UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number __________
CARRIER1 INTERNATIONAL S.A.
(Exact name of registrant as specified in its charter)
LUXEMBOURG 98-0199626
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
ROUTE D'ARLON 3
L-8009 STRASSEN, LUXEMBOURG
(Address, including zip code of principal executive offices)
(011) (41-1) 297-2600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common stock, par value $2.00 per share, outstanding at September 30,
1999: shares 31,019,071
<PAGE>
CARRIER1 INTERNATIONAL S.A.
Table of Contents
Part I. Financial Information
Item 1. Unaudited Financial Statements
Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998.........................................
Consolidated Statements of Operations for the Three Months Ended
September 30, 1999 and September 30, 1998, Nine Months Ended
September 30, 1999 and the Period from February 20, 1998
(Date of Inception) to September 30, 1998.....................
Consolidated Statement of Shareholders' Equity as of
September 30, 1999 ...........................................
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 1999 and the Period from February 20, 1998
(Date of Inception) to September 30, 1998.....................
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ........................................
Item 3. Quantitative and Qualitative Disclosures about Market Risk........
Part II. Other Information
Item 1. Legal Proceedings.................................................
Item 6. Exhibits and Reports on Form 8-K .................................
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER. 31,
1999 1998*
------------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................... $ 13,931 $ 4,184
Restricted cash ......................................................... 7,217 1,518
Restricted investments held in escrow ................................... 74,750 --
Accounts receivables .................................................... 19,066 1,217
Unbilled receivables .................................................... 14,322 1,645
Other receivables ....................................................... 13,208 3,014
Prepaid expenses and other current assets ............................... 7,453 3,179
--------- ---------
Total current assets .................................................. 149,947 14,757
PROPERTY AND EQUIPMENT - NET .............................................. 142,350 31,091
INVESTMENT IN JOINT VENTURES .............................................. 4,681 4,675
RESTRICTED INVESTMENTS HELD IN ESCROW ..................................... 28,993 --
OTHER ASSETS .............................................................. 15,491 911
--------- ---------
TOTAL ..................................................................... $ 341,462 $ 51,434
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable .................................................. $ 33,936 $ 27,602
Accrued interest ........................................................ 4,148
Other accrued liabilities ............................................... 44,224 4,643
--------- ---------
Total current liabilities ............................................. 82,308 32,245
LONG-TERM DEBT (Net of discount of $2,199) (See Note 7)
Senior notes ............................................................ $ 248,259 --
Other long-term debt .................................................... 16,758 --
---------
Total long-term debt .................................................. 265,017 --
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' EQUITY:
Common stock, $2 par value, 55,000,000 and 30,000,000 shares respectively
authorized, 31,019,071 and 18,885,207, respectively
issued and outstanding at September 30, 1999 and December 31, 1998 .... 62,038 37,770
Additional paid-in capital .............................................. 2,304 --
Accumulated deficit ..................................................... (71,731) (19,235)
Accumulated other comprehensive income .................................. 1,526 654
--------- ---------
Total shareholders' equity ............................................ (5,863) 19,189
--------- ---------
TOTAL ..................................................................... $ 341,462 $ 51,434
========= =========
</TABLE>
* Derived from audited consolidated financial statements.
See notes to unaudited consolidated financial statements.
3
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 1998, NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
THE PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS THREE MONTHS NINE MONTHS FEBRUARY 20,
ENDED SEPTEMBER ENDED SEPTEMBER ENDED SEPTEMBER 1998 TO SEPTEMBER
30, 1999 30, 1998 30, 1999 30, 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
REVENUES ............................ 27,311 $ 51 $ 59,798 $ 51
OPERATING EXPENSES:
Cost of services (exclusive of
items shown separately below) ... 32,543 4,062 71,904 4,062
Selling, general and administrative 4,216 2,671 10,681 4,109
Depreciation and amortization ..... 4,183 246 7,817 246
-------- -------- -------- --------
Total operating expenses .......... 40,942 6,979 90,402 8,417
-------- -------- -------- --------
LOSS FROM OPERATIONS ................ (13,631) (6,928) (30,604) (8,366)
OTHER INCOME (EXPENSE):
Interest expense .................. (8,718) -- (21,323) --
Interest income ................... 2,009 89 5,087 89
Currency exchange gain (loss), net 1,931 871 (5,218) 871
Other, net ........................ (25) -- (438) --
-------- -------- -------- --------
Total other income (expense) .... (4,803) 960 (21,892) 960
-------- -------- -------- --------
LOSS BEFORE INCOME TAX
BENEFIT ............................. (18,434) (5,968) (52,496) (7,406)
INCOME TAX BENEFIT - Net of
valuation allowance ................. -- -- -- --
-------- -------- -------- --------
NET LOSS ............................ $(18,434) $ (5,968) $(52,496) $ (7,406)
======== ======== ======== ========
EARNINGS (LOSS) PER SHARE:
Net loss:
Basic ........................... $ (0.59) $ (0.63) $ (1.83) $ (1.75)
======== ======== ======== ========
Diluted ......................... $ (0.59) $ (0.63) $ (1.83) $ (1.75)
======== ======== ======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
4
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMMON PAID-IN- ACCUMULATED COMPREHENSIVE
STOCK CAPITAL DEFICIT INCOME TOTAL
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE--December 31, 1998 ........... $ 37,770 $(19,235) $ 654 $ 19,189
Issuance of shares (12,133,864 shares) 24,268 24,268
Issuance of warrants ................. $ 2,304 2,304
Comprehensive income (loss):
Net loss ........................... (52,496) (52,496)
Other comprehensive income, net of
tax:
Currency translation adjustments . 872 872
Total comprehensive loss ............. (51,624)
-------- -------- -------- -------- --------
BALANCE--September 30, 1999 .......... $ 62,038 $ 2,304 $(71,731) $ 1,526 $ (5,863)
======== ======== ======== ======== ========
</TABLE>
See notes to unaudited consolidated financial statements.
5
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND
PERIOD FROM FEBRUARY 20, 1998 (DATE OF INCEPTION) TO SEPTEMBER 30, 1998
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS FEBRUARY 20,
ENDED SEPTEMBER 1998 TO SEPTEMBER
30, 1999 30, 1998
--------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................... $ (52,496) $ (7,406)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization ................... 7,817 246
Changes in operating assets and liabilities
Restricted cash ............................... (5,699) --
Receivables ................................... (40,781) --
Prepaid expenses and other current assets ..... (3,863) (1,869)
Other assets .................................. (14,687) --
Trade accounts payable and accrued liabilities 38,103 4,201
--------- ---------
Net cash provided by (used in) operating
activities ................................ (71,606) (4,828)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of restricted investments held in escrow (103,743)
Purchase of property and equipment ................ ( 95,506) (13,093)
Investments in joint ventures ..................... (6) --
--------- ---------
Net cash used in investing activities ....... (199,255) (13,093)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt .......... 248,259 --
Proceeds from issuance of common stock and warrants 26,572 21,398
Proceeds from subscription of shares .............. 4,018 --
--------- ---------
Net cash provided by financing activities ... 278,849 21,398
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS .............................. 1,759 809
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........... 9,747 4,286
CASH AND CASH EQUIVALENTS
Beginning of period ............................... 4,184
--------- ---------
End of period ..................................... $ 13,931 $ 4,286
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH
OPERATING AND INVESTING ACTIVITIES:
At September 30, 1999 and September 30, 1998, the Company had purchased
approximately $23,429 and $11,828, respectively, of equipment on open
accounts payable. During 1999, the Company acquired property and equipment
of $7,944 by entering into a capital lease. In addition, the Company
acquired $12,230 of equipment by entering into a long-term loan with the
vendor.
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE>
CARRIER1 INTERNATIONAL S.A. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998 AND NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND THE PERIOD FROM FEBRUARY 20, 1998 (DATE OF
INCEPTION) TO SEPTEMBER 30, 1998 (IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE
INFORMATION)
1. NATURE OF OPERATIONS
Carrier1 International S.A., its subsidiaries in Europe and its subsidiary
in the United States ("Carrier1" or the "Company"), operate in the
telecommunications industry offering long distance voice and Internet Protocol
telecommunication services on a wholesale basis. The Company offers these
services primarily to competitive fixed-line operators, other carriers, wireless
operators, Internet service providers, resellers, and multi-national
corporations. The Company is a societe anonyme organized under the laws of the
Grand Duchy of Luxembourg and has adopted a fiscal year end of December 31.
2. UNAUDITED FINANCIAL INFORMATION
The financial information included herein is unaudited; however, the
information reflects all adjustments (consisting solely of normal recurring
adjustments) that are, in the opinion of management, necessary for a fair
presentation of the Company's financial position and results of operations and
cash flows for the interim periods presented. The results of operations for the
three months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the full year.
3. EARNINGS PER SHARE
The following details the earnings per share calculations for the three
months ended September 30, 1999 and September 30, 1998, for the nine months
ended September 30, 1999 and for the period from February 20, 1998 (date of
inception) to September 30, 1998 (in thousands of U.S. dollars, except share
information):
<TABLE>
<CAPTION>
PERIOD
FROM
THREE MONTHS THREE MONTHS NINE MONTHS FEBRUARY
ENDED ENDED ENDED 20, 1998 TO
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Loss from operations ................. $ (13,631) $ (6,928) $ (30,604) $ (8,366)
=========== =========== =========== ===========
Net loss ............................. $ (18,434) $ (5,968) $ (52,496) $ (7,406)
=========== =========== =========== ===========
Total number of shares used to compute
basic earnings (loss) per share ...... 31,019,000 9,514,000 28,764,000 4,222,000
=========== =========== =========== ===========
Loss from operations:
Basic loss per share ............... $ (0.44) $ (0.73) $ (1.06) $ (1.98)
=========== =========== =========== ===========
Diluted loss per share ............. $ (0.44) $ (0.73) $ (1.06) $ (1.98)
=========== =========== =========== ===========
</TABLE>
7
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Net loss:
Basic loss per share.................... $ (0.59) $ (0.63) $ (1.83) $ (1.75)
----------- ----------- ----------- -----------
Diluted loss per shares................. $ (0.59) $ (0.63) $ (1.83) $ (1.75)
=========== =========== =========== ===========
</TABLE>
Potential dilutive securities have been excluded from the computation for
the three months ended September 30, 1999 and September 30, 1998, for the nine
months ended September 30, 1999 and for the period from February 20, 1998 (date
of inception) to September 30, 1998 as their effect is antidilutive. Had the
Company been in a net income position for the three months ended September 30,
1999 and September 30, 1998, for the nine months ended September 30, 1999 and
for the period from February 20, 1998 (date of inception) to September 30, 1998,
diluted earnings per share would have included an additional 8,204,893,
2,822,000, 8,204,893 and 2,822,000 shares, respectively, related to outstanding
warrants, stock options and stock subscriptions.
4. OTHER RECEIVABLES
Other receivables at September 30, 1999, consist of the following:
VAT receivable $12,995
Withholding Tax 213
-------
Other receivable $13,208
=======
5. PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1999, consist of the following:
Network equipment .......................................... $ 59,127
Indefeasible right of use investments ...................... 37,447
Leasehold improvements ..................................... 7,847
Furniture, fixtures and office equipment ................... 6,464
Construction in progress ................................... 40,661
---------
151,546
Less: accumulated depreciation and amortization ............ (9,196)
---------
Property and equipment, net .............................. $ 142,350
=========
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities at September 30, 1999, consist of the following:
VAT payable $ 5,838
Accrued refile cost 13,967
Accrued network cost 15,874
Employee shares not registered 4,018
Miscel. Accruals 4,527
-------
Other accrued liabilities $44,224
=======
7. LONG-TERM DEBT
On February 19, 1999, the Company issued $160 million and [euro]85 million
of 13 1/4% senior notes (the "Notes") with detachable warrants with a scheduled
maturity of February 15, 2009. Each Dollar warrant is initially exercisable to
purchase 6.71013 shares of common stock and each Euro warrant is initially
exercisable to purchase 7.53614 shares of common stock. Holders will be able to
exercise the warrants at a per share price equal to the greater of $2.00 per
share and the minimum par value required by Luxembourg law (currently 50
Luxembourg francs), subject to adjustment.
The Company has the right to redeem any of the Notes beginning on February
15, 2004. The initial redemption price is 106.625% of their principal amount,
plus accrued interest. The redemption price will decline each year after 2004
and will be 100% of their principal amount, plus accrued interest, beginning on
February 15, 2007. In addition, before February 15, 2002, the Company may redeem
up to 35% of the aggregate amount of either series of Notes with the proceeds of
sales of its capital stock at 113.25% of their principal amount. The Company may
make such redemption only if after any such redemption, an amount equal to at
least 65% of the aggregate principal amount of such Notes originally issued
remains outstanding.
The Notes contain covenants that restrict the Company's ability to enter
into certain transactions including, but not limited to, incurring additional
indebtedness, creating liens, paying dividends, redeeming capital stock, selling
assets, issuing or selling stock of restricted subsidiaries, or effecting a
consolidation or merger.
