 the
FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Statement replaces SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
although it retains the impairment testing methodology used in SFAS No. 121. The accounting and reporting provisions of Accounting Principals Board Opinion (APB) 30, Reporting the Results of OperationsReporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions, are superceded by SFAS No. 144, except that the Statement preserves the requirement of APB 30 to report discontinued operations separately
from continuing operations. The Statement covers a variety of implementation issues inherent in SFAS No. 121, unifies the framework used in accounting for assets to be disposed of and discontinued operations, and broadens the reporting of
discontinued operations to include all components of an entity with operations that can be distinguished from the rest of the entity and that will be eliminated from the ongoing operations of the entity in a disposal transaction. The Statement is
effective for fiscal years beginning after December 15, 2001. FiberNet adopted SFAS No. 144 on January 1, 2002. The Company does not expect the adoption of SFAS No. 144 to have a material impact on our financial statements.




23




---



FIBERNET TELECOM GROUP, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(UNAUDITED)







3.    PROPERTY, PLANT AND EQUIPMENT





Property, plant and equipment consist of the following (dollars in thousands):





March 31, 2002


December 31, 2001Computer software

$
175


$
178Computer equipment


278



293Leasehold improvements


30



30Office equipment and furniture


146



146Construction in progress






4,425Network equipment and infrastructure


125,220



120,523125,849



125,595Accumulated depreciation


(18,219
)


(15,758
)Property, plant and equipment, net

$
107,630


$
109,837





4.    SIGNIFICANT EVENTS





On March 15, 2002, the Company received gross proceeds of $2.0 million from the issuance of a subordinated note to an existing investor.
The issuance of the note was in lieu of a second closing on our series J convertible preferred stock, as was previously contemplated. The subordinated note has a maturity date of June 14, 2002 and bears interest, which is due and payable on the
maturity date, at an annual rate of 8%. The subordinated note may be converted into equity, on terms to be determined, upon the occurrence of certain events. Additionally, in connection with this financing, the lenders under the Companys
credit facility agreed to extend the due date of the current quarterly interest payment to April 15, 2002.





5.    RESTATEMENT





The Company restated its consolidated financial
statements for the quarter ended March 31, 2001 to record a beneficial conversion feature of $21.0 million in connection with the reduction of the conversion price on Series H and I preferred stock on February 9, 2001. Other than with respect to the
consolidated financial statements for the quarter ended March 31, 2001, this restatement has no impact on the Companys assets or total stockholders equity, and it resulted in an increase in additional paid-in-capital and an increase in
net loss. The change increased net loss by $21.0 million and increased net loss applicable to common stockholders per share by $0.56. The change has no impact on the Companys cash flows.





6.    SUBSEQUENT EVENTS





On
April 15, 2002, in connection with the Companys ongoing efforts to seek additional financing and to undertake a recapitalization, the lenders under the Companys credit facility agreed to further extend the due date of the current
quarterly interest payment to May 6, 2002, and, depending on the satisfaction of certain conditions, to May 27, 2002.





On May 6, 2002 the lenders again agreed to extend the due date of the current quarterly interest payment to May 28, 2002, and the Company reached a conditional agreement with the lenders to convert $25 million of indebtedness into
convertible preferred stock with a conversion price of $0.40 per share. Under the arrangement the lenders would convert $25 million of indebtedness into a minimum of 2,500 shares of new series K preferred




24




---



FIBERNET TELECOM GROUP, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)


(UNAUDITED)




stock. The closing of this transaction is subject to a number of conditions, including, but not limited to final credit approval of each of the lenders, the completion of an acceptable equity
financing and the conversion of all of the Companys currently outstanding convertible securities, excluding certain options and warrants. Each share of series K preferred stock would have a stated value of $10,000 per share and would convert
into 25,000 shares of common stock.





Concurrently with the consummation of the transaction and the related equity
issuance and conversions, the holders of the series K preferred stock would be issued a sufficient number of warrants to purchase shares of common stock to ensure that they would hold on an aggregate basis a fully-diluted ownership position in the
company of at least 30%. The exercise price of such warrants issued to the holders of the series K preferred stock would be the lower of 125% of the market price as of the closing date or 110% of the exercise price of any warrants issued to
investors in the concurrent equity financing, and the term of the warrants would be five years.





This arrangement
would also involve certain amendments to the provisions of the senior secured credit facility, including the reduction of the maximum availability to approximately $77 million and the reduction in the interest rate currently from LIBOR + 4.5% to
LIBOR + 3.75%.





It is anticipated that, if these conditions are met, the closing of these transactions will occur
as soon as practicable. However, there can be no assurance that the Company will be able to successfully effectuate any or all of the transactions described above. In addition, any financing or broader recapitalization the Company undertakes will be
substantially dilutive to the Companys existing stockholders.




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