Carrier1 International completed an exchange offer for the Notes on
September 8, 1999. Because completion did not occur by August 19, 1999,
additional interest is due on the Notes at the rate of 0.5% per annum for the
period from August 19, 1999 to September 8, 1999.
As required by the terms of the Notes, the Company used approximately
$49.2 million of the net proceeds to purchase a portfolio of U.S. government
securities and approximately [euro]26.9 million ($29.8 million) of the net
proceeds to purchase a portfolio of European government securities, and pledged
these portfolios for the benefit of the holders of the respective series of
Notes to secure and fund the first five interest payments.
The details of other long-term debt are as follows:
Seller financing ...................................... $12,719
Network fiber lease ................................... 3,736
Other ................................................. 303
-------
Total ................................................. 16,758
=======
Approximately $12.7 million of other long term indebtedness is
attributable to seller financing of fiber optic cable for the Company's German
network. Pursuant to the terms of the financing agreement, the seller will
either provide financing for the entire amount of the purchase with the contract
value to be repaid over three years in equal annual installments beginning on
December 31, 2001 together with interest, or will allow the Company to make
payment in full by December 31, 2000 without interest. The loan, if provided,
will bear interest at the U.S. dollar Libor rate plus 4% per annum.
Approximately $3.7 million of other long term indebtedness is attributable
to a lease of network fiber the Company entered into on April 1, 1999. The lease
requires the Company to make monthly payments of $274 for operating and
maintenance costs for 36 months, after which the Company will obtain a 15 year
indefeasible right of use in the fiber underlying the lease. The Company will be
required to pay an annual operating and maintenance fee of $250 for the term of
the indefeasible right of use.
The Company also has available to it, but as of September 30, 1999, had
not drawn any amounts under, a vendor financing facility with Nortel. The Nortel
facility will allow the Company to borrow money to purchase network equipment
from Nortel and, in limited amounts, other suppliers. Under this facility, the
Company may borrow up to $75 million or the actual amount paid or payable by the
Company for network equipment supplied prior to December 31, 1999, whichever is
less. Advances under the facility will bear interest at a floating rate tied to
LIBOR, and interest payments will be payable periodically from the date of the
relevant advance. At the Company option, it may pledge assets to secure the
Nortel facility and receive a lower interest rate. The Company may not borrow
additional funds under the Nortel facility after December 31, 2000. Advances are
to be repaid in sixteen equal quarterly installments beginning March 31, 2001.
8
<PAGE>
8. COMMITMENTS AND CONTINGENCIES
Purchase Commitments
On April 16, 1999, Carrier1 signed an agreement to swap fiber wavelength
on the basis of a 15 year indefeasible right of use (IRU). Carrier1 is to
receive two unprotected wavelengths on diverse routes between Hamburg,
Copenhagen and Malmo and provide two unprotected wavelengths on the routes
between Hamburg and Frankfurt, Hamburg and Berlin, and Berlin and Frankfurt in
exchange. The first wavelength to Scandinavia is confirmed for receipt by
Carrier1 by mid December 1999, the second for the first quarter of 2000.
Carrier1 will deliver the two wavelengths on the German ring during the first
quarter of 2000. The Company will account for this transaction as a nonmonetary
exchange in accordance with Accounting Principles Board Opinion No. 29,
"Accounting for Nonmonetary Transactions."
On April 29, 1999, Carrier1 signed a letter of intent with Nortel for the
purchase of DWDM equipment to light up dark fiber in Germany and on the London
ring. The value of the purchases and the associated services to be performed
within 18 months amounts to $25 million.
On May 7, 1999, Carrier1 signed a contract for the purchase of a 10-year
indefeasible right of use (IRU) for 2.5 Gbit/s of capacity from London to
Amsterdam, Frankfurt, Paris and Brussels in the amount of $15.0 million. The
capacity was delivered in August 1999. Carrier1 sold in exchange to the same
company a 10-year IRU for 2.5 Gbit/s of capacity from London to Frankfurt,
Amsterdam and Paris in the amount of $12.0 million. Carrier1 paid $3.0 million
on the date of acceptance; the remaining $12.0 million will be offset by the
delivery of Carrier1's wavelength.
On August 17, 1999, Carrier1 signed a contract to swap 12 strands of dark fiber
on Carrier1's German network for 12 strands of dark fiber covering substantially
all of the major cities in France. Like Carrier1's German fiber infrastructure,
this new homogeneous French ring utilizes the latest generation of high speed,
high capacity fiber optic cable. The French fiber infrastructure will become
available in phases throughout the year of 2000. Each party will provide certain
network maintenance services for the other party in their respective countries.
The Company will account for this transaction as a nonmonetary exchange in
accordance with Accounting Principles Board Opinion No. 29, "Accounting for
Nonmonetary Transactions."
On September 3, 1999, Carrier1 signed a swap agreement under which it will
provide internet services for a total amount of $20.7 million in exchange for
bandwidth capacity connecting Malmo, Oslo and Gothenburg. The bandwidth capacity
is scheduled to be provided on May 31, 2000, with an initial wavelength of 2.5
Gbps, increasing to 10 Gbps one year later. Carrier1 has the right to convert
the wavelength any time after May 31, 2000 to an 18 year indefeasible right of
use of one fiber pair.
On September 29, 1999, Carrier1 contracted to build a 44 kilometer, multiple
duct city ring connecting major telecommunications points-of-presence in
Amsterdam. The ring will pass much of Amsterdam's business and financial
district, and is scheduled to be completed in the third quarter of 2000. Parts
of the ring are expected to be usable in the first quarter of 2000. The
construction cost is expected to amount to approximately $4.8 million, based on
the September 30, 1999 exchange rate of hfl 2.07 to $1.00.
On October 19, 1999, Carrier1 signed an agreement to swap one of the ducts of
the Amsterdam city ring for one duct on a city ring connecting Amsterdam south
with the business centers in Amsterdam-Schiphol and Amsterdam-Hoofddorp. The
swap extends the Amsterdam city ring network by an additional 71 kilometers.
9. SHAREHOLDERS' EQUITY
Carrier1 has granted options pursuant to the 1999 Share Option Plan to
acquire approximately 2,295,718 Shares at an exercise price of $2.00 per Share
plus applicable capital duty (currently 1% of the subscription price payable to
Carrier1 International by the subsidiary granting the applicable option).
Carrier1 intends to grant additional options in the future.
9
<PAGE>
10. INCOME TAXES
The Company has tax loss carry forwards of approximately $20,000 at
September 30, 1999. The ability of the Company to fully realize deferred tax
assets related to these tax loss carryforwards in future years is contingent
upon its success in generating sufficient levels of taxable income before the
statutory expiration periods for utilizing such net operating losses lapses. Due
to its limited history, the Company was unable to conclude that realization of
such deferred tax assets in the near future was more likely than not.
Accordingly, a valuation allowance was recorded to offset the full amount of
such assets.
11. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments for the nine months ended September 30, 1999 is shown in the following
table. The "Other" column includes unallocated shared and corporate related
assets.
<TABLE>
<CAPTION>
VOICE SERVICES DATA SERVICES OTHER CONSOLIDATED
-------------- ------------- ----- ------------
<S> <C> <C> <C> <C>
Revenues .............. $ 53,342 $ 6,456 $ 59,798
Fixed cost contribution 9,540 6,456 15,996
Identifiable assets ... 30,856 3,761 306,845 341,462
</TABLE>
12. SUBSEQUENT EVENTS
During the fourth quarter of 1999, Carrier1 entered into a memorandum of
understanding for a joint venture to build carrier co-location-facilities, or
"IT mega centers," in major markets throughout Europe. Carrier1 has committed
$23.4 million to a $155 million project to develop full-service carrier hotels
providing bandwidth-intensive internet and telecom customers co-location
services. Other partners in the venture are expected to include affiliates of
U.S.-based investment firms, Providence Equity Partners Inc. and Carlyle Group,
as well as European network operator iaxis BV. Carrier1 and iaxis also are
expected to serve as strategic anchor tenants in these facilities, which are
expected to be connected to Carrier1's network. A fund managed by Providence
Equity Partners Inc. indirectly holds a majority of Carrier1's outstanding
common stock.
10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
THE FOLLOWING DISCUSSION AND ANALYSIS OF CARRIER1'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED
FINANCIAL STATEMENTS AND THE NOTES THERETO CONTAINED ELSEWHERE IN THIS REPORT.
CERTAIN INFORMATION CONTAINED IN THE DISCUSSION AND ANALYSIS OR SET FORTH
ELSEWHERE IN THIS REPORT, INCLUDING INFORMATION WITH RESPECT TO CARRIER1'S PLANS
AND STRATEGY FOR ITS BUSINESS AND RELATED FINANCING, INCLUDES FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISK AND UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THE RESULTS DESCRIBED IN OR IMPLIED BY THE FORWARD-LOOKING
STATEMENTS CONTAINED HEREIN DUE TO, AMONG OTHER THINGS, POLITICAL, ECONOMIC OR
LEGAL CHANGES IN THE MARKETS IN WHICH CARRIER1 DOES BUSINESS, COMPETITIVE
DEVELOPMENTS, OR RISKS INHERENT IN CARRIER1'S BUSINESS PLAN, SUCH AS ITS
SIGNIFICANT CAPITAL REQUIREMENTS, ITS SIGNIFICANT INDEBTEDNESS AND COVENANT
RESTRICTIONS AND ITS NEEDS TO CONTINUE TO EXPAND AND DEVELOP ITS NETWORK RAPIDLY
AND COST-EFFECTIVELY. THESE FACTORS ARE DETAILED ELSEWHERE IN THIS REPORT AND IN
CARRIER1'S REGISTRATION STATEMENT ON FORM S-4 ON FILE WITH THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION.
OVERVIEW
Carrier1 is a rapidly expanding European facilities-based provider of long
distance voice and Internet Protocol data telecommunications services. Carrier1
offers these services on a wholesale basis primarily to competitive fixed-line
operators, other carriers, wireless operators, ISPs, resellers and
multi-national corporations. In March 1998, Carrier1's experienced management
team and Providence Equity Partners formed Carrier1 to capitalize on the
significant voice and data opportunities that are emerging for facilities-based
carriers in Europe's rapidly liberalizing telecommunications markets. By
September 1998, Carrier1 had deployed its initial network and commenced selling
wholesale services. As of March 31, 1999, Carrier1 had executed 79 contracts
with voice customers and 35 contracts with data customers. As of June 30, 1999,
Carrier1 had executed an additional 63 contracts with voice customers and an
additional 11 contracts with data customers. As of September 30, 1999, Carrier1
had executed additional 70 contracts with voice customers and additional 14
contracts with data customers.
Carrier1 is developing an extensive city-to-city European network linking
key population centers. Carrier1 intends to continue rapidly expanding this
network in a cost-effective manner to serve the needs of its existing and
potential customers. Carrier1 believes that its network will allow it to provide
and price its services in Europe on a city-to-city basis without regard to
national borders. This provisioning and pricing structure will put Carrier1 at
the forefront of a shift occuring in the European telecommunications market away
from services and pricing that distinguish between international and national
long distance.
To date, Carrier1 has experienced net losses and negative cash flow from
operating activities. From Inception to September 1998, Carrier1's principal
activities included developing its business plans, obtaining governmental
authorizations and licenses, acquiring equipment and facilities, designing and
implementing its voice and data networks, hiring management and other key
personnel, developing, acquiring and integrating information and operational
support systems and operational procedures, negotiating interconnection
agreements and negotiating and executing customer service agreements. In
September 1998, Carrier1 commenced the roll-out of its services. Carrier1
expects to continue to generate net losses and negative cash flow as it expands
its operations and does not expect to generate positive cash flow from operating
activities through 2000. Whether or when Carrier1 will generate positive
cashflow from operating activities will depend on a number of financial,
competitive, regulatory, technical and other factors. See "Liquidity and Capital
Resources."
Although Carrier1's management is highly experienced in the wholesale
telecommunications business, Carrier1 itself has a limited operating history.
Holders of Carrier1's securities therefore
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have limited operating and financial information about Carrier1 upon which to
base an evaluation of Carrier1's performance and an investment in Carrier1's
securities.
Carrier1's consolidated financial statements are prepared in accordance
with U.S. generally accepted accounting principles. Carrier1 reports on a
calendar quarterly basis.
FACTORS AFFECTING FUTURE OPERATIONS
REVENUES
Carrier1 generates most of its revenues through the sale of wholesale long
distance voice and data services to competitive fixed-line operators, other
carriers, wireless operators, ISPs, resellers and multi-national corporations.
Carrier1 is beginning to expand the scope of its wholesale market by adding
value-added services for customers such as switchless resellers. Carrier1
records revenues from the sale of voice and data services at the time of
customer usage. Carrier1's agreements with its voice customers are typically for
an initial term of twelve months and will be renewed automatically unless
cancelled. They employ usage-based pricing and do not provide for minimum volume
commitments by the customer. Carrier1 generates a steady stream of voice traffic
by providing high-quality service and superior customer support. Carrier1's data
services are charged, depending on service type, either at a flat monthly rate,
regardless of usage, based on the line speed and level of performance made
available to the customer, or on a usage basis, with no minimum volume
commitment by the customer. Initially, the majority of Carrier1's data contracts
were usage-based. Since March 31, 1999, Carrier1 has migrated to offering usage
based data pricing only in combination with data contracts that have a fee-based
component that guarantees minimum revenue, in order to encourage usage of its
network services by its data customers. Carrier1's agreements with its data
customers are generally for a minimum term of twelve months, although Carrier1
may seek minimum terms of two years or more for agreements providing for higher
line speeds. Carrier1 believes that, if the quality of the service is
consistently high, data customers will typically renew their contracts because
it is costly and technically burdensome to switch carriers.
Currently, voice and data services are both priced competitively and
Carrier1 emphasizes quality and customer support, rather than offering the
lowest prices in the market. The rates charged to voice and data customers are
subject to change from time to time. Carrier1 will also vary pricing on its
routes as a traffic management tool. Although Carrier1's revenue per billable
minute for voice traffic in the third quarter of 1999 increased, in general,
Carrier1 expects to experience declining revenue per billable minute for voice
traffic and declining revenue per Mb for data traffic, in part as a result of
increasing competition. Carrier1 believes, however, that the impact on its
results of operations from price decreases has been in prior quarters, and, it
believes, will continue to be, at least partially offset by decreases in its
cost of providing services and increases in its voice and data traffic volumes.
Carrier1's focus on the wholesale international and national long distance
markets results in its having substantially fewer customers than a carrier in
the mass retail sector. As a result, a shift in the traffic pattern of any one
customer, especially in the near term and on one of Carrier1's high volume
routes, could have a material impact, positive or negative, on Carrier1's
revenues. One customer accounted for approximately 12% of Carrier1's revenues in
September, 1999, and may continue to account for a significant portion of
revenues in the near term. Furthermore, most wholesale customers of voice
services tend to be price sensitive and, assuming the quality of service is
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equivalent, certain customers may switch suppliers for certain routes on the
basis of small price differentials. In contrast, data customers tend to use
fewer suppliers than voice customers, cannot switch suppliers as easily and,
Carrier1 believes, are more sensitive to service quality than to price.
COST OF SERVICES, EXCLUSIVE OF ITEMS DISCUSSED SEPARATELY BELOW
Cost of services, exclusive of depreciation and amortization, which is
discussed separately below, are classified into three general categories: access
costs, transmission costs and termination costs. Carrier1 has minimal access
costs as its wholesale customers are typically responsible for the cost of
accessing its network. Carrier1 has begun to target switchless resellers and,
for those services, Carrier1 will have access costs payable to the originating
local provider, usually the incumbent telephone operator. These costs will vary
based on calling volume and the distance between the caller and Carrier1's point
of presence.
TRANSMISSION COSTS. Carrier1's transmission costs for voice and data traffic
currently consist primarily of leased capacity charges and switch and router
facilities costs. As a result of Carrier1's objective to enter the market early,
its initial European transmission platform consists largely of leased capacity.
Leased capacity charges are fixed monthly payments based on capacity provided
and are typically higher than a "dark fiber cost level," which is Carrier1's
target cost level and represents the lowest possible per unit cost. Dark fiber
cost level is the per unit cost of high-capacity fiber that has been laid and
readied for use. Dark fiber cost levels can be achieved not only through owned
facilities, but also may be possible through other rights of use such as
multiple investment units, known as "MIUs."
As part of Carrier1's strategy to lower its cost base over time, it will
seek dark fiber cost levels for its entire transmission platform, either through
building, acquiring or swapping capacity. Carrier1 further minimizes its
transmission costs by optimizing the routing of its voice traffic and increasing
volumes on its fixed-cost leased and owned lines, thereby spreading the
allocation of fixed costs over a larger number of voice minutes or larger volume
of data traffic, as applicable. To the extent Carrier1 overestimates anticipated
traffic volume, however, per unit costs will increase. As Carrier1 continues to
develop its owned network and relies less on leased capacity, per unit voice
transmission costs are expected to decrease substantially, offset partially by
an increase in depreciation and amortization expense. Carrier1 also expects to
experience declining transmission costs per billable minute or per Mb, as
applicable, as a result of decreasing cost of leased transmission capacity,
increasing availability of more competitively priced indefeasible rights of use
and MIUs and increasing traffic volumes.
VOICE TERMINATION COSTS. Termination costs represent the costs Carrier1 is
required to pay to other carriers from the point of exit from Carrier1's network
to the final point of destination. Generally, at least one-half of the total
costs associated with a call, from receipt to completion, are
termination-related costs. Voice termination costs per unit are generally
variable based on distance, quality, geographical location of the termination
point and the degree of competition in the country in which the call is being
terminated.
If a call is terminated in a city in which Carrier1 has a point of
presence and an interconnection agreement with the national incumbent telephone
operator, the call will be transferred to the public switched telephone network
for local termination. This is the least costly mode of
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terminating a call. To the extent incumbent telephone operators deny or delay
granting Carrier1 interconnection or grant it interconnection for insufficient
capacity or in undesirable locations, Carrier1 may incur high termination costs,
which could have a material adverse effect on its ability to compete with
carriers that do have interconnection agreements. If a call is to a location in
which Carrier1 does not have a point of presence, or has a point of presence but
does not have an interconnection agreement giving it access to the public
switched telephone network, then the call must be transferred to, and refiled
with, another carrier that has access to the relevant public network for local
termination. Carrier1 pays this carrier a refile fee for terminating its
traffic. Most refilers currently operate out of London or New York, so that the
refiled traffic is rerouted to London or New York and from there is carried to
its termination point. Refile agreements provide for fluctuating rates with rate
change notice periods typically of one or four weeks. To the extent Carrier1 has
to rely heavily on refiling to terminate certain traffic, Carrier1's margins on
such voice traffic will be materially adversely affected. Carrier1 will seek to
reduce its refile costs by utilizing least cost routing. In those countries
where Carrier1 has a point of presence but does not have an interconnection
agreement implemented yet, it has implemented one or more "resale" agreements
whereby a local carrier that has an interconnection agreement with the incumbent
telephone operator "resells" or shares this interconnection right with Carrier1
for a fee. Termination through resale agreements is significantly less expensive
than through refile agreements because the traffic does not need to be rerouted
to another country, as is done with refiling. Termination through resale
agreements is, however, more expensive than through interconnection agreements.
In countries where it has not been directly authorized to provide services,
Carrier1 will negotiate to obtain direct operating agreements with correspondent
telecommunications operators where such agreements will result in lower
termination costs than might be possible through refile arrangements. Carrier1
believes its refile and resale agreements are competitively priced. If
Carrier1's traffic volumes are higher than expected, it may have to divert
excess traffic onto another carrier's network, which would also increase its
termination costs. Carrier1 believes, however, that it has sufficient capacity
and could, if necessary, lease more. In addition, its technologically advanced
traffic monitoring capabilities allow Carrier1 to identify changes in volume and
termination cost patterns as they begin to develop, thereby permitting it to
respond in a cost-efficient manner.
Carrier1 believes that its termination costs per unit should decrease as
it extends its network and increases transmission capacity, adds additional
switches and interconnects with more incumbent telephone operators. Carrier1
also believes that continuing liberalization in Europe will lead to decreases in
termination costs as new telecommunications service providers emerge, offering
alternatives to the incumbent telephone operators for local termination, and as
European Union member states implement and enforce regulations requiring
incumbent telephone operators to establish rates which are set on the basis of
forward-looking, long run economic costs that would be incurred by an efficient
provider using advanced technology. There can be no assurance, however,
regarding the extent or timing of such decreases in termination costs.
DATA TERMINATION COSTS. Termination costs represent costs Carrier1 is required
to pay to other internet backbone providers from the point of exit of Carrier1's
network. Data termination is effected through peering and transit arrangements.
Peering arrangements provide for the exchange of data traffic free-of-charge.
Carrier1 has entered into peering arrangements with several ISPs in the United
States and Europe, including recent peering arrangements with several European
incumbent telephone operators. There can be no assurance that Carrier1 will be
able to negotiate additional peering arrangements or that it will be able to
terminate traffic on their networks at favourable prices. Under transit
arrangements, Carrier1 is required to pay a fee to exchange traffic. That fee
has a variable and a fixed component. The variable component is based on monthly
traffic
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volumes. The fixed component is based on the minimum Mb amount charged to
Carrier1 by its transit partners. The major United States ISPs require almost
all European ISPs and internet backbone providers, including Carrier1, to pay a
transit fee to exchange traffic.
Recently, the internet services industry has experienced increased merger
and consolidation activity among ISPs and internet backbone providers. This
activity is likely to increase the concentration of market power of Internet
backbone providers, and may adversely affect Carrier1's ability to obtain
peering arrangements.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Carrier1's wholesale strategy allows it to maintain lower selling, general
and administrative expenses than companies providing services to the mass retail
market. Carrier1's selling, general and administrative expenses consist
primarily of personnel costs, information technology costs, office costs,
travel, commissions, billing, professional fees and advertising and promotion
expenses. Carrier1 employs a direct sales force located in the major markets in
which it offers services. To attract and retain a highly qualified sales force,
Carrier1 offers its sales personnel a compensation package emphasizing
performance based commissions and stock options. Carrier1 expects to incur
significant selling and marketing costs in advance of anticipated related
revenue as it continues to expand its operations. Carrier1's selling, general
and administrative expenses are expected to decrease as a percentage of
revenues, however, once it has established its operations in targeted markets
and expanded its customer base.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense includes charges relating to
depreciation of property and equipment, which will consist principally of
equipment (such as switches, multiplexers and routers), investments in
indefeasible rights of use and in multiple investment units, furniture and
equipment. Depreciation and amortization also include the amortization of
interest capitalized during the construction of the 2,400 kilometer fiber
network Carrier1 is building in Germany in conjunction with Viatel, Inc. and
Metromedia Fiber Network, Inc. Carrier1 depreciates its network over periods
ranging from 5 to 15 years and amortizes its intangible assets over a period of
5 years. Carrier1 depreciates its investments in indefeasible rights of use and
in multiple investment units over their estimated useful lives of not more than
15 years. Carrier1 expects depreciation and amortization expense to increase
significantly as Carrier1 expands its owned network, including the development
of the German network.
NETWORK DEVELOPMENT
During the third quarter, Carrier1 continued to expand its network,
installing a switch in Brussels and beginning work on switch installations in
Stockholm, Milan, and Manchester. In August, The total number of switches at the
end of the third quarter amounted to eleven. Carrier1 replaced its leased STM-1
transmission ring with its own capacity (an indefeasible right of use)
connecting London with Amsterdam, Frankfurt, Paris and Brussels and moved its
traffic from the leased ring to this new optical network link.
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Also in the third quarter, Carrier1 finalized the implementation of its
interconnect agreement with TeleDenmark and continued the implementation of its
interconnect agreements with Belgacom, Telia, France Telecom and Telecom Italia.
It also upgraded its direct link into Turkey and signed and started to implement
bilateral agreements with selected African incumbent telephone operators,
lowering its cost to terminate traffic into these regions, while improving the
quality of transmission. Construction on the German network proceeded on
schedule. In addition, Carrier1 secured several new peering arrangements with
ISPs, bringing to over 90 its total number of ISP peering arrangements.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999
Because Carrier1 commercially introduced its services in September 1998,
Carrier1's management believes that comparisons of results for the nine-month
period ended September 30, 1999 to the period from Inception to September 30,
1998 and for the three month period ending September 30, 1999 to the three month
period ending September 30, 1998 are not meaningful.
Revenues for the three-month period ended September 30, 1999 were
approximately $27.3 million, primarily relating to voice services, which
contributed $25.6million or 93.8% to the total revenue generated in the third
quarter of 1999. Voice revenue growth compared to the second quarter of 1999
amounted to 61%. Voice traffic volume of 183 million minutes was billed to
Carrier1's customers. Average revenue per minute was $0.14, which represented an
increase of approximately 8% compared to the second quarter of 1999 due
primarily to changes in traffic mix offset somewhat by price reductions. The
majority of voice traffic in the third quarter of 1999 both originated and
terminated in Europe where prices are generally lower, but where Carrier1 has
implemented interconnection agreements and therefore generally does not need to
terminate traffic via more costly refile or resale arrangements. Data services
revenue of $1.7 million for the same period was generated by internet and
bandwidth services.
Cost of services for the three-month period ended September 30, 1999 was
approximately $32.5 million. These costs consisted of operation of the network,
leases for transmission capacity, and termination expenses including refiling.
Depreciation and amortization for the three-month period ended September
30, 1999 was approximately $4.2 million and consisted primarily of depreciation
costs for network equipment, indefeasible rights of use, and other furniture and
equipment. Selling, general and administrative expenses were approximately $4.2
million for the three-month period ended September 30, 1999 and consisted
primarily of personnel costs, information technology costs, office costs,
professional fees and expenses.
Net interest expense for the three-month period ended September 30, 1999
was approximately $6.7 million. It consisted during this period of approximately
$8.7 million of interest on the Notes, less interest income of approximately
$2.0 million. Interest income consists of interest earned from investing the
remaining proceeds of the $60 million dollars invested by funds managed by
Carrier1's equity sponsors to finance the deployment of Carrier1's network and
to fund start-up operations (the "Equity Investment") and the offering (the
"Offering") on February 19, 1999, of $160,000,000 senior dollar units, each such
unit consisting of one 13 1/4 senior dollar Note and one warrant to purchase
shares of common stock and [euro]85,000,000 senior euro units, each such unit
consisting of one 13 1/4 senior euro Note and one warrant to purchase shares of
common stock.
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The strengthening of the euro to the U.S. dollar in the third quarter of
1999 resulted in a currency exchange gain of $1.9 million.
Carrier1's management evaluates the relative performance of its voice and
data services operations based on their respective fixed cost contributions.
Fixed cost contribution consists of the revenues generated by the provision of
voice services or data services, as the case may be, less direct variable costs
incurred as a result of providing such services. Certain direct costs, such as
network and transmission costs, are shared by both the voice and data operations
and are not allocated by management to either service. See Note 9 to the
Unaudited Consolidated Financial Statements presented elsewhere in this report.
Fixed cost contribution for voice services for the three-month period ended
September 30, 1999 was $4.2 million, representing $25.6 million in voice revenue
less $21.4 million, or 11.7 cents per minute, in voice termination costs. Fixed
cost contribution for data services for the same period was equivalent to data
services revenue, or $1.7 million, as there were no direct variable costs
associated directly with providing data services.
PERIOD FROM INCEPTION THROUGH DECEMBER 31, 1998
Carrier1 commercially introduced its services in September 1998. Revenues
for the period from Inception to December 31, 1998 were approximately $2.8
million, primarily relating to voice services, which contributed 98% to the
total revenue achieved in 1998. Voice traffic volume from the start of
operations in September 1998 until the end of 1998 amounted to 10 million
minutes. Data services revenue of $0.1 million for the same period was generated
by internet services.
Cost of services for the period from Inception to December 31, 1998 was
approximately $11.7 million. These costs consisted of operation of the network,
leases for transmission capacity, and termination expenses including refiling.
Depreciation and amortization for the period from Inception to December
31, 1998 was approximately $1.4 million and consisted primarily of depreciation
costs for network equipment, indefeasible rights of use, and other furniture and
equipment. Selling, general and administrative expenses were approximately $9.0
million for the period from Inception to December 31, 1998 and consisted
primarily of start-up expenses, personnel costs, information technology costs,
office costs, professional fees and promotion expenses.
Interest income during the period from Inception to December 31, 1998
consisted of interest earned from investing the proceeds of the issuance of
equity. Interest income totaled approximately $81,000 for the period from
Inception to December 31, 1998. No interest expense was incurred for the period
from Inception to December 31, 1998.
Fixed cost contribution for voice services for the period from Inception
to December 31, 1998 was $0.1 million, representing $2.7 million in voice
revenue less $2.6 million in voice termination costs, reflecting the fact that
during the early stages of its operations, Carrier1 had relatively few
interconnection agreements with incumbent telephone operators so that traffic
had to be terminated at higher cost through refiling. Fixed cost contribution
for data services for the same
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period was equivalent to data services revenue, or $0.1 million, as there were
no direct variable costs associated directly with providing data services.
LIQUIDITY AND CAPITAL RESOURCES
Carrier1 broadly defines liquidity as its ability to generate sufficient
cash flow from operating activities to meet its obligations and commitments. In
addition, liquidity includes the ability to obtain appropriate debt and equity
financing and to convert into cash those assets that are no longer required to
meet existing strategic and financial objectives. Therefore, liquidity cannot be
considered separately from capital resources that consist of current or
potentially available funds for use in achieving long-range business objectives
and meeting debt service commitments.
From Inception through December 31, 1998, Carrier1 financed its operations
through equity contributions. During the nine-month period ended September 30,
1999, Carrier1 financed its operations through additional equity contributions
and with the proceeds of the Offering. The further development of Carrier1's
business and deployment of its network will require significant capital to fund
capital expenditures, working capital, cash flow deficits and any debt service.
Carrier1's principal capital expenditure requirements include the expansion of
its network, including construction of the German network, and the acquisition
of switches, multiplexers, routers and transmission equipment. Additional
capital will be required for office space, switch site buildout and corporate
overhead and personnel.
Carrier1 estimates it will incur capital expenditures of approximately
$220.0 million from Inception through 1999. By the end of 1999, Carrier1 plans
to complete construction of the German network and to purchase additional
switches, multiplexers and routers. As of December 31, 1998, Carrier1 had
incurred capital expenditures of approximately $37.2 million since Inception,
including amounts related to the German Network. As of September 30, 1999
Carrier1 had incurred capital expenditures of approximately $121 million since
December 31, 1998, including amounts related to the German Network. Carrier1's
aggregate funding requirements include requirements to fund capital
expenditures, working capital, debt service and cash flow deficits. Carrier1
estimates, based on its current business plan, that its aggregate funding
requirements for the deployment and operation of its network will total
approximately $330.0 million through 1999.
As of December 31, 1998 funds managed by Carrier1's equity sponsors had
invested a total of approximately $37.8 million to fund start-up operations. As
of February 19, 1999, such funds had completed their aggregate equity investment
totaling $60 million in equity contributions to Carrier1. On February 19, 1999
Carrier1 completed the Offering. Net proceeds from the Offering were $242
million (based on the February 19, 1999, conversion rate of [euro]0.90316 per
$1.00), after deducting discounts and commissions and expenses of the Offering.
Approximately $49.2 million of the net proceeds and [euro]26.9 million ($29.8
million) of the net proceeds were used to purchase a portfolio of government
securities for the benefit of the holders of the respective series of notes.
Carrier1 believes, based on its current business plan, that the net
proceeds from the Offering, the Equity Investment, and the Nortel facility,
together with either (1) proceeds of possible sales of dark fiber on the German
network, (2) proceeds from an accounts receivable facility or other bank
facility, if completed, or (3) proceeds from one or more additional equipment
financing facilities, or a combination of these sources, will be sufficient to
fund the expansion of Carrier1's business as planned, and to fund operations
until Carrier1 achieves positive cash flow from operations. Carrier1 expects to
continue
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to generate net losses and negative cash flow as it expands its operations and
does not expect to generate positive cash flow from operating activities through
2000. Whether or when Carrier1 will generate positive cash flow from operating
activities will depend on a number of financial, competitive, regulatory,
technical and other factors. For example, Carrier1's net losses and negative
cash flow from operating activities are likely to continue beyond that time if:
- Carrier1 decides to build extensions to its network because it
cannot otherwise reduce its transmission costs;
- Carrier1 does not establish a customer base that generates
sufficient revenue;
- Carrier1 does not reduce its termination costs by negotiating
competitive interconnection rates and peering arrangements as it
expands its network;
- prices decline faster than Carrier1 has anticipated;
- Carrier1 does not attract and retain qualified personnel; or
- Carrier1 does not obtain necessary governmental approvals and
operator licenses.
Carrier1's ability to achieve these objectives is subject to financial,
competitive, regulatory, technical and other factors, many of which are beyond
Carrier1's control. There can be no assurance that Carrier1 will achieve
profitability or positive cash flow.
The actual amount and timing of Carrier1's future capital requirements may
differ materially from Carrier1's estimates as a result of, among other things,
the demand for Carrier1's services and regulatory, technological and competitive
developments. Sources of additional financing, if available on acceptable terms
or at all, may include commercial bank borrowings, equipment financing or
accounts receivable financing, or the private or public sale of equity or debt
securities.
On February 18, 1999, Carrier1 entered into an agreement to purchase fiber
optic cable for the German network during 1999 for $20.3 million plus
value-added tax. The seller will either provide financing for the entire amount
of the purchase with the contract value to be repaid over three years in equal
annual installments beginning on December 31, 2001 together with interest, or
will allow Carrier1 to make payment in full by December 31, 2000 without
interest. The loan, if provided, will bear interest at the U.S. dollar LIBOR
rate plus 4% per annum. If a loan is not provided, the seller is obligated to
provide certain additional equipment to Carrier1 without charge.
Carrier1 also entered into a financing facility with Nortel Networks Inc.,
a major equipment supplier, on June 25, 1999. The Nortel facility allows
Carrier1 to borrow money to purchase network equipment from Nortel and, in
limited amounts, other suppliers. Under this facility, Carrier1 may borrow up to
$75,000,000 or the actual amount paid or payable by Carrier1 for network
equipment supplied prior to December 31, 1999, whichever is less. Advances under
the facility will bear interest at a floating rate tied to LIBOR, and interest
payments will be payable periodically from the date of the relevant advance. At
Carrier1's option, it may pledge assets to secure the Nortel facility and
receive a lower interest rate. Carrier1 may not borrow additional funds under
the Nortel facility after December 31, 2000. Advances are to be repaid in
sixteen equal
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quarterly installments beginning March 31, 2001. As of September 30, 1999,
Carrier1 had not drawn any amounts under the Nortel facility.
As of September 30, 1999, Carrier1 had total current assets of $149.9
million, of which $33.2 million was escrowed interest on the Notes issued in the
Offering and $41.6 million of which was allocated to the construction cost of
the German network. Net unrestricted cash as of the same date was $13.9 million.
EBITDA, which Carrier1 defines as earnings before interest, taxes,
depreciation, amortization, foreign currency exchange gains or losses and other
income (expense), decreased from negative $5.3 million in the second quarter of
1999 to negative $9.5 million in the third quarter of 1999. EBITDA is used by
management and certain investors as an indicator of a company's historical
ability to service debt. Management believes that EBITDA is an indicator of
ability to service existing debt, to sustain potential future increases in debt
and to satisfy capital requirements. However, EBITDA is not a measure of
financial performance under generally accepted accounting principles and should
not be considered as an alternative to cash flows from operating, investing or
financing activities as a measure of liquidity or an alternative to net income
as indications of Carrier1's operating performance or any other measure of
performance derived under generally accepted accounting principles. EBITDA as
used in this report may not be comparable to other similarly titled measures of
other companies or to Consolidated EBITDA as calculated under the indentures
pursuant to which the Notes were issued.
FOREIGN CURRENCY
Carrier1's reporting currency is the U.S. dollar, and interest and
principal payments on its Notes will be in U.S. dollars and Euro. However, the
majority of Carrier1's revenues and operating costs are derived from sales and
operations outside the United States and are incurred in a number of different
currencies. Accordingly, fluctuations in currency exchange rates may have a
significant effect on Carrier1's results of operations and balance sheet data.
The Euro has eliminated exchange rate fluctuations among the 11 participating
European Union member states. Adoption of the Euro has therefore reduced the
degree of intra-Western European currency fluctuations to which Carrier1 is
subject. Carrier1 will, however, continue to incur revenues and operating costs
in non-Euro denominated currencies, such as pounds sterling. Although Carrier1
does not currently engage in exchange rate hedging strategies, it may attempt to
limit foreign exchange exposure by purchasing forward foreign exchange contracts
or engaging in other similar hedging strategies. Carrier1 has outstanding one
contract to purchase Deutschemarks in exchange for dollars from time to time in
amounts anticipated to satisfy its Deutschemark-denominated obligations under
its German network arrangements. Any reversion from the Euro currency system to
a system of individual country floating currencies could subject Carrier1 to
increased currency exchange risk. Carrier1 has selected its computer and
operational systems in an attempt to ensure that its ability to transact
business will not be impaired by complications resulting from the introduction
of the Euro. While Carrier1 believes that its systems have not been adversely
impacted by the Euro conversion, there can be no assurance that Carrier1 will be
able to avoid the accounting, billing and logistical difficulties that might
result from the introduction of the Euro. In addition, there can be no assurance
that Carrier1's third-party suppliers and customers will be able to successfully
implement the necessary protocols.
INFLATION
Carrier1 does not believe that inflation will have a material effect on
its results of operations.
NEW ACCOUNTING PRONOUNCEMENT
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In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." This statement establishes accounting and reporting
standards for derivative instruments embedded in other contracts (collectively
referred to as derivatives) and for hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. If
certain conditions are met, a derivative may be specifically designated as (a) a
hedge of the exposure to changes in the fair value of a recognized asset or
liability or an unrecognized firm commitment, (b) a hedge of the exposure to
variable cash flows of a forecasted transaction, or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an unrecognized
firm commitment, an available-for-sale security, or a
foreign-currency-denominated forecasted transaction. This standard is effective
for Carrier1's fiscal year ending December 31, 2000. Management has not yet
completed its analysis of this new accounting standard and, therefore, has not
determined whether this standard will have a material effect on Carrier1's
financial statements.
IMPACT OF YEAR 2000
"Year 2000" generally refers to the various problems that may result from
the improper processing of dates and date-sensitive calculations by computers
and other equipment as a result of computer hardware and software using two
digits, rather than four digits, to define the applicable year. If a computer
program or other piece of equipment fails to properly process dates including
and after the Year 2000, date-sensitive calculations may be inaccurate or a
major system failure may occur. Any such miscalculations or system failures may
cause disruptions in operations including, among other things, a temporary
inability to process transactions, send invoices or engage in other routine
business activities. A failure of Carrier1's computer systems could have a
material adverse effect on its operations, including its ability to make
payments on the notes.
STATE OF READINESS
As Carrier1 has developed and implemented its network, operational support
systems, and computer systems, it has conducted an evaluation for Year 2000
compliance. Based on such evaluation, Carrier1 believes that its critical
information technology ("IT") systems and its non-IT systems, such as its
network transmission equipment and its Nortel and Cisco network operating
systems, are Year 2000 compliant. In addition, Carrier1 has received written
assurances from Cisco, Nortel, and International Computers Limited (a
significant software supplier) that the systems they have provided Carrier1 are
Year 2000 compliant. Carrier1, therefore, does not expect to have to remedy any
of its IT or non-IT systems to be Year 2000 compliant.
Carrier1 has instituted a Year 2000 project team with responsibility for the
Company's efforts to protect Carrier1 and its customers from Year 2000 issues
and the other potential problem dates in that year. The Year 2000 project team
includes members of the network and voice switches, IP network services, IT,
building services, corporate network, customer care and legal departments.
Throughout 1999, this Year 2000 team has worked together with all suppliers of
IT, network equipment, access and building control and power backup systems and
equipment and software in an effort to assure Year 2000 compliance. By September
30, 1999, the Year 2000 team had completed its review of the Company's voice and
data networks, voice management systems, switch and router location sites power
backup, billing systems and critical internal IT systems and believes these
networks and systems are Year 2000 compliant. Non-critical IT systems are
believed to be approximately 99% Year 2000 compliant.
Carrier1 has contacted its principal service or capacity suppliers and
customers, with a view towards evaluating these parties' efforts to prepare for
the Year 2000 and the degree of its corresponding exposure if such efforts are
inadequate. Carrier1 has received responses from 70% of these capacity suppliers
and customers. Carrier1 is in the process of evaluating these responses.
Carrier1 intends to follow up with suppliers and customers who have not yet
responded.
RISKS OF YEAR 2000 ISSUES
Any failure of the computer systems of Carrier1's vendors, service or
capacity suppliers or customers as a result of not being Year 2000 compliant
could materially and adversely affect Carrier1. For example, in the event of a
failure as a result of Year 2000 issues in any systems of third parties with
whom Carrier1 interacts, the Company could experience disruptions in portions of
its network, lose or have trouble accessing or receive inaccurate third party
data, experience internal and external communications difficulties, or have
difficulty obtaining components that are Year 2000 compliant from its vendors.
Any of these occurrences could adversely affect Carrier1's ability to operate
its network and retain customers. In addition, the Company could also experience
a slowdown or reduction of sales if customers are adversely affected by Year
2000 issues. As noted above, Carrier1 has
21
<PAGE>
contacted its service or capacity suppliers and customers and is in the process
of evaluating Carrier1's risks associated with their noncompliance. As Carrier1
has not yet received responses from all of its suppliers and customers, there
can be no assurance as to Carrier1's degree of exposure to Year 2000-related
problems.
CONTINGENCY PLANS AND COSTS TO ADDRESS YEAR 2000 ISSUES
Based on Year 2000 compliance information it has received from suppliers
and customers Carrier1 has developed a contingency plan to assess the likelihood
of and address worst-case scenarios, to deal with potential Year 2000 problems
caused by a failure of its vendors, service or capacity suppliers or customers
to be Year 2000 compliant. This contingency plan is currently being reviewed by
management. There can be no assurance this plan will not need to be revised or
replaced as Carrier1 continues to receive and review responses regarding Year
2000 compliance from its suppliers and customers.
Carrier1 has not incurred any significant costs associated with Year 2000
compliance and does not anticipate incurring significant costs in the future.
Carrier1 may, however, have to bear costs and expenses in connection with the
failure of its vendors, suppliers or customers to be Year 2000 compliant on a
timely basis. Because no material Year 2000 issues have yet been identified in
connection with external sources, Carrier1 cannot reasonably estimate costs
which may be required for remediation or for implementation of contingency
plans.
RECENT DEVELOPMENTS
During the fourth quarter, Carrier1 entered into a memorandum of understanding
for a joint venture to build carrier co-location-facilities, or "carrier
hotels," in major markets throughout Europe. Carrier1 has committed $23.4
million to a $155 million project to develop full-service carrier hotels
providing bandwidth-intensive internet and telecom customers co-location
services. Other partners in the venture are expected to include affiliates of
U.S.-based investment firms, Providence Equity Partners Inc. and Carlyle Group,
as well as European network operator iaxis BV. Carrier1 and iaxis also are
expected to serve as strategic anchor tenants in these facilities, which are
expected to be connected to Carrier1's network. A fund managed by Providence
Equity Partners Inc. indirectly holds a majority of Carrier 1's outstanding
common stock.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Because substantially all of Carrier1's outstanding debt at September 30,
1999 is fixed-rate debt, a change in market interest rates would not have a
material effect on Carrier1's earnings, cash flows or financial condition.
Carrier1 is exposed to market risk from changes in foreign currency exchange
rates. As of September 30, 1999, Carrier1 does not have a position in futures,
forwards, swaps, options or other derivative financial instruments with similar
characteristics to manage the risk arising from these exposures. Carrier1's
market risk exposure exists from changes in foreign currency exchange rates
associated with its non-derivative financial instruments and with transactions
in currencies other than local currencies in which it operates.
Carrier1 has foreign currency exposures related to purchasing and selling
in currencies other than the local currencies in which it operates. Carrier1's
most significant foreign currency exposures relate to Western European countries
(primarily Germany, Switzerland, and the United Kingdom) where its principle
operations exist. However, the introduction of the euro has significantly
reduced the degree of intra Western European currency fluctuations to which
Carrier1 is subject as of September 30, 1999 (other than fluctuations in
currencies that were not converted to euros, such as the British pound and the
Swiss franc). Additionally, Carrier1 is exposed to cash flow risk related to
debt obligations denominated in foreign currencies.
The table below presents principal cash flows and related average interest
rates for Carrier1's obligations by expected maturity dates as of September 30,
1999. The information is presented in U.S. dollar equivalents, Carrier1's
reporting currency, using the exchange rate at September 30, 1999. the actual
cash flows are payable in either U.S. dollars (US$) or euro (EURO), as indicated
in the parentheses. Average variable interest rates are based on Carrier1's
borrowing rate as of September 30, 1999. Fair value of the dollar and euro notes
was estimated based on quoted market prices. Fair value for all other debt
obligations was estimated using discounted cash flows analyses, based on
Carrier1's borrowing rate as of September 30, 1999.
<TABLE>
<CAPTION>
(IN THOUSANDS)
EXPECTED MATURITY There Fair
DATE 1999 2000 2001 2002 2003 after Total Value
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notes Payable:
Fixed Rate (EURO) . $ 90,458 $ 90,458 $ 94,171
Interest Rate ..... 13.25% 13.25%
Fixed Rate (US$) .. $160,000 $160,000 $158,738
Interest Rate ..... 13.25% 13.25%
Fixed Rate (US$) .. $ 1,013 $ 3,038 $ 3,038 $ 760 $ 7,849 $ 6,351
Fixed Rate ........ 9.7% 9.7% 9.7% 9.7%
Variable Rate (US$) $ 4,240 $ 4,240 $ 4,239 $ 12,719 $ 8,806
Interest Rate ..... 9.7% 9.7% 9.7%
</TABLE>
22
<PAGE>
The cash flows in the table above are presented in accordance with the
maturity dates defined in the debt obligations. However, the dollar and euro
notes provide for early redemption at specified dates in stated principal
amounts, plus accrued interest. Carrier1 has not determined if these debt
obligations will be redeemed at the specified early redemption dates and
amounts. Carrier1 may elect to redeem these debt obligations early at a future
date. Cash flows associated with the early redemption of these debt obligations
are not assumed in the table above. Should Carrier1 elect to redeem these debt
obligations earlier than the required maturities, the cash flow amounts in the
table above could change significantly.
23
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Carrier1 may, from time to time, be a party to litigation that arises in
the normal course of its business operations. Carrier1 is not presently a party
to any such litigation that Carrier1 believes would reasonably be expected to
have a material adverse effect on its business or results of operation.
Item 6. Exhibits and Reports on Form 8-K
Exhibits:
3.1 Articles of Incorporation of Carrier1 International S.A.
27.1 Financial Data Schedule
Reports on Form 8-K
None
24
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Carrier1 International S.A.
Date November 15, 1999 By: /s/ Joachim W. Bauer
Name: Joachim W. Bauer
Title: Chief Financial Officer
Date November 15, 1999 /s/ Joachim W. Bauer
------------------------------------------
Name: Joachim W. Bauer
Title: Chief Financial Officer
(Principal Financial Officer and Principal
Accounting Officer)
25
<PAGE>
Exhibit Index
3.1 Articles of Incorporation of Carrier1 International S.A.
27.1 Financial Data Schedule
26
Exhibit 3.1
STATUTS COORDONNES
------------------
CARRIER 1 INTERNATIONAL S.A.
Societe anonyme
Siege social; Strassen
R.C. Luxembourg B 65864
-------------------------------------------------------------------------
constituee suivant acte dresse par le notaire Gerard LECUIT, de residence
a Hesperange, en date du 13 aout 1998, publie au Memorial Recueil Special
C numero 783 du 28 octobre 1998,
les statuts ont ete modifies a plusieurs reprises et pour la derniere fois
suivant acte dresse par ledit notaire Gerard LECUIT, en date du 15 juin
1999,
et suivant acte dresse par ledit notaire Gerard LECUIT, en date du 5
juillet 1999,
/s/ GERARD LECUIT
-----------------
[Notary Seal]
Gerard LECUIT, Notaire
HESPERANGE
<PAGE>
TITLE I.- DENOMINATION, REGISTERED OFFICE, OBJECT, DURATION,
ARTICLE 1
There is established hereby a societe anonyme under the name of
CARRIER 1 INTERNATIONAL S.A.
ARTICLE 2
The registered office of the corporation is established in Strassen.
The registered office may be transferred to any other place in the
municipality by a decision of the board of directors.
If extraordinary political or economic events occur or are imminent,
which might interfere with the normal activities of the registered office,
or with easy communication between the registered office and abroad, the
registered office shall be declared to have been transferred abroad
provisionally, until the complete cessation of such extraordinary events.
Such provisional transfer, shall have no effect on the nationality of the
corporation. Such declaration of the transfer of the registered office
shall be made and brought to the attention of third parties by the organ
of the corporation which is best situated for this purpose under such
circumstances.
ARTICLE 3
The corporation is established for an unlimited period.
ARTICLE 4
The corporation may take any action permitted by the laws of
Luxembourg for commercial companies and in particular, may carry out all
transactions pertaining directly or indirectly to the acquiring of
participating interests in any enterprises, in whatever form, having
activities directly or indirectly related to the field of
telecommunications, and the administration, management, control, and
development of those participating interests.
In particular, the corporation may use its funds for the
establishment, management, development and disposal of a portfolio
consisting of any securities and patents of whatever origin, having a
direct or indirect relationship to the field of telecommunications and
participate in the creation, development and control of any enterprise,
the acquisition, by way of investment, subscription, underwriting or
option, of securities and patents, the realisation thereof by way of sale,
transfer, exchange or otherwise, the development of such securities and
patents, and the granting to other companies or enterprises of any
support, loans, advances or guarantees.
<PAGE>
The corporation may also carry out any commercial, industrial, or
financial operations, any transactions in respect of real estate or
moveable property, which the corporation may deem useful to the
accomplishment of its purposes. This shall include without limitation the
ability to issue warrants, bonds and notes and other financial
instruments, and to borrow funds from financial institutions and other
third parties.
TITLE II.- CAPITAL, SHARES
ARTICLE 5
The subscribed capital of the corporation is fixed at SIXTY-TWO
MILLION THIRTY-EIGHT THOUSAND ONE HUNDRED AND FORTY-TWO UNITED STATES
DOLLARS (62.038.142.-USD) represented by THIRTY-ONE MILLION NINETEEN
THOUSAND SEVENTY-ONE (31.019.071) shares with a par value of TWO UNITED
STATES DOLLARS (2.- USD) each.
The authorized capital of the corporation is fixed at HUNDRED TEN
MILLION UNITED STATES DOLLARS (110,000,000.- USD) to be divided into FIFTY
FIVE MILLION SHARES (55,000,000) shares with a par value of TWO UNITED
STATES DOLLARS (2.- USD) each. A maximum of FOUR MILLION FOUR HUNDRED
FORTY FOUR THOUSAND FOUR HUNDRED FORTY FOUR UNITED STATES DOLLARS
(4,444,444.-USD) (not counting any additional options granted to Thomas
Wynne or Victor Pelson ) are reserved to the holders of options issued
under the 1999 Share Option Plan approved by the board of directors on
January 15, 1999 and a maximum of EIGHT MILLION UNITED STATES DOLLARS
(8,000,000.- USD) are reserved for the holders of warrants issued as part
of an issuance by the corporation at 1) USD Units, each USD Unit
consisting of one dollar note due 2009 and one warrant to purchase shares
of common stock of the corporation and/or 2) EuroUnits, each Euro Unit
consisting of one euro note due 2009 and one warrant to purchase shares of
common stock of the corporation, in each case as determined by the board
of directors or its designee(s).
Subject to what is stated above with respect to the authorized
capital reserved to the holders of options and/or warrants, the authorized
and subscribed capital of the corporation may be increased or reduced by a
decision of the general meeting of shareholders, voting with the same
quorum as for an amendment of the articles of incorporation.
The board of directors is hereby authorized to issue further shares
with or without issuance premium so as to bring the total capital of the
corporation up to the total authorized capital in whole or in part from
time to time as it in its discretion may determine and to accept
subscriptions for such shares within a period such
<PAGE>
as determined by article 32(5) of the Company Act of August 10, 1915, as
amended.
The board of directors is specifically authorized to make such
issues without reserving for the then existing shareholders a preferential
or pre-emptive right to subscribe for the shares to be issued.
The board of directors may delegate to any duly authorized person,
the duty of accepting subscriptions, receiving payment for shares
representing part or all of such increased amounts of capital, issuing
shares and carrying out all such acts and things as are necessary to
document the increase in capital and, in particular, to amend in the
legally required notarial form, the present article to reflect the capital
increase.
Shares may be evidenced at the owners option, in certificates
representing single shares or in certificates representing two or more
shares.
Shares may be issued in registered or bearer form, at the
shareholder's option, unless transfer restrictions or other restrictions
otherwise require.
The corporation may refuse to approve a transfer of shares if it
determines that such transfer would be in violation of an existing
restriction on the transfer of shares which has been brought to its
attention (it being understood that such a refusal must not result in a
situation where a shareholder of the corporation who wishes to sell his
shares to a party who has made a bona fide offer to purchase such shares
is forced to continue holding such shares for an extended period of time)
and shall notify the grounds for its refusal to the shareholder seeking to
effect the transfer.
The board of directors may delegate to any committee formed by the
board of directors the responsibility for approving or refusing to approve
proposed share transfers as contemplated by the preceding paragraph of
this article 5.
The corporation may, to the extent and under the terms permitted by
law, purchase its own shares.
Moreover, the board of directors is authorized to issue ordinary or
convertible bonds and notes, in registered or bearer form, with any
denomination and payable in any currencies. Any issue of convertible bonds
and notes may only be made within the limits of the authorized capital.
The board of directors shall determine the nature, the price, the
interest rate, the conditions of issue and reimbursement and any other
conditions which may be related to such bond or note issue.
If the corporation issues bonds or notes in registered form, a
ledger of the registered bondholders will be held at the registered office
of the corporation, or at such other place as the board of directors shall
designate for this purpose.
<PAGE>
Within the limits of the authorized capital set forth above, the
board of directors is also authorized to issue warrants giving to each
warrant holder a right to subscribe for one or more shares (or for a
fraction of a share, it being understood that the corporation shall in no
event be obligated to issue any fractional shares), without reserving to
the existing shareholders a preferential right to acquire the warrants or
to subscribe to shares upon the exercise of the warrants. The board of
directors is authorized to determine the conditions under which the
warrants will be issued, including without limitation the subscription
price to be paid for the shares upon the exercise of the warrants, subject
to article 26-5 (1) of the law on commercial companies, as well as the
price to be paid in consideration of the warrant, if any. The board of
directors may subject the exercise of the warrants to such conditions as
it in its discretion may determine, including restrictions, if any, as to
the disposal of the shares issued upon the exercise of the warrants.
TITLE III.- MANAGEMENT
ARTICLE 6
The corporation shall be managed by a board of directors composed of
at least three members, either shareholders or not. Each director shall be
appointed for a term not exceeding six years, by a general meeting of
shareholders. Each director may be reelected and may be removed at any
time by a general meeting of shareholders.
The number of directors and their term of office shall be fixed by a
general meeting of shareholders.
In the event of a vacancy on the board of directors, the remaining
directors have the right to appoint a new director to fill the vacancy,
which appointment must be ratified by the next general meeting.
ARTICLE 7
The board of directors shall elect from among its members a
chairman.
A meeting of the board of directors shall be convened at any time
upon call by the chairman or at the request of not less than two
directors.
The board of directors may validly deliberate and act only if the
majority of its members are present or represented. A proxy between
directors, is permitted provided that a director may represent only one of
his colleagues at a given board meeting. A director shall be considered
present at a board meeting if he participates in the meeting by conference
call. Directors may cast their vote on the points of the agenda by letter,
telegram, telex or telefax. Resolutions in writing approved and signed by
all directors shall have the same
<PAGE>
effect as resolutions voted at the directors' meetings.
Resolutions shall require a majority vote.
In case of a tie, the chairman has a casting vote.
ARTICLE 8
The board of directors shall have the broadest powers to perform all
acts of administration and disposition in compliance with the corporate
object stated in Article 4 hereof.
All powers not expressly reserved by law or by the present articles
of association to a general meeting of shareholders, shall fall within the
competence of the board of directors.
The board of directors may pay interim dividends in compliance with
the legal requirements.
ARTICLE 9
The corporation shall be bound in all circumstances by the joint
signature of two directors or by the sole signature of the managing
director, if any, and by the signature of individual(s) who have received
a delegation of powers or proxy given by the board of directors pursuant
to Article 10 hereof.
ARTICLE 10
The board of directors may delegate its powers for the conduct of
the daily management of the corporation, to one or more directors, who
will be called managing directors.
The board of directors may also commit the management of all or part
of the affairs of the corporation, to one or more managers, and give
special powers for determined matters to one or more proxyholders. Such
proxyholder or manager shall not be required to be a director or a
shareholder.
Delegation to a member of the board of directors is subject to a
prior authorization of the general meeting.
The board of directors may designate one or more committees.
Each committee designated by the board of directors shall consist of
such number of directors as from time to time may by fixed by the board of
directors and may include individuals who are not directors. The board of
directors may also designate one or more directors as alternate members of
any such committee, who may replace any absent or disqualified member or
members at any meeting of such committee. Thereafter, members (and
alternate members, if any) of each such committee may be designated by the
board of directors. Any such committee may be abolished or re-designated
from time to time by the board of directors. Each member (and each
alternate member) of any such committee shall hold office until his or her
<PAGE>
successor shall have been designated or until his or her earlier death,
resignation or removal.
Any committee formed by the board of directors, except as otherwise
provided in this article, shall have and may exercise such powers of the
board of directors as may be provided by resolution of the board of
directors.
No committee formed by the board of directors shall have the power
or authority:
a) to approve or adopt any action or matter expressly required by the
applicable laws of the Grand-Duchy of Luxembourg to be submitted to the
stockholders for approval; or
b) adopt, amend or repeal any provision of the articles of association of
the corporation, subject to what is stated under article 5.
Each such committee may fix its own rules of procedure and may meet
at such place (within or outside the Grand-Duchy of Luxembourg), at such
time and upon such notice, if any, as it shall determine from time to
time. Each such committee may keep minutes of its proceedings and shall
report such proceedings to the board of directors at the meeting of the
board of directors next following any such proceedings.
Except as may be otherwise provided in the resolution creating such
committee, at all meetings of any committee the presence of members (or
alternate members) constituting a majority of the total membership of such
committee shall constitute a quorum for the transaction of business. The
act of the majority of the members present at any meeting at which a
quorum is present shall be the act of such committee. Any action required
or permitted to be taken at any meeting of any such committee may be taken
without a meeting, if all members of such committee shall consent to such
action in writing and such writing or writings are filed with the minutes
of the proceedings of the committee. The members of any such committee
shall act only as a committee, and the individual members of such
committee shall have no power as such.
Members of any committee designated by the board of directors may
participate in a meeting of such committee by means of conference
telephone or similar communications equipment by means of which all
persons participating in the meeting can hear each other, and
participation in a meeting pursuant to this provision shall constitute
presence in person at such meeting.
In the event of the absence or disqualification of a member of any
committee, the member or members thereof present at any meeting and not
disqualified from voting, whether or not he, she or they constitute a
quorum, may unanimously appoint another member of the board of directors
to act at the meeting in the place of any such absent or disqualified
member.
<PAGE>
Any member (and any alternate member) of any committee may resign at
any time by delivering a written notice of resignation, signed by such
member, the chairman of the board of directors. Unless otherwise specified
therein, such resignation shall take effect upon delivery.
Any member (and any alternate member) of any committee may be
removed from his of her position as a member (or alternate member, as the
case may be) of such committee at any time, either for or without cause,
by resolution adopted by a majority of the whole board of directors.
If any vacancy shall occur in any committee, by reason of
disqualification, death, resignation, removal or otherwise, the remaining
members (and any alternate members) shall continue to act, and any such
vacancy may be filled by the board of directors.
ARTICLE 11
The Company shall indemnify any director, any member of any
committee designated by the board of directors and any fonde de pouvoir
and his or her heirs, executors and administrators, against expenses
(including attorney's fees) judgments and fines in connection with any
action, suit or proceeding or appeal therefrom, to which he or she may be
made a party by reason of his or her being or having been a director or a
member of any committee designated by the board of directors or a fonde de
pouvoir of the Company, or, at the request of the Company, of any other
company, partnership, joint venture, trust or other enterprise in which
the Company holds a direct or indirect ownership interest or of which the
Company is a direct or indirect creditor and by which he or she is not
entitled to be indemnified, provided that he or she acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect to any criminal
action or proceeding had no reasonable cause to believe his or her conduct
was unlawful; and in the event of a settlement, such indemnification shall
be provided for all expenses incurred and amounts paid in connection with
such settlement unless the Company is advised by its legal counsel that
the person to be indemnified did not meet the above indicated standard of
conduct; except that in the case of an action or suit brought by the
Company against such a director, committee member or fonde de pouvoir to
procure a judgment in favor of the Company (1) such indemnification shall
be limited to expenses (including attorneys' fees) actually and reasonably
incurred by such person in the defence or settlement of such action or
suit, and (2) notwithstanding any other provisions hereof, no
indemnification shall be made in respect of any
<PAGE>
claim, issue or matter as to which such person shall have been adjudged to
be liable to the Company unless and only to the extent that the Luxembourg
Courts or the courts in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but
in view of all the circumstances of the case, such person is fairly and
reasonably entitled to indemnity for such costs and expenses as the
Luxembourg Court or such other court may deem legal and proper.
The Company may purchase and maintain insurance on behalf of any
person who is or has agreed to become a director, committee member or
fonde de pouvoir of the Company, or is or was serving at the request of
the Company in any equivalent position in any such other company,
partnership, joint venture, trust or other enterprise, against any
liability asserted against him and incurred by him or on his behalf in any
such capacity, or arising out of his status as such, whether or not the
Company would have the power to indemnify him against such liability under
the provisions of this article, provided that such insurance is available
on acceptable terms, which determination shall be made by a vote of a
majority of the entire board of directors.
If this article or any portion hereof shall be invalidated on any
ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify each such directors, committee member or fonde de
pouvoir and may indemnify each employee or agent of the Company as to
costs, charges and expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement with respect to any action, suit or
proceeding, whether civil, criminal, administrative or investigative,
including an action by or in the right of the Company, to the fullest
extent permitted by any applicable portion of this article that shall not
have been invalidated and to the fullest extent.
Subject to the applicable provisions of Luxembourg law and in
particular Section 59 of the Luxembourg Law on Commercial Companies, no
director, committee member or fonde de pouvoir of the Company shall be
liable to the Company or its stockholders for his actions or omissions
when performing his duties as a director, committee member or fonde de
pouvoir, provided that nothing contained in these articles of association
shall eliminate or limit the liability of a director, committee member or
fonde de pouvoir (i) for any breach of his duty of loyalty to the Company
or its stockholders, (ii) for acts or omissions not in good faith or which
involves intentional misconduct or a knowing violation of the law, or
(iii) for any transaction from which the director derived an improper
personal benefit.
<PAGE>
ARTICLE 12
Any litigation involving the corporation either as plaintiff or as
defendant, will be handled in the name of the corporation by the board of
directors, represented by its chairman or by a director delegated for such
purpose.
TITLE IV.- SUPERVISION
ARTICLE 13
The corporation shall be supervised by one or more statutory
auditors, appointed by a general meeting of shareholders which shall fix
their number, remuneration, and their term of office, such office not to
exceed six years.
They may be reelected and removed at any time.
TITLE V. - GENERAL MEETING
ARTICLE 14
The annual general meeting of shareholders will be held in the
commune of the registered office at the place specified in the convening
notices on the second Tuesday of June at 11.00 a.m. and the first time in
the year 2000. If such day is a legal holiday, the annual general meeting
will be held on the next following business day.
The board of directors or the statuory auditor may convene other
shareholders' meetings each time the interests of the company so require.
Such meetings must be convened each time shareholders representing at
least one fifth of the subscribed capital request it by writing with an
indication of the agenda. Each share gives the right to one vote.
If all the shareholders are present or represented and if they
declare that they have had knowledge of the agenda, the general meeting
may take place without previous convening notices.
TITLE VI. - ACCOUNTING YEAR, ALLOCATION OF PROFITS
ARTICLE 15
The accounting year of the corporation shall begin on the 1st of
January and shall terminate on the 31st of December of each year, with the
exception of the first accounting year, which shall begin on the date of
the formation of the corporation and shall terminate on the 31st of
December 1999.
ARTICLE 16
After deduction of any and all expenses and amortizations of the
corporation, the credit balance represents the net profits of the
corporation. Of such net profit, five percent (5%) shall be appropriated
for the compulsory legal reserve. Such appropriation shall cease to be
compulsory when the legal reserve amounts to ten percent (l0%) of the
capital of the corporation, but must be resumed until the reserve is
entirely reconstituted if, at any time and for whatever
<PAGE>
reason, the legal reserve has fallen below the required ten percent of the
capital of the corporation (10%).
The balance of the net profit is at the disposal of the general
meeting.
TITLE VII. - DISSOLUTION, LIQUIDATION
ARTICLE 17.
The corporation may be dissolved by a resolution of the general
meeting of shareholders. The liquidation will be carried out by one or
more liquidators, appointed by the general meeting of shareholders which
will specify their powers and fix their remuneration.
TITLE VIII.- GENERAL PROVISIONS
ARTICLE 18
All matters not governed by these articles of association are to be
construed in accordance with the law of August 10th 1915 on commercial
companies and the amendments thereto.
SUIT LA TRADUCTION FRANCAISE DU TEXTE QUI PRECEDE:
--------------------------------------------------
TITRE IER: DENOMINATION, SIEGE SOCIAL, OBJET, DUREE ARTICLE 1ER
Il est forme une societe anonyme sous la denomination de CARRIER 1
INTERNATIONAL S.A.
ARTICLE 2
Le siege de la societe est etabli a Strassen. Il pourra etre
transfere dans tout autre lieu de la commune par simple decision du
conseil d'administration.
Au cas ou des evenements extraordinaires d'ordre politique ou
economique, de nature a compromettre l'activite normale au siege social ou
la communication aisee de ce siege avec l'etranger se produiront ou seront
imminents, le siege social pourra etre declare transfere provisoirement a
l'etranger, jusqu'a cessation complete de ces circonstances anormales. Une
telle decision n'aura d'effet sur la nationalite de la societe. La
declaration de transfert du siege sera faite et portee a la connaissance
des tiers par l'organe de la societe qui se trouvera le mieux place a cet
effet dans les circonstances donnees.
ARTICLE 3
La societe est constituee pour une duree illimitee.
ARTICLE 4
La societe peut entreprendre toutes operations permises par les lois
luxembourgeoises relatives au societes commerciales et en particulier,
elle peut
<PAGE>
effectuer toutes transactions ayant un rapport direct ou indirect avec la
prise de participations dans toute entreprise, sous quelque forme que ce
soit, exercant des activites en relation avec le domaine des
telecommunications et l'administration, la gestion, le controle, et le
developpement de ces prises de participations.
Elle pourra notamment employer ses fonds a la creation, a la
gestion, a la mise en valeur et a la liquidation d'un portefeuille se
composant de tous titres et brevets de toute origine, participer a la
creation, au developpement et au controle de toute entreprise, acquerir
par voie d'apport, de souscription, de prise ferme ou d'option d'achat et
de toute autre maniere, tous titres et brevets, les realiser par voie de
vente, de cession, d'echange ou autrement, faire mettre en valeur ces
affaires et brevets et accorder aux societes auxquelles elle s'interesse
tous concours, prets, avances ou garanties.
La societe pourra egalement entreprendre toutes operations
commerciales, industrielles ou financieres, toutes transactions en rapport
avec la propriete immobiliere ou mobiliere, qu'elle estimerait utile a la
realisation de son objet. Ceci comprendra sans limitation la possibilite
d'emettre des warrants, des obligations et d'autres instruments financiers
et emprunter des fonds a des institutions financieres et a d'autres
tierces parties.
TITRE II: CAPITAL, ACTIONS
ARTICLE 5
Le capital social est fixe a SOIXANTE-DEUX MILLIONS TRENTE-HUIT
MILLE CENT QUARANTE-DEUX DOLLARS DES ETATS-UNIS (62.038.142.-USD)
represente par TRENTE-ET-UN MILLIONS DIX-NEUF MILLE SOIXANTE-ET-ONZE
(31.019.071) actions d'une valeur nominale de DEUX DOLLARS DES ETATS-UNIS
(2.-USD) chacune.
Le capital autorise de la societe est fixe a CENT-DIX MILLIONS
DOLLARS DES ETATS UNIS (110,000,000,-USD) a diviser on CINQUANTE-CINQ
MILLIONS (55.000.000.) d'actions ayant une valeur nominale de DEUX DOLLARS
DES ETATS UNIS (2.-USD) chacune. Un maximum de QUATRE MILLIONS QUATRE-CENT
QUARANTE-QUATRE MILLE ET QUATRE-CENT QUARRANTE-QUATRE DOLLARS DES ETATS
UNIS (4,444,444,.-USD) (sans compter d'autres options additionnelles
offertes a Thomas Wynne ou Victor Pelson) sont reserves aux detenteurs
d'options emises sous le Share Option Plan de 1999, approuve par le
conseil d'administration a la date du 15 janvier 1999 et un maximum de
HUIT MILLIONS DE DOLLARS DES ETATS UNIS (8,000,000,-USD) sont reserves aux
detenteurs de warrants emis comme partie d'une emission de la societe de
1) USD Units, chaque USD Unit consistant en une note de un dollar venant
a echeance an 2009 et un warrant pour acquerir des actions ordinaires
<PAGE>
de la societe et/ou 2) des Euro Units, chaque Euro unit consistant en une
note de un euro venant a echeance en 2009 et un warrant pour acquerir des
actions ordinaires de la societe, dans chaque cas comme il sera determine
par le conseil d'administration ou son (ses) delegue(s).
Sous reserve de ce qui a ete dit plus haut, concernant le capital
social autorise reserve aux detenteurs d'options et/ou de warrants, le
capital social autorise et souscrit de la societe peut etre augmente ou
reduit par une decision de l'assemblee generale d'actionnaires, deliberant
aux conditions de quorum requis pour une modification du capital social.
Le conseil d'administration est par la presente autorise d'emettre
des actions supplementaires avec ou sans prime d'emission en vue de porter
le capital total de la societe au total du capital autorise en une fois ou
en plusieurs fois, tel qu'il le decide librement et d'accepter des
souscriptions pour ces actions endeans une periode determinee conformement
aux termes de l'article 32(5) de la loi sur les societes commerciales du
10 aout 1915, telle que modifiee.
Le conseil d'administration est autorise plus particulierement a
proceder a des emissions sans devoir reserver pour les actionnaires
existants un droit preferentiel ou un droit de preemption de souscrire les
actions qui vont etre emises.
Le conseil d'administration pourra deleguer a une quelconque
personne valablement autorisee, le pouvoir d'accepter les souscriptions,
de recevoir les paiements pour les actions representant une partie ou le
tout d'une telle augmentation de capital, d'emettre des actions et de
proceder a tous actes et actions necessaires pour documenter
l'augmentation de capital et, en particulier, de modifier le present
article pour refleter l'augmentation de capital, sous la forme notariee
telle que requise par la loi.
Les actions seront, a l'option du detenteur, exprimes en certificats
representant une seule action ou on des certificats representant deux ou
plusieurs actions.
Les actions seront emises, a l'option de l'actionnaire, comme
actions nominatives ou au porteur, sauf au cas ou des restrictions au
transfert ou d'autres restrictions requierent le contraire.
La societe pourra refuser d'approuver un transfert d'actions si elle
estime qu'un tel transfert est en violation d'une restriction existante
sur le transfert d'actions qui a ete portee a sa connaissance (etant
entendu que ce refus ne doit pas resulter en une situation ou un
actionnaire de la societe, qui veut vendre ses actions a une partie qui a
fait une offre de bonne foi d'acquerir
<PAGE>
ces actions, est force de garder ces actions pour une periode prolongee)
et elle notifiera les raisons de son refus a l'actionnaire qui veut
proceder au transfert.
Le conseil d'administration pourra deleguer a tout comite etabli par
le conseil d'administration la responsabilite d'approuver ou de refuser
les transferts d'actions envisages conformement aux termes du paragraphe
precedent de cet article 5.
La societe pourra, dans la mesure de ce qui est permis par la loi,
acquerir ses propres actions.
De plus, le conseil d'administration est autorise d'emettre des
obligations ou notes ordinaires ou convertibles, nominatifs ou au porteur,
avec une denomination quelconque et payable en n'importe quelle devise.
Toute emission d'obligations et de notes convertibles pourra seulement
etre effectuee dans les limites du capital autorise.
Le conseil d'administration determinera la nature, le prix, le taux
d'interet, les conditions d'emission et le remboursement et toutes autres
conditions qui pourront le cas echeant etre en relation avec une telle
emission d'obligations ou de notes.
Si la societe emet des obligations ou des notes au porteur, un
registre des detenteurs d'obligations nominatives sera tenu au siege
social de la societe, ou a toute autre endroit que le conseil
d'administration determinera a cet effet.
Dans le cadre des limites du capital autorise, le conseil
d'administration est egalement autorise a emettre des warrants donnant a
chaque porteur le droit de souscrire une ou plusieurs actions (ou fraction
d'action, en etant sous-entendu que la societe ne sera aucunement obligee
d'emettre des fractions d'action), sans reserver aux actionnaires
existants un droit preferentiel d'acquerir des warrants ou de souscrire
des actions suite a l'exercice des warrants.
Le conseil d'administration est autorise a determiner les conditions
sous lesquelles les warrants seront emis, y inclus sans limitation le prix
de souscription a payer pour les actions suite a l'exercice des warrants,
sans prejudice de l'article 26-5 (1) de la Loi sur les Societes
Commerciales, ainsi que le prix a payer en consideration du warrant, si
applicable. Le conseil d'administration peut soumettre l'exercice des
warrants aux conditions qu'il determine librement, y inclus des
restrictions, si applicable, concernant la disposition des actions emises
suivant l'exercice des warrants.
TITRE III: ADMINISTRATION
ARTICLE 6
La societe est administree par un conseil compose de trois membres
au moins, associes ou non, nommes chacun pour un terme qui ne peut exceder
six
<PAGE>
annees, par l'assemblee generale des actionnaires. Chaque administrateur
peut etre reelu et revoque a tout moment par l'assemblee generale.
Le nombre des administrateurs et la duree de leur mandat sont fixes
par l'assemblee generale de la societe.
En cas de vacance au sein du conseil d'administration, les
administrateurs restants ont le droit de nommer un nouvel administrateur,
laquelle nomination devra etre ratifiee a la prochaine assemblee.
ARTICLE 7
Le conseil d'administration choisit parmi ses membres un president.
Le conseil d'administration se reunit a tout montent, sur la
convocation du president ou sur la demande de deux administrateurs.
Le conseil d'administration ne peut valablement deliberer et statuer
que si la majorite de ses membres est presente ou representee. Une
procuration entre administrateurs est permise etant entendu qu'un
administrateur ne peut representer qu'un de ses collegues lors d'une
reunion du conseil d'administration.
Un administrateur sera considere comme etant present a une reunion
du conseil s'il y participe par conference telephonique. Les
administrateurs peuvent emettre leurs votes sur les points a l'ordre du
jour par lettre, telegramme, telex ou fax.
Les resolutions par ecrit approuvees et signees par tous les
administrateurs auront le meme effet que les resolutions adoptees a une
reunion du conseil d'administration.
Les resolutions sont prises a la majorite des voix.
En cas de partage, le president a une voix preponderante.
ARTICLE 8
Le conseil d'administration est investi des pouvoirs les plus
etendus pour effectuer tous actes d'administration et de disposition qui
rentrent dans l'objet social conformement a l'article 4 ci- dessus.
Il a dans sa competence tous les actes qui ne sont pas reserves
expressement par la loi et les statuts a l'assemblee generale.
Le conseil d'administration est autorise a verser des acomptes sur
dividendes, aux conditions prevues par la loi.
ARTICLE 9
La societe est engagee en toutes circonstances par les signatures
conjointes de deux administrateurs, ou par la signature d'un
administrateur-delegue, s'il en est, et par la
<PAGE>
signature individuelle de la (des) personne (s) qui aura (auront) recu une
delegation de pouvoirs ou un mandat confere par le conseil
d'administration en vertu de l'article 10 des statuts.
ARTICLE 10
Le conseil d'administration peut deleguer la gestion journaliere, de
la societe a un ou plusieurs administrateurs qui prendront la denomination
d'administrateurs-delegues.
Le conseil d'administration peut aussi confier la direction de
l'ensemble ou de telle partie ou branche speciale des affaires sociales a
un ou plusieurs directeurs, et donner des pouvoirs speciaux pour des
affaires determinees a un ou plusieurs fondes de pouvoirs. Le fonde de
pouvoir ou le directeur ne doit pas etre necessairement un administrateur
ou un actionnaire.
La delegation a un membre du conseil d'administration est
subordonnee a l'autorisation prealable de l'assemblee generale.
Le conseil d'administration peut designer un ou plusieurs comites.
Chaque comite designe par le conseil d'administration comprendra
autant d'administrateurs que le conseil d'administration nommera, y
compris des personnes qui ne sont pas des administrateurs. Le conseil
d'administration peut egalement designer un ou plusieurs administrateurs
remplacants du comite, dont la fonction sera de remplacer des membres
absents ou disqualifies ou des membres a toute reunion du comite. Par la
suite, les membres (et les membres remplacants, le cas echeant) de chaque
comite peuvent etre designes par le conseil d'administration. Chaque
comite peut etre aboli ou re-designe de temps en temps par le conseil
d'administration. Chaque membre (et chaque membre remplacant) de chaque
comite sera en charge jusqu'a ce que son successeur ait ete designe ou
jusqu'a sa mort, sa resignation ou sa revocation, si tel evenement se
produisait a une date plus rapprochee.
Chaque comite forme par le conseil d'administration, sauf indication
contraire dans le present article, aura et exercera les pouvoirs du
conseil d'administration tel que prevu par les resolutions du conseil
d'administration.
Aucun comite forme par le conseil d'administration aura le pouvoir
ou l'autorite
a) d'approuver ou d'adopter une action ou affaire dont les lois
applicables du Grand-Duche de Luxembourg requierent expressement
l'approbation des actionnaires
b) d'adopter, de modifier ou d'abolir une disposition des statuts de la
societe, sans prejudice des disposition de l'article 5
Chaque comite peut fixer ses propres regles et pourra se reunir a
telle place (au Grand-Duche de
<PAGE>
Luxembourg ou a l'etranger) , a telle heure et, le cas echeant, selon
telle convocation qu'il pourra de temps en temps determiner. Chaque comite
pourra tenir des proces-verbaux des ses reunions et fera le rapport des
ses reunions au conseil d'administration lors de la reunion du conseil
d'administration suivante.
Sauf indication contraire dans les resolutions creant le comite, a
chaque reunion de chaque comite, la presence des membres (ou des membres
remplacants) constituant la majorite du total des membres de ce comite
sera constitutif d'un quorum. Les actes de la majorite des membres
presents a chaque reunion lors de laquelle un quorum est present seront
consideres comme etant ceux du comite. Toute action qui pourrait etre
prise lors d'une reunion d'un comite pourra etre prise sans reunion, si
tous les membres du comite consentissent a l'action prise par ecrit et
l'ecrit ou les ecrits sont deposes avec les proces-verbaux des ses
reunions du comite. Les membres de chaque comite agiront uniquement en
tant que comite et les membres individuels d'un comite n'ont pas de
pouvoir propre.
Les membres de tout comite designes par le conseil d'administration
pourront participer dans une reunion de ce comite par conference call ou
voie de communication similaire permettant a tous les personnes
participant dans la reunion de s'entendre, et la participation dans une
reunion suivant cette disposition constituera une presence en personne
dans cette reunion.
En cas d'absence ou de disqualification de tout membre de tout
comite, le membre ou les membres presents a la reunion et non disqualifies
de voter, independamment du fait si il, elle ou eux constituent un quorum,
pourra/ont a l'unanimite designer un autre membre du conseil
d'administration en vue d'agir lors de la reunion en lieu et place de la
personne absente ou disqualifiee.
Chaque membre (et chaque membre remplacent) de tout comite pourra
demissionner a tout moment en remettant une note ecrite de demission,
signee par le membre en question, au president du conseil
d'administration. Sauf indication contraire, la demission prendra effet
apres la remise de la note.
Chaque membre (et chaque membre remplacant) de tout comite pourra
etre revoque de sa position en tant que membre (ou membre remplacant, le
cas echeant) de tel comite a tout moment, avec ou sans cause, par le biais
d'une resolution prise a la majorite de l'entier conseil d'administration.
En cas de poste vacant au sein d'un comite, en raison d'une
disqualification, d'un deces, d'une demission, d'une revocation ou en
raison de toute autre cause, les membres restants (et tous les
<PAGE>
membres remplacants) continueront d'agir, et chaque poste vacant pourra
etre occupe par le conseil d'administration.
ARTICLE 11
La societe indemnisera tout administrateur, tout membre du comite
designe par le conseil d'administration et tout fonde de pouvoir et ses
heritiers, executeurs testamentaires et administrateurs de biens pour tous
frais (en ce inclus les frais d'avocats), condamnations et amendes
relatifs a des actions en justice, proces, poursuites judiciaires ou
procedures d'appel auxquelles il est partie en raison de ses fonctions
d'administrateur ou de membre de comite nomme par le conseil
d'administration ou par un fonde de pouvoir de la societe ou, a la demande
de la societe, de tout autre "partnership", "joint venture", "trust" ou
toute autre entite dans laquelle la societe possede une participation
directe ou indirecte ou pour laquelle la societe est creanciere directe
ou indirecte et par laquelle il n'est pas habilite a etre indemnise, a
condition qu'il ait agi de bonne foi et d'une maniere qu'il a consideree
raisonnablement comme etant ou n'etant pas opposee aux meilleurs interets
de la societe et, s'agissant de poursuites penales, qu'il n'ait pas eu de
motif raisonnable de croire que sa conduite etait illegale; en cas
d'arrangement transactionnel, une telle indemnisation sera fournie pour
toutes depenses occasionnees ou sommes payees a l'occasion d'un tel
arrangement, sauf si la societe est informee par son conseil juridique que
la personne a indemniser ne s'est pas conformee aux principes de conduite
decrits ci-dessus. A l'exception de l'hypothese ou une action en justice
ou un proces serait engage par la societe contre un tel administrateur,
membre de comite ou fonde de pouvoir tendant a obtenir un jugement en
faveur de la societe, (1) une telle indemnite sera limitee aux frais (en
ce inclus les frais d'avocats) reellement et raisonnablement occasionnes
par une telle personne pour sa defense ou pour un accord transactionnel
faisant suite a telle action en justice ou a un tel proces, et (2)
nonobstant toute autre disposition, aucune autre indemnite ne sera
octroyee en raison d'une requete, litige ou matiere pour lesquels cette
personne a ete reconnue responsable vis-a-vis de la societe a moins que,
et dans cette seule limite, les juridictions luxembourgeoises ou les
juridictions devant lesquelles ces procedures ou actions en justice ont
ete engagees ne decident que malgre la reconnaissance de sa responsabilite
mais eu egard a l'ensemble des circonstances de l'espece, cette personne a
honnetement et raisonnablement droit aux indemnites pour ces frais et
depenses que les
<PAGE>
juridictions luxembourgeoises ou toutes autres juridictions evalueront
souverainement. La societe pourra acheter et maintenir en vigueur une
assurance pour couvrir la responsabilite de toute personne qui est, a ete
ou a accepte de devenir administrateur, membre du comite ou fonde de
pouvoir de la societe, ou est ou a ete, a la demande de la societe, dans
une fonction equivalente au sein d'une autre societe, "partnership",
"joint venture", "trust" ou toute entite, contre toute responsabilite
alleguee contre elle et encourue par elle ou pour son compte a ce titre,
ou provenant de sa situation, que la societe ait ou non le pouvoir
d'indemniser cette personne contre une telle responsabilite aux termes du
present article, a la condition qu'une telle assurance soit disponible en
des termes acceptables, la decision concernant cette disponibilite devant
etre prise par un vote de la majorite de l'ensemble du conseil
d'administration.
Dans l'hypothese ou le present article ou une partie du present
article devait etre annulee pour quelque cause que ce soit par une
juridiction, la societe devra alors neanmoins indemniser l'administrateur,
membre de comite ou fonde de pouvoir, et pourra indemniser chaque employe
ou agent de la societe pour les couts, frais et depenses (en ce compris
les frais d'avocats), jugements, amendes et sommes payees au titre d'un
accord transactionnel occasionne par une action en justice civile,
criminelle, administrative ou faisant suite a une enquete, y compris une
action par ou au nom de la societe, dans les limites indiquees aux
dispositions du present article qui n'auraient pas ete annulees et dans
les limites de la loi applicable.
Sous reserve des dispositions de la loi luxembourgeoise et plus
particulierement de l'article 59 de la loi luxembourgeoise sur les
societes commerciales, aucun administrateur, membre de comite ou fonde de
pouvoir de la societe ne pourra etre tenu responsable vis-a-vis de la
societe ou de ses actionnaires pour ses actions ou omissions dans
l'exercice de ses fonctions d'administrateur, de membre de comite ou de
fonde de pouvoir, a condition qu'aucune disposition des presents statuts
ne supprime ou ne limite la responsabilite d'un administrateur, membre de
comite ou fonde de pouvoir (i) pour tout manquement a son devoir de
loyaute vis-a-vis de la societe ou de ses actionnaires, (ii) pour tous
actes ou omissions n'ayant pas ete faits de bonne foi ou ayant ete generes
par une faute intentionnelle ou une violation manifeste de la loi, ou
(iii) pour toute transaction de laquelle l'administrateur a tire un profit
irregulier.
<PAGE>
ARTICLE 12
Les actions judiciaires concernant la societe, tant en demandant
qu'en defendant, sont suivies au nom de la societe par le conseil
d'administration, representee par son president ou un administrateur
delegue a ces fins.
TITRE IV: SURVEILLANCE
ARTICLE 13
La societe est surveillee par un ou plusieurs commissaires nommes
par l'assemblee generale, qui fixe leur nombre et leur remuneration, ainsi
que la duree de leur mandat, qui ne peut exceder six annees.
Ils peuvent etre reelus ou revoques a tout moment.
TITRE V: ASSEMBLEE GENERALE
ARTICLE 14
L'assemblee generale annuelle se reunit dans la commune du siege
social, a l'endroit indique dans les convocations, le second mardi du mois
de juin a 11.00 heures et pour la premiere fois en 2000. Si ce jour est
un jour ferie legal, l'assemblee generale a lieu le premier jour ouvrable
suivant.
Le conseil d'administration ou le commissaire aux comptes peut
convoquer d'autres assemblees generales chaque fois que l'interet de de la
societe le requiere. De telles assemblees doivent etre convoquees chaque
fois que des actionnaires representant un cinquieme au moins du capital
souscrit le requierent par ecrit avec indication de l'ordre du jour.
Chaque action donne droit a une voix.
Si tous les actionnaires sont presents ou representes et s'ils
declarent qu'ils ont eu connaissance de l'ordre du jour, l'assemblee
generale peut avoir lieu sans convocation prealable.
TITRE VI: ANNEE SOCIALE, REPARTITION DES BENEFICES
ARTICLE 15
L'annee sociale commence le 1er janvier et finit le 31. decembre de
chaque annee.
Exceptionnellement, le premier exercise social comprendra tout le
temps a courir de la constitution de la societe jusqu'au 31. decembre
1999.
ARTICLE 16
L'excedent favorable du bilan, defalcation faite des charges
sociales et des amortissements, forme le benefice net de la societe. Sur
ce benefice, il est preleve cinq pour cent (5%) pour la formation du fonds
de reserve legale obligatoire; ce prelevement cesse d'etre obligatoire
lorsque la reserve aura atteint le dixieme du capital social,
<PAGE>
mais devrait toutefois etre repris jusqu'a entiere reconstitution, si a un
moment donne et pour quelque cause que ce soit, le fonds de reserve
devient inferieur a dix pour cent (10%) du capital de la societe.
Le solde est a la disposition de l'assemblee generale.
TITRE VII: DISSOLUTION, LIQUIDATION
ARTICLE 17
La societe peut etre dissoute par decision de l'assemblee generale.
Lors de la dissolution de la societe, la liquidation s'effectuera par les
soins d'un ou de plusieurs liquidateurs, nommes par l'assemblee generale
qui determine leurs pouvoirs et leurs emoluments.
TITRE VIII: DISPOSITIONS GENERALES
ARTICLE 18
Pour tous les points non specifies dans les presents statuts, les
parties se referent et se soumettent aux dispositions de la loi
luxembourgeoise du 10 aout 1915 sur les societes commerciales et de ses
lois modificatives.
POUR COPIE CONFORME DES STATUTS COORDONNES Hesperange, le 2 aout
1999.
/s/ GERARD LECUIT
-----------------
[Notary Seal]
Gerard LECUIT, Notaire
HESPERANGE
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0
0
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